7. Making the most of economic zones

Following the experience of regional peers, Myanmar is advancing an ambitious programme of special economic zone (SEZs) and industrial zone development, with the aim of attracting investors, creating jobs, and developing industry. Currently there are three SEZs and 19 industrial zones across the country. These zones impose a cost on society through forgone revenues from tax incentives, duty exemptions and infrastructure investments specific to the zone. In order to justify their establishment, the associated societal gains must outweigh these costs. In principle, zones, particularly SEZs, have the potential to generate long-run spillovers that benefit workers and firms beyond their confines through knowledge transfers, in addition to being a potential source of foreign currency as they typically target more export-oriented industries. In practice, the experience of SEZs as a vehicle for development has been mixed, depending much on the quality of policies and business environment in which they operate. On the positive side, host countries can, to a certain extent, influence the spillover potential of SEZs with appropriate policies and institutions targeting skills and supplier development, and facilitating the exchange of information between SEZ investors and local companies.

Some important differences in the framework for SEZs and industrial zones exist in Myanmar. SEZ programmes are governed by a special regulatory and institutional framework, dealing with trade, investment, land, tax, labour and environmental policy. The main legislation covering the regime for the establishment and operation of SEZs and the rights and obligations of SEZ authorities, developers and users is the 2014 Special Economic Zone Law. Industrial zones, on the other hand, do not offer a special regulatory or customs regime, and have until recently not been subject to dedicated legislation. The government submitted a draft Industrial Zone Law to Parliament in late 2019, enacted in May 2020, with the objective of ensuring a more systematic approach to zone planning and development.

To attract investors, the Myanmar SEZ Law offers a generous incentive package, including a corporate tax holiday of up to seven years, and a subsequent extended period of reduced corporate tax rate, as well as deductions linked to R&D investments and local staff training activities. In addition, the law mandates the establishment of a one-stop shop to access all government services and clearances, and the provision of basic infrastructure and utilities. In return, investors are subject to a minimum investment requirement, restrictions on domestic sales and employment of foreign personnel, and staff training obligations.

Compared to the in-land regime, the 10-year 50% corporate tax rate reduction offers a substantial competitive advantage, which partly justifies the restrictions on domestic sales of free zone investors, as a means of protecting inland investors from unfair competition. However, a less distortionary approach would be to gradually phase out the reduced tax rate, as has been the case in many regional peers, while relaxing the export share requirement, which would allow inland companies to benefit from high-quality goods produced in the zones.

Thilawa SEZ is currently the most advanced SEZ in Myanmar, with high quality facilities, public utilities and transport links. Its Management Committee, the TSMC, established a One-Stop Services Centre that significantly reduces the number of public officials with which investors must engage and offers expedited one-stop clearances for all necessary approvals and registrations. The TSMC is in the process of developing a portal for investors to submit applications and obtain approvals online, and has committed to specific turnaround times for many procedures, on par with zones that are internationally recognised for their good practice in business facilitation. It has also issued a notice clearly stating RBC expectations that apply to all companies doing business in Thilawa. As such, Thilawa can serve as a model for other industrial zones in terms of infrastructure development and zone management, and as a laboratory for policymakers to test new policies, like simplified regulations or RBC policies, before rolling them out to the wider economy. While it is too early to assess Thilawa’s wider economic impacts, currently, 74 businesses are operational in the SEZ and account for around 9 000 jobs; a quarter of these businesses have already started exporting. Moreover there is evidence that Thilawa is contributing to skills development, as reported by surveyed zone workers, while the extent of backward linkages with non-zone firms remains limited mainly because of the still limited capacity of domestic firms (IGC, 2018).

The planning and administration of industrial zones is generally less well developed compared to that of SEZs. Until now, management committees have not been subject to rules or standards for developing and managing the zones, and the respective roles of different government bodies in administering zone development were not clearly defined. The weak and outdated legal framework has resulted in the rapid proliferation of industrial zones with inadequate planning and little assurances on their performance and benefits. Many industrial zones have inadequate infrastructure, unused plots and irregular use of land. Infrastructure investment and maintenance have been insufficient over the years. Roads are in poor condition even in zones surrounding the main urban areas, and drainage and waste management continue to be a concern. The high prices of land in these zones have led many companies to sell their plots and take their operations outside the zones, defeating any strategy behind zone development. The newly enacted Industrial Zone Law of May 2020 sets out that existing zones shall comply with provisions of the new law, including on land use, environmental conservation, and infrastructure provision. If appropriately enforced, this new legal framework is likely to deliver significant improvements in industrial zone performance.

Mingaladon Industrial Park, developed by a public-private joint venture between the Myanmar government and a Japanese trading and investment company is a notable exception to the general shortcomings of industrial zones. It is widely considered to have the most advanced facilities of any industrial zone in Myanmar, which along with its proximity to Yangon are its main attraction to investors. Unlike other industrial zones in the country, Mingaladon is fully operational with some 41 running businesses occupying all available plots, and employing tens of thousands of workers in light manufacturing activities. But business facilitation in Mingaladon is little better than in other zones or in the wider economy. Building on the Mingaladon experience, the Myanmar government is looking to develop other two industrial parks in partnership with the foreign investors, namely with the Thai Amata Corporation and with the Korea Land and Housing Corporation. It is expected that these new zones will set new improved standards for future industrial zones in the country (Myanmar Times, 2019a and 2019b).

The MIPP proposes a set of actions to improve administration policies of industrial zones, including devising a zone allocation plan based on the investment and linkage potential of different regions; clarifying the roles and responsibilities of different institutions; setting the rules and requirements in terms of activities, infrastructure provision and environmental protection; and examining opportunities for streamlining business-related procedures through a one-window service. The government has since enacted a new Industrial Zone Law as mentioned above and is in the process of amending the Private Industrial Enterprise (1990) and the Small and Medium Enterprise Development (2015) Laws, for the purpose of increasing investment, strengthening links with SEZs, upgrading existing industrial zones and developing sustainable industries. If designed appropriately and in the line with the actions proposed by the MIPP, these laws have the potential to support framework conditions that are conducive to new investment attraction and industrial linkage development in Myanmar’s industrial zones.

Myanmar is currently able to offer abundant labour to investors at a competitive cost but with an insufficient supply of workers with technical or managerial skills, who are vital for the adoption of new technologies and for effective business management. The combination of tax deductions for training expenses, investor obligations to provide training activities, and gradually increasing restrictions on foreign skilled labour may serve to effectively transfer knowledge to local employees and develop the technical skills base. But restricting foreign personnel without a parallel initiative to develop the local skills base will only serve to discourage potential investors from choosing to locate in Myanmar. In parallel, the education system is undergoing a major overhaul and the MIPP proposes concrete actions to develop human resources for industry, including monitoring private sector needs and facilitating dialogue between government bodies that oversee vocational education and skill development, education and training institutions and private sector representatives. These actions, if implemented, have the potential to foster the sorely needed technical and managerial skills.

