Not So Fast: Local business worries over new Foreign Investment Law

 MZINE+

Not So Fast

Local business worries over new Foreign Investment Law

By Victoria Bruce

Proposed changes to Myanmar’s much-anticipated foreign direct investment (FDI) law restricting foreign investment in certain areas could protect local business at the expense of inhibiting long-term socioeconomic growth.

This is the cautious response of experts who are following the debate inside and outside parliament over a law that will help lay out the playing field for foreign investors keen to enter Myanmar as the country opens up.

Experts say the country’s new FDI law could be more restrictive than its 1989 predecessor, and warned the country, currently poised at the crossroads of opening up its crippled economy, could take a wrong turn towards “retrograde” and “protectionist” economic policy.

“It is so important that, at this critical juncture, Myanmar does not lock its economy up in the clutches of old vested interests,” said Dr Sean Turnell, an Australian economist and Myanmar expert.

The under-developed Southeast Asian nation has been going through a series of economic and political reforms aimed at attracting foreign investment. However, these latest updates to its foreign investment law may do little to encourage the confidence of foreign investors, experts told M-ZINE+.

Dr Turnell said the move to restrict foreign trade and investment could discourage foreign investors and prove detrimental for the country’s growth.

“This is an example of the 'creeping protectionism' many of us have feared,” he said.

The new draft will restrict 100 per cent foreign ownership in certain sectors and bans investment in “small and medium industries and enterprises; agricultural and livestock business being carried on by local business people; retail business and small to medium service enterprises,” according to Reuters news agency.

Under the old law, foreign firms could set up shop with 100 per cent capital in all sectors but if the proposed changes are enacted then their operations will be restricted to joint venture partnerships with local firms or the Myanmar government.

An uneven playing field

Previously, local businesses have spoken out against certain sections of the government’s proposed foreign direct investment law, said Dr Maung Maung Lay, the vice president of the Union of Myanmar Federation Chambers of Commerce and Industry (UMFCCI).

The proposal to extend tax holidays for foreign firms from three to five years has been met with resistance from Myanmar’s private sector, he said.

“This part of the new FDI law is certainly creating the biggest bones of contention so far and domestic business doesn’t like it,” said Jared Bissinger, a PhD candidate at Macquarie University studying Myanmar’s economy. “You want to create a level playing field for all business so there’s no need to prejudice one over the other.”

Worries over tax breaks

Local businessmen appear concerned that they may lose out.

“If they give the incentives to the foreigners, say a five-year tax break, then we should also be granted five years, that would be fair,” said Ohn Lwin, managing director of Toyo Battery, a local battery manufacturer.

Dr Maung Maung Lay said extended tax holidays for foreign investors would put local enterprises at a competitive disadvantage, adding many firms fear they will be overwhelmed by incoming competition.

“The private sector feels that currently the playing field is not level and the government is too generous to the foreigners,” said Dr Maung Maung Lay, adding local firms lack the capital and technology to compete effectively.

“In that sense, our mom and pop shops will all suffer and become overwhelmed by these potential investors,” he said.

Trade protection worries

However, a fine line exists between protecting local firms and inhibiting competition, Bissinger said.

“Trade protection often hurts the economy of the country that imposes it, and that’s one of the oldest but still most startling insights economics has to offer,” he said.

“If you keep restricting competition, what incentives will there be for these local companies to ever become strong enough to compete against foreign investors?” Bissinger said.

He said competition in retail industries such as food and beverage industries not only expands a consumer’s choice, thus increasing their welfare, but also helps bring down pricing and improves quality of products.

“Prohibiting competition and choice in the long run is not the answer, and won’t help companies from Myanmar learn, grow, and compete domestically or internationally,” Bissinger said.

He said the role of government should be to protect local companies by ensuring an appropriate degree of regulation regarding competition and suggested a compromise solution might entail allowing some protection in certain areas for a specified length of time, which would allow local firms to catch up.

“The best medicine to kick-start the country’s economy is to adopt economic policies that create a fair, predictable and stable environment from which everyone enjoys some benefits,” Bissinger said.

Protection fails

The failure of attempts to bolster domestic economies and protect local business and jobs from foreign competition with protectionist economic policies that restrict the scope of foreign firms and international trade has been documented at length by economists.

“Some types of protection can be used in positive ways, but governments must always be careful with such measures,” Dr Turnell said.

“They scream vested interest against that of the greater good and the histories of many countries are littered with failed protectionist policies,” he said.

Legal experts have pointed to the need for Myanmar to place itself up there with neighbouring countries as an attractive alternative for foreign investors.

“It is important, this being a very important law, that it should be right and also investor friendly compared to similar laws in the region,” said Min Sein, a Supreme Court lawyer.
“Furthermore, the law should not deprive or eclipse the opportunities of local businessmen,” he added.

Local stakeholders have played a role in influencing the government’s policy changes and many fear they are ill-prepared and under-financed to compete against an influx of foreign firms.

Dr Maung Maung Lay said the government was fine tuning certain aspects of the new law to “alleviate the concerns of the locals and get input from all the stakeholders.”

Need for clarity and stability

Dr Turnell said while a new investment law will help encourage investment, the most important attributes sought by investors are stability, sound institutions, policy and rule of law and Myanmar could learn from the experience of other ASEAN countries such as Thailand and Vietnam.

“But Myanmar must be careful not to be engaged in a race to the bottom with such countries to attract investors,” Dr Turnell said.

“The most important thing is that the law progresses in a way that creates confidence in the process in which it is made, and that the law itself be sound and reasonable,” Dr Turnell said. “It does not have to be, and should not be, excessively generous to international investors, especially in areas (such as resource and energy extraction) where they will come anyway,” he said.

The latest draft of the FDI law is tipped to extend land lease terms with public or private sector to a period of 50 years extendable for two 10-year terms, depending on the nature of the business and the size of the investment, compared to an earlier draft stating 30 years with two 15-year extensions.

This article first appeared in issue 36 of weekly business magazine MZINE+ on 4 September 2012.