Investigating Obstacles and Enabling Located Firms in Special Economic Zones - Essay Prowess

Investigating Obstacles and Enabling Located Firms in Special Economic Zones

Investigating Obstacles and Enabling Located Firms in Special Economic Zones

  

Research Methodologies

  Method of Fact Finding

Data was collected from ten companies in the Savan Seno Special Economic Zone in Laos. These firms include Essilor Lao, JP Investment, KOYO Lao, Logitem Lao GLKP, Nikon Lao, Savan Logistics, Savan Pacifica Development, Toyota Boshoku Lao, Urai Paint Lao, and KP Beau Lao. Interviews were presented to the management of the ten companies. The interview questions were structured similarly to collect qualitative data. The questions were structured consistently to avoid deviating from the core objective of the research. The structure was important since it enabled the interviewer to get direct answers from the respondents. Moreover, the interview questions provided an opportunity to the respondents to give further explanations on the questions (Schermerhorn, 2005).

The interview questions were presented in categories such as the background of the company, its determinants of FDI, investment strategies, investment challenges, and recommendations. For this reason, the interviews assisted the interviewer to collect detailed and highly-structured data.  However, the process can consume  a lot of time and may be expensive because of the busy schedule of managers who are appropriate to give relevant and reliable information (Schermerhorn, 2005). Interviews were very useful in getting the information behind the experiences of the respondents. Most importantly, the ten sets of responses from the ten companies complemented each other in bringing out the collective developments in the SSSEZ. The interviewer did not seek deeper clarifications from the interviewees since each company had its own line of business hence little variations in the answers.

Results

            Background of the Companies

Company Name Year Started Country Origin Workforce Investment Fund(US$) Products & Services
Essilor Lao Company Limited 2013 France 250 14,000,000 Polycarbonate eyeglass lenses
JP Investment Company Limited 2011 France 20 2,000,000 Leasing factory space, warehouse space, and office space
Koyo Lao Company Limited 2014 Japan 120 1,000,000  Camera plastic parts injection and painting
Loitem Lao GLKP Company Limited 2007 Thailand and Laos 20 500,000 Logistics and transportation
Nikon Lao Company Limited 2013 Japan 800 7,500,000 Assembly of digital SLR
Savan Logistics Company Limited 2011 France 20 200,000 Customs clearance services
Savan Pacifica Development Company Limited 2008 Malaysia 50 20,000,000 The developer of the SEZ
Toyota Boshoku Lao Company Limited 2014 Japan 180 5,600,000 Automobile interior components
Urai Paint Lao Company Limited 2014 Thailand 150 2,000,000 Producing paint for domestic sales and export
KP Beau Lao Company Limited 2014 Japan 350 1,000,000 Bath ball, cosmetics, sanitary ware and toys

Determinants of Foreign Direct Investment (FDI)

The entrance of international investment companies in the SSSEZ attracted other international companies to enter into the SEZ. Some companies such as Koyo Lao Company limited were attracted by the operations of their business partners (Nikon) in the SSSEZ. It gives the company an opportunity to extend its business into the region. The two companies are based in Japan and found it essential to conduct their business in the SSSEZ. In other cases, some companies were enticed into the SSSEZ by the prospects joint ventures with other companies in Laos. For example, the Thailand-based company, Logitem entered into the SSSEZ through a joint venture with KP Group which is based in Laos. Joint venture increases enables the two companies to share the risks of investing in the SSSEZ. It also enables the companies to share the risks of investments. It also offers the two companies with an access to new distribution networks and markets (Becchetti and Trovato, 2002).  

Tax exemption is one of the incentives that have attracted foreign companies to invest in the SSSEZ. Foreign companies are exempted from paying taxes for a period of between 7 and 10 years. Manufacturing businesses are exempted from paying taxes for 10 years while other businesses do not pay tax for 7 years.  As low 5% tax is deducted for salaried workers irrespective of their nationality. 