Given the limited base of local suppliers, Myanmar is still at an early stage with respect to linkage programmes, and still relies heavily on donor support to develop the necessary framework for integrating local suppliers in the supply chains of foreign investors. Going forward, successful special economic zones and industrial zones, like Thilawa and Mingaladon, offer a good starting point for implementing pilot linkages programmes. The TSMC could also promote the matching of buyers and sellers by, for example, providing firms in the zone with a list of firms in the Yangon region, and in neighbouring IZs that are producing the relevant inputs or through networking events.

Economic zones have become the preferred instrument of many governments to achieve a number of policy objectives, ranging from FDI attraction to industrial development. Recent estimates suggest that there are nearly 5 400 SEZs globally, of which more than 1 000 established within the last five years (UNCTAD, 2019). Despite many variations in name and form, economic zones can broadly be defined as designated areas where business activity is subject to different rules from those prevailing in the national territory. These distinct (and often laxer) rules are intended to create a business environment that is relatively more liberal from a policy perspective and more efficient from an administrative perspective (Farole, 2011).

Common features of zones include a defined geographic perimeter, reduced tax burden, infrastructure support, simplified regulatory requirements (e.g. with respect to land access, permits and licences, or employment rules), and streamlined administrative procedures (e.g. for registration, customs, etc.) that are often governed by a single autonomous authority. In return for these concessions, governments expect investors in zones to create jobs, boost and diversify exports, and build productive capacity. Their attractiveness to policymakers stems also from their potential use as experimental laboratories where new policies can be tested before being rolled out to the rest of the economy, and more generally to catalyse structural transformation. In practice, evidence of the success of zones in meeting their development objectives is mixed (Box 7.1).

Economic zones generally fall under one of four categories: free zones, export processing zones (EPZs), special economic zones (SEZs), or industrial zones or parks (Table 7.1). Free zones and traditional EPZs are long-established models that are essentially separate customs territories designed to facilitate trade and increase export earnings, respectively. Modern SEZs and industrial zones have a broader development mandate and are designed to facilitate the formation of industrial clusters. SEZs, which are governed by special legislation, typically follow a multi-sector approach and sometimes include other zone models (e.g. large-scale SEZs may include EPZs and industrial zones within them), while industrial zones are usually sector-specific with adapted infrastructure (e.g. science and technology parks) but do not offer special regulatory treatment.

Following the experience of some ASEAN peers and China, the government of Myanmar is advancing an ambitious programme of SEZ and industrial zone development, with the aim of supporting structural transformation of the economy (OECD, 2014). As of November 2019, the government designated three SEZs and 19 industrial zones. Of the three SEZs (briefly characterised in Table 7.2), only Thilawa is currently in operation and is home to 113 residents. Spread across the country, industrial zones were mostly established over 1996 to 2010 and host almost 7 500 residents as of November 2019 (Figure7.1). The three industrial zones in the Yangon region occupy 65% of the country’s industrial land and are divided into 35 separately managed industrial areas and parks. Data shared by the authorities indicates that, including all industrial sub-zones, there are a total of 53 active zones and at least another three planned zones. The overall framework governing zones in Myanmar, and the implementation and performance of Thilawa SEZ and Mingaladon Industrial Park are the focus of the remainder of this chapter.

SEZ programmes are usually governed by a special regulatory and institutional framework, dealing primarily with trade, investment, land, tax, labour and environmental policy (Table 7.3). Within this framework, SEZ legislation sets out the regime for the establishment and operation of SEZs and stipulates the rights and obligations of SEZ authorities, developers, operators, and users. The main legislation covering the definition, procedures and administration of SEZs in Myanmar is the 2014 Special Economic Zone Law (henceforth, SEZ Law), implemented by the 2015 Myanmar Special Economic Zone Rules (SEZ Rules). Multiple provisions in the SEZ Law reaffirm the applicability of national laws on land, environment and labour.

Industrial zones, on the other hand, have not been subject to any dedicated regulation to date, although this may change rather soon. The government has already submitted a draft Industrial Zone Law to the parliament and expects it to be enacted before end-2019 (Frontier Myanmar Research, 2019). The goal of the proposed law is to ensure a systematic approach to planning zones and that their development and management meets international standards.

SEZ programmes that generate extra-zonal benefits through significant linkages with the domestic economy are developed with a clear vision and strategy for achieving specific goals, and are part of a broader development agenda. This strategy is ingrained in SEZ law, through provisions on SEZ definitions, objectives and targeted activities, establishment procedures, investment attraction tools, and operational requirements for investors.

According to a recent UNCTAD survey of SEZ laws in 115 countries, over 90% of SEZ laws contain a general definition of SEZ, but less than a third explicitly mention specific zone types and define them. Under two thirds of surveyed laws state the objectives of the zones. The most frequently cited objectives are static economic impacts such as attracting investment, boosting exports and creating jobs (59%). Around half of the laws articulate dynamic growth objectives, seeking innovation, industrial upgrading, skills development, economic diversification, structural change or integration into value chains. Only 20% specify sustainable development objectives, relating to job quality, environmental protection, or gender issues (UNCTAD, 2019).

The Myanmar SEZ Law provides a general definition of SEZ based on geographic demarcation and legal notification by the competent authority, and further specifies the types of zones (or activities) that can be established within the SEZ. Free Zones, deemed outside national territory and exempt from customs duties are to prioritise export-oriented manufacturing activities; while Promotion Zones, subject to national trade and taxation rules, serve primarily the domestic or internal SEZ markets. A third “other zone” type, can be stipulated by the SEZ managing committee according to market demand in addition to the free zone and promotion zone. There need not be a physical demarcation of free zone activities and promotion or other zone activities within the SEZ.

The objectives of SEZs in Myanmar are clearly stated in Article 4 of the SEZ Law. They include static economic, dynamic growth and sustainable development objectives and are explicitly linked to a broader development strategy, in accordance with good practice. Notably, the SEZ programme aims to support the national economic development plan; create jobs and improve the standard of living of workers; promote economic cooperation with other countries and provide opportunities for vocational training; encourage both domestic and foreign investment; and support the creation of industrial linkages. These objectives, and particularly mention of domestic investment, linkages and vocational training opportunities provide a good basis for a zone programme that generates spillovers.

Most SEZ laws contain a range of investment attraction instruments that confer special treatment to investors in zones, relative to the general legal framework (Table 7.4). The most common are fiscal incentives and special customs regimes, addressed by 85% and 82% of SEZ laws, respectively. Much fewer contain provisions on investment facilitation, investor protection, or land use (28–36%), followed by trade facilitation and infrastructure provision (18-19%); and only 3% provide for social amenities such as schools and hospitals (UNCTAD, 2019). The Myanmar SEZ Law is relatively comprehensive, applying all of these tools aside from social amenities (which can but need not be established in promotion zones) to make SEZs attractive to investors.

