Investment plays an ever-important role in improving the productivity of various industries, moving on to goods and services of higher value, and thereby the growth of the country. Readers who are interested in following Cambodia’s economic growth (which has been nothing short of remarkable the past three decades) must understand how investment has played a role in the country’s development, why investors have decided to come to Cambodia in the first place, and the challenges in attracting investment going forward.
Cambodia’s transition to a market-oriented economy in the 1990s led to an intensely pro-investor policy framework, creating increased incentives to bring business to Cambodia, such as: no restrictions on capital repatriation, permitting 100 percent foreign ownership of companies, and corporate tax holidays of up to 8 years (U.S. Department of State). Positive results from this economic openness were immediately observable: The Council for Development of Cambodia notes that the total stocks of FDI in 1994 was only $5.8 billion, but has grown to $30.2 billion as of 2015. The World Bank reports a similar increase: in 1994, the net inflow of foreign direct investment (FDI) comprised only 2.1% of Cambodia’s GDP. It is now above 9.4%.
Foreign direct investment has played an integral role in sustaining Cambodia’s 7 percent average annual growth rate. A large reason that Cambodia has entered the radars of investors is due to its low average age, rising incomes, falling dependency ration, and growing consumer culture, particularly in cities (The Phnom Penh Post). The recent additions of special economic zones (SEZs) has particularly attracted investment from American companies, bringing in over $100 million investment thus far. American readers might be interested to know some of the major U.S. investors in Cambodia: Coca-Cola, CBRE Group, American Licorice, and Tiffany’s, which operates a diamond polishing factory in the country (export.gov).
The question remains, however, on whether the country can attract further investment in its current state. Even with the aforementioned benefits, many American investors have kept away, wary of corruption, a limited labor supply, low levels of infrastructure, lack of government transparency, and labor unrest (US Dept. of State). Often, US groups will only invest when wages are fair, working conditions livable, and labor relations agreeable. It is difficult to ensure those requirements when Cambodia’s primary industry is factory garment work. Looking toward the future, Cambodian industries’ biggest challenge in attracting investors will be moving beyond low-wage, low-skill stitched garments into sectors where productivity is higher, and where there are higher value-added products (The Phnom Penh Post).
A liberal market economy have played a huge role in bringing Cambodia to where it is today, with foreign direct investment being the foundation. It has enhanced industries, created jobs, and has empowered people. This is just one piece to the puzzle, however. In forthcoming posts, we will discuss its other parts, such as economic openness in the region, and a focus on exports. Stay tuned!