Investment Strategies

Company Name Pre-investment Strategies Pre-investment Strategies
Essilor Lao Company Limited Preparing the workforce and setting up of the legal entity. Preparing the management team. The companies experience in conducting business operations overseas gives it a competitive advantage. The company has unique strategies that help it become competitive. The company needs to sort out human resource issues.
JP Investment Company Limited The company had built its reputation overseas. Therefore it only needed a place in the SSSEZ to meet the needs of its customers in Laos. Involving its customers in the development of goods and services. The company identifies the needs of customers and tailors to satisfy its customers.  
Koyo Lao Company Limited The company took advantage of its partnership with Nikon and extend its services to Laos. For this reason, the company was not troubled by the challenges of finding new customers in the country.  With a company office in Bangkok, Thailand, Koyo decided to take advantage of the SSSEZ location to import and export materials.   Since the demand for cameras is decreasing, the company is planning to manufacture alternative products to ensure its business continuity.
Logitem Lao GLKP Company Limited   Preparing its workforce and setting up of the legal entity. Preparing the management team and working with the local partner.   The company has unique strategies that give it a competitive edge above its competitors.
Nikon Lao Company Limited   Researching the market for more than 2 years Consulting other Japanese investors in Laos through Jetro Networking with the local authorities.   Tracking of the production and the investment in Laos to fulfil the expectations of production expansion (Baum, 2001).
Savan Logistics Company Limited   The company had customers prior to its entry into the SSSEZ. Therefore, getting a place in the SSSEZ was advantageous because of its strategic location.   The company uses the advantage of being the only logistics company. Therefore, serves all customers effectively to consolidate its role in the SSSEZ.
Savan Pacifica Development Company Limited Researched the market for more than 3 years. Established strong local connections for more than 5 years. Looked for potential investors for more than 2 years   Attracting large companies in Europe which in turn attract other large companies.
Toyota Boshoku Lao Company Limited Researched the market for more than 3 years. Consulted other Japanese investors in Laos through Jetro. Networked with the local authorities and some business partners in Laos.   Tracking of the production and the investment in Laos and having proper plans for the business operations.  
Urai Paint Lao Company Limited Preparing the workforce, setting up of the legal entity and preparing the management team. Understanding the culture and working procedures. Having unique strategies and influencing the performance of its human resource.
KP Beau Lao Company Limited (KPBL) The company opted to invest in Laos instead of China because of the poor political relationship between China and Japan. Moreover, labour in Laos is 66.6% cheaper than in China. Managing transportation costs which are high in Laos.

From the illustration of the strategies used by the selected companies in SSSEZ, it is clear that the companies use specific strategies to deal with obstacles that are experienced in the SSSEZ. For instance, KP Beau Lao Company Limited chose to invest in Laos instead of China because of the cheap cost of labour in the country. The low cost of labour could be the reason why many Laotian employees quit their jobs. On the other hand, Savan Logistics Company Limited is the only company offering logistics services in the SSSEZ. For this reason, the transportation costs could be high since the company does not have many competitors.

One of the pre-investment strategies used by some companies such as Koyo Lao Company is following the business partners (Nikon) to the new market. The companies do not have to worry about the new environment since they have partners with similar interests. Most of the companies investing in the SSSEZ have experiences in international business ventures since they have branches in other countries. The companies have experienced management crew that is deployed to the SSSEZ. Normally, knowledge gained from business operations in other countries is used to train local employees in Laos (Volkov, Satanenko, and Tajmazov, 2008).    

Challenges

            Legal and language matters are the major challenges facing the ten companies in the SSSEZ. Legal challenges are solved by seeking the services of law firms. 

With time most of the companies can deal with language barriers by adapting to the culture and language of the local people. Learning the culture of the Laotian people can assist the companies to train the employees effectively. Due to the challenge of incompetency of the workforce, the company should use skills and knowledge from other countries to train the employees. Another challenge outline by the companies in the SSSEZ is competition. Competition is normal in every business environment. Therefore, overcoming competition is dependent on the strategies adapted by specific companies (Best, 2001).   

