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Nicholas Borroz: How Japanese companies can edge out China in Myanmar

Myanmar has opened its doors for business, and foreign investors are flocking to take part in this new frontier market. The latest flurry of activity revolved around banking: On Wednesday, Myanmar announced that it had awarded banking licenses to nine foreign banks. Three are Japanese: Bank of Tokyo-Mitsubishi UFJ, Sumitomo Mitsui Banking Corp. and Mizuho Bank. The announcement followed decades in which Myanmar was closed to foreign lenders, and the opening up of its banking sector is part of an ambitious economic reform plan.

     Japan's recent success in garnering banking licenses (it was awarded more than any other country) contrasts with the troubled experiences of three other major regional investors in Myanmar: China, India and Thailand. Despite their investment inroads, these three countries are often criticized in Myanmar for the perceived insensitivity of their companies' attitudes toward local communities. China is accused of leeching natural resources. Indian investment projects have come under scrutiny for their lack of transparency. Some Thai investment projects have allegedly worsened ethnic conflict in border regions.

     These dilemmas have spurred local resistance to foreign investment projects, sometimes translating into costly delays. China has been particularly prone to grassroots resentment, which has caused Naypyitaw to block two large projects. China is still reeling from the rejection of a planned dam at Myitsone in Kachin state, and, more recently, from the apparent cancellation of a proposed railroad from Kunming in China's southwest to Kyaukpyu in western Myanmar.

     Broadly speaking, Chinese, Indian and Thai companies have made three common mistakes, which have hindered their investments and damaged their reputations with local stakeholders.

     The first is a lack of engagement. Companies often engage with Myanmar's central government in Naypyitaw, but exclude local groups. Historically, little effort has been made to address the desires, concerns and grievances of affected communities. In western Myanmar, for example, Indian companies have been criticized for the opacity of their transport corridor development projects. This has led to a general distrust toward foreign investors in some areas of Myanmar.

     The second is their conduct in areas of ethnic conflict. Companies often operate in areas with ongoing conflicts between ethnic militias and government forces, which are sometimes sent to protect investment projects. That flames tensions and leads to violence. In these situations, companies are exposed to security risks and tarnished reputations by becoming associated with human rights abuses. Thailand and China are often criticized in connection with energy projects in Myanmar.

     The third is their attitude to land rights. Land is sometimes appropriated for infrastructure projects, often without adequate community consultation or compensation. Local communities are displaced, feel marginalized and resent the companies associated with these projects. One of the main complaints regarding China's Myitsone Dam, as an example, was the forced relocation of thousands of villagers to make space for the dam, its reservoir and related infrastructure.

     Like companies from China, India and Thailand, Japanese companies are sponsoring their own special economic zone, Thilawa, as well as other infrastructure projects. However, unlike China, India and Thailand, Japan has a clean reputation in Myanmar. This is because Japan's investment projects have a less "extractive" quality; Japan is not a major harvester of natural resources, it is not building transport corridors through Myanmar's troubled border regions and it invests primarily in sectors that facilitate Myanmar's economic development.

     The recent award of banking licenses, for example, has a more mutually beneficial character than many of the projects being pushed by Chinese, Indian and Thai companies. Japanese banks will help to develop the local financial system and, at the same time, provide much-needed liquidity to facilitate Myanmar's advancement. In return, the Japanese banks are presented with a valuable opportunity to establish their presence in a new market. As Set Aung, the deputy governor of the Central Bank of Myanmar, told the Nikkei Asian Review, "allowing foreign banks to operate -- in a form which would not pose a threat to local banks -- could result in a win-win-win situation, the benefits of which can be shared by foreign banks, local banks and the country as a whole."

Maintaining the edge

The reputation of Japanese investment in Myanmar also benefits from a "nation-building" history between the two countries. The Japan International Cooperation Agency -- the vehicle through which the Japanese government holds its stake in Thilawa -- sponsors dozens of development projects throughout the country. Furthermore, for many years following World War II, and before Myanmar's recent democratic transition, Japan was a major provider of aid and investment. Since President Thein Sein's rise to power in 2011, Japan has forgiven billions of dollars of debt owed to it by Myanmar. Collectively, these factors have left a generally positive perception of Japan.

     Japanese companies have yet to receive the level of criticism directed at Chinese, Indian and Thai companies. In fact, the recent foreign banking license wins show how Japanese companies are still able to reap the benefits of their country's clean reputation.

     Despite this good news, Japanese companies should not be content with their position. On the contrary, they should proactively engage in corporate diplomacy to prevent a tarnishing of their image and to improve their business prospects. The Japanese banks that received the licenses have reportedly pledged to assist local banks' development, including the provision of training and the establishment of an education institute for banking personnel. While this is a good start, Japanese banks and companies should do more. The provision of training and education should be part of a more expansive corporate diplomacy approach that contains the following components.

     First, they should ensure that they carry out comprehensive due diligence. This means more than simply looking at an investment project's feasibility and at partners' backgrounds. It also entails understanding the legacies of conflict, relationships between stakeholders and local perceptions of foreign investment. By mapping and analyzing these factors, Japanese companies can predict their likely evolution. This would be useful, for example, in avoiding worsening ethnic conflict.

     Second, they need to communicate with stakeholders. Japanese companies can demonstrate transparency by carrying out environmental and social impact assessments, and by negotiating their plans with affected groups. They can also demonstrate accountability through the creation of grievance mechanisms to address local groups' concerns; when possible, Japanese companies should revamp their investment projects if doing so improves local acceptance. Communicating with stakeholders in this way would address one of the most common complaints about foreign investors in Myanmar, which is that they are largely deaf to local communities' opinions and concerns.

     Lastly, sustainable development programs help both businesses and local stakeholders to achieve their goals, avoiding the typical tensions with communities that have bedeviled foreign investors in Myanmar. Japanese companies should implement these programs with the assistance of development sector consultants.

     They should also communicate development success stories in order to garner further community support. Japanese banks' plans to train and educate banking personnel in Myanmar are a good example of how to design a program that advances both groups' interests.

     By adopting these strategies, Japanese companies can continue to be viewed as desirable business partners. This will set them apart from other competitors keen to seize business opportunities in Myanmar, in the banking sector and elsewhere, as the country continues its integration into the global economy.

Nicholas Borroz is an independent analyst of energy geopolitics and investment strategies, specializing in energy-related infrastructure. He is based in Washington DC. 

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