Non-Equity Modes of Trade in ASEAN
Promoting new forms of trade between
Japan and ASEAN

mar
n
a
My

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For inquiries, contact ASEAN-Japan Centre(ASEAN Promotion Centre on Trade, Investment and Tourism)
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Paper 6 / March 2020 / Non-Equity Modes of Trade in ASEAN: Myanmar
Promoting new forms of trade between Japan and ASEAN

Non-Equity Modes of Trade in ASEAN
Promoting new forms of trade between
Japan and ASEAN

PAPER 6

M A R C H

2020

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NOTESThe terms country and/or economy as used in this study also refer, as appropriate, to territories orareas; the designations deployed and the presentation of the material do not imply the expression of
any opinion whatsoever on the part of the ASEAN-Japan Centre concerning the legal status of any
country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers orboundaries.

The following symbols have been used in the tables:• Two dots (..) indicate that data are not available or are not separately reported.
• A dash (-) indicates that the item is equal to zero or its value is negligible.
• Use of a dash (-) between dates representing years, e.g., 2015–2016, signifies the period involved
between the years, including the beginning and end years.
Reference to “dollars” ($) means United States dollars, unless otherwise indicated.

There are ten papers in total. The other nine papers are being prepared simultaneously.
Paper 1. Brunei Darussalam
Paper 2. Cambodia (published in August 2019)
Paper 3. Indonesia
Paper 4. Lao People’s Democratic Republic (published in March 2020)
Paper 5. Malaysia
Paper 6. Myanmar
Paper 7. Philippines (published in March 2018)
Paper 8. Singapore
Paper 9. Thailand
Paper 10. Viet Nam (published in December 2018)

Prepared by Dr. Rajah Rasiah (University of Malaya, Malaysia) and Yasushi Ishida (AJC) under
the direction of Masataka Fujita (AJC). Errors and omissions are only those of the authors andshould not be attributed to to their respective organization.

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CONTENTS
1. Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Characteristics and Scope of NEMs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.1 Scale and scope of NEM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

2.2 NEM by modality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  12(1) Subcontracting: Garments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  12(2) Subcontracting: IT-BPO. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  17(3) Licensing and management contracts: Hotels . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
3. Opportunities and challenges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
3.1 Local capabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
3.2 Relationships between NEM modalities and industries. . . . . . . . . . . . . . . . . . . . . 27
3.3 Ownership and control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
3.4 Localization strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
3.5 Local NEM firms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
4. Policy implications. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  31
4.1 Enhancing capacities of local firms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  31
4.2 Developing the basic infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
4.3 Developing science, technology and innovation infrastructure . . . . . . . . . . . . 33
4.4 Promoting connectivity and coordination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
4.5 Promoting integration into global markets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

4.6 Mainstreaming sustainable development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

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KEY MESSAGES• The value of non-equity modes (NEMs) of production in Myanmar has grown rapidly. A numberof industries, including services, produce considerable NEM exports.
• Having engaged in the world economy only about two decades ago and started to integrate into
it only recently, NEM firms in Myanmar are still in the nascent stage of operations. They areobserved largely as subcontracts, management contracts and franchising operations, varying
by industry.
• The garment industry, which is dominated by the outsourcing (subcontracting) activities oftransnational corporations (TNCs), is among the highest generators of exports and employment
in NEM businesses in Myanmar. The volume of NEM exports in the industry is estimated at$1 billion, more than 70 per cent of total garment exports.
• The information technology-business process outsourcing/business process management(IT-BPO/BPM) industry is new to Myanmar and offers tremendous growth potential in the country.
Because competition in the industry is severe, the government needs to develop infrastructure incommunication networks to stimulate its growth.
• International hotels are operated in Myanmar through either management contracts or franchise
agreements, or on long-term leased land on which hotels are built with equity investments.
The government’s inward foreign direct investment (FDI) policy prohibits foreigners from owning
private land.
• NEM firms in Myanmar face a significant challenge that those in other countries also face. TNCs
can easily terminate their contracts, particularly if the quality of services or goods supplied
does not meet their competitive standards or when more competitive suppliers emerge inother countries.
• The government should develop basic infrastructure, as well as science, technology and innovation(STI) infrastructure to promote connectivity and coordination between firms and organizations
and external markets. This development is necessary for NEM firms to be able to connect andcoordinate competitively with global value chains (GVCs), and to upgrade in them.
• The government should form a one-stop agency within the Economic Planning Board, entrusted
to play the role of promoting investment, and establishing and increasing interactions between
firms, organizations and government agencies responsible for providing basic infrastructureservices.
• The government should consider implementing and strengthening the regulatory environment
to enable NEM firms to export, expand their employment and upgrade technologically.

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1. INTRODUCTION
The extensive literature on accounts of trade between countries has focused on aggregate statistics
by broad ownership patterns, largely discussing exports by local and joint-venture firms and by foreign
firms at different levels of product categories. Few works have studied non-equity modes (NEMs) ofownership, where trade links appear with supply chains, or in many cases, with the global value chains(GVCs) of transnational corporations (TNCs). NEMs tend to either dominate trade, as in clothing andelectronics, or manifest in the form of intra- and inter-firm trade, vertically or horizontally, among
TNC affiliates. NEMs of participation in trade within GVCs started gaining significance following the
successful expansion of firms from Japan, the Republic of Korea, and Taiwan Province of China. In
light of the importance of the balance of payments and the overall economic development of national
economies, there is increasing recognition that NEM engagement in trade is important not only tocheck resource outflows but also to develop local productive capabilities. Trade between Japan and
ASEAN members is no exception.
NEM engagement in trade is also spreading in Myanmar in the form of international subcontracting
in manufacturing industries, such as electronics and garments; contract farming in agriculture
and food processing; international franchising in fast food, hotels and retail stores; variationsof build-own-operate transfer arrangements and other concessions in infrastructure projects;
and management contracts (e.g. in international hotel chains). Offshore software development(information technology-business process outsourcing, or IT-BPO) has gradually become popularin Myanmar. These businesses are largely undertaken under contractual agreements with foreign
entities. This study examines the case of Myanmar in the overall framework of the ASEAN-Japan
Centre project (box 1) targeted at NEMs, particularly with a focus on selected industries.

Box 1. The NEM project by the ASEAN-Japan Centre
Other than arms-length relationships, equity-holding is not the only means of exerting control overthe international production chain. Companies also enter into a contractual relationship with otherindependent firms. This trade is gaining importance as the system of global production is more
integrated and forms value chains. This is the area in which lack of knowledge and a huge gap ofresearch exist in ASEAN. It also calls for an overall analytical framework to assess development
impacts in order to propose a generic policy framework for dealing with this kind of transactions.
The fundamental difference to normal trade is that non-equity forms of operations relate to acontractual partnership between private parties. The role of the state related to this partnershipis limited to setting the framework conditions within which the private parties can freely negotiate
the terms of their cooperation. By understanding better this phenomenon including the scale andscope, and filling in a policy analysis gap, the ASEAN-Japan Centre (AJC) will provide ASEAN
governments with policies that they need to consider in order to fully benefit from these new formsof trade as well as investment.
In order to understand the scale and scope of non-equity involvement in major industrial
sectors, a case study methodology is used. The reasons for taking this approach are two-fold:(1) balance of payment and supplementary statistics do not provide the detail necessary toaccurately measure cross-border non-equity participation; and (2) the relevant microdata arefragmented and disconnected. As much as possible, each case study builds on existing researchand statistics.
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Box 1. The NEM project by the ASEAN-Japan Centre (Concluded)
New opportunities are emerging for ASEAN countries owing to developments in TNCs’ internationalinnovation networks (IINs). While attracting foreign direct investment (FDI) and encouraging
foreign TNCs to establish affiliates remain an important option for ASEAN countries, Governments
need to review their current regulatory regimes to appropriate synergies from IINS. A key objectiveof this study is to make recommendations on which policies (investment and global value chains(GVCs) and industrial policies) the Government needs to consider in order to fully extract theseemerging opportunities.

Two industries in Myanmar possess strong potential to penetrate export markets in future: garments
and food processing. Garments are currently the most significant manufactured export, having risen
in value from $12 million in 1990 to $800 million in 2000 and $859 million in 2015 (table 1). Exports
to Japan rose from $1.1 million in 1997 to $649 million in 2016. Food processing has seen strong
growth in Myanmar. Although the food processing industry’s contribution to exports at the time thisreport was prepared could not be assessed, the overall contribution of the agricultural sector togross domestic product (GDP) is more than one quarter (figure 1).

Table 1. Major export and import products of Myanmar, fiscal year 2015 and 2016
Major export
items

Exportvalue(US$ million)

Share oftotal exports(%)

Importvalue(US$ million)

Share oftotal imports(%)

Natural gas

4 343

39.1

Machinery andtransport equipment

4 945

29.8

Beans

1 152

10.3

Base metals andmanufactures

1 902

11.5

Garments859

7.7

Refined mineral oil

1 514

9.1

Jade

570

5.1

Electric machineryand apparatus

1 417

8.5

Rice

522

4.7

Edible vegetable oil

563

3.4

Base metal/Ore

360

3.2

Plastic

532

3.2

Fish

312

2.8

Cement

332

2.0

Maize

305

2.7

Artificial and synthetic
fabrics309

1.9

Sesame131

1.2

Pharmaceuticalproducts

280

1.7

Others

2 583

23.2

Others

4 784

28.9

Total

11 137100

Total

16 578100

Source: Central Statistical Organization, Myanmar.

Major import items

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3Figure 1. GDP share by sector in the CLMV countries, 2000 and 2015 (Per cent)Year 2000

Year 2015
100

100
80

39.1

60
40
20
0

32.4
19.1

33.1
9.7

23

37.9
Cambodia

38.7

57.2
24.5

Lao PDR

Agriculture

MyanmarIndustry

42.3

40.5

51.8

29.4

34.7

34.5

28.2

24.8

26.7

Cambodia

Lao PDR

Myanmar

44.2

60
36.7

48.5

80

Viet Nam
Services40200Agriculture

Industry37

18.9
Viet Nam
Services

Source: Asian Development Bank, Key Economic Indicators 2016.

