Foreign Direct Investment, Exports, and Labor Force: An ARDL Analysis of Economic Growth in Laos

Foreign direct investment (FDI) and exports are driving forces of the Lao economy, but given systemic issues and the absorptive capacity, their impact is limited. To maximize the benefits from these growth engines, Laos should improve the situation by diversifying its FDI sources, boosting its export sector, and ensuring macroeconomic stability. Such factors can be robustly analyzed by the ARDL method, which can provide useful insights to policy-makers. Based on World Development Indicators data spanning from 1990 to 2022, the study analyzes the relationship between real GDP (RGDPT), foreign direct investment (FDI), and exports (EXPR) while controlling for exchange rate (EXCH), inflation (INF), and labor force participation (LBFR). In this paper, we apply the ARDL bounds testing approach to explore the short- and long-run economic dynamics. Results show that FDI and participation in the labor force are the most important variables for long-term growth, while exports, exchange rate, and inflation are not statistically significant. Thus, in the short run, all exports, FDI, and labor force participation are positively affecting growth, while a strong error correction mechanism tends to maintain long-run equilibrium. These findings have significant policy implications, emphasizing diversification in investments, bolstering trade competitiveness, and maintaining macroeconomic stability. Resistance financing can be met through FDI and export economic growth, by further perfecting these areas, and promoting the existing policies of Laos is also a viable solution.