Abstract
Foreign Investment in Garment & Textile factor is considered as the second biggest the industry which plays an important role in the improvement and development of Cambodia economy and reduces unemployment issue through the accessibility of the thousand prospect jobs for Cambodian people who can be contributed in garment & textile factory in order to generate income for supporting their expenses daily and help for developing community. Since the signing of the 1991 Paris Peace Accords and the structural economic reform, foreign investment was encouraged to invest in Cambodia through a political environment in which there were domestic peace and security, and commitment to ensure the macroeconomic stability and provided a favorable investment climate enshrined in the Law on investment of 1994 by revolution from the social market to free-market for receiving all sides of international investors in the region and outside region relocate businesses into Cambodia that gets highly competency. Cambodia economy focuses on four main factors such as agricultural tourism, and import & export, and garment sectors. And then, Cambodia’s export-oriented garment industry has emerged and growth very effective when flowing foreign investors relocated investment into Cambodia that those investors from Hong Kong, Taiwan, Malaysia, Singapore, and Cambodia was provided an advantage in the country’s quota-free access to the US and EU markets and secondarily its relatively low wage rates so Cambodia’ garment industry has been a pivotal source of export growth representing 80% of the country’s total export and directly contributing approximately 20% to the country’s gross domestic product (GDP). Increasing investments have helped development economically, reducing the unemployment rate, and reduce migration to finding a job in neighboring countries including Thailand, Vietnam, and etc. Basically, garment & textile finished products have offered free taxation in exporting to hug markets in the world as the United States, EU, Australia, and ASEAN countries. These potential sectors that encouraged mainly foreign investors relocated manufacturing bias in Cambodia because besides the provided profitable permission, there are several factors which attractively for international investment that look for advantages of business location, product floor cost, and worker if compare to other countries in the region. Therefore, the flowing of garment & textile investments was increasing very fast and the Cambodian government was created the special economic zones (SEZs) were located the mainly sub-city and provinces in order to efficiency accessed production and connected to the workforce. And especially Cambodia has created a regulatory framework for investment which importantly focused on FDIs including FDIs can be freely implemented, except in areas prohibited to or restricted for foreign investors. In this case, foreign investors have to register with the Ministry of Commerce and obtain relevant operating 2 permits. But if international investors seek investment incentives, they have to apply for investment registration, which can be obtained through the CDC or the ProvincialMunicipal Investment Sub-Committee (PMIS). Recently, the Ministry of Commerce has accessed the business registration system online that provided easily to register the business in Cambodia that can ensure security and a short time. As the result, garment & textile sector have pushed Cambodia with improvement of social infrastructure, economic growth rate, and reduced flowing of workforce to the neighboring countries which confront a lot of problems and lack of workforce to supply in domestic industries such textile & garment, tourism, agricultural, and construction sectors. That’s why the Cambodian government affords in promoting the potential prospect investments which offered multiple business incentives refer to increase the interaction of business activities with the mainly foreign investors that enable to upgrade the numerous of exporting garment & textile products into the foreign markets which occupied the big market shares among other countries’ products and Cambodia are one of the beneficiaries of the Generalized System of Preferences (GSP) schemes operated by the developed countries. Under these schemes, import tariffs on many products from the beneficiary countries are exempt or reduced if requirements such as rules of origin are fulfilled.Keyword: Foreign Direct Investment in Textile and Garment;
- Business Incentive Policy: To encourage the expansion of specific types of businesses through the establishment of a public/private partnership, which results in growth, and expansion consistent with the Town’s Strategic Economic Development Plan (SEDP).
- Downstream Integration: by purchasing a firm using or distributing its products, to get higher value-added along the chain and to aggressively push distribution.
- Diversification: by purchasing a firm doing somewhat different activities than the purchaser, to seize new opportunities.
- Garment Manufacturers Association: The trade organization of Cambodian apparel and fashion manufacturers, involved in representation, personnel training, and education.
- Generalized System of Preferences: a U.S. trade program designed to promote economic growth in the developing world by providing preferential duty-free entry for up to 4,800 products from 129 designated beneficiary countries and territories.
- Free Trade Agreement: Treaty (such as FTAA or NAFTA) between two or more countries to establish a free trade area where commerce in goods and services can be conducted across their common borders, without tariffs or hindrances but (in contrast to a common market) capital or labor may not move freely. Member countries usually impose a uniform tariff (called common external tariff) on trade with non-member countries.
