Myanmar’s Foreign Investment Law Opens Doors, but Uncertainties Remain

By Phuong Nguyen

Bogyoke Aung San market in Yangon. Myanmar's foreign investment law represents a compromise between reformist and conservative factions. Source: DerFussi’s flickr photostream, under a creative commons license.

Myanmar president Thein Sein November 2 signed a much anticipated foreign investment law, just one day after parliament approved it. The passage came as Thein Sein prepared to attend a series of high-profile regional events this month, including the November 5-6 Asia-Europe Meeting in Laos and the upcoming ASEAN Summit in Cambodia November 18-20.

Having the law in hand is a substantial feather in his hat as the reformist leader meets with his counterparts from around the world. The new investment code is considered more investor-friendly than earlier drafts, and seemingly presents a compromise upon which both reform-minded and the more conservative factions of the governing elite can agree.

Previous drafts of the law required foreign investors to provide at least 35 percent of start-up capital in joint ventures and limited foreign ownership to a maximum of 50 percent in “sensitive” sectors such as agriculture and natural resources. The new version removes the mandatory caps on foreign ownership entirely. Foreign investors and their local partners will be free to determine a mutually agreed-upon ownership ratio.

The law also drops a required minimum investment of $5 million, and allows foreign investors to lease land from the government or authorized private parties for up to 50 years. In addition, foreign firms will be offered a tax holiday in the first five years of operation, among other tax incentives.

Announced amid plans by global and regional lenders to step up financial assistance to Myanmar, the new law creates a sense of certainty among international investors, while demonstrating the current government’s growing commitment to further economic reforms. The easing of restrictions on limited foreign ownership and required capital will be a significant boost to entrepreneurs and businesses in service sectors such as tourism and education, as well as smaller manufacturing firms such as the garment industry. It will be especially conducive to job growth and bodes well for the government’s goal to create one million new jobs by the end of 2015.

On the other hand, the new law gives the Myanmar Investment Commission (MIC), a government-appointed body under the Ministry of National Planning and Economic Development, broad powers to determine whether and at what ratios to allow foreign investment in 11 sectors deemed “sensitive,” including agriculture and fisheries. Requirements on foreign ownership ratios will be mentioned in relevant rules and regulations only if necessary.

This decision can be problematic. A large concentration of power in a central government body can create inefficiencies and cultivate rent-seeking behaviors. There are also questions about whether the MIC, which had about 20 staff as of September and a steep learning curve, will have the capacity to absorb the enormous surge of interest in the Myanmar market that is to come.

By not specifying provisions regarding sensitive sectors, the law gives way to a case-by-case approach for approving investment projects in those sectors. This can be seen as a gesture to appease the vested interests of wealthy tycoons affiliated with, and proxies of, the former military regime. Foreign multinationals eager to invest in restricted sectors may be inclined to seek out local partners with established ties to government officials, therefore further enriching already wealthy and politically connected businessmen.

Rules and regulations to implement the newly passed law are expected to follow in about 90 days. Putting in place a foreign investment legal framework is a necessary first step in administering wide-ranging economic reforms. Myanmar is admittedly the first country in the region to adopt radical political and economic reforms simultaneously, and the degree of economic dividends delivered by the coming wave of foreign investment will be a decisive factor in determining the next turn of the country’s nascent democracy.

Ms. Phuong Nguyen is a researcher with the CSIS Chair for Southeast Asia Studies.

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