Deregulation and the consequent rising importance of foreign direct investment (FDI) into Myanmar
are now well documented (Myint, 2012). What is less documented is the growth and expansion of
local firms. Yet, local firms have been overwhelmed by foreign firms and those from Japan, theRepublic of Korea and Taiwan Province of China exhibit different behaviours. In the case of firms
from the latter two countries, the GVCs that helped support their growth were strongly integrated
into the activities of United States and European firms. In Asia, the technological catch-up thatfacilitated the transformation of local firms from low to high value added activities was verymuch based initially on creative learning from knowledge acquired and imported from Westernand Japanese firms, with FDI playing a critical role (Amsden, 1989; Kim, 1997). The successful
leapfrogging experience of many firms in ASEAN occurred. Although it is too early to study thepossibility of a similar experience in Myanmar, nevertheless it will be helpful to investigate whether
there are signs that could be used to formulate relevant policy recommendations to stimulate
such a development.
Local participation in GVCs has already emerged in some ASEAN countries, particularly in theelectronics and the textile and clothing industries, with outsourcing firms coming from sophisticatedlocal innovation systems. Changes in such intra-firm and inter-firm production linkages haveresulted in changes in the nature of control exerted by buyer TNCs and target markets. However, notmuch work has emerged on value chains that local NEM firms connect with. This paper seeks to
examine the nature of control in the value chains of local clothing and textile firms either selling toJapanese firms in Myanmar or exporting to Japanese markets.

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Box 2. Factors that make countries attractive NEM locations: the case of Myanmar
When examining the factors that make locations attractive and conducive to NEMs, there is aneed to address overlapping factors that stimulate FDI inflows. As with FDI, determinants oflocation include political and social stability, sufficiently efficient and competitive policies, financial
incentives, smooth trading procedures and conducive macroeconomic policies. These factors arealso conducive to attracting NEMs.
In addition to policy-related determinants, many other factors can support NEM development
in host countries. First, as NEMs include forms of contract-based TNC engagement in the hosteconomy, these factors include stable contract laws and commercial contract laws. For example,
in franchises (e.g. Krispy Kreme and Doughnut Group, a Singapore-based firm) and contract
farming (e.g. Mitsui and MAPCO, the Myanmar Agribusiness Public Corporation), it is important toestablish sufficient protection of intellectual property rights.
Second, as with FDI, facilitation measures for promoting businesses are very important for
attracting NEMs. For example, investment promotion institutions must apply promotional activities
and financial incentives over a wide scope. Access to capital procurement is also an importantfactor for regional enterprises that has strong potential for promoting NEM expansion.
TNCs must establish footholds from places where they can support NEM businesses. These
footholds can be a minimal commercial presence, as when purchasing and quality management
organizations provide support for outsourced manufacturing or, as in the case of retail and quick
service restaurant business franchises, when logistics support operations include the provision ofmaterials to franchise locations.
The existence of reliable and capable regional enterprises, and the ability to engage them, areimportant factors in NEM operations. Most NEMs require local partners that are powerful,
efficient and capable of taking on risk on behalf of TNCs. For example, when TNCs do not enter
contracts directly with individual farms, agricultural cooperatives can act as intermediaries toreduce business risk and provide reliability (Barrett et al., 2010).
The third factor is the degree of economic development and its association with social capital
within a country. For example, consumer market scale and growth, and access to regional markets
are equally as important to such NEMs as franchises and out-licensing as they are to FDI. Basic
infrastructure provision, and transport, energy, and communications costs are all major areas ofinterest to companies.
Technological capabilities and the capacity to improve the quality and productivity of regional
enterprises are critical to both TNC and NEM operations. Government policies targeted at
improving such capabilities in national firms, as well as regulations to stimulate strong corporatesocial responsibility practices and minimum labour conditions, are also important to stimulate
upgrading in both TNCs and NEMs. Such initiatives also help expand the pool of NEMs available
to network with TNCs. For example, the Malaysian government has introduced a law specificallyconcerning franchises, and has implemented other measures to promote TNC participation inregional economies. For service outsourcing, the government of the Philippines has contributed tothe promotion of the IT-BPO industry.
Factors such as these have contributed to increasing the overall allure of ASEAN countries assites for various types of NEMs. Box table 2.1 summarizes the major locational determinants ofeach mode.
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Box 2. Factors that make countries attractive NEM locations: the case of Myanmar(Concluded)

Box Table 2.1. Locational determinants for FDI and NEMs
Relevant for FDI and NEMs

More relevant for FDI

More relevant for NEMs

Policy framework• Economic, political andsocial stability• Competition policy• Trade policy• Tax policy• Rules regarding entry andoperations• Standards of treatment offoreign affiliates• International investment
agreements• Privatization policy• Stable general commercial andcontract law• Specific laws governing
NEM contractual forms(e.g. recognizing licensing,franchising contracts)• Intellectual property protection

Business facilitation• Reduction of hassle costs(e.g. cost of doing business)• Investment promotion• Investment incentives• Provision of after-care• Provision of social amenities(e.g. quality of life)• Infrastructure• Market size and per capita
income• Market growth• Access to regional and global
markets• Country-specific consumer
preferences• Access to raw materials• Access to low-cost labour• Access to skilled labour• Relative cost and productivityof resources and assets• Other input costs(e.g. transportation,communication, energy)• Access to strategic assets• Created assets(e.g. technology, intellectual
property)• Strategic infrastructure• Facilitation efforts aimed at- upgrading of technologicalquality, productivity standards of
local firms- enterprise development,
increasing local entrepreneurial
drive, business facilitation- subsidies, fiscal incentives forstart-ups- information provision,awareness-building on NEM
opportunities with local groups- support for minimum standardsof working conditions andcorportate social responsibility
in local firms

Economic determinants

Source: AJC based on various issues.

• Presence of credible local
entrepreneurs and business
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Since shifting to civilian rule, Myanmar (which is the seventh largest export economy in ASEAN),
has emerged among foreign investors as Asia’s last untapped market. In 2017 it had the fifth largest
population in ASEAN after Indonesia, the Philippines, Viet Nam, and Thailand in 2017. NEMs havealready emerged in all sectors in the country – primary, manufacturing and services – to contributeto its economic development (table 2). In manufacturing, for example, the garment industry plays apivotal role in the country’s economic development, accounting for 7.7 per cent (over $859 million in2015) of total exports, with approximately 400 companies employing 300,000 workers.
Myanmar is primarily an agricultural country, with the sector accounting for over a quarter of GDP.
Paddy rice is the country’s most important crop, with $522 million in exports to over 50 countries in2015. China was the biggest importer, accounting for over 70 per cent of Myanmar’s rice exports,1transported largely through its northern border with China.2 Services has become the fastestgrowing sector, accounting for over half of GDP in 2015,3 with the retail sector generating $25 billion
in revenue. These developments demonstrate the strong potential for the development of NEMs in
Myanmar in a wide range of economic sectors.
The next section explains the characteristics and scope of NEM by type and introduces particular
types of NEM that are distinctive in Myanmar. Section 3 discusses opportunities and challenges inselected industries to draw implications of NEM for the Myanmar economy. The policy conclusions
are presented in the last section.

1
2
3

Ministry of Commerce.
Myanmar has 15 border points with neighbouring Bangladesh, China, India and Thailand.
Its GDP contribution share reached 52 per cent in 2015.

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Table 2. Selected NEMs, including examples of typical industries, in Myanmar
Modality

Description(in the international context)

Typical industries

Company examples

Electronics• Earth Tamura Electronics(SATORI S-Tech)• Foster

Garments

Yangon Pan Pacific/A1
Garment

IT

FROBO Myanmar

Agriculture• MAPCO (Mitsui)• Lluvia (Mitsubishi)

Fuel

Max Energy (Shell)

Finance (chip card)

MPU (Union Pay/JCB)

Telecommunication

MPT (KDDI)

Fast foodDoughnut Group(Krispy Kreme)

Hotel

Asia Myanmar Shining Star
(Wyndham Hotel)

Management
contracts

Agreement under which
operational control of an asset
in a host country is vested in a
TNC contractor that manages theasset for a fee.

Hotel

LP Holding(Hilton Worldwide)

Other

Includes concessions, leasing
agreements, build-operatetransfer arrangements,
etc., involving public-private
partnerships.

Infrastructure

YMA (LSG Sky Chefs)

Subcontracting

Agreement whereby a TNC contracts
out to a host-country firm one ormore aspects of product design,
processing or manufacturing.
Includes contract manufacturing anddesign outsourcing, in the case ofservices and business processes.

Contract farming/
contract mining

Agreement between a TNC buyer
and host-country farmers/miners(including governments) that
establishes conditions for the
production and marketing of farm or
mining products.

LicensingContractual relationship in whicha TNC (licensor) grants to a hostcountry firm (licensee) the right touse an intellectual property (e.g.
copyrights, trademarks, patents,
industrial design rights, trade
secrets) in exchange for a payment(royalty). Includes brand licensing,product licensing and process
licensing (cross-licensing and intrafirm licensing).

Franchising

Source: AJC.

Contractual relationship in whicha TNC (franchisor) permits ahost-country firm (franchisee) to
run a specified business model
on a system developed by the
franchisor in exchange for a fee.

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2. CHARACTERISTICS AND SCOPE OF NEMS
The characteristics and scope of the different modalities vary; hence, it is important to discuss themso that efforts to promote them are cognizant of the unique elements associated with each of them.
Since most NEM modalities have already emerged in Myanmar, a systematic discussion is provided
in this section.

2.1 Scale and scope of NEM
NEMs can be compared with FDI from the perspective of TNC’s motivation. For example, contract
farming is motivated by a search for supply of resources. Contract manufacturing and outsourcing
or subcontracting are motivated by the desire to improve efficiency by reducing costs, while moving
the production of agricultural materials to local owners. Licensing and franchising are motivatedby the desire to expand markets. Whereas subcontracting is similar to FDI in that it consists oftransferring resources, technologies and expertise to contractors in the form of “packages”,
licensing and management contracts involve little direct transfer. Table 2 shows various forms of
NEMs; following is an overview of the features of each NEM.