- Horizontal integration: by purchasing a firm making the same product, to expand its production, reduce costs, and improving logistics.
- Intra-company loans: when the investor borrows funds to the affiliate, usually without the intention of asking the money back.
- Industry life cycle: FDI comprehends cross-border Mergers & Acquisition, thus they retain some of their hectic movements, with accelerated boost and severe crashes.
- Regional Value Content: The type of rule of origin used in Annex 6-A of KORUS. Regional Value Content (RVC) rules require that a product include a certain percentage of originating content.
- Reinvested Earnings: The investor's share of earnings not distributed as dividends by affiliates, in proportion to its share in the equity (say for instance 50% in a certain joint venture).
- Special economic zones (SEZ): The geographical areas that possess special economic regulations where are different from those that apply to other areas in the country. The regulations that apply to SEZs are generally market-oriented and conducive to foreign direct investment and include tax incentives and lower tariffs.
- Trade Sector Wide Approach: an approach to international development that "brings together governments, donors and other stakeholders within any sector. It is characterized by a set of operating principles rather than a specific package of policies or activities.
- The Value of Non-originating Materials: other than indirect materials, acquired and used by the producer in the production of the product; VNM does not include the value of a material that is self-produced.
- Upstream Integration: by purchasing a provider, whose input will now be sold cheaper (or exclusively) to it or be differentiated along with particular features.
Introduction
Cambodia is a developing country among ASEAN country members and over the world, and it was challenged with the civil war for two decades and the economy rate was slow down. Since the 1980s, Cambodia started to shift from a command and control economy to the free market. Cambodia’s law on investment was initiated to establish an open and liberal foreign investment regime to attract foreign investment from all countries around the world that might be able to increase economy scale and reduced the poverty so all sectors of the economy are privatized and open to foreign investment. There are no performance requirements and no sectors in which foreign investors are denied national treatment. The Law on Investment was amended in 2003, bestowing a simplified, more transparent, and faster mechanism for investment approval. Furthermore, following the signing of the 1991 Paris Peace Accords and the structural economic reform, foreign investors were encouraged to invest in Cambodia by a political environment in which there were domestic peace and security, a commitment to macroeconomic stability, and a favorable investment climate enshrined in the Law on Investment of 1994. And Cambodia economic focuses on four main factors such as agricultural, tourism, export & import, and 4 garment industry factors which turn economic distribution increase and decrease, and help to develop Cambodia's condition becomes advanced country in the region. Since then, Cambodia’s export-oriented garment industry has emerged and grown very fast when Asian textile and garment investors from Hong Kong, Taiwan, Malaysia, and Singapore started to produce for export in Cambodia. In doing this, they took advantage of the country’s quota-free access to the US and EU markets and, secondarily its relatively low wage rates. Cambodia’s garment industry has been a pivotal source of export growth representing 80% of the country’s total export and directly contributing approximately 20% of the country’s gross domestic product (GDP). Since 2012, 471 garment export-oriented factories have been currently operating, of which about 95% are foreign-owned, and which has employed about 415,550 Cambodian workers. The ownership is dominated by investors from other Asian countries, in particular, Taiwan, China, Hong Kong, and South Korea. Taiwan tops the list with 111 factories, followed by Hong Kong, China, South Korea and Malaysia (Garment Manufacturers Association in Cambodia).The global downturn depressed the demand for garments, and exports, particularly hard-hit, declined by 19% in 2009. However, the United States remained a key market. The government stated that 73 garment factories closed in 2008 with a loss of about 25,000 jobs but in the same year, 64 new factories opened and absorbing 13,000 workers. Since about 70% of its clothing exports go to the US and 25% to Europe, the crisis took its toll with about 100 factories closing in 2009. The structure of the businesses makes it susceptible to shocks in the global economy because it is so export-driven. Rather, the research focuses on key implications for managerial practice at the firm level related to strategic entrepreneurial posture that has an effect on the export performance of garments manufacturing businesses in Cambodia (MFE, 2014). Foreign investment in garment manufacture industry has increased that stimulated exporting garment products increase to the region and the world with the high rate because Cambodia was provided free taxation to export finish products to those countries such as the United States, European Union, China, Australia, and all ASEAN countries and another main reason is low labor cost if we compare to worker’s fees other countries in Asia and ASEAN. That’s why; Cambodia is the best location to build the garment manufacture industry of foreign investment in the garment sector that provided high profitability and opportunities to export and import garment products to the worldwide markets without regulatory prohibition the ASEAN members and outside the region.The end of 2015, ASEAN will be full integration into ASEAN economic that staking is long-standing commitment by the ten Member States of ASEAN to “ hasten the establishment of the AEC and to transform ASEAN into a region with free movement of goods, services, investment, skilled labor and free flow of capital.” This integration provides a lot of benefits and chances for foreign direct investment in the garment sector in Cambodia to increase the outcome of products to export finished products to overseas and import raw material, equipment, and material to improve garment productivity and labor skill.