Commonly used fiscal incentives include exemptions or reduced tax rates on corporate income tax (CIT), tax deductions or credits on expenses (e.g. R&D), and accelerated depreciation of assets. Incentive schemes, particularly tax holidays can impose significant fiscal costs. In Cambodia, the incentive regime is among the least generous in the region, yet forgone revenue due to tax incentives was estimated to amount to 6% of GDP (OECD, 2018a). Incentives that lower the cost of investment (e.g. tax deductions and credits) are considered more efficient for attracting new investments than profit-based tax incentives (e.g. tax holidays and reduced CIT), which by design make already profitable projects even more profitable. Incentives that target specific activities (e.g. training or supplier development) involve greater transaction costs both in terms of understanding eligibility and of monitoring compliance, but, if effectively implemented, can support the achievement of socio-economic objectives.

The Myanmar SEZ Law specifies that businesses in the free zone and promotion zone receive corporate tax exemptions for the first seven or five years, respectively, followed by a 50% reduced CIT rate for the second five years, plus an additional five-year reduced rate on reinvested profits. Then the standard corporate tax rate of 25% applies. Dividends paid out to shareholders from taxed profits are exempt from dividend tax. Additionally, free zone investors are exempt from customs duties and commercial taxes on all imports used for production (including imports from promotion zones), while promotion zone investors can apply for exemption on imported capital goods, only. Expenses related to staff training and research activities incurred by investors in free zones can be deducted from taxable income.

At first glance, a comparison of the Myanmar SEZ Law1 and the Myanmar Investment Law2 suggests that promotion zone investors and inland regime investors are essentially under the same tax and customs regime, and exporters in the inland regime have access to similar fiscal and customs advantages as free zone investors (Table 7.5). However, an important difference in the two regimes is the extended period of reduced CIT rate after the initial CIT holiday, available to both export-oriented (free zone) and domestic market-oriented (promotion zone) investors (Table 7.4). While this may compensate market-seeking investors for high costs related to market penetration and product adaptation, this fiscal advantage may be particularly detrimental for domestic non-zone companies that compete for the same market as promotion zone investors.

While the corporate tax holiday is similar to or shorter than the SEZ regimes of regional peers, this is one of the more generous incentive packages offered in the region (along with Indonesia, Lao PDR and Viet Nam), as a result of the long period of reduced CIT rate.3 Many regional peers have abolished reduced tax rates in zones altogether, in line with wide consensus among international experts to simplify tax regimes and reduce reliance on tax incentives. Cambodia took this approach, offering essentially no special fiscal treatment to companies in SEZs to date. This avoids creating a dual regime system that can be an added source of complexity and distortion (OECD, 2018a). More advanced countries in the region have moved away from zone-based incentives, to targeting priority sectors and activities. Prioritising industries can also be problematic and may not be suitable for Myanmar at this stage, but there may be scope for further reducing fiscal privileges of investors in zones relative to the wider economy.

On the other hand, tax deductions granted under Article 52 of the SEZ Law for staff training expenses can make an important contribution to upgrading skills and building local capacity. The government may consider extending these deductions to investors in promotion zones and in the inland regime.

While financial incentives are influential, they are not the only considerations for investors. Non-pecuniary incentives strive to improve the business climate within the SEZ, and have been found to matter more for SEZ success than tax incentives, based on data from 77 countries (Farole, 2011). Among the main obstacles faced by domestic and foreign investors in Myanmar are access to electricity and access to land (World Bank, 2016). The Myanmar SEZ framework alleviates these constraints by requiring developers to provide basic infrastructure and utilities; by sidestepping the costs imposed by inadequate land registry and conversion of land use categories; and by protecting against land expropriation.

The SEZ Law further mandates the establishment of a one-stop services centre (OSSC) to access all government services and clearances, where on-site representatives from relevant government departments are granted authority to issue all necessary permits without seeking approval from line ministries. Customs officers are similarly required to provide simplified and expedited clearance procedures on-site. This is a huge benefit, as there is effectively still no one-stop clearance for an investor outside the SEZ, and the investor has to make several applications across various ministries to get approval for the project.

Over a third of SEZ laws specify criteria that investors must meet to establish and operate in SEZs, including minimum investment and performance requirements related to exports, employment and skills transfer (UNCTAD, 2019). The Myanmar SEZ Laws and Rules similarly establish these requirements, which are somewhat more onerous compared to other regional peers in terms of capital and export requirements (Table 7.6). In particular, free zone investments in Myanmar are subject to a 75% export share requirement (ESR), and supporting industry activities of free zones must sell 80% of their output to free zone exporters. In contrast, zone investors in Cambodia, Lao PDR and Viet Nam are not restricted from selling to the domestic market provided these sales are treated as imports and subject to general tariffs and customs procedures.

The statutory ceiling on domestic sales, or export share requirement, is intended on the one hand, to protect firms in the inland regime from exposure to unfair competition from free zone firms under special investment regimes, and on the other to develop exports and avoid creating incentives for domestic market-seeking firms to relocate to free zones. However, it may distort investors’ allocation of sales across domestic and export markets to comply with the ESR and enjoy the associated incentives, or prevent them from adjusting to macroeconomic fluctuations in demand. Moreover, it limits the extent to which the domestic industry and Myanmar citizens can, respectively, benefit from high-quality inputs and consumer goods produced in free zones. This may be particularly damaging to both SEZ investors and Myanmar consumers since the onset of the COVID-19 pandemic and the related impediments to trade. Lastly, monitoring the implementation of ESRs can be costly from an administrative point of view.

At the same time, the current preferential treatment available to both export-oriented and domestic market-oriented investors (i.e. the extended 50% CIT rate reduction) goes counter to the justification of protecting inland investors from unfair competition. Gradually lowering import tariffs and easing import procedures under the inland regime while phasing out profit-based corporate tax incentives in the zones may reduce the costly comparative advantage gap between free zone and inland investors (OECD, forthcoming 2020). This was the approach adopted in Cambodia, where zone investors enjoy virtually no fiscal advantage compared to the inland regime.

Among the countries considered only Cambodia and Myanmar require investors to train local staff. Specifically, Article 73 of the SEZ Law mandates the provision of training and course material on subjects relevant to the business “for the improvement of the skill of the citizen staff”. In Cambodia, all investors, within and outside zones are required to provide adequate and consistent training to Cambodian staff under the national investment law. Moreover, zone developers have a duty to cooperate with the Ministry of Labour and Vocational Training to facilitate the training of Cambodian workers and employees and to promote new knowledge and skills through specifically-designed programmes.

Similar to its regional peers, Myanmar allows the employment of foreign personnel in SEZs only for activities requiring technical or managerial skills. In particular, Article 75 of the SEZ Law requires plants to gradually shift their skilled labour force towards Myanmar citizens, from at least 25% in the first year of operation to 75% in the fifth year. In Cambodia the law is much more restrictive allowing for at most 10% of skilled workers to be foreigners; while, at the other end of the spectrum, Viet Nam does not impose any restriction on skilled foreign employees. Combined with Article 73 on training requirements, and Article 52, on tax deductible training expenses, Myanmar’s approach of gradually increasing the foreign employment restriction may be a way of fostering skills upgrading and anchoring investors to the country, although it entails the potentially high administrative costs of monitoring and enforcing the regulation. A less restrictive approach like that of Viet Nam, on the other hand, gives investors greater flexibility to bring in qualified manpower with the required qualification, increasing the zones attractiveness.

