Literature Review The Impact of Foreign Direct Investment in Myanmar

LiteratureReview: The Impact of Foreign Direct Investment in Myanmar

LiteratureReview: The Impact of Foreign Direct Investment in Myanmar

Thedeveloping countries consider foreign direct investment (FDI) as aneffective tool that can help them unlock their economies. FDIsupports economic growth through technology transfer and the inflowof capital into the host country. Foreign companies tend to have acompetitive advantage over local firms, since they use newtechnology, knowledge, and production methods (Melnyk, Kubatko &ampPysarenko, 2014). Developing countries assume that the lack of moderntechnology and capital are the key bottlenecks that limit theirdevelopment. This literature review will focus on the advantages anddisadvantages of FDI in Myanmar. Myanmar is a country located inSoutheast Asia.

Growththeory

Thegrowth theory is based on an assumption that a sustainable economicgrowth is achieved when there is an optimum allocation of resources.The optimum allocation of resources is influenced by several factors,including the availability of the government incentives, appropriatepolicies that attract investors, and the growth of science (Masoud,2014). This implies that a country with adequate resources andfactors of production may fail to achieve sustainable economic growthin case it lacks suitable policies, incentives, and the scientificknowledge to exploit the available resources. This has been the casewith Myanmar, which was ranked as one of the 13 poorest countries inAsia, in spite of the fact that it has natural resources and a youngworkforce.

PresidentThein Seign attracted foreign investor by initiating policy reformsthat prepared the country for economic engagement with the world. Oneof the key benefits that Myanmar got from the FDI is a growth in theGDP. The country recorded a GDP growth rate of below seven percentageprior to the financial period 2007/2008, but this rate had reached8.5 % by the financial year 2014/2015 (Japan InternationalCooperation, 2015). After creating an environment for FDI, Myanmarattracted additional $ 3,282 million and $ 4,661 million of foreigndirect investment in the years 2014 and 2015 respectively. About 24 %of the funds were channeled to the manufacturing sector, while 20 %of the funds boosted the construction sector (JIC, 2015). Inaddition, a change of policy from a central planned economy to aliberalized economy attracted the scientific knowledge and financialcapital that helped Myanmar exploit its wide range of naturalresources, such as coal, natural gas, and metals (Clark, 2011).

Apartfrom the establishment of a sustainable economic growth that has beenachieved through the exploitation of natural resources, Myanmar hasbenefited from FDI through the creation of employment opportunities. FID facilitated the spillover of technology from the nearby countries(such as Malaysia, India, and China) into Myanmar, which empoweredthe local workforce to work in factories, construction industry, andother economic sectors (Flamini, Eckhold, Jahan, Tun., Kashiwase &ampWong, 2015). Therefore, FDI has helped Myanmar address the challengeof unemployment.

Internationalproduction theory and the growth of export trade in Myanmar

Theinternational production theory holds that the propensity ofcompanies to start the process of producing goods for theinternational market depends on resource implications and otherincentives in a given country as compared to advantages of operatingin a different country (Gillies, 2011). In addition, differentactions taken by the government determine the attractiveness of thecountry and the ability of the companies operating in it to producegoods that are competitive in the international market. In the caseof Myanmar, the government established an environment that wasattractive to foreign investors. The adoption of the open doorpolicies that permitted local companies to partner with foreign firmsand international corporations to invest in the local market was inline with the government’s objective of creating an export-orientedeconomy.

Theentry of the international investors into Myanmar’s market throughthe government’s FDI initiatives helped the country to enhance itsbalance of trade by increasing its export trade. For example, FDIincreased the amount of financial resources and technical skills thatMyanmar required to exploit the natural resources. These naturalresources (such as natural gas) account for 70 % of the Myanmar’srevenue that is generated from export business annually, whichrepresents about 10 % of the national GDP (Lynn &amp Oye, 2014). Thecountry has a lot of natural resource deposits (including the 160million barrels and 20.11 trillion cubic feet of potentialdiscoveries of oil and gas) that could not be exploited withoutinflow of FDI (Lynn &amp Oye, 2014). Moreover, FDI that targeted themanufacturing sector allowed Myanmar to increase its proportion ofmanufactured goods (including clothing and apparel) that are sold inthe international market to 21 % from 13 % (Bissinger, 2012). Byexpanding its export trade, Myanmar has managed to increaseproductivity of its economy and improve the balance of trade.

Decapitalizationtheory

Thetheory of decapitalization holds that the host countries do notbenefit from FDI in the long-run. This is because FID, in most cases,comes from large international corporations that take up theinvestment opportunities held by the local firms (Bissinger, 2012).These corporations impoverish the host country in the long-run byrepatriating the profits that they earn to their countries of origin(Buettner &amp Wamser, 2013). A permission to repatriate profits isone of the key conditions and an incentive promised to foreigninvestors in order to attract them to invest in the local market.

Thelocal companies operating in Myanmar faced a stiff competition fromthe foreign companies that were encouraged by the government toinvest in the country. Terms set by the government of Myanmar weretoo favorable for FDI, but the stakeholders in the economy sectordoubted the capacity of the local investor to survive the stiffcompetition. In addition, the government aimed at enhancing the GDPgrowth, but the impact was quite limited due to the impact of therepatriation of profits and less than expected levels of FDI inflows(Trevor, 2012). This implies that most of the benefits associatedwith FDI are short-term, but the host country and local investorslose in the long-run, especially when FDI inflows are brought aboutby large multinational corporations.

Conclusion

Countriesencourage the inflow of foreign direct investments with theobjectives of enhancing their GDP growth and unlocking their domesticeconomies. Myanmar increased its rate of growth in GDP by expandingits export trade, creating jobs for unemployed citizens, increasingthe reserve of the foreign currency, and technology transfer. Theinflow of FDI in Myanmar unlocked two sectors, including themanufacturing and mining. Foreign investors provided the country withthe technology required to mine the natural resources (including thenatural gas), which played a critical role in boosting the exporttrade. However, FDI is associated several disadvantages, including astiff competition for the local firms and repatriation of profits tothe countries where foreign companies or investors belong.

References

Bissinger,J. (2012). Foreign investment in Myanmar: A resource boom but adevelopment bust? ContemporarySoutheast Asia,34 (1), 23-52.

Buettner,T. &amp Wamser, G. (2013). Internal debt multinational profitshifting: Empirical evidence from firm-level panel data. NationalTax Journal,66 (1), 63-96.

Clark,K. (2011). The prospects for change in Burma: Examining the role offoreign direct investment. ColgateAcademic Review,9, 108-147.

Flamini,V., Eckhold, K., Jahan, S., Tun., K., Kashiwase, K., &amp Wong, Y.(2015). Myanmarselected issues.Washington, DC: International Monetary Fund.

Gillies,G. (2011). Theories of international production: A criticalperspective. CriticalPerspective on International Business,3 (3), 196-210.

JapanInternational Cooperation (2015). Long-termforeign direct investment promotion plan in Myanmar.Tokyo: JIC.

Lynn,T. &amp Oye, M. (2014). Naturalresources and sub-national governments in Myanmar.London: International Growth Center.

Masoud,N. (2014). A contribution to the theory of economic growth: Old andnew. Journalof Economics and International Finance,6 (3), 47-61.

Melnyk,L., Kubatko, O. &amp Pysarenko, S. (2014). The impact of foreigndirect investment on economic growth: Case of post communismtransition economies. Problemsand Perspectives in Management,12 (1), 17-24.

Trevor,W. (2012). Thepolitics of investing in Myanmar.Sydney: Australia-Myanmar Chamber of Commerce.