In conclusion, Cambodia is looking to the promotion of foreign investment in textile and garment industry sector in order to attract foreign investors sites of the world who outlook best perspective business context in Cambodia along with providing high foreign investment incentive and usefully import and export through reduced trade barrier and no tax duty among ASEAN country members, USA, European Union, and ASEAN plus members that upgraded availability and mutual recognition of foreign investment, which have signed agreement
Objectives
This study aims to examine the validity of some of the concerns expressed in Cambodia over the potential effects of foreign direct investment in the garment sector on local communities, infrastructure and great more job prospects for local people who can be gotten benefit from increased foreign investment in this sector. Growing foreign companies in Cambodia have pushed improvement on all main sectors that changed new appearance to have actual development and reduce flow labor to neighboring countries. The overall goal of this research study is to analyze the foreign direct investment in special economic zones, export & import procedure, and investment incentives that focus on basically point:- Initially, it investigates the extent and nature of FDI in the textile and garment sectors. It then analyses the policy and regulatory environment and institutions governing and facilitating such FDI, as well as prevailing business models, in the acquisition of garment factory location. The paper concludes by providing some policy recommendations in response to the challenges facing the sector.
- Identify the revolutionary of textile and garment products to overseas markets and its procedures.
- Determine the perception of key stakeholders toward investment regulatory of Cambodia.
- To assessment, the FDI aspects recently in Cambodian by comparing to ASEAN country aspects conformance with exact data and believable information relevance to the requirement of business applications, workforce’s wage, taxable and shares of exportation of textile and garment products to the oversea markets.
- To analyzing the import and export of textile and garment products to the oversea markets which help to push Cambodia GDP and improvement of people living conditions equal to the ASEAN region.
- Make recommendations for improvement on investment situation in Cambodia.
Literature Review
The economy of Cambodia' at present follows an open market system (market
economy) and has seen rapid economic progress in the last decade. Cambodia had a GDP
of $13 billion in 2012. Per capita income, although rapidly increasing, is low compared
with most neighboring countries. Cambodia's two largest industries are textiles and
tourism, while agricultural activities remain the main source of income for many
Cambodians living in rural areas. The service sector is heavily concentrated on trading activities and catering-related services. Recently, Cambodia has reported that oil and
natural gas reserves have been found off-shore. In 1995, the government transformed the
country's economic system from a planned economy to its present market-driven
system. Following those changes, growth was estimated at a value of 7% while inflation
dropped from 26% in 1994 to only 6% in 1995. Imports increased due to the influx of
foreign aid, and exports, particularly from the country's garment industry, also increased.
After four years of improving economic performance, Cambodia's economy slowed in
1997-98 due to the regional economic crisis, civil unrest, and political infighting. Foreign
investments declined during this period. Also, in 1998 the main harvest was hit by
drought. But in 1999, the first full year of relative peace in 30 years, progress was made on
economic reforms and growth resumed at 4%.
Currently, Cambodia's foreign policy focuses on establishing friendly borders with its
neighbors (such as Thailand and Vietnam), as well as integrating itself into regional
(ASEAN) and global (WTO) trading systems. Some of the obstacles faced by this
emerging economy are the need for a better education system and the lack of a skilled
workforce; particularly in the poverty-ridden countryside, which struggles with inadequate
basic infrastructure. Nonetheless, Cambodia continues to attract investors because of its
low wages, plentiful labor, proximity to Asian raw materials, and favorable tax treatment.
