Before 1975, Laotian foreign economic relations were conducted under the FEOF and the US Commodity Import Program, under which dollar exchange was provided; Laos in turn allocated dollars to local importers, who then made kip payments to the government for the purchase of foreign goods. There was little direct foreign investment, however. From 1975 until the mid-1980s, all foreign capital has come in the form of development assistance.
Reforms, as part of the New Economic Mechanism (NEM) initiated in 1986, included the introduction of a the Laos Foreign Investment Code and Decree in 1989, which established the Foreign Investment Management Cabinet (FIMC). The FIMC oversees the Committee for Investment and Foreign Cooperation (CIFC) with power to authorize and approve investment. All investment proposals, no matter how small, must be submitted to the CIFC of the FIMC, which passes it for screening by the relevant line ministries. The Code and Decree focus on three types of transactions: contractual business, joint ventures, and wholly foreign-owned enterprises. Investment is now allowed in the areas of agriculture, forestry, industry, communications, transport, service, and tourism, for projects using the indigenous raw materials and natural resources of Laos. The Decree details the permitted sectors of foreign investment and outlines restrictions and prohibitions. For instance, environmentally damaging investment, investors with overwhelming debt, long-term projects making great use of imported materials, and enterprises that would compete with local entrepreneurs are prohibited and/or discouraged. Hindrances to foreign investment are poor legal and physical infrastructure and a lack of skilled labor and capital. Additional disadvantages in the landlocked country are high transportation costs and limited domestic and foreign markets. In 1994 a new foreign investment law streamlined regulations and tax structures and included a flat corporate tax rate of 20%. The contractual business mode of foreign investment was eliminated. Although the law stipulated that the pre-approval process for new investment was to take only 60 days, delays in fact have been a year or more.
Since 1986, foreign investment in Laos has totaled an estimated $5.7 billion, about 75% in hydroelectric power projects. The Asian financial crisis, precipitated by Hong Kong's return to Chinese rule in June 1997, dealt foreign investment flows a blow from which it has not recovered. FDI fell from $170 million in 1996 to $45.3 million in 1998. In 1999, the Thai company that had been granted the concession to build Laos's first railroad in May 1997, backed out of the deal declaring it economically non-viable. A small uptick in FDI to $51.5 million in 1999 was followed by sharp declines in $33.9 million in 2000 and a negligible $23.9 million in 2001 in the face of the continuing depreciation of the currency. The depreciation feeds into a vicious cycle, because with the government's need to conserve its hard currency reserves, it has become increasingly difficult for foreign investors to convert their kip income into foreign exchange. The government in 2002 was rationing foreign exchange, with priorities given to fuel, food and medicines.
Thailand has been Laos's biggest foreign investor, accounting for about 42% of total FDI. In 2001, Laos and Thailand signed an agreement for the construction of a second bridge across the Me Kong, a project abandoned by a Japanese company in 1998 after the concession had been granted in 1996. Two Thai companies are also shareholders in the proposed $1.2 billion 650 MW Nam Theum River hydroelectric power project. The other partners are the Laotian government and the French company, Electicite de France, the largest shareholder. China's Yunnan Province contracted to develop sylvite deposits in the Vientiane Basin. Twelve sylvite-bearing zones have been identified, with an estimated total of 10 billion tons.