Mitsubishi Materials is the latest Japanese multinational corporation to discover communist Laos, a landlocked south-east Asian country that has long been off the radar for FDI in manufacturing. In February, Mitsubishi Materials set up a factory in the Vientiane Industry and Trade Area (Vita) special economic zone (SEZ), near the country's capital, to produce thermal resistor sensors for export to its larger operations in Thailand and Malaysia.

Japanese investors in Laos have more than doubled in the past two years, from 60 registered companies in 2012 to 123 now. Confirming Japan’s interest in Laos, the Japan External Trade Organisation, the facilitator of Japanese business abroad, set up office in Vientiane last year.

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Alternative supply

There are several reasons for corporate Japan’s sudden interest in Laos. Most of the recent investors in Laos are affiliates of Japanese firms in neighbouring Thailand, home to more than 2000 Japanese operations. Some of those companies were hit hard by the catastrophic floods of 2011 that swamped six industrial estates near Bangkok, disrupting global supply chains in the car industry and causing billions of dollars in damages. Having alternative supply bases in Laos, Cambodia and Vietnam spreads the risk for these companies.

Added to this is the labour factor. Thailand’s minimum wage was hiked by some 40% in late 2011 to about $230 a month. Laos’s minimum wage was $78 a month in 2014, and was recently raised to $111, still below rates in Cambodia and Vietnam.

To Laos’s credit, the country's authorities have made efforts to facilitate an inflow of quality investors from Japan, especially by setting up SEZs that offer one-stop services and generous tax waivers on imported machinery, raw materials and earnings. The Savan Seno SEZ in the southern province of Savannakhet has proven particularly successful. Launched in 2002 as a state project, a lack of budget led to long delays in getting the infrastructure in place. The government split the 932-hectare zone into three sites in 2009 and farmed them out to foreign investors to develop.

One, Site C, run by the Malaysian firm Savan Pacific Development Company, got its infrastructure in place and has now attracted 49 investors, including Nikon, which has been assembling parts for its digital single lens reflex cameras there since October 2013, and Toyota Boshoku, which makes car seat covers for export to Thailand and Vietnam.

Well connected

There are 10 SEZs in Laos, although most of these are actually 'specific' economic zones, set up to facilitate special foreign-owned projects with no manufacturing facilities, such as casinos and real estate developments. Savan Seno and Vita SEZs are the most advanced but Thakhek specific economic zone, in Khammouane province, southern Laos, will soon have space available.

Another SEZ in Pakse city is awaiting approval. Pakse, Khammouane and Savannakhet are all linked to Thailand by bridges across the Mekong River, and Khammouane and Savannakhet also have road links to ports in Vietnam.

Authorities in Laos acknowledge that providing adequate SEZ space is essential to attract more FDI, especially from Japan. “When you go to an economic zone, you don’t need to worry about the regulations, which is why the Japanese are interested in SEZs. They don’t want headaches,” says Outakeo Keodoungsinh, deputy director-general of Japan’s Ministry of Planning and Investment.

Past FDI into Laos has primarily been in concessions, such as hydroelectricity projects, mining and plantations. “We have to improve ourselves because countries such as Myanmar have opened up and they are also rich in natural resources,” says Mr Keodoungsinh.