(1) Manufacturing: Subcontracting
The degree to which subcontracting accounts for overall production varies by industry type. In thetoy, sporting goods, electronics and automotive industries, subcontracting generates about 50 per
cent or more of value added. In pharmaceutical products, it accounts for less than 50 per cent of thevalue added.
Subcontracting has grown significantly in the electronics industry since the 1990s as competition has
driven firms to seek cheaper options while taking advantage of the opportunities presented by NEMs
in rapidly industrializing economies, such as Taiwan Province of China, China and Malaysia. Major
electronics companies dedicated themselves to research and development (R&D), product design
and brand management, using electronics manufacturing services (EMSs) to outsource component
manufacturing. Some suppliers, such as Celestica (Canada), Flex (Singapore) and Foxconn (Taiwan
Province of China), evolved to undertake R&D and the design of these components so as to create amodular value chain (Sturgeon, 2002).
Subcontracting also expanded into labour-intensive industries, such as apparel, footwear and toys.
From simple cut, make and pack (CMP) operations, subcontractors in clothing value chains have
evolved to become intermediaries handling a large number of the stages involved in value chains – e.g.
manufacturing and logistics throughout Africa, Asia and Latin America (Rasiah, 2007; UNCTAD, 2011).
Myanmar garment manufacturers have started to participate in international subcontracting as
subcontractors. Foreign companies in Myanmar, such as Famoso Clothing and Manufacture GFT
Enterprise (both Japan), and local companies, such as Yangon Pan Pacific and A1 Garment, areinvolved in subcontracting for foreign apparel makers, including major brands such as GAP (UnitedStates), H&M (Sweden) and Uniqlo (Japan).

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9(2) IT-BPO: Outsourcing
For TNCs, value chains have also undergone business function differentiation and segmentation inservices, such as back-office functions and customer services. Major advances in information andcommunication technology (ICT) have made it possible to outsource, with locations where services
are created that are physically separated from the locations where those services are consumed.
Services outsourcing began in the 1990s with IT “onshoring”, but quickly shifted to developing
countries where costs could be kept down.
The major outsourcing services contractors are primarily located in Asia, owing to the presence oflarge pools of human capital in IT. India, the Philippines, and Malaysia enjoy language advantages,
high IT skill levels (especially software skills), low wages and reasonably good ICT infrastructure atparticular locations.
Since the transfer of power to civilian control in 2011, Myanmar has developed the potential to be a
key centre of offshore software development. In addition, BPO services, such as data entry and callcentres, have started growing.

(3) Agriculture: Contract Farming
Contract farming spanning international borders has become widespread. TNCs use contract
farming in over 110 developing countries and are involved in a diverse range of agricultural products,
including fruits, vegetables and tubers (UNCTAD, 2011).
Contract agriculture is a tool for the efficient procurement of agricultural products because it
makes it possible for TNCs to secure the necessary quantity and quality of products while leaving
production in the hands of national producers. Where a strong regulatory framework exists, farmers
can also secure stable prices and sales to improve their income. TNCs demand high quality fromcontract farmers, and farmers try to meet that quality because they can sell at prices higher than in
the domestic market owing to demand from richer consumers in developed countries. In addition,
contract farming offers the opportunity for farmers to acquire new information and technology bytrading with TNCs.
Contract farming contributes extensively to employment as it is primarily undertaken by large
numbers of small-scale farmers. This employment has a reasonable impact on reducing poverty.
Although the total number of contract farms is hard to identify, individual projects can have several
tens of thousands of participating farms.
The Myanmar government and agricultural associations have initiated the adoption of guidelines forcontract farming systems and procedures to implement by companies and farmers. Measures are
currently being taken to promote the adoption of these procedures by important stakeholders, suchas the Ministry of Planning and Finance, the Ministry of Agriculture, Livestock and Irrigation, theFarmers Affairs Committee of the Parliament and the Myanmar Rice Federation.

(4) Retail, hotels, etc.: FranchisingFranchising is well known as a channel for marketing and distributing products and services.
Franchisers are able not only to rapidly and efficiently expand operations, but also to procure capital.
The formula is being applied to the retail industry, including high street retail and goods stores, aswell as in restaurants, hotels, business services, education and a variety of other business practices.
In franchise agreements, typically franchisers provide franchisees with various types of support
related to business operations. This support can include initial and ongoing support, training,
management guidance, marketing, and administration and human resource advice.

10

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UNCTAD (2011) estimated global NEM production at over $2 trillion of sales in 2010.4 However, thereport also states that the analysis of NEMs is complex since “the web of directly owned, partiallyowned, contract-based, and arm’s-length forms of international operation of TNCs is entangled, sothat some of the distinctions between the different modes are blurred” (p. 130). Thus, the analysis
here is limited to a number of industries in which NEMs are especially important.
NEMs have generated significant exports in all three sectors in Myanmar (table 3).
In the primary sector, through the contract farming mode, rice and bean production and exports
are operated and managed by cooperatives and exporting companies that are affiliated with major
companies, such as the Myanmar Agribusiness Public Corporation (MAPCO).5 The Myanmar
Agricultural Development Bank has extended credit to farmers, as well as millers, traders andbrokers in Myanmar. The government has also started to introduce reforms in the agricultural sector
to promote market diversification and greater yields, which are also targeted to contract farmers.
There has been much dialogue between farmers and policy officials to increase the supply of highyielding rice seeds, which is considered to be important in order to take advantage of high prices anddemand in the developed countries.6 It is widely known that the contract farming system can benefit
from technology transfer from buyers, as competition and exposure to developed markets require
constant upgrading in national farms. Contract farming can benefit from stable markets and prices,
improved technological methods and environmental practices, provided that host governments
introduce good governance institutions.
Rice and broken rice, and beans are major agricultural export products of Myanmar. They play a vitalrole in creating jobs, generating incomes, contributing to GDP and bringing in foreign exchange fromexport earnings. China is Myanmar’s largest destination for rice exports, accounting for $320 million
or 73 per cent of total rice exports in 2016.7 Exports of beans, pulses, and green and black grams
go mainly to India, the United Arab Emirates, Viet Nam, Malaysia, Indonesia, China, Japan and theUnited Kingdom. India is the largest importer of Myanmar’s dry beans.
In the secondary sector, FDI-dominated garment production has been the main export, and it is thesecond largest export of Myanmar, following natural gas, accounting for 13.6 per cent ($1.5 billion)of overall exports in 2016. Garment manufacturing is also a major focus of FDI, accounting for 33
per cent of all such investment. About 400 export-oriented companies are members of the Myanmar
Garment Manufacturers Association (MGMA). Nearly 100 of them started or expanded operations in2014 and early 2015, and more than 200 are foreign companies from Japan, the Republic of Korea
and the United States.

4

5
6

7

Contract manufacturing and services outsourcing accounted for $1.1-1.3 trillion, franchising $330-350 billion,
licensing $340-360 billion, and management contracts about $100 billion (UNCTAD, 2011, p. 132).
Contract growing is a contract between plantation company and cooperative.
Senior officials reported at the ASEAN-Japan Centre and Myanmar Ministry of Trade seminar, Non-Equity Modesof Trade in ASEAN, Myanmar 6-8 March 2018.
UNCOM Trade.

FROBO Myanmar$9 million ($5 million)

Yangon Pan Pacific/A1 Garment Niban
Foster IIDA

$1.5 billion ($1 billion)

73 Myanmar Pulses, Beans
and Sesame Seeds Merchants
Association

Shwe Myanmar

660,000 tonnes$484 million($48 million)

21 Myanmar Rice Federation

Mitsui (MAPCO)

1.5 million tonnes$438.9 million($44 million)

Major companies(local partner/ main
franchisee)

Estimated export
volume (estimatedexport by NEM)

Source: AJC.
Note: Selected industries only.
*
2016 data unless specified.

Rapid shift to higher value
work
Locational expansion
outside Yangon

Rapid export increase byforeign companies in SEZs

TNCs keep eyeing Myanmar as
a low-cost garment hub
Step up from CMP to
OEM (original equipment
manufacturing) will be neededin order to sustain the industry

Illegal outflows of beans andpulses via India’s border routes
Supply chain at risk as Indian
government imposes restrictions
on Myanmar beans

Illegal outflows of rice on China’s
border routes
Expected to boost production,
increase liquidity, improve logistics
and distribution, and expand
access to credit for small farmers.

Product/
service scope

Genex, a BPO company,
manages Telenor callcentre operation in
Mandalay

85% of electric exports go to
Singapore

Japan 33%
European Union 25%
Korea 25%
United States 2.4%
China 2.4%

India 80%
China
Japan
Pakistan
Singapore

China 73%
Bulgaria 5%
Belgium 4%
Singapore 3%
Côte d’lvoire 2%

180%, 2015- 2016

1211%, 2015-2016

Market/trade scale

Subcontracting
24,000 (6,000 computerrelated graduates every
year)

Nearly 145% growth FY20142015

4.3% average, 2014-2016

Average export growth

Subcontracting
30,000 (24,000)

Myanmar Hotelier Association(Over 800)

Myanmar Computer
Industry Association(Over 550)

More International hotel chains
have rooms to enter local resorts$0.8 billion increase in sales
from 2015

7% average growth rate forecast
for 2017-2027

962,720 hotel and restaurants(2014)

Licensing, Management contract

56,429 hotel rooms

LP Holding (Hilton Worldwide)

Welcome, comfort, quality, trustand safety services

Hotel

Software development
Data entry

25% 2014-2015

Subcontracting
230,000 (160,000: MGMA only)

Contract farming/growing

Total farmers: 5,763,203
Agricultural extension workers: 5,572 (2015-2016)

Modality in NEM

Employment(estimated NEM
employment)

51 Electrical equipment
manufacturing companies(20)

387 Myanmar Garment
Manufacturers Association$213.8 million

Trigger-switch
Car speaker

IT-BPO

No. of companies(NEM-related firms,
estimation)

Electronics

Apparel (CMP)

Garment

Beans and pulses

Rice and broken rice

Beans

Rice

Product/services

Tertiary

Industry(representative
example)SecondaryPrimary

SectorTable 3. NEM operations in major sectors, 2016

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Electronics is another manufacturing industry that is expected to expand rapidly in the next decade,especially when Myanmar’s special economic zones are launched. In 2016, the export value ofelectronics increased 12 times from the previous year, to $213.8 million. EMS providers and original
design manufacturing (ODM) providers became important when foreign firms relocated operations
to Myanmar. Whereas EMS companies produce electronic parts or devices to order and do not haveproducts of their own brand, ODM companies design the products of clients, then manufacture andsupply them under clients’ brands. Both types of companies are characterized by NEM operations solong as they have orders from other companies with which they do not have equity relations.
In the tertiary sector, various services are growing quickly. Its GDP share reached 42 per cent of thetotal in 2016 with an average growth rate of 7.3 per cent from 2012 to 2016. IT-BPO is one of thehighest-potential industries in terms of revenues and employment. Although the industry is quite
new in Myanmar, its success in neighbouring countries such as Viet Nam and the Philippines implies
that industrial developments in voice-based services (call centres) and in outsourcing of later-stage,
non-voice and complex knowledge-based processes may be on track in Myanmar.
According to a World Travel & Tourism Council (WTTC) report, the direct contribution of travel
and tourism to GDP in 2016 was $2.1 billion, or 3 per cent of total GDP. The industry also
generated 2.7 per cent of total employment or 1,662 million jobs that year. In the industry, hotels– international hotel chains in particular – can best contribute to NEM operations, through thecontract management mode.

