Openness to foreign investment

Significant gaps in the nation's legal and institutional frameworks limit business confidence in Cambodia, but there are opportunities for foreign exporters and investors. The Council for the Development of Cambodia (CDC) Cambodia's foreign investment approval body, administers an attractive package of investment incentives and imposes few restrictions on imports from abroad. The recent amendments made to the investment law makes the procedure even easier than before as H.E. Sok Chenda Sophea, Secretary General of the CDC (Link to the Company Profile) said: "with the new law, the investor will come to the CDC, present its project and apply to us (…). The innovation lies in the role of the CDC to secure, on behalf of investors, all necessary permits, licenses and authorizations from other ministries". The CDC has even pushed further its performance and has lowered the length of the process application. It used to be 45 working days, but as H.E. Suon Sitthy, Deputy Secretary General of the Cambodian Investment Board (CIB) explains: "Following the new Investment Law, the length of this process must not take longer than 28 working days. When it comes to routine cases like for instance a garment project, the process takes even less time and it can be approved within 7 working days".

Cambodia's 1994 law on investment (attach law on investment.doc) establishes an open and liberal foreign investment regime. All sectors of the economy are open to foreign investment. There are no performance requirements and no sectors in which foreign investors are denied national treatment with the exception of land ownership (but a foreigner is able to lease land for a period of up 70 years). "when it comes to do business in Cambodia, foreigners have the same rights as nationals; you can own and operate 100% any kind of business" said H.E. Sok Chenda Sophea. A successful example of this policy is the Phnom Penh and Siem Reap airports realized in partnership with the French company, Vinci.

The Law on investment is supported by recent revisions to the Law on taxation under which investors can choose to be subject to a special depreciation schedule rather than automatic three years tax holiday provisions under the Law on investment. For example, it provides tax and duty exemptions, including those for projects located in Export promotion Zones (EPZ).
Thanks to this policy, the Kingdom has already attracted 1.1 billion USD. Even if there is a decline in FDI, the existing investors have managed to expand their projects, especially in the manufacturing sector, in particular the textile industry. In terms of major foreign investing nations, the top three sources are Malaysia, Taiwan and the United States of America.

Future challenges and opportunities

Cambodia is facing serious challenges in the coming years. The Kingdom has seen a declining trend in garment exports, due to the global economic slowdown and US granting preferential trade arrangements to other countries, including Vietnam. Moreover, the phasing out for the quotas under the WTO Agreement on Clothing and Textiles (ACT) in 2005 will mean massive changes in the Cambodian garment industry. Fundamentally, the abolition of quotas would leave Cambodia without a guaranteed market for its garments exports. Cambodia still suffers from poor infrastructure and high utilities costs. While the "cheap, productive workforce" approach will be used to maintain and attract new foreign investments, Cambodia will face great difficulties in competing with large-scale producers such as India or China.

Moreover, attention should be paid to labor costs in Cambodia in the next three years. Electricity prices, transportation and port handling costs in Cambodia, are high when compared to other countries in Asia. But if given the proper attention to infrastructure works, the opportunity for a steady and sustainable growth can be achieved. Mr. L-Martin Desautels, Managing Director of DFDL Legal & Tax Advisors (www.dfdl.com.kh), comments on the current opportunities in infrastructure: "(…) roads, electricity, telecommunications, water. That's the place where the biggest potential is and there are some investors interested into it. We have already some clients interested into developing infrastructure. In my opinion, this area will develop a lot in the next years. The government is also making efforts to set up a clear and transparent framework to attract investors towards this kind of projects".

Cambodia's Competitive Advantage

Currently in the final phase of its accession to WTO, Cambodia is reaching the last level of its slow progress into the international arena. "(…) with the upcoming membership to the WTO, and the adoption of the intellectual property law this year things are going to improve." Said Mr. Desautels.

Indeed Cambodia's will to access to the main international commercial organizations had made these legal reforms a sine qua non condition.

Moreover the country received special status through the GSP (Generalized System of Preferences) and MFN (Most Favored Nation) schemes. Market access wise, Cambodia is one of the two remaining LDC's in the region (the other being Lao PDR) still benefiting from the GSP scheme of major developed trading partners like the US, EU, Canada, Australia and Japan. There are altogether 28 countries (trade partners) offering MFN/GSP privileges for Cambodia exports.

Growth corridors, highways to regional integration

Cambodia economical development through regional integration has been performed through its access to the ASEAN organization and by ratifying the CEPT (Common Effective Preferential Trade Area) agreement, thus enjoying law tariff rates making "Cambodia a viable base for exports to the ASEAN zone".

With its integration into ASEAN, Cambodia benefits from the combined population of the 10 ASEAN member countries, which is about 500 million people. The grouping, also rich in natural resources, raw materials, and land, represents a large market full of economic potential and an attractive destination for investment. The combined GDP of the ASEAN-10 was about US$ 700 billion in 1996. The region experienced high economic growth of 5% to 7% in the 25 years before the financial crises in 1997.

This regional integration is also backed up by the Greater Mekong Sub-region structure Program which goal is to promote economic and social development by strengthening economic linkages between its members: Cambodia, Laos, Myanmar, Thailand, Vietnam and Yunnan. The priority sectors are transport, telecom, energy, environment, tourism, trade facilitation, investment, and human resource development. According to Hang Chuon Naron, from the Ministry of Economy and Finance "All these investments and efforts will transform, within the foreseeable future, the Sub-regional economy into a broad, rapidly growing market of close to 500 million people who enjoy the benefits of prosperity and peace".

In order to attract manufacturers into Cambodia, the government created Special Promotions Zones and Special Processing Zones, which will according to the Minister of Commerce H.E. Cham Prasidh "maximize the potential that we get from the special and differential treatment we have from the developed countries"(Cambodia as a LDC benefits of the 0% tariff rate) and thus attract neighbours liable to MFN rate duty such as Thailand and Vietnam, into these privileged zones."

By setting up Export Processing Zones, next to the Thai and Vietnamese borders the government intends to obtain the relocation into Cambodia of the closest Thai and Vietnamese factories, the latter thus benefiting from Cambodia's export documents.

"They may re-export their production from the same port of Thailand and reach the same old customer in Europe, but cheaper because it is duty-free" adds the Minister of Commerce "we are providing them a very stream lined procedure in the Export Processing Zone and one-stop service (…) we propose all kind of incentives that we have provided in our investment law". With Thailand, Cambodia has also developed a "Crescent of Opportunities" cooperation setting up strategies on promotion of trade and investment, establishing thus the concept of "two kingdoms, one destination".

In order to increase Cambodia's chance to access to the WTO the government is tackling several issues concerning trade liberalization policies and mainstreaming trade strategy for national development policies aimed at poverty reduction in Cambodia.

Cambodia has also set out a legislative agenda to implement the WTO requirements with various intellectual property laws, competition law, insolvency, law, law on business enterprises, commercial contracts law, secured transaction law, law on rules of origin and various laws on antidumping and countervailing duties.

According to Mr. Bretton Sciaroni, one of the MekongBank managing directors, "after decades of isolation, Cambodia is joining the mainstream of the regional and international economic system. Discussion of ASEAN, AFTA, and WTO all will contribute to the potential investors vision of Cambodia as being on the path to normalization of its trade and economic relations with other countries".