As discussed in Chapter 6, Myanmar’s regulatory framework for Environmental Impact Assessments (EIAs) is set out in the 2012 Environmental Conservation Law (ECL) and its implementing regulations. The framework precedes the 2014 SEZ Law, and explicitly references SEZs only with respect to environmental conservation (e.g. waste treatment). In turn, the SEZ Law embeds the ECL framework by requiring all zone developers and investors to abide not only by the environmental standards described in the ECL, but also by international standards. The SEZ Law does not attach any environmental permitting responsibility whatsoever to the SEZ Authority. The SEZ management committee is only mandated to supervise and ensure compliance of both zone developer and investors in the SEZ with the existing laws relating to the conservation and protection of natural environment.

As such, there are no provisions in either law or respective implementing regulations that establish dedicated arrangements for EIAs on SEZs and SEZ investments or which exempt them from the purview of EIA requirements established in the ECL (Baird and Cosier, 2016). Nonetheless, stakeholders have reported cases of SEZ developers and investors pursuing their investments without obtaining the required approvals from the Environmental Conservation Department (ECD) of the Ministry of Natural Resources and Environmental Conservation as stipulated in the ECL. For the moment, under the current legal framework, these and any other future SEZ investment project relying simply on the investment permission issued by the SEZ authority, where it would have been subject to EIA approvals if located outside the zone, are likely to be in violation of Myanmar law. The Government needs to resolve this inconsistency by amending the implementing regulations of either law and creating a dedicated EIA regime for SEZs.

SEZs have a complex institutional set-up involving multiple public- and private-sector actors with different roles and responsibilities:

  • The government sets the overall development objectives and implements the underlying economic policies, including SEZ programmes.

  • Most governments establish an SEZ authority, responsible for the strategic and operational planning of the SEZ programme, and for overseeing development and administration of zones. The authority usually responds to the highest levels of government, in the form of an independent specialised agency or a state-owned enterprise.

  • The zone developer, under the supervision of the SEZ authority, implements a zone project, providing infrastructure and making land arrangements. Given the requisite technical and financial capacities, many countries opt for private sector involvement in zone development, and over 40% of SEZ laws include incentive schemes to attract private developers (e.g. tax breaks and preferential land use).

  • Zone users, or investors, are the intended beneficiaries of the special regime, and contribute their productive and technological capabilities to the zone.

Like most countries, Myanmar established a separate SEZ authority, the Central Body, to co-ordinate zone policies and initiate related programmes. As it responds directly to the presidential cabinet and is chaired by the Vice President of Myanmar, the Central Body enjoys considerable autonomy in performing its duties, which include establishing SEZs; appointing and supervising each zone’s management committee; selecting zone developers; and approving zone development plans submitted by the committees. The Central Body is also charged with forming a Central Working Body chaired by the Minister of Commerce to scrutinise proposed zone development plans and provide assistance in the implementation of SEZ activities.

The management committee of a zone, in turn, is charged with supervising the zone’s development and day-to-day operations, providing all required permits within a prescribed time-frame (30 days), and establishing the one-stop window for issuing permits to investors. Within the SEZ, it can stipulate the demarcation between free zone, promotion zone, and other zone as it deems fit.

The developer, selected by the SEZ authority and licensed by the management committee, carries out the implementation and maintenance of the SEZ, and subleases land to investors. The SEZ Law specifies that the developer can be public, private, a public-private joint venture, fully domestic, fully foreign, a foreign-domestic joint venture, or an inter-governmental venture.

This institutional model (Figure 7.1) gives broad flexibility to policymakers to shape SEZ regimes according to zone activities and specific investment projects. It allows for developers to retain broad autonomy in their operations and to leverage the expertise of foreign public and private investors, while SEZ authorities retain some control over the admission process through the management committees.

Contrary to SEZs, the legal framework, planning and administration of industrial zones in Myanmar are generally inferior to advanced ASEAN countries (MIC-JICA, 2018). Most zones were created between 1991 and 2010, and, up until now, have been governed by the directives of related ministries and the 1990 Private Industrial Enterprise Law (PIE). In this framework, the authority that oversaw industrial zones was the Directorate of Industrial Supervision and Inspection (DISI) under the Ministry of Industry. Management committees under DISI’s oversight supervised industrial zone activities and provided the necessary services to business but were not subject to rules or standards for developing and managing the zones. The respective roles of different government bodies in planning and implementing zone development were not clearly defined. This weak legal framework resulted in the rapid proliferation of industrial zones with inadequate planning and little assurances on their performance and benefits to society at large.

There are limited investment climate incentives for establishing within existing zones, as business-related procedures are as costly and time-consuming as outside the zones. Corruption and regulatory red tape in particular make it difficult and time consuming to obtain the land ownership documentation required for loans or to import new technologies. Investors often have little understanding of the laws surrounding industrial processes, and find that many of these laws are unclear and applied unevenly. In practice, business owners must submit to the arbitrary request of officials. Whether or not these requests are supported by actual laws is often unknown by business owners (FNEFF, 2015).

Many industrial zones have inadequate infrastructure, unused plots and irregular use of land (a notable exception discussed in more detail in the next section is Mingaladon Industrial Park), being simply the result of the transformation of agricultural to industrial land (see Chapter 8 for a discussion on challenges related to land allocation and administration more generally). Infrastructure investment has fallen short of the needs of businesses, particularly for the more peripheral zones, and maintenance has been insufficient over the years. Roads are in poor condition even in zones surrounding the main urban areas, and drainage and waste management continue to be a concern, particularly as most zones were developed with inadequate waste management systems prior to the 2012 Environmental Conservation Law. The high prices of land in these zones have led many companies to sell their plots and take their operations outside the zones, defeating any strategy behind zone development. Also, the location of some industrial zones is questionable, as they are not connected to markets and trading routes (OECD, 2014).

In light of these shortcomings, the MIPP proposed a set of actions to improve administration policies of industrial zones, as part of the wider 2017-36 investment promotion strategy (Table 7.7). These actions include devising a zone allocation plan based on the investment and linkage potential of different regions and economic corridor considerations; clarifying the roles and responsibilities of different institutions; setting the rules and requirements in terms of zone activities, infrastructure provision and environmental protection; and examining opportunities for streamlining investment-related procedures through a one-window service.