In 2007, Cambodia's gross domestic product grew by an estimated 18.6%. Garment
exports rose by almost 8%, while tourist arrivals increased by nearly 35%. With exports
decreasing, the 2007 GDP growth was driven largely by consumption and investment.
Foreign direct investment (FDI) inflows reached US$600 million (7 percent of GDP),
slightly more than what the country received in official aid. Domestic investment, driven
largely by the private sector, accounted for 23.4 percent of GDP. Export growth,
especially to the US, began to slow in late 2007 accompanied by stiffer competition from
Vietnam and emerging risks (a slowdown in the US economy and lifting of safeguards on
China’s exports). US companies were the fifth largest investors in Cambodia, with more
than $1.2 billion in investments over the period 1997-2013. Cambodia was severely hit by
the 2008 economic crisis (refer to figure below), and its main economic sector, the
garment industry, suffered a 23% drop in exports to the United States of America and
Europe. As a result, 60,000 workers were laid off. However, in the last quarter of 2009 and
early 2010, conditions were beginning to improve and the Cambodian economy began to
recover. Cambodian exports to the US for the first 11 months of 2012 reached $2.49
billion, a 1 percent increase year-on-year. Its imports of US goods grew 26 percent for
that period, reaching $213 million. Another factor underscoring the potential of the Cambodian economy is the recent halving of its poverty rate. The poverty rate is 20.5
percent, meaning that approximately 2.8 million people live below the poverty line.
Method
The survey collected qualitative and quantitative data. The textile & garment industry, Ministry of Commerce, and the Ministry of Economic and Finance interviews were conducted by research teams composed of one technical garment expert and one economic researcher. In one day, each three-person team could visit as many as four factories. Two teams mad visits during a five-week period in September and November 2015. To gain a qualitative sense of factory operations, the team usually spent three hours visiting an entire factory during work hours, observing everything from the warehousing of raw material and accessories to the cutting and assembly process to textile and garment finishing and shipping. The garment expert toured the factory with a representative of management and generally ended the visit by making some immediate observations and recommendations. Questionnaires were distributed by e-mail before the factory visit. The questionnaire was composed of six sections; general profile, organization profile, technical factory profile, export, and import profile, quality and service profile. At the outset of the factory visit, the economist spent about an hour explaining the questionnaire and data definitions. Because the questionnaires were complex, they were left with the factory managers to allow the factory to collect the information. It took an average of two days for factories to gather data from several departments and make the calculations necessary to complete the questionnaire. Electronic or paper copies were subsequently returned by the factories. Follow up was time-consuming. Half the questionnaires were not complete when returned, and half of the factories that completed the questionnaires asked the assistance in completing them.Results
Foreign direct investment in Cambodia began in the mid-1990s and expanded sharply after the conclusion of a comprehensive trade agreement with the United States that granted Most Favored Nation (MFN) treatment to Cambodian exports. The introduction of the Qualified Investment Project (QIP) incentive scheme and the creation of Special Economic Zones (SEZ), underpinned by political stability and rapid economic growth, have boosted the FDI stock from an initial value of $149 million (four percent of GDP) in 2010 to $7 billion (over 50 percent of GDP) in 2014. Between 2010 and 2014, 29 percent of approved FDI projects were realized. This FDI realization ratio would be much higher if mega-investment projects were excluded.
China (excluding Macau, Hong Kong, and Taiwan), South Korea, Vietnam, Malaysia, and Taiwan are the top five countries in terms of FDI inflows in Cambodia since 2005, accounting for 65 percent of the total $6.3 billion. These countries are also the top five investors in terms of FDI approvals. Given that their total FDI approvals were $11.2 billion during the same period, their realization rate of the approved FDI projects was around 56 percent. The figure below shows the total foreign direct investment and investment in the textile and garment sector from 2010 to 2013. The foreign direct investment wavered in 2011 due to the effects of the global economic crisis (2011: 5.3% of GDP), but recovered again in 2012. The net foreign direct investment (FDI) inflows into Cambodia surged by an estimated 75% in 2012, to $1.5 billion, in various industries as well as diversifying garment production into higher-value products and tourism into new areas. In addition, Cambodia’s economic growth is forecast at 7.2% in 2013, picking up to 7.5% next year as a recovery in Europe and the United States takes hold (ADB’s annual economic outlook).