2.2 NEM by modality
There are several foreign firms and TNCs doing business with local partners in NEM modes invarious industries. Their involvement in NEMs and their contribution to the economy vary by modality
and industry. This section examines the subcontracting, franchising and management contract
modalities by looking at particular industries that relies on those modalities.

(1) Subcontracting: Garments
Clothing industries have played a significant role in export-oriented industrialization. The rise of
the Asian Tigers or Asian Dragons – Hong Kong, Taiwan Province of China and the Republic ofKorea – in the early 1980s expanded the export of clothing rapidly. ASEAN member countries such
as Indonesia, Malaysia, Thailand and the Philippines followed later. In the 2000s, China extended its
capacity to export clothing, becoming the world largest producer. Then, in the 2010s, Cambodia, theLao People’s Democratic Republic, Myanmar and Viet Nam (the CLMV countries) began to extend
their clothing exports.
Myanmar’s garment industry is dominated by CMP operations. This is a form of contract work inwhich a foreign buyer with the necessary financial and technical abilities pays contracting fees to a
garment factory to perform the labour-intensive tasks of cutting fabric, sewing garments together
according to design specifications supplied by brand holders and then packing the garments forexport to international markets (figure 2).
According to the MGMA, in 2017 there were about 480 member companies (including enterprises
with foreign capital) with a labour force exceeding 230,000. These member companies include firmsthat perform embroidery and firms that perform inspection, which account for 12 per cent of all
Myanmar manufacturers that produce textiles, wearing apparel, leather and related products.

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13

Figure 2. CMP operations, garment manufacturing, Myanmar

Foreign buyers(ex. Japan, Korea, China, and EU)

Free sourcingof raw materials

Tax exemption
on imports
trough customs

Reduction of
incedenceof procurement
and foreignexchange reserve

No transfer of
Design and Styledevelopment

CMP
charge≒ 8 to 10 %of FOB

Exportingthe garments

CMP factories in Myanmar

Source: AJC based on Kudo (2012).
Note: FOB means “free on board”.

Garment exports from Myanmar began in the middle of the 1990s, but the share of garments in totalexports fell from 2001 until 2009 for two reasons: limited access to other markets, in particular theUnited States and the European Union, under economic sanctions, and the rapid increase in exportsof natural gas following the imposition of sanctions. Garment exports began to grow again withrenewed access to new markets, such as Japan, and with the return to civilian rule.
Although orders from the European Union overtook those from Japan for the first time in 2016,
the East Asian market has been the prime target of Myanmar’s garment exports. Indeed, in thatyear Japan was the largest single importer of Myanmar’s apparel products, totalling $667 million,
followed by the Republic of Korea at $344 million. These two countries accounted for 31 per cent and16 per cent of Myanmar’s garment exports in 2016.
With respect to Japan’s imports of garments, China has been its largest partner. However, since2010 the ratio of imported garments from China began to decline gradually as lower-cost sites
emerged, especially the ASEAN countries. Japan offers a zero-tax incentive on imports of woven
garments from Viet Nam, Indonesia, Thailand, Cambodia and Myanmar. Table 4 shows garment
imports to Japan by country origins.
The increase in exports of garments from Myanmar and other ASEAN transition economies has
also strongly benefited from dedicated technical support training on the industry provided by theJapan International Cooperation Agency and the Association for Overseas Technical Cooperationand Sustainable Partnership. These development agencies have provided support for the MGMA’straining efforts since 2009. In addition, JUKI and Brothers, Japanese makers of industrial sewing
machines, have offered technical training to user companies.

464

10 Taiwan Provinceof China

Source: JTIA/Trade Statistics of Japan.

38 447474

9 Cambodia

Total

516

8 Korea, Republic of

3 062

561

7 Myanmar

Others680

1 027

4 Italy

6 Bangladesh

1 407

3 Indonesia

860

3 172

2 Viet Nam

5 Thailand

26 255

1 ChinaRankingUS$million

2014

94.0

108.0

102.1

158.8

90.4

116.9

112.6

105.8

94.4

103.4

112.2

89.1

Change fromprevious year
(%)

Total

Others10 Taiwan Provinceof China

9 Cambodia

8 Korea, Republic of

7 Myanmar

6 Bangladesh

5 Thailand

4 Italy

3 Indonesia

2 Viet Nam

1 ChinaRanking

35 508

2 775

423

433

583

662

814

840

918

1 434

3 435

23 189US$
million2015

Table 4. Garment imports to Japan by major trading economies, 2014–2016

92.4

90.6

82.0

93.4

103.9

139.8

119.7

97.7

89.3

102.0

108.3

88.4

Change fromprevious year
(%)

Total

Others10 Taiwan Province ofChina

9 Cambodia

8 Korea, Republic of

7 Myanmar

6 Bangladesh

5 Thailand

4 Italy

3 Indonesia

2 Viet Nam

1 ChinaRanking

34 777

2 759

422

422

650

838

858

955

960

1 412

3 713

21 789US$
million

2016

97.9

99.3

100.7

99.8

111.4

126.6

102.2

117.3

104.6

98.4

108.1

94.0

Change fromprevious year(%)

14

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15

The volume of trade by NEMs in Myanmar garment exports is difficult to estimate. Nonetheless,officials from the MGMA put it at about 70 per cent, or $1 billion. The estimation is guided by thefollowing observations:• Of the 480 garment factories that are affiliated with the MGMA, about 100 specialize in CMP andexport products based on orders from foreign companies that have no equity capital.
• From the 144 foreign garment companies, about 70 per cent of products are exported as original
equipment manufacturing (OEM) products and some are exported to third countries.
• From the 40 joint-venture garment companies, about 90 per cent of products are exported as OEM
products, and some are exported to third countries.
• None of the global brand apparel retail companies, such as Zara, GAP, H&M and UNIQLO, havegarment factories in Myanmar, only what they call partner factories or contract manufacturers.8
The industry currently employs 210,000 to 300,000 workers. According to the MGMA, more than one
million people in Myanmar are partly or wholly dependent on garment factories for their incomes,
when spouses, parents and children are included. NEM trade in the garment industry thus makes asignificant contribution to the Myanmar economy.

Box 3. The role of the MGMAThe MGMA is among the country’s largest member organizations for business, with 480 member
companies that collectively employ over 230,000 workers. Among them are Myanmar’s exporting
garment factories. Founded in 2002, the MGMA is committed to supporting member factories
by providing valuable technical training services and support in finding business opportunities.
The MGMA operates a skills training centre in North Yangon, engages in business matchmaking
for member companies, produces sectoral research reports and serves as the voice of industry.
Membership costs 50,000 kyats ($37) per year and the initial induction fee is 100,000 kyats ($74).
The MGMA works with a variety of international partner organizations to promote responsible andsustainable development in Myanmar’s garment sector.
Currently, the MGMA sees its opportunities and challenges as follows:
Opportunities• Myanmar’s garment industry is still extremely small, compared with neighbouring countries,
and has potential for further growth.
• Having satisfied the quality standards of Japanese and Korean consumers during the so-called“Lost Decade”, major European and United States brands are now produced in Myanmar.
• Low wages and a ready supply characterize the relatively well-educated labour force.
• The government offers favourable import and export tariffs.
Challenges• Infrastructure is poor.
• Supporting functions are lacking.
• Lead times are long.
• There is a need to move up the value chain from CMP to OEM activities.
• Doing business in Myanmar poses general difficulties.
• Non-negligible macro risks relate to domestic politics.
Source: Adapted from information from the organization’s website and related materials (http://www.myanmargarments.org/).

8

These figures take the assumption that subcontractors from East Asia are included in the NEMs.

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Box 4. Why did Just choose Myanmar? (Just Co., Ltd.)
Just Co., Ltd. (Just-fashion) is a Japanese apparel maker producing suits, jackets and coats formen and women. Established in 1951, the company has developed as a men’s apparel maker,
expanding its production system to take advantage of rapid customer growth and an increasing
number of retailers.
The company decided to set up operations overseas in the 1990s when it was in the growing
phase. In China, Just-fashion established a joint venture to produce suits for men in Beijing in
1992 and another to produce casual jackets in Shanghai in 1994. In 2001 Just-fashion established
Asian Just Co., Ltd. in Myanmar in order to diversify its inter-country risk. The president of Justfashion identified the following attractions of Myanmar as the reasons for setting up a factory inthe country:• A nation friendly to Japanese people• A huge pool of cheap labour• Abundant natural resources• Abundant agricultural and marine resources• Favourable import and export tariffs
Asian Just Co., Ltd., started as a private Myanmar company. It was the first Japanese-affiliatedcompany to start producing suits for men in the country. In the start-up phase, as a private local
company Asian Just co. enjoyed various benefits, such as low prices for oil and electricity, and a
low tax rate. The company also provided dormitories for its workers. As the business in Myanmar
matured, the company shifted to a joint venture with a local company.
The company’s main products are OEM suits. In 2017 it employed 2,000 workers with a staff
turnover rate of about 2.5 per cent monthly.
Source: Adapted from information from company’s website and related materials (https://www.just-style.com/).

China’s workforce shortage in garment factories in the East and rising wages accelerated therelocation of Chinese garment firms from China to the CLMV countries. Despite sourcing mostmaterials from China, total production costs in Myanmar are still lower than costs in China.
Exporting firms enjoy import duty exemptions in Japan as Myanmar enjoys the Generalized System
of Preferences because of its status as a least developed country. Just Co., Ltd. (box 3), enjoys
stable revenue because its production does not depend on seasonal demand in Japan, since its
main product is suits for men and the company has strong links to major Japanese mass retailersof business suits.
The garment industry is one of Myanmar’s most dynamic export sectors and has played a criticalrole in creating jobs, especially for women. Although the industry accounts for only about 300,000
workers, equivalent to 1 per cent of the labour force, about 85 per cent of those workers are women.
Workers in the garment industry are primarily young with limited formal education, although they
are literate. According to a report from the International Labour Organization (ILO),9 the median ageof workers in Myanmar is just 27 years, although male workers (33 years) tend to be much older
than female workers (26 years). Notably, four in five have less than a primary education or at mostan ordinary degree.

