Why Cambodia for Investment?
Cambodia is a rapidly changing society that still gets insufficient notice from investors but presents many opportunities for the investors willing to research and proceed prudently, tourism being only one of the opportunities although one of the more visible. Although more progress still needs to be achieved in legal and judicial reform and rule of law and transparency, foreign investors are increasingly convinced of the Royal Government’s commitment to the process of reform itself. The country’s commitment to a market-based economy is without question and is enshrined in the Constitution.
The short answer is low wages, liberal government policy on business, access to larger markets, and a country that offers extensive opportunities for tourism. The large markets are a function of location and access to AFTA described below. Cambodia also has preferential access to the lucrative European and North American markets through its status as one of the least developed countries (LDC).
In looking at economic opportunities in Cambodia, one always needs to look at them in the context of Cambodia’s larger relationship with the region. In 1999, Cambodia became a member of the Association of South-East Asian Nations (ASEAN), a political grouping which groups 10 countries with a total population of about 550 million and a GDP of something under $600 billion — at purchasing power parity, $1.8 trillion. The Asia Free Trade Area (AFTA) is the economic manifestation of area economic integration. Under agreements, which give Cambodia a phase-in period to protect local companies, the Cambodian government will reduce most tariffs on Cambodia’s exports to its neighbors to between 0 and 5% by 2010 or before and will abolish them altogether by 2018. The much later China–ASEAN Free Trade Area (CAFTA), will come into effect in 2010 and will create a trading block of 1.7 billion people. Talks under way between India and ASEAN could create another trading relationship almost as large. In addition, as an LDC, Cambodia has preferential access to some of the world’s richest markets for a number of products.
Cambodia has one of the most open economies in what is a generally very open economic region. According to the Heritage Foundations Index of Economic Freedom which is complied annually Cambodia ranked 35th among 170 countries in 2003 in terms of economic freedom. This puts it on a par with Japan and well ahead of several of its neighbors (Malaysia, 72nd; Indonesia, 99th; Viet Nam, 135th; and Lao People’s Democratic Republic, 153rd). The Index noted the Cambodian government’s positive policies in terms of the level of fiscal burden, labor market restriction, regulatory barriers and trade policy. This is not to say that Cambodia is not without problems similar to many poor less developed countries (LDCs) such as poor health care, limited infrastructure, low government salaries, etc. but at least with respect to doing business the country does offer a progressive welcome to investors. Emblematic of this welcome, according to the Index, Cambodia is at the top of the chart among world’s LDCs in market-friendliness. Among the areas of note are:
Tourism is the area in which Cambodia rightly most wants to attract foreign investment. This goal is little different than its neighbors like Thailand, Vietnam and most recently even Laos. The country is anticipated to exceed the 1-million-tourists mark in the next two years and the potential here may be huge. Although much of the development to date has concentrated on servicing visitors at the Angkor complex of temples near Siem Riep, the laid back colonial charm of Phnom Penh and the beautiful beaches of the South also offer abundant opportunities. Eco-tourism and cultural based tourism still offer almost unlimited potential as do investment in hotels, golf courses and other amenities. The government of Cambodia is quite progressive in dealing with these opportunities and several build-operate-transfer (BOT) schemes are already in operation, for example
at the Phnom Penh international airport. Additionally potential financing can be explored from a variety of sources, including the Asian Development Bank (ADB), the International Finance Corporation (IFC) and donor countries such as Japan.
Investment in agriculture offers extensive opportunities, especially in organic farming, agro-processing and several other sectors. Fertile land, plentiful water and access to a willing and cheap workforce all offer opportunities for further development if the foreign partner brings in the necessary know-how, knowledge and access to markets, etc. Although foreign investors cannot own land, they can acquire long-term use of it through 99-year leases, and can also acquire partial ownership by joint venturing with a local partner who owns 51% of the equity. Among the opportunities identified by the Government are those in fisheries, rubber processing, sugar processing, jute, palm oil refineries, and all kinds of tropical fruit and organic fruits and vegetables.
