Home MMBIZ News Myanmar’s Quest for Foreign Investment

Myanmar’s Quest for Foreign Investment

During the past few years, Myanmar’s economic reforms and opening-up policies have unleashed a rapid inflow of Western capital. In addition to the traditional Asian investors, multinational executives and foreign dignitaries have been rushing to Myanmar, which is often seen as the last frontier of emerging Asia.

Usually, strong growth potential translates to increasing foreign direct investment (FDI). While inflows are steadily rising in Myanmar, the volume of FDI is still relatively low.

The question is why? And what could be done about it?

Falling behind

Historically, inflows of foreign investment in Asia have steadily expanded, but there is great variation within the region and between countries. While FDI stocks illustrate historical trends, FDI flows describe current realities. Both illustrate the Asian rivalry for foreign investment.

In the past three decades, FDI in Asia has been a game of three sets of countries. First, Hong Kong, China and Singapore accounted for more than 70 percent of FDI stocks in East and Southeast Asia in 2012. Another FDI group comprises Korea and the ASEAN tigers, including Indonesia, Thailand, and Malaysia. The third group includes Vietnam, Taiwan, Philippines, Macao, Brunei, Myanmar, Cambodia and Lao.

Until the late 1980s, foreign investment in Myanmar was one of the lowest in Asia, less than $6 million per year, as measured by foreign direct investment stock. As the status quo in the country began to change, FDI stocks increased to $60 million in 1989 and $1.2 billion by the mid-1990s. Myanmar surpassed Cambodia and Laos, but fell far behind Vietnam.

As reforms intensified in 2010, there was much talk about the great potential for FDI in Myanmar. Certainly, foreign investment grew from $1.2 billion to almost $10 billion, while FDI stocks as a percentage of Myanmar’s GDP increased from 15.7 percent to 20.7 percent.

With economic reforms and opening-up policies, the FDI stocks climbed to $11.9 billion last year. As a percentage of GDP, however, they have stagnated, representing 20.6 percent of Myanmar’s GDP last year.

In terms of FDI flows, foreign investment in Myanmar was minimal until the late 1980s. It really took off only at the turn of the 1990s, when the country attracted more than $225 million in annual FDI flows – barely a 10th of comparable flows in Vietnam.

Until recently, the FDI performance of Myanmar and the Philippines has been relatively even. Last year, however, Myanmar fell behind the Philippines, the current growth leader of Southeast Asia.

What can be done?

Today, FDI is an integral part of the globalisation of competition and the global specialisation of value chains of multinational corporations. To identify FDI opportunities, the latter focus on global indicators, including business environment, corruption, and competitiveness.

In the new Global Competitiveness Index (World Economic Forum), Myanmar is ranked 139th, some 50 places behind Cambodia, which at 88th place is ranked second lowest in ASEAN. In the Corruption Perceptions (Transparency International), Myanmar is ranked 172nd, along with Sudan and Afghanistan but significantly behind Cambodia (157), Indonesia (118), and the Philippines (105). Further, Myanmar is ranked only 182nd in the Doing Business indicators (World Bank), along with Congo and Eritrea – and well behind Laos (159), Cambodia (137), and the Philippines (108).

At the broadest level, Myanmar can attract FDI by enhancing its business environment, fighting corruption, and fostering competitiveness. These efforts should be considered necessary in any national FDI initiative.

To strengthen competitiveness, the objective should be to attract investors primarily with higher productivity. For instance, subsidising electricity rates may offer private gains for the investor, but improving the efficiency and quality of the electricity grid will enhance the productivity of the entire business environment.

Second, the goal should be to improve the quality of the location in ways that benefit many companies and industries, not just one or two firms. Specific tariff exemptions generate market distortions, whereas improved customs procedures enhance national competitiveness.

Also, it is vital to develop ‘sticky’ incentives that are tied to the location rather than the investor. Granting corporate tax breaks boosts the “race to the bottom.” In contrast, broad improvements in the business environment contribute to country attractiveness.

Finally, the focus should be on sustained investment rather than one-time deals. If incentives are tied to the total size of the investment, including follow-on investments, they will be more beneficial to the country.

Global FDI stagnation

Last April, the EU agreed to lift all sanctions on Myanmar, while the US suspended sanctions a year before. While these measures have positive implications in Myanmar, they come with new constraints as all advanced economies cope with stagnation, lingering recovery, or worse.

Global FDI is no longer immune to the gloomy growth prospects worldwide. In 2012, these inflows plunged dramatically, by a whopping 18 percent. Most importantly, FDI flows to developed economies declined by 32 percent, to a level last seen almost a decade ago. Europe alone accounted for two thirds of the global FDI decline.

Furthermore, FDI flows from advanced economies have been supported by liquidity-driven growth since 2008; record low interests and non-traditional monetary instruments. By spring 2014, this growth is likely to be reset as the US Federal Reserve is expected to start the gradual unwinding of quantitative easing.

That, in turn, means new downside risks, especially if the anticipated unwinding of monetary policy stimulus in the US leads to sustained capital flow reversals. In that case, those nations in Asia that depend on FDI from the US will take a hit, as they did in 2008-09. Over time, the same goes for those nations that rely on FDI from Europe, the longer the sovereign debt crisis continues, or from Japan, if Tokyo begins the proposed tightening of its monetary and fiscal policies.

While an increasing volume of the “new” FDI in Myanmar comes from advanced economies in the West, the great volume of the country’s FDI has historically relied on other Asian nations. Even today, China accounts for about a third or more of foreign investment in Myanmar, along with Japan and Asian tiger economies, Singapore and South Korea.

The more diversified the sources of these FDI inflows, the greater will be the benefits in Myanmar. What is certain is that, in the near future, the rivalry for FDI is about to become a lot tougher, more complex and volatile.

Dr Dan Steinbock is the research director of international business at the India, China and America Institute (USA) and a visiting fellow at the Shanghai Institutes for International Studies (China). For more, please visit http://www.differencegroup.net.

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