The government has since submitted to Parliament a new Industrial Zone Law with the stated objectives of enhancing opportunities for investment, controlling and managing environmental impacts caused by industry, ensuring systematic planning of new zones, upgrading infrastructure of existing zones. Under the new law, enacted on 26 May 2020, industrial zones are governed by a three-tier system for policy design, oversight and management. A newly established Industrial Business and Industrial Zone Development Central Committee (Central Committee), chaired by the Minister of Planning, Finance and Industry, sets policies and reviews proposals to develop industrial zones. The Central Committee oversees regional supervisory committees, in turn chaired by regional ministers and charged with governing the zone programmes of their respective regions. Private sector representatives are included in the membership of regional committees. Individual zones and their day-to-day activities are then administered by management committees chaired by representatives elected by the zone investors under the supervision of their region’s supervisory committee. Management committees will also at least be partly composed of investors.

The new law contains provisions on land use, environmental conservation, taxation and incentives, rights and obligations of developers and investors, and settlement of administrative disputes. For instance, under the IZ Law, regional supervisory committees are responsible for subjecting existing zones to environmental conservation plans, identifying any unused land plots, and reallocating them to SMEs. Prerequisites for new zones include strategic location with transport links to domestic and international markets; infrastructure development; sufficient land area; access to water and electrical power; and support for skills development through training opportunities. In addition, DISI is trying to draft a new and more comprehensive industrial law to replace the 1990 PIE law, and to amend the Small and Medium Enterprise Development Law (2015).

If these laws are enacted as proposed and in line with the actions proposed by the MIPP, together with the new IZ Law, they have the potential to support framework conditions that are conducive to new investment attraction and industrial linkage development. These laws should also aim to enhance the environmental performance of industrial activities, including by aligning and ensuring adequate monitoring of industries compliance with national standards, such as the Myanmar National Environmental Quality (Emissions) Guidelines (2015) which provides for controls on noise and vibration, air emissions, and liquid discharges from various sources (see Chapter 6 for more information on environmental standards).

In practice, existing management committees of selected zones have already started monitoring water use and examining opportunities for developing waste water treatment systems in their respective zones, under the guidance of the Environmental Conservation Department, and with the support of donors (JICA, 2018).

SEZs and IZs are part of a broader national investment promotion and facilitation framework that comprises national and regional policies, legislation and institutions. As mentioned in previous chapters, the Myanmar government has taken significant strides toward strengthening the institutions and measures to promote and facilitate investment in the country, notably through the Investment Policy announced in 2016, and the new investment regime under the Myanmar Investment Law and Special Economic Zone Law.

Currently, DICA under the Ministry of Investment and Foreign Economic Relations is responsible for the overall investment promotion strategy and related activities, while SEZ programmes are under the direct supervision of the cabinet of ministers with the Ministry of Commerce providing an advisory role, and industrial zones are under the oversight of the Ministry of Planning, Finance and Industry. While it is not unusual for countries to have multiple institutions promoting investments at national and zone levels, what is important is for the activities and mandates of these institutions to be clearly outlined and co-ordinated to avoid wasteful duplication and overlap. Myanmar could look at the experience of other regional peers with different degrees of centralisation of FDI promotion efforts and zone programmes, and their respective successes and failures (Box 7.2).

There has been little systematic research on the impact of zones, as monitoring data on zone performance are rarely collected or comparable across countries. Zone assessments are largely based on case studies, which often focus on success stories and the characteristics that make them successful rather than providing a comprehensive cost-benefit appraisal.

The expected benefits of zones are both direct and indirect. Direct benefits include FDI attraction, job creation and income generation, export growth and diversification, and foreign exchange earnings. Indirect economic benefits are more difficult to define and measure, but are an essential component of the sustainable development impact of zones. They include supplier linkages beyond the confines of the zone and the indirect employment they create, as well as the induced income and jobs resulting from spending of zone wages in the wider economy.

Importantly, the benefits of SEZs should be weighed against their costs, which include the capital expenditure for zone development, the cost of operating the zone authority and other operating expenses, and the public revenues forgone through tax exemptions. Public expenditures on SEZs tend to be highest where governments develop and manage zones (UNCTAD, 2019). The combined economic impacts of a zone net of its investment and operating costs provide a measure of the zone’s financial viability, including the payback period on zone investment and the long-run fiscal burden it generates.

As mentioned earlier, zones can also generate dynamic economic effects through their impact on technology and skills development. These include promoting industrial upgrading and economic diversification, as well as enhanced regional co-operation and integration in regional and global value chains. Beyond economic impacts, zones can have positive or negative social and environmental impacts, by affecting for instance labour conditions, land use and pollution. Finally, zones that are used for policy experimentation can provide valuable policy lessons and catalyse reforms (or alternatively reduce pressure for governments to pursue difficult national reforms). The net economic, social, and environmental benefits of zones and their effects on policy reform capture their overall sustainable development impact, which is what ultimately affects structural transformation.

As argued earlier, successful SEZ programmes require years of nurturing before they fully bear fruit, and in the case of Thilawa and Mingaladon, it is still early to assess broad socio-economic impacts weighed against investment and operation costs. Nevertheless, it is useful to examine zone implementation and economic performance, both relative to the broader economy and in comparison to other countries so as to get a sense of their economic contributions and draw some lessons for the way forward.

Initiated in 2011, Thilawa commenced commercial operations in September 2015 and is currently the most advanced SEZ in Myanmar. The zone is located 25 km southeast of Yangon, adjacent to Thilawa Port, and stretches over 2500 hectares. The development of the zone is undertaken by MJTD, a public-private joint venture, including the Government of Myanmar and the Japan International Cooperation Agency, along with private consortia from Myanmar and Japan (Figure 7.3). As of September 2019, a quarter of the total available land is developed (629 ha) and hosts 113 contracted investors, of which 74 are in operation (MJTD, 2019). Around a quarter of tenants are export-oriented tenants of the Free Zone, while the remainder are domestic market-oriented tenants of the Promotion Zone.

Countries often use SEZs to sidestep pre-existing regulatory procedures that impose high operating costs on firms, and to compensate for weak infrastructure. As mandated by the SEZ Law, the Thilawa SEZ Management Committee (TSMC), chaired by the Deputy Minister of Finance and Planning, established a One-Stop Services Centre (OSSC) that significantly reduces the number of public officials with which investors must engage and offers expedited one-stop clearances for all necessary approvals and registrations. Given the short lead time that international buyers require, delays and uncertainty around securing permits through multiple government agencies can be costly for producers, making one-stop clearances and effective way to reduce trade costs, which are estimated to be large in Myanmar (IGC, 2016).

The Thilawa OSSC is staffed by representatives of various ministries who are fully authorised to grant necessary licences and approvals required by investors. At the time of the project launch, the OSSC provides approval of company establishment, investment approval, company registration, environmental, construction and taxation application, and registration of foreign workers. During project construction and operation, the OSSC further offers visa issuance, customs clearance, labour management application, environmental management, tax filing, and power supply procedures (MJTD, 2018). The main steps for setting up a business in Thilawa are clearly explained on the Thilawa OSSC website, which provides links to all related forms and documentation (Figure 7.4). The TSMC is in the process of developing a portal for investors to submit applications, obtain approvals and interact with the TSMC online.

