INTRODUCTION

It is not appropriate for national planners to persist in independent and self-satisfactory national development strategies without taking globalization into consideration. It is more rational and time-saving to plan national development strategies in the framework of sub-regions where countries or economies adjoin. Globalization and liberalization are making rapid progress all over the world. Laos should not suppress nor oppose globalization, regional economic integration and liberalization. If Laos can provide more liberal policies than other ASEAN countries, it will succeed in establishing a more attractive investment environment and attract a larger number of overseas investors. This is the most appropriate strategy to develop a land-locked country like Laos with a small population and low income. According to Paul Krugman (1994, p. 90), “A nation is significant if the government policies affect the movements of goods and production elements.” In other words, strategies to be taken in an age when political and economic borders could be established, and those appropriate for an age when the significance of national borders is becoming increasingly immaterial should be different (Suzuki 2008).

The aim of the paper is to indicate that, in formulating its industrialization strategies today, it is more appropriate for Laos, which was far behind in starting economic development, to take advantage of geographical proximity to Thailand and to establish complementary relations with them by deploying international divisions of labour through vertical production networks than to adopt customs and trade policies based upon national borders.

The author proposes five kinds of fragmentation in section II. In section III, the author explains the importance of functions which mother factories possess in industrial clusters. In section IV, the significance of fragmentation is emphasized in a global value chain context. Section V argues that the establishment of second factories depends on the size of trade service link costs and cost reduction factors before and after fragmentation. A gravity model is introduced from the viewpoint of trade link costs in section VI. In section VII, the author proposes a four-stage process in the sub-regionally complementary industrialization of Laos. In section VIII, collective efficiency for reducing trade link costs and increasing the benefits of individual firms is discussed.