cerc-cambodia

Cambodia rates poorly as an overseas investment destination for Japanese firms. In a survey by the Japan Bank for International Cooperation (JBIC) of Japanese companies holding three or more overseas subsidiaries, Cambodia ranked 20th as a promising medium-term destination for manufacturers, drawing just 1.5% of votes (5 votes). That places it lowest among the major Southeast Asian economies, behind Vietnam in 3rd (25.1%), Indonesia in 4th (22.2%), and Thailand in 5th (15.1%). Even as labor costs surge in countries such as Vietnam and firms search for the next low-cost base, Cambodia has not been chosen.

What does Cambodia lack compared with other Southeast Asian countries, and what can it improve? The Cambodia Economic Research Center answered this by analyzing inward foreign direct investment (FDI) stocks for 110 country pairs across Southeast Asia from 2009 to 2022.

What emerged was a two-tier structure of constraints. Unreliable electricity supply was a constraint that depresses FDI across the entire region; improving it does little to set Cambodia apart from its neighbors. The rule of law and government effectiveness, by contrast, were constraints strongly tied to FDI only in Cambodia—the only economy in the sample for which both indicators were jointly and significantly related to FDI. The added effect of governance on FDI was an order of magnitude larger than for the average destination. Behind this lies Cambodia’s reliance on a single source, China, for 43.7% of its FDI.

Improving electricity is necessary, but as a region-wide issue it does little to differentiate Cambodia as an investment destination. The marginal return to reform is highest for judicial and administrative institutions, and policy priority must be placed on institutional reform, the analysis found. The paper, however, frames this as a correlation rather than a causal relationship.