The TSMC has committed to specific turnaround times for many procedures like investment approval (30 days), company incorporation (1 day), and construction design approval (5 days). In this respect, Thilawa is comparable to zones that are internationally recognised for their good practice in business facilitation, such as the Philippines Economic Zone Authority and the Clark Development Corporation in the Philippines (Box 7.3).

In terms of infrastructure, the TSMC has taken access to basic public utilities seriously, as demonstrated by the recently developed electricity distribution network, gas pipeline, gas-fired power generation plant to supply firms inside the Thilawa SEZ, and water supply network. In addition, the bridges, highways and container terminals, both completed and under development, demonstrate the government’s commitment to connect the SEZ to the wider economy.

Lastly, another key contribution of the TSMC to improving the investment climate in Thilawa has been its Notice No. 4/2015 to Ensure the Responsible Investment in the Thilawa SEZ. The guidance formally states what is expected of companies doing business in the SEZ in terms of responsible business conduct beyond simple compliance with Myanmar law. This includes respecting human rights; engaging with stakeholders affected by their activities; supporting the rights of workers; building human capital; ensuring effective grievance mechanisms; being open and transparent; creating shared value; and supporting the communities in which they operate. Given the reluctance of international brands to be associated with SEZs that violate human rights or other RBC principles, such a notice is an important step in branding Thilawa as a responsible business destination, and attracting more investment. As discussed in greater detail in Chapter 4, a similar notice, not only from other zone management committees, but from the government as a whole, would be a welcome improvement in the overall investment climate.

Just over 110 enterprises from 19 countries (including Myanmar) invested in Thilawa as of September 2019, with a combined total pledge of USD 1.89 billion. Currently, 74 businesses are operational and account for around 9000 jobs; a quarter of these have already started exporting. The vast majority of investors in Thilawa are Japanese, followed by Thai and Korean investors, while only two are local (Figure 7.5a).

Comparing the distribution of firm size (in terms of employment) inside Thilawa as of February 2018 to a representative sample of Myanmar firms from the 2016 World Bank Enterprise Survey suggests that firms in Thilawa are typically larger than firms operating outside the zone (Figure 7.5b). A closer look indicates that the average number of employees of firms in the Free Zone is 250 compared to 50 in the Promotion Zone, and 80 outside Thilawa. This gap is largely due to the difference in industry specialisation between the Zones. Domestic market-oriented firms of the Promotion Zone, include more capital-intensive producers of construction materials, fertilisers, medicine and packaging, as well as logistics companies and service providers. Large-scale export-oriented employers, such as garment, shoe, and toy manufacturers, are instead the main occupants of the Free Zone (Figure 7.6).

The potential long-run benefits of SEZs arise through knowledge transfers between foreign companies in the SEZ and local companies. An important channel of knowledge transfer is labour mobility. Foreign investors in SEZs typically use more advanced technology and processes and need to train their staff to acquire the relevant skills. If the trained staff subsequently move outside the zone to work for domestic companies or start a business they can share valuable knowledge acquired inside the zone to the wider economy. In Thilawa, the top perceived benefit of working in the zone is indeed learning new skills, and 62% of the managerial workforce report that human resource management is the most important skill acquired in the zone (Figure 7.7a).

Another important mechanism for zone spillovers is through business linkages between zone and non-zone firms, through selling or buying intermediate inputs. By engaging with firms with more advanced technology and knowhow, higher quality products and services and better management practices, domestic firms can internalise this knowledge and operate more efficiently. However, domestic input sourcing of Thilawa’s investors is currently not very high. The percentage of intermediate inputs sourced locally is less than 20% in the Promotion Zone and under 10% in the Free Zone, compared to 80% in the rest of the country (Figure 7.7b). The sector in which local sourcing is greatest is food processing, where 50% of inputs were sourced domestically, on average (IGC, 2018).

A total of 19 operational industrial zones exist across Myanmar with three more zones planned or currently under construction. The Yangon East Industrial Zone and Yangon North Industrial Zone are significantly larger than other zones in the country, and are consequently divided into 29 industrial areas that function as independent industrial zones, each with a management committee.

Stretching over 90 hectares, Mingaladon Industrial Park (henceforth, Mingaladon) is one of the independent industrial areas in the North Yangon Industrial Zone, located 7 km from Yangon International Airport, 25 km from central Yangon and 50 km from Thilawa SEZ. Originally established in 1996, Mingaladon was developed by a public-private joint venture involving Japanese Mits Co. Ltd. (60%) and the Myanmar Ministry of Construction (40%), with the objective of creating an industrial zone in Myanmar to meet international standards. In fact Mingaladon is the only zone in the country to have foreign participation in its development. Other zones are entirely domestically developed and many do not have a formal zone developer. Given the zone’s relative success, clear rules and criteria for zone developers are a crucial factor introduced by the new 2020 Industrial Zone Law.

Similarly to all industrial zones, Mingaladon does not offer special treatment in terms of taxes, customs duties or administrative procedures. Investors benefit from customs duty exemption on import of capital goods for five years, and on the import of raw materials and intermediate goods used to manufacture export products, as stipulated by the Investment Law, provided the necessary materials are declared at the time of investment proposal. The same is true of employing skilled foreign staff (low-skilled foreign workers are not permitted). This can pose a considerable hurdle for investors, as any adjustments in imported resources require additional approvals. While similar procedures for importing materials and workers are necessary in Thilawa at the time of business proposal, they can be more easily and rapidly (1 day for registering foreign workers) amended thanks to the highly efficient Thilawa OSSC. Instead, in terms of business facilitation, there is limited improvement in Mingaladon with respect to other zones or the wider economy. Interviewed foreign investors in the garment sector, report that the zone management does little to help investors navigate through the required paperwork and procedures, and investors are forced to rely on personal acquaintances for help.

Mingaladon is widely considered to have the most advanced facilities of any zone in Myanmar, which are its main attraction to investors. Specifically, the zone provides access to electricity, communication, and water supply networks, a waste water treatment plant, a retention pond, roads and drainages. For large-scale producers, the supply of electricity remains insufficient, and many have their own generators. Unlike other zones, Mingaladon is fully operational with 28 running businesses occupying all available plots, each of 1 to 4 hectares in size. One interviewed embroidery manufacturer employing 5000 workers expressed that they would expand operations in Mingaladon if it were possible but are limited by availability of plots, and do not find other sites sufficiently attractive.

While other zones in the country fail to attract foreign investment, the vast majority of businesses in Mingaladon are Japanese, Korean and Chinese, and engaged in export-oriented, labour-intensive manufacturing of garments, shoes and cosmetics. As they export most if not all of their production, they benefit from duty and tax refunds on imported inputs. Interviewed businesses report that all machinery and equipment are imported mainly from Japan, Germany and Italy, and raw materials from China and Chinese Taipei.

