Enhancing the Enabling Environment for SMEs in the Lao PDR

The 2024 ProFIT index recorded a modest overall improvement of two points, driven by better scores in transparency, policy consistency, and fewer informal charges. These gains suggest that institutional reforms and efforts to simplify administration are beginning to take hold in selected provinces. However, these positive developments were offset by declines in the areas like starting a business, dealing with regulations, and overall business friendliness. This highlights how unevenly national reforms are being implemented across provinces, and how ongoing transaction costs continue to weigh heavily on micro and small enterprises. For instance, although a 2019 ministerial decree aimed to reduce business registration to three steps, most provinces still require nine—making it harder and more costly for businesses to enter the formal market.

Addressing financing constraints is a critical and urgent priority for enterprise development. Despite overall growth in bank lending, the proportion of credit allocated to SMEs has plummeted from 30.9% in 2015 to just 12% in 2022. This alarming decline reflects both demand- and supply-side constraints. On the supply side, financial institutions often lack tailored lending instruments and risk assessment frameworks suited to SMEs. On the demand side, many enterprises struggle to meet collateral requirements, maintain financial records, or prepare bankable proposals.

To urgently alleviate these constraints, the development and expansion of credit guarantee schemes, simplified loan appraisal procedures, and the use of alternative forms of collateral (such as movable assets) should be prioritized. In parallel, strengthening the financial literacy of SME owners and promoting the use of digital finance platforms can expand access to formal financial services and reduce reliance on informal sources of capital. These measures are essential to enhance firms’ capacity to invest, grow, and integrate into regional value chains.

Digitalization and innovation adoption also remain limited. Only 26% of SMEs maintain a website, and over 80% report no innovation-related activities. This lack of digital integration reduces competitiveness, particularly in trade and services. Furthermore, institutional fragmentation and uneven service delivery at the provincial level hinder policy coherence.

The 2024 ProFIT survey introduced two new thematic components: tax compliance and skills availability—both of which are critical to productivity and enterprise resilience.

Survey results indicate that complex tax filing procedures and renewal requirements for tax identification numbers (TINs) impose significant compliance costs, particularly for micro and small firms with limited accounting capacity. This regulatory complexity contributes to informality and underreporting, while also weakening the tax base. Abolishing the TIN renewal process and transitioning to simplified annual reporting systems. especially for lower-tier firms, would therefore be beneficial.

In parallel, skill shortages continue to constrain firm-level productivity and investment. Firms report difficulties in hiring and retaining skilled labor, particularly in provinces with higher economic potential. These challenges are exacerbated by labor migration to neighboring Thailand, driven by cross-border wage differentials. The findings call for both wage policy adjustments and improved alignment between vocational training and labor market demand.

The ProFIT survey highlights persistent gender-based disparities in enterprise development and trade participation. Although 18.9% of enterprises are involved in import/export activities, only 29.3% of these are women-led. Among women-led firms, 97% are micro or small enterprises, and access to trade information remains a significant barrier. The Lao National Single Window, a digital platform designed to streamline trade processes, is used by only 10% of surveyed firms, indicating the need for improved outreach and digital capacity building. Targeted interventions to support women entrepreneurs, particularly in navigating regulatory systems and accessing trade-related services, will be essential to realizing inclusive private sector growth.

The government should streamline business formalization and reduce entry costs for SMEs. To achieve this, the government should fully digitize the business registration process and ensure platforms are user-friendly and accessible to enterprises of all sizes. Registration procedures should be consolidated into a single step across all provinces, including for enterprises subject to additional regulatory oversight under the “control list.” In parallel, eliminating registered capital requirements and simplifying the fee structure, based on enterprise type rather than location or sector. would further lower barriers to entry and incentivize compliance.

Simplifying the tax system will reduce burdens and encourage formal participation. Abolishing the renewal requirement for tax TINs would eliminate an unnecessary administrative burden and reduce opportunities for informal payments. Tax reporting procedures, particularly for micro and small enterprises, should be simplified and adapted to reflect firms’ varying accounting capacities. The expansion of online tax filing systems and electronic bank transfer mechanisms would improve compliance and reduce transaction costs. Additionally, linking tax compliance to access to credit by using tax history as a basis for creditworthiness can incentivize more accurate income reporting and formal participation in the financial system.

Modernizing institutions and scaling up e-governance will improve regulatory transparency. To reduce discretionary enforcement and promote a predictable regulatory environment, the government should expand e-government platforms for approvals, licensing, and compliance reporting. Standardized digital procedures will enhance predictability and reduce reliance on informal networks. Ensuring the consistent application of national policies across provinces is essential to providing a level playing field for businesses and increasing confidence in public institutions.

Investments in infrastructure and skills are essential to strengthen the enabling environment. Improving the SME operating environment requires sustained investment in reliable electricity, roads, and telecommunications—especially in underserved or high-potential regions. Regulatory enforcement mechanisms should be used to ensure the quality and maintenance of infrastructure assets, such as enforcing vehicle weight limits to preserve roads. At the same time, labor market competitiveness should be addressed through wage policy reform and improved retention strategies, including vocational and on-the-job training programs that align more closely with private sector needs.

Targeted support for women entrepreneurs can unlock inclusive business growth. To increase women’s participation in the formal economy, it is important to recognize the impact of unpaid care responsibilities and promote family-friendly workplace policies. Introducing tax concessions for childcare expenses and expanding mobile-enabled platforms would enhance access to services and information for women entrepreneurs. Targeted training programs, combined with improved access to digital trade platforms, will help address gender-specific barriers in trade, formalization, and enterprise growth.

^[1] The ProFIT survey is a collaborative effort between the Asian Development Bank (ADB), the Asia Foundation, the Department of Foreign Affairs and Trade (DFAT) of the Government of Australia, and the Lao National Chamber of Commerce and Industry (LNCCI).