During Prime Minister Hun Manet’s recent visit to Australia, he reiterated that Cambodia is open to investment from all countries. He stressed the importance of attracting foreign investors from various countries and welcomed opportunities for global economic cooperation. He further said that in the past six months, Cambodia has significantly improved its macroeconomic stability, attracting nearly $4 billion in domestic and foreign investment. These projects are expected to create approximately 190,000 jobs for Cambodians. This initiative demonstrates his commitment to promoting foreign direct investment to foster economic growth, create job opportunities, and strengthen bilateral relations with all countries.
Understanding foreign direct investment in Cambodia and its evolutionary process
Foreign direct investment (FDI) refers to a long-term investment made by a party in one country in a business or enterprise in another country in order to establish a lasting benefit. Examples of foreign direct investment in Cambodia include Ford’s investment in a car assembly plant in Krakor district, Pursat province, the construction of the Sihanoukville Special Economic Zone, and Rosewood Hotels & Resorts’ investment in Phnom Penh.
Before the 2000s, Cambodia struggled to attract significant FDI and investment opportunities were limited due to a chaotic history marked by political instability. However, in the early 2000s, Cambodia implemented economic reforms and began opening its market to foreign investors. The government implemented policies such as trade liberalization, privatization of state-owned enterprises, and improvement of the business environment to encourage FDI inflows. Over time, FDI has gradually increased in Cambodia.
From 2012 to 2020, Cambodia saw a sharp increase in FDI, reaching an all-time high of 14.1%. This increase was driven by factors such as the country’s open investment environment, government incentives, and infrastructure development. In particular, increased investment from countries such as China through initiatives such as the Belt and Road Initiative contributed significantly to the surge in FDI during this period.
FDI in Cambodia has been affected by external factors such as the COVID-19 pandemic since 2020, but foreign investment has increased recently, and FDI inflows in the first half of 2023 are expected to be higher than the same period in 2022. This was an increase of 41.6% compared to the previous year. This surge can be attributed to favorable economic conditions, political stability, market opportunities, technological advances, and government policies to attract foreign investors. The government has introduced a new investment law in 2021 to maintain this positive momentum. The law aims to create a transparent legal framework for investment and promote quality, efficient and effective investment. This includes provisions regarding investment incentives, investor guarantees, and investment procedures.
How can FDI be Cambodia’s gateway to prosperity?
Foreign direct investment benefits Cambodia and contributes to its economic growth and development. One of the major benefits is the transfer of advanced technology, management practices, and skills from foreign investors to local workers. This knowledge transfer will improve the quality of products and services produced in Cambodia, making the industry more competitive on a global scale. Chia Vuthi, Executive Director of the Council for the Development of Cambodia, highlighted that Chinese investments have injected capital and technology, created jobs, increased production, and facilitated Cambodia’s integration into regional and global value chains. .
Furthermore, FDI contributes to the diversification of Cambodia’s industrial base by attracting investment in sectors such as manufacturing, agriculture, infrastructure, and services. Cambodia has historically been dependent on agriculture, particularly rice cultivation, and has experienced a shift towards manufacturing and other sectors. For example, the textile industry has experienced significant growth due to foreign investment. The textile industry is one of Cambodia’s prominent sectors, employing over 800,000 workers in over 700 factories. This diversification will make the Cambodian economy more resilient and less dependent on a single sector for growth.
Foreign investors often participate in infrastructure projects, strengthening transport networks, energy supplies, telecommunications and essential facilities. Infrastructure improvements support business operations and contribute to improving overall economic efficiency and competitiveness. A notable example is the $2 billion Phnom Penh-Sihanoukville highway, which opened in October 2022 and was made possible by foreign direct investment. This will strengthen connectivity within Cambodia, promote trade and commerce, and contribute to economic development and growth.
FDI inflows also have a positive impact on employment. The investment projects approved in 2023 are expected to create approximately 307,000 jobs, reduce unemployment and contribute to poverty alleviation. The Council for the Development of Cambodia emphasizes that FDI brings capital and creates employment opportunities for local people.
However, FDI also has disadvantages. Over-reliance on foreign direct investment can make a host country overly reliant on certain companies for economic growth, making it vulnerable to changes in the global economy. Furthermore, foreign companies can significantly influence local policies and decision-making processes, undermining the host country’s ability to pursue its development goals. Income inequality within host countries may also be exacerbated, as the benefits of FDI may not be distributed equally among citizens.
Finally, FDI can threaten local and small businesses, which may struggle to compete with large multinational corporations.
In conclusion, attracting foreign direct investment is crucial for Cambodia’s sustainable economic growth, technological advancement, industrial diversification, infrastructure development, export promotion, and job creation. By promoting a favorable environment for foreign investors, Cambodia can leverage the benefits of FDI to drive economic development. However, policy makers and stakeholders need to consider the importance of FDI when formulating investment policies and strategies to ensure that FDI contributes to sustainable development and benefits all strata of Cambodian society. Disadvantages must be carefully considered.
“Investments from China will help inject new capital into Cambodia, bring new technology, create jobs, increase production and exports, and accelerate the kingdom’s integration into regional and global value chains. ” – Mr Chea Vuthi, Secretary General of the Council for the Development of Cambodia.
The author is an independent analyst in Cambodia.