Cambodia opening its doors to investment

 Sept 10, 2012

Bangkok Post

With GDP growth averaging around 9% for the past decade, Cambodia is certainly attracting interest from potential investors. It has possibly the most investor-friendly environment in Asean with no exchange controls, no restrictions on repatriation of profit, and no discrimination between foreign and local investors.

Moreover, corporate income tax is 20% and there are tax holidays of up to nine years. Foreigners can also take out leases on land for up to 99 years and foreign companies can buy land.

For Thai investors, the interest so far has been in Cambodia’s growing footwear and garment industry. This is Cambodia’s biggest employer and key export earner and there are over 300 garment or textile factories. Low wages – about one-third the level of Thailand’s – are a big attraction for investors, even though the minimum wage for garment workers in Cambodia rose from $61 a month to $66 earlier this year.
Cambodian garments and footwear also enjoy favourable tariff-free access to markets in the United States and Europe.

Many American and European brands are already outsourcing their production to Cambodia. One of the benefits for these companies is the unionised workforce and labour laws in Cambodia, as it is assumed that basic rights of workers are protected. This provides insurance for big-name brand companies concerned about possible consumer boycotts over poorly treated workers.

There are challenges, however, for investors in Cambodia’s textile and garment industry. For example, there are already signs of labour shortages – earlier this year the Cambodian industry association said that many vacancies had gone unfilled as more young people were being lured to work overseas.

Another potential problem is strong competition from Myanmar as economic sanctions fade and investors from developed economies begin establishing businesses there.

A third problem facing all manufacturers is the electricity supply – electricity in Cambodia  is expensive and access is largely restricted to urban centres, with only 20% of households nationwide connected to the power grid.

However, these issues do not seem to be a major concern to Japanese investors who last year more than doubled their investment in Cambodia to around $75 million. According to the Japan Times, Japanese investors are focusing on Cambodia as labour costs are rising in Thailand, China and Vietnam. Although Japanese investors are interested in the garment and textile industry, they are also concentrating on food processing, agriculture and tourism, retail, transport services and natural resources development.

The Japanese government has also worked with the Cambodian government to develop the Sihanoukville Special Economic Zone near Thailand’s eastern border. This industrial zone adjoins the Sihanoukville Port, which is the only deep-water port in Cambodia, and the infrastructure is being developed by Japanese engineers and contractors.

Sihanoukville Port is being prepared for listing on the Cambodian Stock Exchange later this year and is expected to attract great interest, given the success of the Exchange’s first listing, in April this year, when the IPO of the Phnom Penh Water Supply Authority was many times oversubscribed.

As one of the frontier economies of Southeast Asia, and a close neighbour, Cambodia should certainly be of interest to Thai SMEs considering expanding their production base. Although Cambodia has been mainly limited up until now to small scale enterprises dominated by tourism and the garment and textile industry, the new developments taking place are a sign of things to come.