The 28 firms in Mingaladon, of which none are small and only one is medium-sized, employ a total of 14 872 workers as of 30 November 2019, according to official data shared by the authorities. In other words, investors in Mingaladon employ on average 531 workers, compared to 172 in the wider North Yangon Zone, and 53 countrywide, reflecting the zone’s high concentration of low-skilled labour-intensive manufacturing activities (Table 7.8). A sport footwear manufacturer reported that they provide three months of training to new employees during their probationary period and keep them if they meet the skills requirements. Trainers are brought in from China, while supervisors within the plant are local. Other companies employ managers from Chinese Taipei and technicians and local staff for production. Competent, fast-learning and hard-working labour force were commonly reported as motives for locating in Myanmar during field visits.

As discussed in the previous section, SEZs impose a cost on society through forgone revenues from tax incentives, duty exemptions and infrastructure investment specific to the zone. In order to justify the establishment of zones, the societal gains must outweigh these costs. The potential long-run benefits of SEZs are that they generate spillovers that benefit workers and firms located outside the zone through knowledge transfers.

SEZ spillovers encompass all sorts of long-lasting, structural benefits that investments in the SEZ can bring to the host country, whether on the quality of the workforce, on the competitive environment in the economy, or on the creation of supply chain linkages with domestic firms. Business linkages between zone and non-zone companies are the channel through which SEZ spillovers can be maximised, owing to the productivity gains resulting from the transfer of knowledge and technology from zone investors to domestic companies and workers (Farole and Winkler, 2014).

While SEZ investors will generate spillovers depending on the spillover potential of the particular type of investment in the host economy, domestic firms will benefit from them if they have sufficient absorptive capacities. To a certain extent, host countries can influence investor spillover potential and domestic firm absorptive capacities with appropriate policies and institutions, such as labour market regulations, intellectual property (IP) rights, access to finance, education and training facilities, investment and trade policies and promotion as well as SME development policy.

Business linkages occur along the supply chain and can be either backward or forward. Backward linkages refer to upstream sectors and occur when domestic firms become suppliers to SEZ investors. Forward linkages arise in downstream sectors, when the investors’ goods and services are used as inputs in local companies’ operations. Low- and middle-income host countries tend to focus, in the first instance, on promoting the former as they can more easily serve to develop the potential of local SMEs. Creating linkages also serves the purpose of investment attraction and retention, as it induces foreign investors to be more firmly anchored to the local economy, to adopt a longer-term investment strategy in the country and be inclined to reinvest or expand activities.

Business linkages depend first and foremost on the capabilities of domestic companies, which in turn hinge crucially on the skills of local managers and workers. Addressing skills shortages and tailoring human resource development to meet industry needs are a critical first step. Improving the business climate outside SEZs, building a supplier base with the requisite capacities, and other more proactive measures to encourage linkages and develop clusters around SEZs are then essential to ensure SEZs become part of the wider business ecosystem rather than enclaves and benefit the rest of the economy.

A skilled workforce tailored to private sector needs is vital for the creation of productive business linkages, and for embedding economic zones in the wider business ecosystem. Higher education and vocational training are important means for acquiring the technical skills workers need in their professions. Policy action can help ensure educational and training programmes are high-quality, relevant, and regularly reviewed, and plays a fundamental role in linking education and training institutions with businesses and industry, to ensure programmes meet business needs. Human resource development is one of the priority policy areas to be addressed by the inter-ministerial Investment Promotion Committee (task force 5) established in 2019 (see Chapter 3).

Myanmar is currently able to offer abundant labour to investors at a competitive cost, but there remains insufficient supply of workers with technical or managerial skills, who are vital for the adoption of new technologies and for effective business management. Lack of trained staff was among the top reported business challenges in a 2017 Myanmar Business Survey of 500 domestic and international investors (Roland Berger, 2017). Quality of employees is similarly among the most commonly cited problems faced by Japanese investors in Myanmar (59%), second only to Bangladesh (63%) in a survey of 5073 firms in Asia and Oceania (JETRO, 2018).

Skills shortages derive from a combination of a weak education system and a lack of adequate training opportunities. Only 10% of young people from any year group currently obtain secondary school-leaving certificates, enabling them to meet the requirements for enrolment in university or in most vocational training programmes (GIZ, 2019). For those who qualify for higher education, there are 33 technical universities specialised in science and engineering and 28 computer studies universities, but their graduates do not satisfy the requirements of investors in terms of expertise (MIC-JICA, 2018). SME employees have limited access to formal on-the-job training opportunities. Training facilities are poorly equipped and run-down and the programmes they offer are often ill-suited to the demands of a rapidly evolving labour market. Training institutes lack the ability to teach practical computer courses, for instance, due to a limited number of computers, lack of electricity and severely restricted funding (Oxford Business Group, 2018). To date, the private sector has not been systematically involved in developing and implementing vocational education initiatives (GIZ, 2019).

Recognising the need to improve the quality of the education system and develop adequate skills in Myanmar, the government laid out the groundwork for reform with the 2012 Comprehensive Education Sector Review, which resulted in the enactment of the 2014 National Education Law4 and establishment of a Technical Vocational Education and Training (TVET) Task Force. The education system is undergoing a major overhaul under the ambitious National Education Strategic Plan (2016-2021), which articulates strategies for human resource development, and for which the government is currently attempting to create the necessary legislation and institutional structures. The National Skills Standard Authority has reviewed TVET institutions from the perspective of skill standards, competency-based curriculum and competency-based assessment, and is creating a skills qualification framework in accordance with that of ASEAN (MIC-JICA, 2018).

In parallel the MIC acknowledges that investors sorely need skilled workers with practical knowledge and middle management staff, and sets out required actions to develop human resources for industry, as part of the wider 2017-36 investment promotion strategy. The proposed actions crucially include monitoring the needs of the private sector by facilitating dialogue between government bodies that oversee TVET and skill development, education and training institutions and private sector representatives, such as the UMFCCI. According to the strategy, DICA is to convey the needs of investors to relevant policymakers, while the Technical and Vocational Education Council is to formulate a plan for developing human resources for industry, with the purpose of designing curricula that meet the needs of business.

The MIPP further endorses the establishment of collaborations between universities and training institutions, foreign investors, local business and donor organisation, and several such collaborations are already in place. The Myanmar-Japan Centre for Human Resources Development, managed by UMFCCI with the assistance of JICA, provides training on practical production techniques. The Myanmar Garment Human Resource Development Centre trains garment workers in collaboration with JETRO. The Singapore-Myanmar Vocational Training Institute collaborates with foreign automobile producers and hotels on internship programmes. Thilawa SEZ has created its own Vocational Training Centre to train workers based on what skills are in demand by investors in the SEZ, although records of its activities are not yet available. Lastly, the action plan proposes revamping the employment placement network that matches job-seekers and investors, and putting together a reliable database on TVET institutions that allow investors to easily access information on where to find required skills.

