Business | Opinion Business | Opinion

Seizing the FDI oportunities

The new Myanmar Investment Law,
ratified by parliament in October 2016, is
a major step forward, ensuring a more lev-
el playing field for local and foreign busi-

New laws aimed at attracting increased
foreign investment are encouraging,
but more steps are needed to ensure
that the country’s growth benefits
people in all parts of the country and
E
CONOMIC DIVERSIFI-
CATION should be high on
the agenda of Myanmar’s
government. The country’s
leaders must make manag-
ing Foreign Direct Investment a priority in
order to attract high-quality investment in
all sectors and parts of the country.
nesses, providing corporate tax reductions
for foreign businesses, and easing condi-
tions for long-term real estate leases. The
new law also effectively ends the one-size-
fits-all approach to automatic five-year tax
breaks for all investments, and introduces
more fluid tax incentives targeting specific
sectors and parts of the country.
On April 1, the government published

supports the peace process. If not properly managed, the inflow of

FDI will merely exploit domestic low-cost
labour, natural resources and transfer the
By Henrich Dahm profits out of Myanmar. How to attract,
and benefit from, FDI is a key challenge
for Myanmar in the next few years, and
is closely linked to the peace process, as
many of the natural resources are located
in ethnic minority areas.
its list of nearly 190 promoted sectors.
They tend to be labour-intensive and in-
clude manufacturing, infrastructure de-
velopment, agriculture, food processing
and hotel and tourism, as well as sectors
such as healthcare, education, and renew-
able energy. The government has yet to
officially release more information about
restricted and prohibited investments.

A WORKER carries bricks at a factory on the outskirts of Mandalay (above). Photo: Teza Hlaing
MYANMAR'S GARMENT industry is one of that the government has recently announced as
a promoted sector for attracting FDI (left). Photo: Ann Wang

This piecemeal approach puzzles investors
and only adds to the current wait-and-see
mode for investing in Myanmar.
The new approach targeting specific
sectors is a big step forward to increase
value-oriented foreign investment, but
misses the opportunity to set a clear agen-
da to reduce the heavy reliance on oil and
gas. Although the share of non-oil FDI has
steadily increased in recent years, exports
and government revenues remain concen-
trated on this sector.
The two sectors combined account
for almost two-thirds of the accumulated
stock of foreign investment for the cur-
rent financial year as of February 2017.
The Myanmar Investment Commission
failed to adopt more specific regulations
to rebalance the economy away from oil
and gas and set clear goals for increasing
the share of non-oil FDI. Such plans are
critically important, not only for economic
growth, but also for the ambitions of mil-
lions of young people in the country.
All businesses in the promoted sectors
are entitled to income tax exemption, but
the extent of the exemption depends on
the level of development in the area of the
country where the investment takes place.
If a company invests in a less developed
region, they will gain a higher tax exemp-
tion. Myanmar’s least developed areas will
be classified as “Zone 1”, allowing income
tax exemptions of up to seven years, “Zone
2” refers to areas at a middle stage of de-
velopment and carry exemptions of up to
five years and the most developed areas
are classified as “Zone 3” and carry exemp-
tions lasting up to three years.
It is doubtful that the new rules on tax
exemptions will spur labour-intensive in-
vestment in underdeveloped regions that
need it most. Tax exemption alone will
not make up for challenging business en-
vironments and lack of infrastructure.
If not properly managed, the inflow of
non-resource FDI will continue to centre
on the Yangon-Mandalay corridor, further
contributing to the economic imbalance
in the country and negatively affecting
the peace process. The MIC will have to
come up with more concrete investment
promotion policies that correspond to the
priority locations. For example, Vietnam
used a “carrot and stick” approach to lure
foreign investors to remote regions. It al-