9

Asia-Pacific Garment and Footwear Sector Research Note, Issue 6, November 2016 (ILO).

PA P E R 6 M YA N M A R

17(2) Subcontracting: IT-BPO
Two types of business activities in Myanmar are associated with IT-BPO: IT software development
and BPO data entry services. Software companies take care of creating, implementing andmaintaining applications. With developments in ICT, companies can outsource some activities
related to IT application programming. There are many technologies that help support offshore
software development.
BPO data entry businesses are conducted through outsourcing, the contracting out of a business
function to an external provider. Data entry usually involves extracting key facts from dense
documents, compiling and updating databases, and converting numbers into workable statistics,
among other things. The source company can save time and money to focus more on core activities.
In IT-BPO services, client firms or user firms offshore a variety of businesses, such as call centres,
data entry, engineering, software development, game application development and R&D to local
firms or foreign subsidiaries in a host country (table 5).

Table 5. Outsourcing and offshoring by activity type
Location
Mode
ControlHome

AbroadInternal (equity)

Domestic operation

Captive offshoring

External (non-equity)

Outsourcing

Offshore outsourcing

Source: AJC.

The development of Myanmar’s IT-BPO industry started after the transition to civilian control ofgovernment. There is strong demand in Japan for good-quality cross-border IT engineers, as wellas IT human resources in offshore countries. For example, according to Japan’s IT HR white paper,
offshore development by Japanese companies amounted to about $920 million from 2009 to 2012.
Approximately 84 per cent of Japan’s offshore development of IT-BPO in 2012 went to China, followedby India (19 per cent) and Viet Nam (19 per cent) (figure 3). A 2014 survey showed that Myanmar has
become an important offshore development destination for Japanese IT companies (table 6). Casestudies of Japanese companies (boxes 5-7) provide direct insight into strategic operations related tothe outsourcing of IT-BPO services to Myanmar.

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18

Figure 3. Offshore development order destination from Japan, by country, 2009–2012(Per cent)

90
80
70
60
50
40
30
20
10
0
China

India

Viet Nam
2009

2010

Philippines
2011

USA & Canada

Korea, Republic of2012

Source: IT HR white paper 2013.

Table 6. Offshore development: Destination prospects of Japanese companies
Rank

ChangeCountry

2012 response

2014 response1↗

Myanmar

8

11

2

→

Viet Nam

11

10

3

↘

China

16

9

4

↗

Malaysia

4

6

5

↗

Indonesia

65Source: JISA Global Business questionnaire (February 2014).

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19

Box 5. FROBO Myanmar: offshore development in Myanmar
FROBO Myanmar is a Japanese IT company operating in Yangon. Established as a 100 per centforeign capital company in April 2015, the company develops bridge systems with FROBO Japan,
which takes orders from Japanese clients and delivers the products by managing the production
schedule and doing quality control.
Currently, FROBO Myanmar has 30 employees, including a Japanese representative and a Japanesesystem engineer and 28 Myanmar programmers. Fixing design specifications, Japanese andMyanmar system engineers work together in the process of development, testing, and translationof systems.

Box figure 5.1. Offshore development system of FROBO

Clientsin Japon
Overall Management
Order
Deliver

Quality Control

DesignMyanmar
Programmers

Development
Testing
Translation

In addition to orders from Japan, FROBO Myanmar responds to requests from Japanese companies
in Myanmar. In order to upgrade engineers’ IT skills, the company dispatches them to FROBO
Japan regularly.
Source: Adapted from company’s website and related materials (https://www.frobom.com/en/).

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The hub institutions involved in producing engineers and technical personnel in Myanmar are
universities and private IT schools. In 2017 there were 27 universities that offered IT-related
education courses, producing 6,000 graduates a year. However, educational capabilities in Myanmar
are insufficient to train world class IT engineers, at the levels achieved in India and China. Unstableelectrical power supply in Myanmar has restricted the running of IT courses, which require goodconnectivity and coordination of information over the internet. In most of the universities, students’desktop computers are not connected with local area networks and because most lack batteries forback-up, system crashes occur often due to the frequent power outages in the country.
Although the penetration rate of mobile phones has dramatically expanded, from 13 per cent in 2013
to 89 per cent in 2016, the share of internet users in 2015 had grown to only a little more than 20
per cent. Comparing this figure with other countries, such as 50 per cent in Viet Nam, and 70 per
cent in Malaysia, Myanmar has much room for improving the IT infrastructure. This seems to have acorrelation with the low penetration of computer users.
In addition, the lack of IT lecturers and instructors in universities and institutions has created aserious bottleneck in the training of IT engineers. The situation is also unfavourable for learning
new skills and knowledge in the field, which has progressed at a rapid speed. In order to develop theindustry, the Myanmar government has to solve this problem.

Box 6. NTT DATA Myanmar: offshore and system development in Myanmar
NTT DATA Myanmar is a foreign subsidiary of NTT DATA, a Japanese systems integration company.
Established in November 2012, the company conducts bridge system development with NTT DATA
Global Technology System Japan (NTT DATA GTSJ), which takes orders from Japanese clients,
jointly develops the system and delivers.
Currently, NTT DATA Myanmar has 200 employees and a plan to increase the staff up to 500 inorder to respond to the Financial Network System ordered by the Central Bank of Myanmar(CBM Financial Network System) and orders from Japan. The company office is located in the
Myanmar Information and Communication Technology Park (MICT Park), in the Hlaing campus of
the University of Yangon.
There are two main reasons that NTT DATA set up its office in Myanmar: to establish a newsoftware development base and to enter a future market. When it became difficult to obtain lowcost resources sustainably at its main offshore base in China, the company found it necessary
to have a new software development location, in addition to those it already had in India and Viet
Nam. Looking ahead to a sluggish Japanese market, NTT DATA was confronted with a choice toexpand its sales overseas. It was significant for the company to secure the local base in order to
respond to IT investment by official development assistance.10
To recruit quality IT engineers, the company opened an endowed chair at the University of Computer
Studies Yangon. It also opened the NTT DATA Myanmar Professional SE Academy.
Source: Adapted from the company’s website and related materials (http://www.mm.nttdata.com/).

10

Besides the CBM Financial Network System, NTT DATA has developed the Myanmar Automated Cargo Clearance
System used at major customs ports in Myanmar.

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21

The rapid growth of the outsourcing industry and its division of labour has reached Myanmar. Foreigncompanies that operate BPO businesses have started operation in the country. The low labourcosts and available human resources are attractive for foreign companies, making their moves to
Myanmar possible.

Box 7. Myanmar RECOMM Co., Ltd.: operation of BPO centre in Myanmar
Myanmar RECOMM is a foreign subsidiary of RECOMM, a Japanese sales solution company that
conducts sales and maintenance of office appliances and BPO services. RECOMM opened a callcentre in Dalian, China, in 2003 and started a call centre business for Japanese companies. The
company expanded into customer service and customer care services in voice BPO as well as
human resources management, financial and accounting services, procurement purchasing anddata entry in non-voice BPO.
With the business expansion, the company established Myanmar RECOMM in December 2014as its third overseas BPO base, followed by Dalian and Changchun in China. Myanmar RECOMM
started to engage in the BPO business in Myanmar in May 2015 by training data entry personnel
and improving the infrastructural communication environment.
Myanmar RECOMM is handling data entry services, responding to orders from Japan. In orderto recruit excellent workers who can understand Japanese, Myanmar RECOMM has requested aJapanese language school to train staff in order to achieve the necessary language level for work.
The Myanmar BPO base responds to demand for low-end services while the BPO bases in
China respond to demand for middle and high-end services. The company expects Myanmar
RECCOM to advance to higher-level services through the development of human resources
and infrastructure.
Source: Adapted from the company’s website and related materials (http://www.mm.nttdata.com/).

Despite the growing importance of IT-BPO services in Myanmar, there are no industry associations
specialized in IT-BPO in the country. Compared with the industry in the Philippines, it seems toface two inter-related problems: standardizing services and upgrading technology. Traditionally,
particularly in the voice, non-voice, and management process outsourcing industry, IT-BPO
companies used to train their own employees because standardized skills are required. In-housetraining provides good results for employees. However, employees who acquire higher skills fromin-house training tend to leave the company. For example, at a United States IT-BPO company in thePhilippines, its non-voice centre segment has a rather high turnover ratio of 40 to 45 per cent every
year, with 70 per cent recorded in certain years. As a result, the overall skill level of employees has
not improved and has remained low, even though companies have invested significantly in training.
Officials in Myanmar should be wary of this possibility.
From a technological point of view, continuous investment is required in this industry. Oncecompetition becomes severe, companies try to differentiate themselves by having more advanced IT
technology, to attract overseas customers. For example, in order to support software development,
massive data need to be synchronized with customers overseas. The Myanmar government must
develop the IT infrastructure to stimulate the growth of IT-BPO services.

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22(3) Licensing and management contracts: Hotels
International hotels are operated in many countries, including Myanmar, using different types ofcontracts and different types of entry modes (table 7). Since the inward FDI policy of Myanmar does
not allow foreigners to own private land, international hotels are operated either by NEMs throughmanagement contracts or franchise agreements or through long-term lease of land on which hotels
can be built with equity investments.

Table 7. Hotel operations by type of NEM
FDI

Management contract

Franchise agreement

Ownership of theland and hotel

Owns hotels

Without ownershipinterest

Without ownershipinterest

Management
control

Direct control

Direct leadership by
expatriates from theheadquarters

Management training
through the manuals

Contract fees

Not applicable

Tend to be higher(10% or more of profit)

Lower(less than 10% of profit)

Scale and speedof the hotel chain

Slow, smaller scale

Faster, medium scale

Very fast, larger scale

Hotel categories

First stage of hotel chain,
5-star hotel, independent hotel

Mostly 4 star class

Mostly 3-star class

Source: Adapted from Shinomiya (2016).