Analysis and Discussion

Analysis of the Challenges facing the Selected Companies in the SSSEZ

Company Name Challenges (Obstacles) How the Company Overcomes the Challenges
Essilor Lao Company Limited Language and legal mattersIncompetent workforce and high turnover rate ü  Hiring a translator and a law firm Hiring recruitment firms and advertising on media for recruitment
JP Investment Company Limited Language and legal mattersEntry of new competitors after successful establishment of the company in the SSSEZ (Volkov, Satanenko, and Tajmazov, 2008).   Hiring a translator and a legal advisorForming a solid contact with its customers and maintaining a good relationship with customers to keep them even when its  competitors lower the prices of their products    
Koyo Lao Company Limited ü  Maintaining enough work-force due to job quitting practices by Lao Workers ü  The company contracted a Lao consultant with 20 years of experience working in Japan. The consultant had a close relationship and strong connection with SEZ Authority. Hiring new employees when some employees quitted their jobs
Logitem Lao GLKP Company Limited   Some rules and regulations in the SSSEZ are not clearIntense competition among companies in the SSSEZ. More competitors in the same industry (Volkov, Satanenko, and Tajmazov, 2008).     Engaging a local partner handle the local authorities matter. It helps the company concentrate on its core business operations.Contracting customers especially Japanese linked customers for at least 1 year.  
Nikon Lao Company Limited   Vague rules in the SSSEZ. The interpretation of the rules and regulations can be ambiguous.Getting sufficient workforce and training them up to meet Nikon expectations and standards (Gopinath, 2009).   ü  Hiring a law firm and a consultation firm to help Contracting recruitment a firm under KP Group to help find workforce and seeking the services of Nikon Thailand team to provide training of both technical and soft skills (Momaya, 2000).   
Savan Logistics Company Limited   ü  Language barriers Competitors came into the SSSEZ when the company has established itself ü  Hiring a translator, but it does not solve the problem completely ü  Creating a solid contract with customers and maintaining a good relationship even when lower their prices
Savan Pacifica Development Company Limited Language and cultural understandingFinding skilled people to be in the management team. It is really hard to find local people who can be at the manager level.       ü  Hiring a translator to help in language challenges but cultural barriers need time. Foreigners must work with the Lao people to understand their lifestyles and work culture Advertising through newspapers and trying to get referrals from other people when recruiting new employees  
Toyota Boshoku Lao Company Limited Vague rules in the SSSEZ. The interpretation of the rules and regulations can be ambiguous.Getting sufficient and capable workforce is not easy.     Using a law firm and consultation firm and also contacting other investorsUsing recruitment firm and training teams from other countries  
Urai Paint Lao Company Limited Some rules and regulations of the SSSEZ are not clearQuality of workforce and high turnover rate. People still want to cross the border to work in Thailand.     Consulting the local authorities often, trying to get their support when the company has doubts on the legal matters.Advertising and setting KPI for its employees  
KP Beau Lao Company Limited (KPBL) ü  There were several attempts for KPBL to approach the cultural difference and common sense Troubles or obstacles in the manufacturing process ü  KPBL is a joint venture with KP group in Lao. Therefore, KP group could provide a lot of support to KPBL. KPBL’s Key members deal with or sort out technical problems while KP group provides support for general administrative issues.  

From the illustration in the table above, it is evident that some problems such as legal and language obstacles face almost every company in its early stages of establishment. After the companies establish themselves in the SSSEZ, they face stiff competition from other companies which are attracted into the SSSEZ.  Factors that hinder the potential development of companies usually hinder the development of the SEZ and the country as well. These barriers range from institutional to financial barriers. Financial obstacles are caused by the high cost of establishing and maintaining a stable foundation. Kuchiki and Tsuji (2009) argue that the high cost of training employees who offer little output to the companies causes continuous wastage of funds by the companies.

Institutional obstacles are mostly brought about by the interaction of the government with companies such as taxation issues, legal issues, and government support. However, foreign-based companies are troubled by taxation since they get enough support from the local authorities. The companies are cushioned by the government through subsidised taxes for a period of up to 10 years. On the contrary, discriminatory regulations and complicated laws deter the companies from making their progress beyond the start-up step (Volkov, Satanenko, and Tajmazov, 2008).  

The Savan Seno Special Economic Zone has many advantages for investors if the obstacles that hinder their optimal utilization are eliminated. Among the comparative investment opportunities available for investors in the zone include the economic and political stability of Laos. Its strategic geographic location makes it even better for the utilization of rich natural resources. Moreover, the country is free from natural disasters. Tax incentives make the country a favourable place for investments especially in the first ten years of investments when companies are given a tax holiday. A 5% for both foreigners and Laotian people within SSSEZ makes it favourable for employees. Furthermore, a 5% dividend tax for the companies that have at least two shareholders is used in the SSSEZ. The dividend tax is applied after the tax holiday comes to an end (Lubit, 2001).  

Tax Holiday 7-10 Years
Land Leasing 99 Years
Lease Exemption 12 Years
Land Leasing 99 Years
Personal Income Tax 5%
Dividend Tax 5%
 Import duty on Vehicles for Administrative Purposes 1%
Tax and Customs for manufactured export products 0%
Corporate Profit Tax 8 – 10%

Savan Seno Special Economic Zone (SSSEZ) is located centrally in Laos, a strategic that connects many important parts of the region. The promising SEZ attract some companies such as Nikon and Toyota to relocate to the SEZ because of the prospects of thriving business in the region. The decision of these companies to shift their investments and focus on Savan Seno SEZ was because of factors such as good infrastructure facilities, improved logistics and the tax break policies that are currently ruling the SEZ. The promising growth of the SEZ is however, hampered by intense competition. By analyzing the entry of the selected companies into the region, it is evident that the SEZ is attracting my foreign-based investors despite the challenges of operating in a different environment with a different culture (Schweinberger, 2003).  

