Cambodia is located in the southwest of the Indochinese peninsula and has a rich culture that dates back 2,000 years ago. The country has 181,035-square-kilometers land area and a population of 16 million people (2017). Like the other Southeast Asia countries, Cambodia’s climate is characterized by two main seasons: dry season and rainy season. Economically, Cambodia has enjoyed strong growth rates during the past decade. Economic performance had positive statistics telling of an average GDP growth of 8.2% between 2000-2010, and 7.4% from 2011-2013. GDP per capita is US$1,485 (2017) compared to approximately US$200 in 1992. As a result, Cambodia’s economic status has now been upgraded as a lower-middle income country under World Bank classification and least developed country under the UN system. The country, however, remains one of the poorest in Asia. Cambodia still relies on foreign aid, with donor support totaling approximately 25% of the government’s budget. Despite the strong performance of the garment, tourism, construction, and real estate sectors, Cambodia remains an agrarian country.
Cambodia is also a member of the Association of Southeast Asian Nations (ASEAN) and the Asia Free Trade Area (AFTA). As part of its membership of ASEAN and associated regional free trade agreements, Cambodia’s local products can be exported to the ten-member countries with zero import tax, and those benefits are extended to Australia/New Zealand, China, India, Japan, and the Republic of Korea. Cambodia also has preferential access to major protected markets such as the United States (under Generalized System of Preferences, GSP), and the European Union (under ‘Everything But Arms’, EBA), which are its first and second largest export markets respectively.
In recent years, Cambodia has benefitted from substantial Chinese investment, and can potentially access the Chinese market, due to China’s policy of outward investment and Cambodia’s diplomatic support for China. China is the largest source of foreign direct investment (about US $1 billion annually from 2013 to 2017), the largest source of bilateral aid (US $275 million of $732 million total) and holds half of Cambodian’s external debt. This is manifested in a strong presence across the economy: one-third of factories in the garment sector are Chinese owned, China is the largest source of tourists (20% total), and the largest foreign investor in infrastructure development.
Cambodia has pursued policies and reforms to integrate. Over the past two decades, Cambodia has undergone a significant transition, reaching lower middle-income status in 2015 and aspiring to attain upper middle-income status by 2030. Driven by garment exports and tourism, Cambodia’s economy has sustained an average growth rate of 8% between 1998 and 2018, making it one of the fastest-growing economies in the world. While easing slightly, growth remained strong, estimated to have reached 7.1% in 2019, after the better-than-expected growth rate of 7.5% in 2018.
The number of registered enterprises is less than half of all Cambodian manufacturing SMEs due to barriers to registration and little perceived benefit of joining the formal sector. At a rough approximation there are over 60,000 industrial SMEs in Cambodia today. The Ministry of Industry Mines and Energy (MIME) estimated that there were at least 30,000 unregistered industrial enterprises in Cambodia in 2005.
Today the vast majority of Cambodian manufacturing SMEs are small family run businesses, involved in basic processing of primary produce for the domestic market. There are very few who export directly or by supplying larger domestically based exporting firms. Few have formal contracts or more than basic interactions with other companies. A lot of commerce is based around personal relationships. According to MIME data, in 2005 over 80 percent of Cambodian industrial SMEs were involved in food, beverage and tobacco industries. Furniture manufacturers made up a further 7% of the sample. Small scale textile and garment, machinery and non-metallic mineral producers made up the bulk of the remaining 13 %. There is also a small number of Cambodian SMEs involved in traditional handicrafts and chemicals.
SME development is crucial for sustained and equitable development of the Cambodian economy. Evidence from more economically developed Asian nations demonstrates that SMEs have considerable potential for driving economic growth. Under the right conditions, entrepreneurs, regardless of background, can start and grow SMEs, generating profits and creating employment opportunities. SMEs provide ⅔ of Cambodia’s employment. SMEs drive industrial progress, improve an economy’s ability to deal with shocks and are recognised as breeding grounds of innovation.
In the long run by increasing the activity of SMEs and their involvement in international trade the government will increase tax revenues. This will enable the government to upgrade infrastructure and supporting technology with flow on effects right through the economy. This will further encourage FDI and on-going business development. By establishing an enabling business environment and encouraging development of the nation’s SMEs Cambodia will be able to maintain strong and equitable economic development.
Cambodia’s export potential is hampered by a variety of factors, including a lack of domestic manufacturing and processing companies that can produce exportable, intermediate, or finished goods at sufficient quality levels, domestic capacity to address technical issues that prevent market entry, and the existing export infrastructure. These challenges are particularly relevant to the agriculture sector, in which Cambodia has the potential to produce a large exportable surplus. However, in addition to the above challenges, processors face low farm productivity and competition for raw material from Vietnamese and Thai traders operating across Cambodia’s land borders. Exports are strong in the garment sector, however, the industry focuses on ‘cut-make-trim’, which is low-value added and typified by weak backward linkages to local SMEs.
Poverty continues to fall in Cambodia. According to official estimates, the poverty rate in 2014 was 13.5% compared to 47.8% in 2007. About 90% of the poor live in the countryside. While Cambodia achieved in 2009 the Millennium Development Goal (MDG) of halving poverty, the vast majority of families who escaped poverty did so by a small margin. Around 4.5 million people remain near-poor, vulnerable to falling back into poverty when exposed to economic and other external shocks.
The global shock triggered by the COVID-19 pandemic has significantly impacted Cambodia’s economy in 2020 at a time when Cambodia also faces the partial suspension of preferential access to the EU market under the “Everything but Arms” initiative. The outbreak caused sharp deceleration in most of Cambodia’s main engines of growth in the first quarter of 2020, including weakened tourism and construction activity. Growth is projected to slow sharply to 2.5 percent in 2020 under the baseline scenario. The COVID-19 outbreak and slow recovery in global economic activity alongside prolonged financial market turmoil pose risks to Cambodia’s growth outlook.