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 Business | Opinion
lowed investment in preferred sectors like
labour-intensive industry only in desig-
nated regions, but sweetened the deal with
special incentives, such as preferential
treatment on land use fees and exemption
of import duties to spur investment in un-
developed areas.
Boosting local industry
One of the most effective ways to im-
prove economic and geographic diversi-
fication is to develop the effectiveness of
local companies. By promoting private
sector development, governments can
help develop internationally-competitive
companies across the country. The spill-
over of high productivity from FDI to do-
mestic firms is key to multiplying the eco-
nomic impact of FDI, which should “crowd
in” not “crowd out” domestic investment
by increasing their participation into FDI
production and regional production net-
works. This will foster more vibrant in-
dustries, promote local content creation,
spawn advanced technologies and inno-
vation, and provide new job opportunities.
While concerns are often expressed
by domestic business communities over
an anticipated influx of foreign investors,
which could reduce their market share,
the reality is that local companies were
prevented from laying the foundations
for global competitiveness throughout
the years of isolation. Collaboration may
be the best way forward for the country
as a whole, as well as for those companies
wanting to survive in a global economy.
In many ASEAN countries, the compet-
itive pressure brought by foreign firms
has stimulated the operational efficiency
of domestic firms, and forced them to ac-
celerate the introduction of advanced pro-
duction technology.
Therefore, the MIC should consider
actively linking incoming FDI with exist-
ing local industries and encourage local
content and technology transfers in order
to boost competitiveness. More open reg-
ulations on joint ventures could lead the
way. MIC is currently revising the Com-
panies Act, which is expected to allow for-
eign businesses to hold stakes in existing
domestic companies. Currently, Myanmar
bans foreign companies from holding
stakes in existing domestic businesses but
the revision is expected to allow foreign
ownership in some companies. The gov-
ernment is considering opening up the lo-
cal stock market to foreign investment and
16 | FM
WORKERS CARRY
baskets loaded with gravel as
they unload them off a boat
in Yangon on July 28, 2016.
Photo: AFP
introducing a 35 percent foreign owner-
ship threshold, defining what constitutes a
foreign invested company that is subject to
foreign investment regulations. If the revi-
sion leads to active corporate mergers and
acquisitions, it could serve as an opportu-
nity to reinvigorate local companies and
enable better local participation in global
value chains.
Technological leapfrogging
Technology can be the single most
important enabler of innovation, compet-
itiveness and economic diversification.
Myanmar has an opportunity to succeed in
this area because it is relatively unbound
by legacy systems. Myanmar can spring
over traditional stages of economic devel-
opment by adopting leading-edge technol-
ogies in energy, environment, agriculture
and production. The country’s huge youth
population, with its digitally oriented cul-
ture, offers many opportunities for leap-
frogging digital technology and speeding
up economic diversification.
Unfortunately, this approach would
require huge investments in building the
necessary technological infrastructure
that is probably beyond the current means
of the government. FDI may be a way
forward, as technology transfer is widely
considered one of the benefits of FDI, and
played an important role in economic de-
velopment in other countries like China,
Vietnam, and Thailand.
As a matter of fact, many countries in
Southeast Asia are giving higher incen-
tives to foreign companies who transfer
high technology. Under the new legislative
framework, some sectors like information
technology, telecommunication, science
and research services, and renewable en-
ergy qualify for tax incentives as promoted
sectors, but the government would be well
advised to take more specific actions to
encourage technology transfer in all sec-
tors. This will help to attract more quality
investment to generate technology spill-
over effects from foreign companies and
joint-venture companies to domestic firms
and improve local technology absorption.
Future-proof workforce
Currently, Myanmar has a compar-
ative advantage regarding lower labour
cost and is attracting FDI in export-ori-
ented, labour-intensive sectors. When
receiving FDI, the Myanmar government
should recognise the positive effects of
creating employment and ensure that
workers in the country are able to be-
come more skillful in technologies. The
effects of job creation of foreign investors
are well known by the countries in the
region. Consequently, other Southeast
Asian countries offer incentives to for-
Business | Opinion
eign companies who create employment.
For example, the Malaysian government
allowed the extension of tax holidays for
companies who employ 500 people or
more from five to ten years.
A large gap exists between the techno-
logical and managerial skills of Myanmar
labour, and the skills increasingly needed
in business today. Therefore, it is import-
ant to promote further human resource
development to meet investors’ employ-
ment needs and facilitate technology
transfer. If ignored, this skill gap will wid-
en and scare off potential investors. The
best way to address this issue is through
short- and medium-term training initia-
tives. Existing educational reforms are
important, but can take decades to make
an impact. New, urgent initiatives should
focus on targeting vocational education
and training, ideally in collaboration with
companies and academic institutions.
The education sector is one of those tar-
geted by MIC to receive special treatment
but more needs to be done to encourage
foreign investors to transfer skills and
technical knowledge to their employees.
Specific policies should be drafted, such
as providing incentives for establishing
in-house training centres for large scale
investments. For example in Vietnam,
the investment license for automobile
manufacturing was linked with setting up
vocational schools to support sector spe-
cific skills development.
If educational institutions and FDI
are better connected, and the skill level
of average workers continues to increase,
Myanmar has the opportunity to receive
A large gap exists FDI that requires higher technical skills.
This is the best way to step up the techno-
between the logical ladder and diversify the economy.
technological Once-in-a-generation opportunity
Seizing the opportunities offered by
and managerial foreign investment is important. The next
few years will be a once-in-a-generation
skills of opportunity for Myanmar’s government
and private sector to engage with foreign
Myanmar labour, investors in the next phase of the nation’s
and the skills
reform and growth. Much of this will
hinge on getting the investment strategy
increasingly
right and demonstrating the ability to
host an export-oriented industry. With
needed in business a shift in FDI policy, Myanmar can low-
er its dependence on natural resources
today. and regional imbalance moving into the
future as a more balanced economy en-
joying sustainable growth.
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