Foreign direct investment (FDI)
Throughout the 1990s, Cambodia attracted increasing amounts of FDI. When viewed on a US Dollar per $1,000 GDP basis, Cambodia has done excellently and compares favorably to China and Vietnam by this measure. The improving political and macroeconomic situation has helped, as has the openness of the economy. According to the official figures supplied by the Cambodian government, Malaysia was the biggest investor during the 1994–2001 period, with 31.2% of all investment and 79% of ASEAN investment over this period. Why has Malaysian done so well in Cambodia? Malaysia was the first country to sign a bilateral visa exemption agreement with Cambodia in 1992 and Malaysian investors were the first to come and thus received a great many investment concessions, including concessions in mining and forestry. Other important sources of FDI were Taiwan (8.27%), the United States (7.28%) and China (4.47%).
Please note that official FDI figures in Cambodia as in many other developing countries particularly LDCs, are based on approved investment. Actual investment may be only a small percentage of the approved amount. Cambodia’s approved figure for FDI flows in the period 1994–2001 is close to $6 billion. According to a study done by UNCTAD actual figure for the same period is somewhat under $1.4 billion.
Areas for Continuing Concern
Traditional problems endemic to countries at an early stage of economic development have been magnified in Cambodia by early problems with conflict and instability during the 1970s and 1980s. Cambodia continues to suffer from the long-term damage done to the country by the Khmer Rouge during the late 70s. The Khmer Rouge killed off much of the cream of society and the results of this policy are still being felt today. For example, professional qualifications are scarce. Literacy rates are low by the standards of most of its neighbors: 68%, as against 94% and 96% for Viet Nam and Thailand. Life expectancy at birth is low as well: 54, as against 69 for Viet Nam and Thailand. In 2001, there was one fixed-line telephone for every 400 Cambodians, as against one for just over 100 Laotians and one for just over 25 Vietnamese. Road infrastructure is both limited and in poor condition, especially in rural areas. Power consumption rates are very low by regional standards and the cost of electricity is high.
By way of balance, it needs to be noted, however, that in virtually all areas, the trend is positive. Investors and outside observers note that telecommunications availability and service is improving. Roads and transportation also seems to be improving although most of the progress is confined to major urban centers such as Phnom Penh, Sihanoukville and Siem Reap. Investors also note that continued government improvement is urgently required in many areas. Among these, bureaucratic delays are commonplace and corruption is rampant. Administrative weakness is pervasive in Cambodia. All of these increase the cost of doing business in the country, which should be factored into planning. The inadequacies of the legal framework for investment are another continuing difficulty although the government does appear to be making attempts to improve things in this area.
Trends for Future Investment
FDI grew from almost nothing in the late 1980s to an annual average of $61 million in the first half and $217 million in the second half of the 1990s. This is all testament to the way in which Cambodia had managed to turn itself around after a prolonged period of instability. Two further points must be noted. First, this was not FDI going into
natural resources, as is often the case in a developing economy such as Cambodia. The breakdown of FDI approvals by the Cambodian government suggests that FDI in this period went mainly into tourism and manufacturing, with infrastructure and construction a somewhat distant third. Secondly, through much of the last decade of the century, Cambodia attracted proportionately more FDI, given its gross domestic product (GDP), than most of its neighbors and competitors. Even in 2001, it attracted more per $1,000 in GDP than its neighbors as well as China. When this is taken together with some of the advantages and positive trends mentioned above, it suggests that the country’s investment performance is likely to continue being robust in the foreseeable future.
Cambodia has come a long way in a very short period. It is important to note that not that long ago, Khmer Rouge remnants roamed the country and basic security was a key issue. Today, security is a lesser issue although crime is rising as in any developing society; tourists freely travel to most major tourist venues with little worry.
Although in 2006 most formerly closed or Socialist economies are now firmly making steps to transition to a market-oriented, few have embraced economic reform with as much enthusiasm and steadfastness as has Cambodia. A business-friendly
Government in a region that is rapidly developing an opening markets offers much for foreign investors ready to experience the challenges that an underdeveloped economy invariably offers.
For Cambodia, the major challenges are:
Human-resource development/Education. - Although investors speak positively about the trainability and capacity for hard work of the country’s labor force, they also stress repeatedly that the training it has received is clearly inadequate
Health care – infant mortality, high HIV/AIDS rates, poor rural health care are all major issues
Inadequacy of the regulatory and institutional framework – In fairness, it must be noted that the government has made a sustained effort at improvement, in particular, with a view to entering the WTO
Non-transparency in government
Better border controls
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