Figure 4. Number of visitors to Myanmar, 2010–2016

1 400 000

1301 583

1272 596

2015

2016

1131 624

1 200 000
900 161

1 000 000
800 000

593 381600 000
400 000

310 688391 176

200 000
0
2010

2011

Source: Ministry of Hotels and Tourism.

2012

2013

2014

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23Myanmar has managed to attract tourists from all over the world. The number of foreign visitors
has grown steadily, especially since the transition to civilian rule in 2011 (figure 4). Table 8 shows thenumber of accredited hotels and the number of rooms in the different regions.

Table 8. Number of hotels and rooms by region, 2016
State/Region

Number of hotels

Number of rooms

Major places

Chin State

4

99

Kanpatlat, Mindat

Kachin State

26

733

Bhamaw, Myitkyina

Kayah State

19

713

LashioKayin State

20

706

Hpa-an, Myawaddy

Mon State

43

1 442

Kyaikhto, Mawlamyaing

Rakhine State

66

1 896

Ngapali, Pyay

Shan State

286

8 941

Kalaw, Nyaung Shwe

Ayeyarwady Region

63

2 559

Chaungtha, Ngwesaung

Bago Region

40

1 027

Bago, Taungoo

Magway Region

27

685

Magwe, Pakokku

Mandalay Region359

12 414Bagan, Mandalay

Sagaing Region

22

816

Kalay, Sagaing

Taninthayi Region

36

1 451

Dawei, Myeik

Yangon Region356

17 763

YangonNaypidaw Union Territory

65

5184

Nay Pyi Taw

1 432

56 429Total
Source: Adapted from Shinomiya (2016).

According to the Myanmar Tourism Master Plan, 2013-2020, Myanmar has set a goal to receive 7.5
million international tourists annually by 2020. Consequently, total tourism receipts are expected
to increase from $534 million in 2012 to $10 billion in 2020. Considering the current tourism
infrastructure, especially for the quality of the hotels and local airports, the target seems to be
too ambitious. While Myanmar tourism has room for growth, the WTTC reported that the total
contribution of tourism amounts to 6.6 per cent of Myanmar’s GDP ($4.5 billion) in 2016, and it isforecast to rise by 7.5 per cent per year to 7.0 per cent of GDP ($9.7 billion) by 2027, which has led to
Myanmar tourism being ranked second in the world in terms of long-term growth (forecast 2017-27).
In 2016, an influx of $3 billion in FDI went to the development of hotel and tourism-relatedcommercial complexes (figure 5), which amounted to 11,207 rooms across 56 projects, of which 59
per cent have been completed, 20 per cent were under construction, and 21 percent were approvedby the Myanmar Investment Commission. Between 2012 and 2016, growth in the number of rooms
with foreign investment increased 66 per cent while the total amount of investment increased by
118 per cent.

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Figure 5. FDI flows into hotels and commercial complexes, 2012–2016 (Millions of dollars)

3 500
3 000
2 500
2 000
1 500
1 000
500
0
2012

2013

Completed2014

Under Construction

2015

2016

MIC Permitted

Source: Myanmar Ministry of Hotels & Tourism.

Table 9. Foreign investors operating hotels in Myanmar
Hotel brand

Name of hotel in Myanmar

Open year

Local partner

Hilton Mandalay

2017

Eden Group (management agreement with HH&RP)

Hilton Nay Pyi Taw

2014

Eden Group (management agreement with HH&RP)

Hilton Ngapali Beach Resort

2014

Eden Group (management agreement with HH& RP)

Kempinski Mandalay

2014

JL family

Waterfront

The Heritage Hotel Kempinski
Yangon2016

JL family

Dusit

Dusit Yangon

2020

Myanmar V-Pile Group of Companies

Melia

Melia Yangon

2016

HAGL Group (Long-term build-operate-transfer)

Shangri-La

Sule Shangri-La

1996

Shangri-La International Hotel Management

HiltonSource: AJC.

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25

The hotel industry links with other industries, such as online booking services, restaurant
services, food and beverage services, linen services, and furniture and decoration industries, aswell as transport services and tourism businesses. These linkages contribute to employment
creation and the development of related industries in the country.11 The tourism industry has
been identified as one of the priority sectors for development in many states and regions, such as
Shan, Rakhine, Ayeyarwady and Mandalay. Most branded hotels are concentrated in Yangon and
Nay Pyi Taw (table 9), where they cater to commercial demand and government requirements.
There is limited presence of international hotels in the leisure destinations, as these markets
have only recently been opened and are not very well known among foreign travellers. The hotelindustry has contributed strongly to employment and rural development because of its labourintensiveness and community-based activities.
One of the most critical factors affecting TNCs’ decision to choose NEMs in Myanmar is local
regulations, which favour NEMs over FDI. Hotel management and operations are constrained byland ownership conditions, and hence, foreign investors engage in management contracts, offer
franchises or undertake a long-term lease. However, despite its forecast long-term ranking for
tourism growth, Myanmar ranked only 140th in 2016, whereas Indonesia, Thailand, and Viet Nam
ranked 14th, 20th and 26th, respectively, according to the WTTC. Since the hotel industry in Myanmar
has the potential to grow, the government must promote the use of TNCs as a springboard to
stimulate NEM operations in the country.

11

According to PSC (2014), there were 416,942 people engaged in accommodation and food service activities, andtotal income reached $8.9 billion. The breakdown of employment is as follows: accommodation activities (91,843);
restaurants and mobile food service (290,535); event catering and other food service (7,791); and beverage serving
activities (26,773).

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3. OPPORTUNITIES AND CHALLENGES
This section provides an analysis of the opportunities and challenges faced by Myanmar inpromoting and utilizing NEMs. There are a number of opportunities each industry will benefit fromby establishing NEM agreements with TNCs (figure 6). However, there are also challenges for local
firms, particularly because of the characteristics of NEM.

Figure 6. Opportunities for NEMs in Myanmar

Local companies/
Local employees

Agreements between
TNCs and local firms
exist through NEMs
Opportunities

TNCs

Challenges
Subcontracting
Garment industry
Competition among ASEAN
Member States
Business model is basedon TNC’s side

Non-equity modalities in Myanmar

Job creation

Outsourcing
IT-BPO industry
Competition among ASEAN
Member States
Business model is basedon TNC’s side

Job creation

Management contracts
Hotel industry

Management know-how
transfer

Source: AJC.
Note: Major industries only.

Substantial investment isrequired from locals
Training by TNC,
no localization requirement

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3.1 Local capabilities
In the absence of direct operations by fully or jointly owned foreign TNCs, local firms can takeadvantage of potential opportunities, but this will not come easily as there are challenges. TNCs
typically make decisions on whether to produce in-house or to subcontract out on the basis of a wide
range of factors. One key factor is the existence or potential emergence of competent suppliers.
TNCs are likely to contract out supplies to local firms if they benefit economically from outsourcing
relative to producing them in-house. Such contractual arrangements can benefit host countries,
as most of the profits arising from the operations are most likely to stay within the host country.
Thus, there are potential opportunities for national firms in the garment, IT and hotel businesses,
as well as other industries, to have contractual agreements with TNCs. However, such opportunities
can only be leveraged effectively if the local firms acquire and develop the requisite capabilities toparticipate in such contract relationships. Such capabilities include management, inventory andquality control systems, and production technology. There will also be a pressing need to sustain
rapid technological upgrading among national NEMs for them to remain connected to GVCs, as wellas to enjoy movement to higher value added activities. This is how Foxconn from Taiwan Province ofChina managed to transform its link with Apple from OEM to taking control of the design and R&D ofcertain components it supplies (Sturgeon, 2002). Also, unless national NEMs succeed in remaining
competitive, for example in hotel franchising, TNCs will switch suppliers or terminate their brandrecognition. In hotels, established brand holders such as Hilton and Sheraton have terminatedcontractual agreements with host-owners when their standards are not upheld. NEMs are often
vulnerable to the vicissitudes of volatile demand fluctuations. In industries such as garments, TNCs
often engage a few suppliers at the same time so that orders from successful upgrading firms canbe stepped up to cover for orders terminated from poorly performing firms.

3.2 Relationships between NEM modalities and industries
As noted earlier, NEM modalities differ with each industry, and in some cases with the host country.
Myanmar’s garment industry is dominated by local manufacturers who use CMP operations to
supply TNCs abroad and foreign contractors operating in the country. In the IT-BPO/BPM industry
TNC-owned subsidiaries still dominate as both internet penetration and IT infrastructure are poorly
developed. These subsidiaries create offshore outsourcing with TNCs’ vendors. This type of modality
creates opportunities for local employees to be integrated with subsidiaries’ business activities.
However, it does not provide opportunities for capacity-building in local firms. Initiatives to start
local IT-BPO/BPM firms through contract agreements with TNCs (especially Japanese ones), canstimulate offshore outsourcing. TNC affiliates also have a modality through captive offshoring, which
is done through FDI (non-NEM) operations, but it could be a good way for Myanmar to stimulate
NEMs in IT-BPO/BPM operations. Because IT-BPO/BPM is a complementary industry that supports
all industries, it is important that the government promote local IT firms that can then connect with
TNCs located abroad.
Different types of modalities are also seen in the hotel industries. Most brand holders use management
contracts and franchising modalities. There are a few five-star hotels owned by foreigners in Myanmar.
Examples include the Sule Shangri-La hotel, which is owned by Robert Kuok from Singapore. The
management contract and franchising modalities should be promoted in Myanmar, as foreign
brand holders have demonstrated strong global marketing ability to attract tourists worldwide to
Myanmar and to their hotels. However, since brand holders impose stringent conditions to protect
their branding, local owners will have to maintain high operating standards to remain attractive tothem. Indeed, throughout ASEAN, management contracts and franchise agreements are the typical28

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modalities engaged in by TNCs in the hotel industry, though there are also hotels that are owned andmanaged directly by foreign hoteliers (e.g. the Shangri-La). The achievement of tourism synergies
from the promotion of NEMs in the hotel industry will also require that the government improve
infrastructure (including IT support) and security throughout the country.

