What Are The Determining Factors For European Investment Into Cambodia?
A survey report released in January 2024 titled “Cambodia's Attractiveness For EU Foreign Direct Investments”, conducted by ARISE Plus Cambodia and the German Agency for International Cooperation (GIZ), provides an overview of the business experiences and key factors for European investment in Cambodia.
The report is based on interviews with European investors across Southeast Asia and offers insights into the various factors that influenced their investment decisions in the region.
Although some of the findings are hardly new to investors who have been engaged in the local market for a while, there are, nonetheless, still some interesting takeaways from new and experienced foreign investors in the Cambodian market.
Till Ahnert, Head of the ARISE Plus Cambodia Project, told EuroCham: “In an era where global investment dynamics are rapidly changing, we believe this comprehensive survey will serve as a valuable knowledge asset for European businesses aspiring to broaden their horizons and tap into Cambodian markets. This report will enable businesses to make informed decisions, navigate the investment landscape with confidence and seize the unique opportunities that Cambodia presents.”
Key factors in the report include:
- The favourability of national legislation and the investment climate (policy);
- The cost and skill level of the workforce (labour);
- The reliability and cost of electricity (energy);
- The state of logistics and access to logistical hubs (logistics);
- Awareness of the country as an attractive investment destination (promotion), and;
- The level of support, whether from chambers of commerce, the government, or other stakeholders, for establishing and expanding their operations (stakeholder support).
According to a report from the Khmer Times, EU partners, 10 EU member countries, and the Swiss Confederation have supported Cambodia with USD $4.2 billion of funding, accounting for 19 per cent of the Kingdom's total cooperation financing since 1992.
However, this new survey report highlights that levels of European Foreign Direct Investment (FDI) into Cambodia have generally lagged behind levels of FDI from North America and Asia.
Factors Influencing Foreign Investment Decisions In Cambodia
Government Regulation And Administration
The survey report analyses the broader ecosystem within which businesses operate in Cambodia, and identifies a number of indices that show areas for improvement, such as the Good Government Index, Corruption Perception Index, and Tax Complexity Index. Rankings cited are as follows:
- In 2023, Cambodia was ranked 88th in the Good Government Index, up from 90th in 2022.
- The Kingdom scored 24/100 on the Corruption Perception Index (CPI), up slightly from 20/100 in 2018.
- Cambodia ranked 55th out of 69 on the tax complexity rankings (2020).
“The strides in tax regulations and enforcement, the growth in the government's overall capacity, and the overall robust economic growth have developed Cambodia over the past two decades. However, existing perceptions may take longer to change,” the report noted.
Policy, Investment Climate And Business Ecosystem
The study concludes that there are still many hurdles which Cambodia faces in its policy and investment climate. Investors have identified numerous administrative challenges such as time-consuming paperwork and a bureaucracy that can slow down intended business operations.
In the tourism sector, European business representatives call for Cambodia to ease its visa policies for longer stays and a simplification of the application process, citing the example of neighbouring countries’ more lenient visa policies. Despite these concerns, structural barriers that are usually perceived by investors are slowly being eroded.
The report notes that there has been a positive shift in the investment climate, particularly since a new Cambodian government took office in 2023. Investors observed changes not only through Cambodia's robust economic growth (the government predicts a GDP growth of 6.6 percent in 2024) but also in the government's capacity to handle hardships, such as Cambodia's successful vaccination campaign amid the height of the COVID-19 pandemic.
Strong efforts have also been made by the Cambodian government to improve the country’s infrastructure, such as the completion of the Phnom Penh-Sihanoukville Expressway.
“Combined, this has led to a growing business ecosystem, not only for local subsidiary production purposes but also for a domestic market where products can be sold, rather than only for export markets,” the report stated.
One investor also noted a growing awareness in Cambodian society for sustainable business practices as another signal of market transition in the Kingdom, where more value is being given to environmental considerations over solely economic ones.
Complexities In The Tax System Continues To Be A Major Barrier
Based on the survey, the Cambodian tax system is still perceived as a major issue for European investment, with frustrations primarily aimed at import procedures and fees.