If this co-ordinated effort continues to receive credible political backing and public resources, and the described actions are effectively implemented, monitored and reviewed, the ongoing overhaul of the education system is expected to help develop and maintain a skilled and adaptable workforce. Addressing existing skills shortages will in turn provide an important first step to building a vibrant supplier base that can engage in productive business linkages with SEZ investors. In advancing the activities of the Thilawa Vocational Training Centre and ensuring their effectiveness, Myanmar may draw some lessons from Malaysia’s experience with the Penang Skills Development Centre (Box 7.4).

Industrial clusters, characterised by geographic concentrations of interconnected firms, have yet to begin developing in Myanmar (MIC-JICA, 2018). The export-oriented garment sector has developed in the Yangon region and its periphery, but lacks upstream linkages. Local competition is not yet well-prepared to face players operating on an international level, according to 78% of foreign investors that participated in a 2017 survey (Roland Berger, 2017). Resource-based industries, such as the agro-industry, are characterised by low value addition and offer limited spillover potential. In an effort to address the general lack of capacity, DISI has started offering technology-related training programmes in collaboration with relevant line ministries and organisations for SME development. The national and regional SME agencies also formulated an action plan for SME development.

Building absorptive capacities of Myanmar supporting industries and enhancing MNE-SME linkages not only requires a horizontal approach to SME development but also industry-specific capacity-building to help SMEs achieve technological upgrading and meet quality standards. The potential for Myanmar companies to become suppliers of foreign affiliates remains limited in most industries. While it is important to help SMEs meet international quality standards (e.g. ISO), it might be more critical to help them meet industry-specific standards, as the latter are more inclined to help SMEs become sound supporting industries and integrate in global value chains (Farole and Winkler, 2014). Technical support and training also need to involve industry associations and MNEs themselves, which can play a key role in both the design and the delivery of such training, and ensure their relevance. These aspects also highlight the importance of adapting the country’s human resource development strategy with national economic priorities, as discussed in the previous section.

The government could support the design of systematic and well-institutionalised industry-specific training programmes for supporting industries, in collaboration with donors, the business community and educational institutions. Agencies and training providers responsible for implementation should involve SEZ investors in the design of curricula and programmes. Initially the effort should focus on key economic sectors, such as those targeted by the MIPP, including textiles and garments, agroindustry and machinery assembly. As the bulk of existing linkages between Thilawa investors and domestic non-zone suppliers are in food processing, where 50% of inputs are sourced domestically, the agro-industry in particular could serve a good starting point for any pilot initiatives.

Thailand provides an interesting example of how a donor-supported industry initiative was scaled-up and institutionalised into an agency capable of providing technical and managerial support, and as supporting industries developed, gradually assumed a coaching role for fully privately-run industrial associations capable of delivering their own technical support (Box 7.5).

In parallel the government could target investments from strategic first-tier suppliers to advance the development of upstream activities in which Myanmar lacks capacity. The automotive industry is a good case in point, as global lead companies (e.g. Toyota) have shown interest in investing in assembly plants in Thilawa but are constrained by the absence of locally established suppliers. Myanmar companies are not yet at the stage of supplying automotive parts and components but have the potential to plug into the value chain as 3rd or 4th tier suppliers. Thus focusing Thilawa’s investment promotion efforts to target international 1st and 2nd tier auto parts suppliers can be a way to promote the development of supporting industries, and ultimately linkages, in the automotive value chain.

Even when local SMEs are competitive enough and technologically ready to engage with foreign investors, these linkages may not materialise. Many MNEs are bound by contracting arrangements that tie them to international suppliers. In some other cases, MNEs rely on their usual overseas business partners for convenience or because of lack of information, and do not make the effort to look for local firms that can act as suppliers. In such cases, the government can bridge information gaps with targeted measures to facilitate exchange of information. Such soft policy tools can both inform MNEs of local sourcing opportunities and their reliability, and inform SMEs of foreign investors’ needs in terms of products and services, standards, and delivery. Whether or not foreign affiliates have an interest in creating and strengthening local linkages, their willingness to do so can be reinforced by government policies designed to:

  • Provide information on local suppliers;

  • Ensure that linkage programmes address SME capabilities

  • Value the knowledge transfers from foreign investors to SMEs;

  • Expand markets through MNE networks.

Southeast Asian peers have, to varying degrees and with varying levels of success, put in place a range of policies and programmes designed to raise the capabilities of domestic firms and deepen linkages between local SMEs and foreign MNEs. These initiatives can be grouped into seven broad categories (OECD-UNIDO, 2019):

  • SME centres offer a wide array of services designed for SMEs including business matching activities.

  • Matching services provide direct assistance in identifying business partners or buyers, and in setting up meetings or on-site factory tours.

  • Networking events include SME showcase events and exhibitions and business matching sessions that bring together SME suppliers and prospective MNE buyers.

  • SME portals provide SMEs with listings of commercial and government opportunities, networking events, or directly connect businesses through online channels

  • Supplier databases provide lists of local suppliers by product or sector of activity.

  • Training and supplier development initiatives offer funding to MNEs that support local SMEs in acquiring skills or technology, or in meeting specific vendor requirements.

  • SME solutions initiatives offer funding for collaboration to develop solutions to help SMEs improve operational efficiency, adopt new technologies, upgrade capabilities, or develop new offerings.

  • MNE specialist secondments provide financial and organisational support to MNEs whose specialists are seconded to SMEs to assist them in meeting vendor requirements.

Given the still limited base of local suppliers, Myanmar is still at an early stage with respect to linkage programmes, and still relies heavily on donor support to develop the necessary framework for integrating SMEs in the supply chains of foreign investors. Going forward, successful special economic zones and industrial zones, like Thilawa and Mingaladon, offer a good starting point for implementing pilot linkages programmes. The TSMC could also promote the matching of buyers and sellers, for example, through networking events, or by providing zonal firms with a list of firms in the Yangon region, and in neighbouring IZs that are producing the relevant inputs and that meet the relevant international standards, both related to product quality and to responsible business practices. Regional initiatives like the ASEAN Supplying Industry Database will also benefit information provision and business match-making efforts.

Moreover, the example of Thailand’s illustrates that successful linkage promotion needs to be part of a longer-term development plan that is coordinated across multiple government bodies (Box 7.6).


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← 1. Myanmar Special Economic Zone Law, 2014 (2014, The Pyidaungsu Hluttaw Law No. 1/2014), 8th Waning of Pyatho 1375 ME (2014, January 23).

← 2. Myanmar Investment Law 2016 (The Pyidaungsu Hluttaw Law No. 40/2016), 2nd Waning of Thadingyut, 1378 M.E. (18th October, 2016).

← 3. The tax holiday lasts 6 years in Cambodia and the Philippines; 8 years in Thailand; 10 years in Indonesia and Lao PDR; and 4 years in Viet Nam, followed by a 5% CIT rate for 9 years.

← 4. Myanmar National Education Law 2014 (The Pyidaungsu Hluttaw Law No. 41/2014), 1376, New Moon of Thadingyut 7th day (September 30, 2014).

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