Literature review

Three strands of literature contribute to the current research. First, the literature pertaining to the “new” economic geography that has flourished since 1990s makes increasingly clear the importance of geography in explaining patterns of trade and economic development. For example, access to sea and distance to major markets have been shown to have a strong impact on shipping costs, which in turn, strongly influence the success developing countries achieve in global markets for manufactured exports and ultimately in their achievements in terms of economic growth (e.g. Limao and Venables, 2001). Countries suffering multiple geographical handicaps such as landlocked status, an absence of navigable rivers and lakes, or tropical or desert ecology, tend to be among the poorest in the world. Though these correlations are commonsensical, economic geographers have contributed quantitative results by combining new tools in Geographical Information Systems (GIS) with empirical economic modeling (e.g. Radelet and Sachs, 1998, and Redding and Venables, 2004). These papers have documented a strong negative empirical relationship between transport costs and economic growth controlling for the other variables that would be expected to influence growth. In the context of GMS, the relative poverty of Lao PDR has long been understood as at least a partial result of the country’s landlocked status. Empirical evidence in this literature suggests there is much potential for cross-border road infrastructure and associated institutional arrangements to benefit economies that are not endowed with geographic characteristics favorable to economic development.

Second, the “new” trade literature that incorporates the presence of imperfect competition in standard trade theory derives many policy implications for prompting trade and growth that are not predicted in the standard neoclassical trade models (i.e. Hecksher-Ohlin-Samuelson type models). For example, Markusen and Venables (2000) find that the presence of transaction/trade costs and increasing returns to scale in production may create incentives for production agglomeration in particular markets. On the other hand, papers in this literature have also found that multinational firms can gain from intra-firm trade by integrating production processes located in different countries with varied comparative advantage, which reduces the tendencies towards production agglomeration. If the advantages of production integration across different countries outweigh those from agglomeration, then following this reasoning, reductions in transport costs would make FDI complementary to trade.

Third, the longstanding but recently revived empirical literature examining the relationship between the level of trade, trade openness, and broader economic growth suggest a positive effect of increased trade and openness on economic growth.² These studies often share an understanding that one of the common threads in the economic successes of the “East Asian Miracle” has been the trade openness of these economies, and a virtuous cycle of increased trade, economic growth, and FDI in export-oriented manufacturing industries based on comparative advantage. This literature suggests the possibility of a trade-FDI nexus in GMS that can be induced by investments in cross-border transport infrastructure.³ GMS economies have the potential to benefit significantly from regional economic integration in the areas of trade and investment though the development of improved cross-border infrastructure. Easier trade and financial transactions can enable these economies to better exploit their comparative advantages, to gain from increased specialization and scale economies in production, and more generally to enhance their complementary economic relationships. For example, Thailand currently provides a significant share of the manufactured goods demanded by Lao consumers while it purchases a significant share of Lao PDR’s resource-based exports (e.g. hydroelectric power and timber).

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