- Taxation is a complex issue for companies, particularly regarding customs duties and bureaucratic red tape, resulting in some evading taxes while others continue to try to navigate a challenging tax process.
- In the past 2-3 years, challenges in taxation have become more prominent, with certain companies paying significantly higher taxes compared to others with similar volumes.
In a more positive development, the General Department of Taxation (GDT) introduced a new Law on Taxation in 2023, aimed at improving tax clarity. It was confirmed that no new taxes were created, and the GDT has been actively engaging in meetings with the private sector to address tax compliance issues.
In September 2023, the tax department announced its intention to apply capital gains tax on the Cambodian real estate sector. However, this decision sparked significant public backlash, leading to a delay in its implementation.
As a response, in January 2024, the Ministry of Economy and Finance announced that the application of capital gains tax would be extended until the end of the year.
Cambodia's Position In The Region
Within the region, Cambodia is seen as being favourably positioned to benefit from improved regional connectivity, particularly in light of strained trade relations between the United States and China.
As businesses aim to diversify their production sites through nearshoring (moving production closer to home) or by implementing a China Plus 1 policy (having at least one production site outside of China), Cambodia stands to gain from this trend.
Labour In Cambodia
The report claims that the labour force in Cambodia has played a crucial role in fostering the development of the light manufacturing sector over the past decade. However, competitiveness highly depends on factors such as education, productivity, and wages.
- Cambodia ranks 165th in labour productivity out of 189 countries, while Vietnam and Bangladesh score 121st and 145th, respectively.
- In terms of GDP per hour worked in 2021, Cambodia's figure stands at USD $3.48 – Vietnam and Bangladesh stand at USD $10.22 and USD $6.38, respectively, in comparison.
Education And Training
The Cambodian labour market exhibits significant variation in terms of its education and skill levels. Investors appear to recognise the rising English proficiency of the Cambodian workforce, especially among youth and particularly within the tourism sector.
However, a number of structural challenges arising from the Cambodian education system are also noted in the report. Investors emphasise the need for improvements in order to better equip the workforce for the professional market.
Furthermore, while skill levels in sectors such as engineering are noted to be advancing, there is still a need for additional university programs that address the evolving demands of the job market. Two key issues highlighted by investors are:
- The scarcity of skilled labour in some areas, leading to low productivity and sometimes reliance on expatriate staff for certain roles.
- Additionally, there is a notable gap in the education of local managers – while there is a growing digital knowledge base, the quality of education and training for managers lags behind international standards.
The survey noted that this gap is not limited to certifications but extends to broader aspects of education, including behaviour and work ethic. Furthermore, investors observe a cultural challenge, where there is a tendency to rely on hierarchical approval rather than embracing proactive problem-solving and decision-making (This is hardly a new revelation, and the theme has been consistent among foreign investors for some time).
Cambodia’s Energy Sector
The energy landscape in Cambodia is described to be quickly improving. Only 6.6 per cent of Cambodians had access to electricity in 2000. As of the end of 2023, 98.27 per cent of villages in Cambodia are now connected to the national electrical grid, according to the latest data report released by the EDC.
It should be noted, however, that there are some conflicting reports on Cambodia’s national electricity coverage in 2023, with Statista reporting:
- The total population share with access to electricity in Cambodia in 2023 was 83.72 per cent.
- The urban population share with access to electricity in Cambodia was 98.86 per cent.
- The rural population share with access to electricity in Cambodia was 78.53 per cent.
The ‘Cambodia's Attractiveness For EU Foreign Direct Investments’ report highlighted that the local government has introduced numerous plans to prioritise the development of energy security, including the Power Development Master Plan 2022-2040 (Cambodia's inaugural national strategy for the energy sector), the National Energy Efficiency Policy (NEEP), and the EnergyTech Roadmap.
These plans aim to ensure a more consistent supply of electricity at stable prices through the state-owned electricity provider and, in turn, insulate the country from recurring global price volatility. The report stated that Cambodia remains heavily reliant on imported fossil fuels to power generators and import electricity, leading to some of the highest electricity tariffs in Asia.
