Cambodia Investment Review

Opinion: 20 Years of FDI in Cambodia: Towards Upper Middle-income Status and Beyond

Opinion: 20 Years of FDI in Cambodia: Towards Upper Middle-income Status and Beyond

Simona Iammarino

Since the beginning of the 2000s, Cambodia has undergone a process of rapid industrialisation, growing internationalisation, and moderate diversification. Cambodia’s export structure has gradually upgraded and diversified, strengthening its integration in Southeast Asian and Asian global value chains (GVCs). Both export-oriented garment manufacturing and tourism services have been key industries to Cambodia’s economic transformation, attracting major FDI.

The sustained growth and diversification of domestic services have been behind the attraction of large inflows of FDI, particularly in retail and finance (Hing, 2023; Iammarino, 2022). In 2022, Cambodia was one of the top five recipients of global greenfield FDI to developing economies, with some of these investments in sectors highly relevant to the Sustainable Development Goals (SDGs) (UNCTAD, 2023).

Read more: UNDP launches SDG Impact Standards in Cambodia

On the other hand, little evidence exists about the recent active internationalisation strategies of Cambodian firms. This blog provides a snapshot of greenfield FDI trends into and from Cambodia based on fDiMarkets by Financial Times for the two decades from 2003 to 2022. The international connectivity of Cambodia – i.e., its exposure to the assets, knowledge and expertise flows coming from and going towards the rest of the world – is of paramount importance for understanding the economic development trajectories of the country and its regions towards the achievement of the upper middle-income status by 2030, and that of high-income country by 2050.

Inward FDI in Cambodia

Cambodia has been attracting considerable inward FDI (IFDI) over the two decades 2003-2022: the trends reported in Figure 1 in terms of both investment value and number of jobs created also illustrate – despite the usual volatility of such indicators, particularly in correspondence to major global crises – the start of the recovery after the COVID-19 pandemic.

Figure 1: IFDI value and number of jobs, 2003-2022.

Change between the two decades 2003-2012 and 2013-2022 shows a major shift toward services (Figure 2), in line with global trends. The “winner” sector has been real estate, becoming by far the most attractive to foreign investors in the second period, followed by financial services. The other main recipient sectors registering substantial growth are alternative/renewable energy and transportation and warehousing, both witnessing doubled IFDI values between the two decades. Interestingly, although the textiles sector shows relatively modest greenfield IFDI values, its labour-intensive nature emerges in terms of the estimated number of jobs, for which it is the first IFDI recipient in Cambodia in both decades, growing fivefold in the most recent period with over 26,400 jobs generated between 2013 and 2022. On the contrary, the largest recipient sector in value terms in the 2003-2012 decade – coal, oil and natural gas – lost its appeal over time, reflecting internal reforms to move away from fossil fuels.

Figure 2: IFDI value by sector between 2003-2012 and 2013-2022.

In terms of the five FDI functions/GVC stages (headquarter, R&D, sales, production, logistic & distribution), the ranking remains the same across the two observed periods, with production consistently displaying the highest and growing shares of total FDI value as well as a number of jobs. Unsurprisingly for a developing economy like Cambodia, R&D is the GVC stage with the lowest level of IFDI in both periods. Worryingly, however, both investment value and job creation have become even more marginal in the most recent years.

Looking at the geography of FDI sources, Figure 3 shows the countries of origin by value of total investment over the whole 2003-2022 period. The rising integration of Cambodia in the wider Asian macro-region is evident: Japan, China and Singapore record the biggest increases in investment inflows in the second decade, all overtaking Malaysia – the largest source during the whole 20 years observed – both in terms of FDI values and job creation. To be noted, France, playing no role as an investor in the 2003-2012 period, emerged as a source of FDI in Cambodia in the second decade. Conversely, sizeable reductions in both FDI values and jobs are recorded in the most recent years for South Korea and Vietnam, whilst USA investors register a modest decline in the amount invested but stability in jobs generated over time.

Figure 3: IFDI value by source country between 2003-2012 and 2013-2022.

Although the dynamics of the subnational distribution of IFDI across Cambodia’s provinces confirm the strong geographical concentration in Phnom Penh (Iammarino, 2022), some changes are worth noting. Whilst Preah Seihanu (ranked second on the overall period) shows a moderate decline in IFDI in the most recent decade, Kampong Speu, Siem Reap and Banteay Meanchey all register remarkable increases in their attractiveness to foreign investors. Interestingly, some provinces such as Preah Vihear, Kep and Kandal emerge as brand-new locations for IFDI in most recent years, possibly indicating a relative spread of the geography of inward FDI and some territorial spillover effects over time.

Outward FDI from Cambodia

Considering outward FDI (OFDI) from Cambodia, some key tendencies can be identified:

  • OFDI started only from 2008 onward, with no investment recorded in the fDiMarkets dataset before then. All investments are classified as new greenfield investments abroad, with one exception categorised as an expansion (in 2014, to Myanmar).
  • 31 OFDI projects from Cambodia, equivalent to 917.6 million USD and associated with an estimate of 1,659 jobs generated abroad, are reported over the 2008-2022 period.
  • OFDI from Cambodia occurred across three of the five GVC stages. Headquarters overwhelmingly dominates, accounting for 84% of all OFDI in the years 2008-2022 and being the only stage of outward investment until 2012. This likely reflects the emergence of active internationalisation strategies from large Cambodian companies. More recently, OFDI occurred only in production and sales suggesting the consolidation of firms’ efficiency- and market-seeking strategies.
  • All OFDI originates from the capital Phnom Penh.
  • Financial services are the dominant sector of origin of OFDI, representing around three quarters of total OFDI value over 2008-2022.

In conclusion, internationalisation will possibly continue to grow, also as a result of the market expansion of large Cambodian companies, the economic integration processes in the Asian macro-region, and the re-configuration of GVCs. The critical nexus sector-function in FDI and GVCs indicates that understanding the detailed structure and evolution of local-global networks should be a central reflection for creating opportunities for upgrading Cambodian production and technological capabilities.

Simona Iammarino is Professor of Economic Geography in the Department of Geography & Environment of the London School of Economics and Political Science (UK). 

This opinion was originally published here.

Related Articles