3.3 Ownership and control
Although foreign firms have no direct ownership in NEMs, more often than not they control theoperations of NEMs. Control can take the form of buyer firms dominating pricing decisions, quality
assessments and determination of lead times. In garment manufacturing, for instance, buyers
determine even the suppliers of inputs under CMP arrangements. Under free (or freight) on board(FOB) operations, Myanmar NEM firms have the autonomy to determine such sources but arecompletely reliant on buyers with respect to lead times, specifications used and materials sourced(Myint and Rasiah, 2014). Similarly, in hotels, franchise holders determine the terms and conditions
under which NEMs must operate. The positive side of these conditions include the pressure
imposed by TNCs on NEMs to upgrade, though NEM firms that remain suppliers will always
remain exposed to contract termination whenever TNCs are not satisfied with their supplies or if
more capable suppliers emerge. Such circumstances often arise when TNCs’ operations evolve tohigh value added activities that require their suppliers to also upgrade. Such circumstances canalso emerge if the TNCs find other supplier bases located in other countries to be more efficient.
Nevertheless, NEM firms that catch the wave of competition offered by major export markets
to upgrade enjoy the opportunity to move up the value chain, and in some cases, such as in the
Republic of Korea and Taiwan Province of China, to leapfrog incumbents. Samsung and Taiwan
Manufacturing Company, respectively, now lead the memory and logic chip value chains (Rasiah
and Yap, 2015; Yap and Rasiah, 2017). Yet, Samsung Semiconductor and TSMC started operations
only in 1975 and 1987 respectively.
If TNCs’ buyer subsidiaries are located in the host country, the control exercised can be stronger
than otherwise. In a number of cases such TNCs will train the workforce of host-country NEM
suppliers or sometimes invest in skills development centres to develop the host country’s humanresources or implement rooting strategies for their own self-expansion (Rasiah, 1995). The hostgovernment often plays a leveraging role to initiate and coordinate such developments. Singapore’s
Economic Development Board and the Penang Development Corporation successfully played such arole (Rasiah and Yap, 2015a, 2015b). Also, this is how TNCs got together to jointly finance the Penang
Skills Development Centre in 1989, which is viewed by experts as a world class training centre(Rasiah, 1995). The garment and IT-BPO/BPM industries in Myanmar can benefit from adapting
such a framework. TNCs often adopt such a function to strengthen their value chain globally.
Given that linkages with foreign TNCs can never be taken for granted, local NEM firms will haveto take advantage of the opportunities to launch new businesses, which will then stimulate sales
growth, job creation and exports. Governments often initiate promotional mechanisms to support
entrepreneurial synergies in both rich and poor countries. In addition to basic infrastructure,
governments also need to develop the science, technology and innovation (STI) infrastructure tostimulate entrepreneurial synergies. However, the limited capacity of local NEM firms to enter suchhigh-technology activities in Myanmar has remained a challenge.

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3.4 Localization strategies
ASEAN governments have often launched localization strategies when foreign TNCs are engaged
in manufacturing for the domestic market. This is how Indonesia, Malaysia and Thailand initiallypromoted local suppliers in the automobile industry (Rasiah, 2009). However, such initiatives havebeen rationalized since the launching of the ASEAN Free Trade Area in 1992 and the World Trade
Organization in 1995. Nevertheless, governments can still promote linkages with local NEM firms
without infringing the Trade-related Investment Measures (TRIM) instrument of the WTO, which
prohibits differential trade treatment on the basis of national ownership (Rasiah, 2014). Linkage
strategies can ensure that the government can use its bargaining strength to impose conditions
for TNCs to train national workers and to source from capable NEM firms, especially when the
TNCs enjoy incentives or benefit from sales in the domestic market in Myanmar. The garment, hotel
and related industries can be targeted for development of NEMs as suppliers, which can then also
export once they have developed sufficient capabilities. However, the challenges include the need tostimulate human capital development and the need for local firms to undergo massive technologicalupgrading to meet international standards.
Foreign TNCs can outsource a part or the whole of any goods or services, or even part of their
GVCs to Myanmar’s local firms when the government uses its leverage to call for localization. Also,
TNCs supplying the domestic market may also seek NEM suppliers to reduce transport costs andto coordinate effectively the implementation of just-in-time inventory control systems. This is why
foreign TNCs have evolved proximate suppliers in the automobile industry, though unless local
capabilities are developed foreign suppliers often fill the void. In the garment industry, Myanmar
NEM firms can improve the quality of their cotton fibre and textile manufacturing activity to supply
TNCs both in the country and to export. That way the clothing industry can build stronger linkages
backward to the harvesting of cotton in the country. Local NEM firms should take initiatives
independently to integrate their operations and activities with TNCs’ overall production networks
and GVCs.

3.5 Local NEM firms
The issues faced by Myanmar firms range from those related to contractual agreements to thoserelated to industry characteristics and TNC strategies. Both opportunities and challenges can befound for each category, which can be grouped into issues of (1) continuity, (2) NEMs’ characteristics,(3) capacity-building and (4) local firms’ initiatives and local embeddedness (table 10).
Local NEM firms in Myanmar will face not only opportunities but also challenges if they canstrategically utilize TNCs’ know-how and technological skills by linking with them. They can alsobuild capacities to deal with these challenges and even expand their businesses by use TNCs’
GVC networks. In addition, local NEM firms can also use their supply experience with TNCs toeventually export directly to foreign markets. However, there must eventually be a strong focus on
the development of the STI infrastructure to stimulate innovation synergies among NEM firms.

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Table 10. Opportunities and challenges for local firms engaged in NEMs
Opportunities

Typical industries
concerned

Challenges

Continuity (footlooseness) problems
Easier to find TNC partners,
both in and outside the country
through, for example, matching
events (since TNCs do notdirectly invest in the business).

IT-BPO
Garments

NEM firms are vulnerable to terminationof contract agreements while long-term
contracts are seldom available. Also,
major low-cost competitors in the IT-BPO
industry exist in India and the Philippines.

IT-BPO
Garments
Hotel

Demand and markets are outside
the country (e.g. customers of the
IT-BPO/BPM industry, hotel industry
and subcontracting products such as
garments are outside Myanmar).

NEM’s characteristic issues
Easier to enter new market
or new area even thoughdemand is not present in
the country. Skills, talents orresources that are available inthe country but not requiredin the country can be usefully
utilized outside the country.

Demands of TNCs may change dependingon the interest and taste of their clients(e.g. changes in trends in tourism
destinations, trends in clothing tastes).

Capacity-building issues
Easier for local employees towork with the business activities
in the IT-BPO/BPM industry andthe garment industry because of
low skills

IT-BPO
Garments
Hotel

Not easy for local firms to build further
capacity apart from receiving orders from
customers as they receive only relevant
know-how at most (e.g. upgrading value
chain activities only through local firms’
efforts is not easy).

Initiatives and local embeddedness issues
Local firms adapt to foreign
design and management anddo not need to think about
local values and localization
strategies (quicker for local
firms to make profit by using
TNCs’ business model).

IT-BPO
Garments
Hotel

Local firms may lose their initiative,
design ability and traditional values,
apart from designing for limited
products in the garment industry (e.g.
local firms may follow TNCs’ businessmodels in the IT-BPO/BPM industry
and hotel industry as they do not needto implement a localization strategy).

Local firms need to belocalized, so it takes longer
for local firms to make profits.
Therefore, they need initiatives
for their operations or activities
leading to embeddedness.

(Food)12

In the short term, franchisees or local
firms may face difficulties to adopt
TNCs’ original strategies to localize
taste and need to learn throughexperience only before they become
part of the community (e.g. in the foodindustry, franchisees need to localize
their strategy to meet local customers’
demands of which TNCs are not aware).

Source: AJC.

12

In this paper, the food industry in Myanmar is not examined, as there is little foreign franchise food business in
Myanmar: however, there is contractual farming in the agricultural sector, or the upper chain of the food industry.

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4. POLICY IMPLICATIONS
The intra-ASEAN trade and investment openness established since the turn of the millennium may
have potential influence against anti-globalization and protectionism movements. ASEAN countries asa whole are among the most open and integrated regions in the world, with rapid expansion of tradeand FDI inflows and outflows, though several members have faced volatile fluctuations in such flows.
Typically, firms owned fully or jointly by local and foreign TNCs that are reliant on export markets
in ASEAN have been the most vulnerable to external shocks, as experienced by Malaysia, thePhilippines, Singapore and Thailand during the global financial crisis of 2007-2008. More important,since TNCs often repatriate their profits to their home countries, local NEM firms – as domesticallyowned firms – can help reduce the wholescale repatriation of profits. The development of resilient
NEM firms will also help deepen the reservoir of domestic capital for national expansion. Hence,
government policy should consider strongly the promotion of NEMs as one of the critical economic
growth strategies. The government can focus on the following broad institutional changes.

4.1 Enhancing capacities of local firms
Local firms’ capabilities in both technological and managerial skills should be enhanced so that they
can meet TNCs’ current and potential demand, as well as to eventually export directly. Once thesenecessary capabilities have been attained, they can have more business initiatives or autonomy intheir operations; they can find potential customers through networks; and independently from TNCs
in terms of autonomy or initiatives, local firms can then create their own business activities in thelong run. The government needs to support the development of local firms’ overall capabilities, at
two levels – the individual firm and the industry.
At the individual firm level, the government needs to support these efforts:• Implementation of continuous internal training for employees in local firms. Local firms need totrain their employees for higher-skilled jobs. If there is some direct or indirect financial support
for training, it will help local firms focus on internal training tailored to their needs, including that
required to meet client TNCs’ demand.13• Establishment of a local business advisory centre where local firms can learn NEM operations
or activities. Local firms need to be aware of the big picture of changes or future demand in theindustry rather than focusing only on their current operations. The government can support thisby being facilitators for connecting individual firms – horizontally and vertically – in the industry.
The centre should covers all aspects of NEM establishment – forming, executing and evaluating
contracts, as well as increasing knowledge about NEM operations.
• Creation of a conducive environment for local firms to facilitate their globalization strategies
and localization strategies. Local firms need to familiarize themselves with TNCs’ changing
strategies to be able to connect and evolve in their value chains. Individual firms need to learn
their customers’ strategies – buyers, sellers and organizations supporting their activities. Thus,
the government should offer support for different types of strategies in different industries at theindividual firm level, without focusing solely on the overall industry level.

13

In the 1990s, the Malaysian electrical and electronics industry started. This provides a useful example for Myanmar
as well.