The United States is the prime market for Cambodian garment products, stayed 45% of total export in 2012, and followed by European (33%), Canada (9%) and Japan market (3%) (See Figure 2.5a). The total export to the US increased year-on-year, however, in 2012 there was a slight decrease to about US$1.99 billion, around 3% compared to the same period in the previous year. Moreover, garment export to the European market had increased by 24% to US$1.45 billion in 2012 due to the “Everything But Arms” initiative, which is the new GSP granted by European Union to LDCs (see Figure 2.5b). Last year in addition, Canada and other markets imported Cambodian garment-product which grew year-on-year by 7% and 21% respectively. Yet, during the first three months of 2013, the product of garment export still stayed in a decline stage by 92% lower from the same period of 2012, in which USA, EU, Canada, and Japan accounted for 28%, 37%, 29%, and 48% respectively.
Conclusion and Recommendation
In my research study mainly focused on foreign investment in textile and garment
sectors in Cambodia that were extremely attractive from international investors who are
finding the best location to industry bias. After Cambodia finished the civil war in 1993 and
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changed its economic system from socialism economy to free-market economy and signed
agreement with international community relevance to trade dimension included European
Union, United States of America, and China that provided a lot of chances to develop
economic, political system, and social infrastructure throughout the country. Therefore,
Cambodia has built many manufacturing industries to complete the global market demand
that required huge amount of finished products to supply, and many foreign businessmen
replaced the manufacturing industry to the countries, were offered the business competitive
advantages and sustainability of productivity with low product floor and workforce costs.
The results of foreign investment, Cambodia was attracted and received numerous
international companies, which operated in the textile and garment sector amount 411
companies and 90% were managed by foreign companies since 2008, which created
thousands of jobs prospects for Cambodia people who enable to complete the production
process’ requirements in the garment factories. The textile and garment sector is the second important pillar in stimulating the national economic growth rate and promoted the
Cambodian people’s living standard in their communities such as social infrastructure
included building highway and subway to connect transportation process and push
community development.
To accomplishing and encouraging foreign investors, Cambodia has created the
Special Economic Zones in sub-Phnom Penh city and vital provinces to respond to the
increasing of garment manufacturing industries in the whole country with providence the
special investment incentive policies during its business operation. For this reason, investors
wouldn’t overlook Cambodia's business location among ASEAN countries and gave fully
resources to facilitate the manufacture’s requirements and progressively. Furthermore, the international community offered the quota on exportation products to the global market with
less taxation duty aim to improve Cambodia's position in the world context. This factor has
stimulated the Cambodian industry to increase the size of production and outputs flow into the
oversea market.
As we have seen, gathering more foreign investment in the textile & garment sector has pushed
wealthy and development Cambodia to be advance country in the region and restored the
economic growth rate, develop the education system, people’s income, and push
Cambodia economy growth from time to time that can be an improvement all-economy
revolutionary and poverty to equal ASEAN countries that might be competitive including
qualification of skill labors who flow into ASEAN when ASEAN community will be fully
integrated, and Cambodia is the best location for international investment that receives high
profitability and effectively production outputs to export to the world markets. Here are
some recommendations for strengthening foreign investment in the textile and garment sector
that should be considered;
- Should be improved enforcement law in state institutions and the justice system that can effected to the investment aspect because stakeholders need the prevention and equality during their business processing.
- Increasing government professional consultancy for consulting investment troubles and provident investment regulatory documentation required that focus on Cambodia investment prospects.
- Have to deduct the corruption that can be affected by the country’s development and welfare because the losing government revenue due to government employees didn’t commit from clearance properly taxation and bribed with some import & export agencies who can’t take this revenue to deposit the government financial pocket. The commitment of enforcement regulation is basically of foreign investment attractiveness and confidence that make sure the manufacturing process muse be insured and protected by the Royal Government of Cambodia.
- Textile and garment employees should be offered properly salary and wage to workers that can be the response to daily expenses and improve their living condition because workers can share more energy and skills to increase product outcomes and the government will upgrade export product volume to the oversee markets which earn more national budget to improve infrastructure and country development.
- The Royal Government of Cambodia continues still to need foreign investment professionals to re-study the priority tasks of investment that given benefits to country and convince potential investors to entrance business in Cambodia because we need more jobs for people to detect flowing workforces to a neighboring country that cause of lack workforces to supply domestic manufacturing requirement in the nearly future.
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