However, in January, Cambodian Deputy Prime Minister Sun Chanthol stated that renewable energy sources are expected to contribute to nearly 70 per cent of Cambodia's electricity generation in 2024.
Investors noted certain prevailing challenges in jumpstarting Cambodia’s renewable energy sector outside of hydropower, such as the lack of a regulatory framework for renewable energy, high upfront costs for renewable energy projects, and a lack of access to affordable financing options. The national electricity grid also does not cover the entire country, leaving some rural areas without electricity.
The report concluded that Cambodia's energy landscape offers both prospects and challenges. The remarkable increase in electrification over the past decade demonstrates a substantial commitment to enhancing energy provision nationwide through generation, distribution and reliability to meet the growing demand of the market.
Furthermore, electricity tariffs in Cambodia, though higher than those in neighbouring countries such as Vietnam and Laos, experienced a 22 per cent reduction between 2015 and 2020. This decrease was attributed to government initiatives aimed at enhancing the affordability of electricity.
Logistics In Cambodia
Transport costs, accessibility, and logistics efficiency are key factors which directly influence the competitiveness of products. Cambodia’s Logistics Rankings:
- 115/139 countries in the Logistics Performance Index (LPI)
- ↑ Tracking and tracing scored highly in the LPI
- ↓ customs, infrastructure scored minimally in the LPI
The Cambodian government is noted to have a fairly conservative fiscal policy commitment, with borrowing capital exclusive to productive investments, notably in infrastructure. Investors in the report also raise concerns about timely delivery and the cost-effectiveness of logistical operations within the country's borders.
The report stated that the quality of road infrastructure connecting Cambodia to its neighbours, Thailand and Vietnam, is a concern due to the high logistical costs involved. However, the Cambodian government has recently commenced the construction of a second Chinese-invested expressway from Phnom Penh to the Vietnam border, with a cost of USD $1.3 billion, to try and address this while two more are being studied.
Furthermore, ongoing reforms and expansions of roads from the capital to neighbouring Thailand, as well as the Cambodia-Thai ASEAN freight rail link, have already been operational since 2023. The cabinet has also approved a canal project that aims to connect the Bassac River in Phnom Penh to the sea through Kampot and Kep, at an estimated cost of USD $1.4 billion.
A feasibility study for a proposed Phnom Penh-Siem Reap Expressway also got underway in 2023 by China Road and Bridge Corporation (CRBC). A fourth expressway has been earmarked to link Phnom Penh to the Thai border in Banteay Meanchey province’s Poipet town.
The report also highlighted the creation of Special Economic Zones as a key development made by the Cambodian government to garner more FDI inflows, and acknowledged Cambodia’s notable expansion in access to international markets over the past decade as a factor that enhances the country’s allure for investors seeking to export products globally.
Cambodia Needs To Promote Itself To Attract More Investment
Cambodia has the potential to emerge as a competitive economy in the region due to its unique strengths like cost-effective labour, improving (energy) infrastructure and active engagement with global partners.
It is essential for Cambodia to enhance its international promotional efforts to attract investors interested in commercial activities. This will involve overcoming barriers related to the country’s reputation concerning illicit business practices, as evident in its 105th rank on the Global Attractiveness Index.
For European FDI to effectively navigate Cambodia’s intricate business environment, the report suggests exploring partnership with government agencies and formal networks, such as the Cambodian Chamber of Commerce and other relevant foreign representative chambers of commerce.
Cambodia has modernised its business registration platform, known as the Online Business Registration Platform (OBRP) or the Single Portal which has a total registered share capital of USD $9.85 billion by the start of 2024.
The report cited Singapore's investment apparatus as a regional example Cambodia could learn from to act as more of an ‘enabler’ and lower barriers to entry, such as by potentially allowing foreign firms to enter the Cambodian market without the need to create a subsidiary or form a partnership.
Although European investors still encounter significant barriers, the overall improvement of factors suggests that the opportunities outweigh the challenges in Cambodia, driven by the country’s robust economic growth.