The Cambodian economy has performed relatively well in the last two decades with an average growth rate of more than seven percent from 2000 to 2016, making it one of the fastest growing economies in Asean and East Asia.
It is forecast that the Cambodian economy will remain dynamic with a growth rate of seven percent for 2017 and 2018, although the global economic environment remains volatile and uncertain.
Foreign direct investment is the key driving force of Cambodia’s economic development. China, Japan, South Korea and Asean countries are the main sources of the foreign direct investment (FDI) inflow to the kingdom.
From 1994 to 2016, the total investment capital from China was about $14.7 billion, concentrated on four sectors – the agriculture and agro-industry, the industrial sector, physical infrastructure and services and tourism
Chinese investments to Cambodia are mainly driven by deep political trust, economic conditions, market access, low labour costs and natural resources.
The reasons given for China investing in Cambodia are the “excellent diplomatic relationship” between the two countries, the relatively stability of the political situation and a sound macroeconomic environment, low labour costs, shared Asian values and Cambodia’s strategic location in mainland Southeast Asia.
Chinese investments to Cambodia are enabled by the bilateral agreement on the protection and promotion of investment, which came into force on August 19, 1999.
As a least developed economy, Cambodia has enjoyed preferential trade agreements with and market access to the world market, particularly the United States and the European Union.
As a member of the Asean economic community, Chinese firms investing in Cambodia can export their products to the whole of the Asean market, which has a population of more than 620 million.
Cambodia has relatively cheap labour costs – the minimum wage for a factory worker was $153 as of 2017.
To avert risks, Chinese firms in Cambodia receive political support from China, in the case of state-owned enterprises, and political connections and protection from the local elites.
Chinese investments in Cambodia are varied in terms of ownership type and asset specificity. China’s state-owned enterprises focus on hydropower plants and natural resources, which largely enjoy investment approval and protection.
China’s private firms concentrate their investments on the garment industry and the tourism sector.
Chinese investment in the textiles and clothing industries contributes significantly to the socio-economic development through creating job opportunities for more than half a million Cambodian workers.
The industry itself has become part of a vertically integrated value chain in China and become the important node in a global value chain. However, Cambodian garment factories mainly work only on the cut-make-trim processes.
There are about 30 Chinese investment projects relating to agriculture and the agro-industry, covering about 237,406 hectares of land, in which 21 projects are in operation on 173,904 hectares. So far, only about 42,081 hectares have been cultivated and rubber plantations consume most of the cultivated land.
In addition, there are seven Chinese investment projects in rice mills with a production capacity of 669,816 tonnes per year.
China also invested in constructing the Sihanoukville Special Economic Zone, the first special economic zone funded by the Chinese government in Asia. The Cambodia International Investment Development Group and Jiangsu Taihu Cambodia International Economic Cooperation Investment co-manage the project.
There are 108 enterprises and companies located in the zone with a total investment capital of more than $3 billion.
In the tourism sector, China has invested in five main projects – an international resort complex in Koh Kong province and a resort complex and five-star hotel in Preah Sihanouk province.
Of the 23 companies investing in the mining industry for things such as iron ore and gold, 10 are from China. In 2016, there were two Chinese investment projects in granite mining in Kratie province.
China is the largest foreign investor in the energy sector in Cambodia, with accumulated capital of more than $7.5 billion in hydropower plants and about $4 billion in coal power plants.
Chinese companies invested in nine electricity power stations with a capacity of 1,733 megawatts – there are seven hydropower projects with a capacity of 1,328 megawatts and two coal energy projects with a capacity of 405 megawatts.
However, some of these energy investment projects do not meet international standards, which in turn have created some adverse impacts on local livelihoods and the ecosystem.
To scale up the positive impacts of Chinese investment projects, one must assume greater responsibility in promoting an inclusive and sustainable development. The local government needs to enhance governance, including transparency and accountability, and empower local communities to benefit more from foreign investments.
Chheang Vannarith is a Visiting Fellow at the ISEAS-Yusof Ishak Institute.