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At the industry level, industrial or business associations and the government can jointly support
these initiatives:• Creation of an environment for competition and cooperation between local and foreign firms.
Individual local firms need to have continuity in their operations or activities by enhancing theircapabilities. Although they need to compete among themselves, they will also need to collaborate
to solve collective action problems. This is crucial to evolve successful industrial districts (Piore
and Sabel, 1984). The presence of TNCs can bring both competition and demonstration effects, toraise the technological capabilities and competitiveness of local firms in Myanmar (Caves, 1974;
Rasiah, 1994). Therefore, the government can create a better environment for competition andcooperation so that NEM industries as a whole can become more competitive internationally.
• Promotion of local firms to upgrade gradually within GVCs. Shifts in demand by TNCs andchanges in TNCs’ GVCs in Myanmar are mostly from TNCs’ requests for cost reduction and for
improvement of quality and shorter lead times. If local firms can upgrade and raise their value
added little by little, higher levels of value chains are created at the horizontal and vertical levelsin the country. The government can promote upgrading of local firm capabilities explicitly throughsupport for innovation and technical upgrading activities. Only then may NEMs be able sustain
their partnership with foreign TNCs. Achieving this will require the launching and continued
upgrading of the STI infrastructure in the country.
• Putting an innovation policy in place for local firms to encourage and protect technologies required
to perform as NEM operators. Local firms in Myanmar need to be attractive enough to become
TNCs’ NEM partners. Innovation policy is required in any event, as Myanmar firms need upgrading
to support GDP growth and employment. Innovations tend to flourish only if there is a conducive
regime of intellectual property rights in place. Such an effort is still premature, as the country
is classified as stage 1 in terms of development, according to World Economic Forum’s Global
Competitiveness Index 2016-2017.

4.2 Developing the basic infrastructure
For NEMs to thrive so that they can contribute significantly to Myanmar’s exports, employment andrevenue, it is important that the government develop the basic infrastructure in those areas wherethese firms would potentially locate. Ease of registration, access to finance and skilled personnel,
and to water and power, and the provision of security are important to lower the cost of doing
business and to operate efficiently. Local administrative agencies must help solve problems thatthese firms face. Where hotels can benefit from an increase in tourist visits to scenic locations if
the infrastructure is good, garment and IT-BPO NEMs can enjoy low costs and quick access toessential services.
Access to the internet will also connect potential customers to hotels, and the various tourist
attractions that surround their locations. The cost for installing broadband internet support has
fallen dramatically over the past two decades. Since the service it provides is a public good, it canstimulate exponential growth.

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4.3 Developing science, technology and innovation infrastructure
While efficient basic infrastructure is important to raise efficiency levels of firms, STI infrastructureis critical to stimulate firms’ participation in innovative activities. ICT and biotechnology should form
the essence of two science parks in the country, to offer complimentary support for a wide range
of industries. Although Singapore and Taiwan Province of China are significantly more developed
economies, science parks specialized in ICT and biotechnology have played major roles to assist
upgrading in firms (Rasiah, 2018).
In addition to helping the local community to address critical problems, science parks provide
incubators to scale up innovations and to adapt existing stocks of knowledge for innovation. Linking
science parks with national universities and public laboratories will be important to stimulatetechnological upgrading in NEM firms. Such essential knowledge support will not only ensure NEM
firms meet the market demands of contracting TNCs, it will also offer them the opportunity to raise
the level of value added.

4.4 Promoting connectivity and coordination
The colocation of organizational support for NEM firms is not sufficient to stimulate technologicalupgrading. There must be strong connectivity and coordination between the basic and STI
infrastructure organizations, and NEM firms. Whereas emphasis on basic infrastructure will makepossible efficient business practices with short lead times and low costs, the development of STI
infrastructure – science parks, industry-university linkages, standards organizations, and goodquality technical and university graduates – will help stimulate and leverage innovation synergies
in firms. The latter is critical for NEM firms to upgrade technologically to enjoy participation in highvalue added activities in GVCs.
The government should form a one-stop agency within the Economic Planning Board, which should
be entrusted to play the role of promoting investment, establishing and increasing interactions
between firms, organizations and government agencies responsible for providing basic and STI
infrastructure services. Basic infrastructure includes security, transport networks and customs
control. The broader human resource development organizations, such as schools, technical andvocational education and training institutes and universities should also be connected with firms sothat there is a two-way flow of demand-supply coordination between them.

4.5 Promoting integration into global markets
External markets offer scale and scope opportunities, and competition and learning effects for
NEMs aiming to upgrade to operate with the highest possible efficiency and quality. What this meansis that existing NEM suppliers to foreign TNCs operating in Myanmar and those in their nascentstage of exporting should be encouraged to expand exports. Thus, Myanmar’s NEM firms should be
integrated into ASEAN, East Asian and global markets. The ASEAN Economic Community offers low
to zero tariffs in almost all product lines for regional ASEAN firms.

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The government can offer double deduction tax incentives on expenditures incurred on theexported value of firms, while seeking ways to lower transaction costs involving export and customs
procedures. The government can also hold international exhibitions to promote local firms’ exports.

4.6 Mainstreaming sustainable development
Given the focus on sustainable development goals advanced by the United Nations, there should beinitiatives by the government to shape the conduct of NEM firms so as to mainstream such goals.
We focus on two critical goals, namely, workers and human rights, and the environment. Labour andenvironmental standards have become important in bilateral trading relationships. Like Cambodia,
Myanmar will have to observe the critical international labour covenants to convince the UnitedStates government to reopen its bilateral trading agreement on garments. This would mean NEM
firms will have to allow unionization of workers and freedom of association, among other things.
IT-BPO firms should also observe the standards imposed as conditions by TNCs and other buyers.
Similarly, established hotel brands require their hosts to observe such standards. Such monitoringby developed-country buyers has increased over the years; many such monitoring systems use
telemonitoring with buyers viewing at any time the production flow in NEM firms. According to theUN’s guide,14 due diligence on human rights “should cover adverse human rights impacts that thebusiness enterprise may cause or contribute to through its own activities, or which may be directly
linked to its operations, products or services by its business relationship” (p. 17).
Pressure on meeting environmental standards has also mounted as the problems of global warming
and climate change have been viewed as the prime cause of rising temperatures and sea levels,
Myanmar has ratified the Paris Agreement under the United Nations Framework Convention for
Climate Change. Hence, the government should raise awareness, as well as work towards theformation of a major standards organization to coach and certify NEM firms.
The government should consider strengthening the regulatory environment for NEM firms so thatthey can export, expand employment and upgrade technologically. This initiative should start with aprofound evaluation of the critical policy pillars shown in table 11.
Within the overall policy framework of NEMs articulated above, the Myanmar government should
consider evaluating the NEMs or NEM-related operations in the country from time to time. Assumingthat there is no such evaluation methodology available, the AJC proposes the checklist in table 11.
The AJC’s proposal is based on the corporate code of conduct of the Tokyo Chamber of Commerceand Industry, with some alterations. It provides some guidelines for the Myanmar government to use
to check NEM agreements and operations.

14

United Nations (2011), “Guiding Principles on Business and Human Rights: Implementing the United Nations‘Protect, Respect and Remedy’ Framework”, United Nations Human Rights Office of the High Commissioner, NewYork and Geneva.

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Table 11. Checklist for NEM agreements and operations to maximize benefits from, andminimize costs with NEM
Whether there is an agreement on contract performance
Whether there is an agreement on contract terms (durations)
Compliancewith laws

Whether there is an agreement on contract termination and its
process
Whether there is an agreement on contract arrangement (additional
contract) and its process
Whether there are rules on non-discrimination (ILO covenant)Whether there are rules on basic human rights

Respect forhuman rights

Whether there are rules on harassment (power balance exists
between local NEM firms and TNCs)
Whether there are rules on freedom of association (ILO covenant)Whether there is minimum wage legislation (ILO covenant)Whether there are rules against forced labour (ILO covenant)Whether there are rules against child labour (ILO covenant)Whether there are guidelines on air pollution by local NEM firms
Whether there are guidelines on water contamination by local NEM
firms

Environmental
consideration

Whether there are guidelines on environmentally friendly goods orservices by local NEM firms
Myanmar submitted Intended Nationally Determined Contribution(INDC) milestones to the United Nations Framework Convention on
Climate Change. It has to meet its INDC milestones to reduce carbon
emissions and concentration.

NEM policy of
the Myanmar
government

Whether there are employment rules (laws) on ages under the NEM
agreement
Whether there are employment rules (laws) on gender under the
NEM agreement
Whether there are guidelines on a safe and pleasant work
environment for local NEM firms
Whether there are employment rules (laws) on working
environments under the NEM agreement
Whether there are employment rules (laws) on working conditions
under the NEM agreement
Work environment

Whether there are employment rules (laws) on working hours under
the NEM agreement
Whether there are employment rules (laws) on taking holidays under
the NEM agreement
Whether there are employment rules (laws) on treatment of absence
under the NEM agreement
Whether there are employment rules (laws) on maternity related
leaves under the NEM agreement
Whether there are guidelines on provision of support system ofchildcare and nursing care
Whether there are employment rules (laws) on terminating
employment contracts under the NEM agreement…/

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Table 11. Checklist for NEM agreements and operations to maximize benefits from, andminimize costs with NEM (Concluded)
Whether there is a program which local NEM firms can take toimprove their technology or capacity
NEM policy of
the Myanmar
government

For local firms'
development

Whether there is a program through which local NEM firms'
employees can learn
Whether there is a program which local NEM firms can take tounderstand NEM policy
Whether there is a program which local NEM firms can take tounderstand business environment of the industry

For TNCs,
required by the
Lao government

Subcontractors
and suppliers

Whether there are guidelines for similar NEM policies for local
subcontractors and suppliers

Earning the trustof customers andconsumers

Whether there are guidelines for TNCs to provide correct informationon their products or services
Whether there are guidelines for TNCs to respect free and fairtrading rules

Mutual growth withpartner companies

Whether there are guidelines for TNCs to provide relevant
information required for trading
Whether there are guidelines for TNCs to develop relationships
based on trust with local NEM firms

Coexistence withlocal communities

Whether there are guidelines for TNCs to establish and maintain agood relationship with local community where NEM local firms arelocatedSource: Adapted from “Corporate Code of Conduct, the Third edition”, Tokyo Chamber of Commerce and Industry(2013).

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Data:
Ministry of Hotels and Tourism http://www.tourism.gov.mm/en_U

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ASEAN Promotion Centre on Trade, Investment and Tourism
https://www.asean.or.jp/en