With the influx of manufacturers into the SEZ, the government of Laos should shift labour to the SSEZ. It should also facilitate the fair and appropriate compensation measure for the employees. This could be the reason why many employees quit jobs just after a short period of employment. The number of employees quitting jobs is alarming as expressed by the responses from Koyo Lao Company.  Most of the employees hired by the company have experience of working in such companies that is below 6 months.  Worse still, after hiring 10 workers, 1 or two of the employees quit the job just after a week or 10 days. The company then loses another 2 or 3 in the first month. Only 3 to 4 employees work beyond three months after employment. These statistics suggest that the company incurs huge losses in the process of hiring and training employees. Therefore, the government should ensure that both parties; the employer and the employees are in good terms of striking long-lasting employment contracts (Schweinberger, 2003).   

Other challenges facing the SSSEZ include the legislation for land compensation. Legislation issues pose problems to new entrants into the SSSEZ because of the wanting status of the legislations used to manage the SSEZ. The leasing regulations used for the SEZ are supportive to the investors but the entry into the zone challenges the investors. The challenges are brought by lack of clarity of the laws used to govern investments in the SSSEZ. All the selected ten companies for this research indicated their dissatisfaction with legal frameworks used to guide investments in the zone (Wahyuni, 2012).   

Another issue that is clear from the research on the selected companies in the Savan Seno SEZ is the low competency portrayed by the workforce hired by the companies. Most of the companies explained the low competency and turnover from the Laos employees. The challenge may be brought by lack of high-end skills of the employees. For this reason, the employees should be trained to acquire skills to work in the industries. The employees not only need technical skills but also sot skills to improve their performance. The government should liaise with higher education institutions in the country as well as the companies to train many young Laotian people to work in such companies. Good skills can be passed to the young people through industrial attachments for the long-term development of professionals. On the other hand, the companies in the SSSEZ can import skills from their original countries and pass them to the Laotian people through training. Most importantly, understanding the working culture of the Laotian people can enhance their training and hence reduce the incidences of job quitting after a short spell of employment (Wahyuni, 2012).    

 Conclusion and Recommendation

From a company’s point of view, successful business operations in the SSSEZ require a good understanding of the customers’ needs and meeting them. The companies should develop a solid relationship with their customers. Attracting and maintaining a strong relationship with customers can reduce or eliminate the challenge of competition. As much as the companies in the SSSEZ try to remain competitive, the environment and the support from the host economy play a vital role in their prosperity beyond the start-up stages. The host government should ensure that the companies investing in the SSSEZ are not hindered are not limited by legal barriers. Legal barriers limit the operations of the companies and some may find it difficult to enter into business ventures in the SSSEZ (Wahyuni, 2012).   

Since it may be challenging to align the Laotian people with the companies’ culture, the companies should understand the Laotian working culture. Understanding the culture can be very essential while training the employees. For instance, there many job quitting cases among the employees working in the SSSEZ because they do not seem to be in a cordial relationship with their employers. The companies can train the employees effectively with a comprehensive understanding of their culture. Thereafter, the employees need to be oriented to adopt the organizational culture and direction of their employers (Hart, 2000).

The government of Laos can improve investments in the SSSEZ by creating a good framework for investing the zone. The framework should solve the problems experienced by potential investors as they try to setup their businesses. Legal issues obscuring potential investors from investing in the zone should be eliminated through effective legislations. Such strategies will attract many investors into the SSSEZ and at the same time enable the operational companies to prosper. Creation of rules that enhance fair competition among the companies in the SSSEZ can enable equal production and marketing opportunities. For this reason, the zone should have a decentralised system that handles the problems faced by the companies in the zone. The systems should reduce goods covered by mandatory quotas so that the companies in the SSSEZ are able to market their internationally (Volkov, Satanenko, and Tajmazov, 2008).

It is recommended by most of the management of the selected ten companies in the SSSEZ that a good relationship of the companies and the relevant authorities can help solve different obstacles. Consultations should be enhanced among the authorities so that problems can be solved in time. Both private and government consultants are crucial in assisting the companies to settle in the SSSEZ. Upon consultations, the investors can get services from relevant firms such as law firms.

           

Work Cited

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