Cambodia has experienced an extended period of strong economic growth, with average annual gross domestic product (GDP) growth hovering at seven percent over the last decade, driven by growing exports (particularly in garment and footwear products), increased investment, and domestic consumption. Tourism is another large contributor to growth, with tourist arrivals reaching 6.61 million in 2019. Cambodia’s GDP per capita stood at $1,674 in 2019, while the average annual inflation rate was estimated at 3.2 percent.
The government has made it a priority to attract investment from abroad. Foreign direct investment (FDI) incentives available to investors include 100 percent foreign ownership of companies, corporate tax holidays of up to eight years, a 20 percent corporate tax rate after the incentive period ends, duty-free import of capital goods, and no restrictions on capital repatriation.
Despite incentives, Cambodia has not historically attracted significant U.S. investment. Apart from the country’s relatively small market size, there are other factors dissuading U.S. investors: corruption, a limited supply of skilled labor, inadequate infrastructure (including high energy costs), and a lack of transparency in some government approval processes. Failure to consult the business community on new economic policies and regulations has also created difficulties for domestic and foreign investors alike. Notwithstanding these challenges, a number of American companies have maintained investments in the country, and in December 2016, Coca-Cola officially opened a $100 million bottling plant in Phnom Penh.
In recent years, Chinese FDI has surged and become a significant driver of growth. The rise in FDI highlights China’s desire for influence in Cambodia, and Southeast Asia more broadly, and that Chinese businesses, many that are state-owned enterprises, may not assess the challenges in Cambodia’s business environment in the same manner as U.S. businesses. The World Bank estimates that Chinese FDI accounted for 60 percent of total FDI-funded projects in Cambodia in 2017; that share rose significantly in 2018. In 2019, FDI hit $3.6 billion – a record – with 43 percent reportedly coming from China.
Physical infrastructure projects, including commercial and residential real estate developments, continue to attract the bulk of FDI. However, there has been some increase in investment in manufacturing, including garment and travel goods factories, as well as agro-processing.
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
Cambodia has a liberal foreign investment regime and actively courts FDI. The primary law governing investment is the 1994 Law on Investment. The government permits 100 percent foreign ownership of companies in most sectors. In a handful of sectors, such as cigarette manufacturing, movie production, rice milling, gemstone mining and processing, foreign investment is subject to local equity participation or prior authorization from authorities. While there is little or no official legal discrimination against foreign investors, some foreign businesses, however, report disadvantages vis-a-vis Cambodian or other foreign rivals that engage in acts of corruption or tax evasion or take advantage of Cambodia’s poor regulatory enforcement.
The Council for the Development of Cambodia’s (CDC) is the principal government agency responsible for providing incentives to stimulate investment. Investors are required to submit an investment proposal to either the CDC or the Provincial-Municipal Investment Sub-committee to obtain a Qualified Investment Project (QIP) status depending on capital level and location of the investment question. QIPs are then eligible for specific investment incentives.
The CDC also serves as the secretariat to Cambodia’s Government-Private Sector Forum (G-PSF), a public-private consultation mechanism that facilitates dialogue within and among 10 government/private sector Working Groups. The G-PSF acts as a platform for the private sector to identify issues and recommend solutions. More information about investment and investment incentives in Cambodia may be found at: www.cambodiainvestment.gov.kh.
Cambodia has created special economic zones (SEZs) to further facilitate foreign investment; as of February 2020, there are 23 SEZs in Cambodia. These zones provide companies with access to land, infrastructure, and services to facilitate the set-up and operation of businesses. Services provided include: utilities, tax services, customs clearance, and other administrative services designed to support import-export processes. Projects within the SEZs are also offered incentives such as tax holidays, zero rate VAT, and import duty exemptions for raw materials, machinery and equipment. The primary authority responsible for Cambodia’s SEZs is the Cambodia Special Economic Zone Board (CSEZB). The largest of its SEZs is located in Sihanoukville and hosts primarily Chinese companies.
Limits on Foreign Control and Right to Private Ownership and Establishment
There are few limitations on foreign control and ownership of business enterprises in Cambodia. Foreign investors may own 100 percent of investment projects except in the sectors mentioned Section 1. According to Cambodia’s 2003 Amended Law on Investment and related sub-decrees, there are no limitations based on shareholder nationality or discrimination against foreign investors except in relation to investments in property or state-owned enterprises. Both the Law on Investment and the 2003 Amended Law state that the majority of interest in land must be held by one or more Cambodian citizens. Further, pursuant to the Law on Public Enterprise, the Cambodian government must directly or indirectly hold more than 51 percent of the capital or the right to vote in state-owned enterprises.
Another limitation concerns the employment of foreigners in Cambodia. A QIP allows employers to obtain visas and work permits for foreign citizens as skilled workers, but the employer may be required to prove to the Ministry of Labor and Vocational Training that the skillset is not available in Cambodia. The Cambodian Bar has periodically taken actions to restrict or impede the work of foreign lawyers or foreign law firms in the country.
employer may be required to prove to the Ministry of Labor and Vocational Training that the skillset is not available in Cambodia. The Cambodian Bar has periodically taken actions to restrict or impede the work of foreign lawyers or foreign law firms in the country.
Other Investment Policy Reviews
The OECD conducted an Investment Policy Review of Cambodia in 2018. The report may be found at this link.
The World Trade Organization (WTO) last reviewed Cambodia’s trade policies in 2017; the first had occurred in 2011. The report can be found at this link.
All businesses are required to register with the Ministry of Commerce (MoC) and the General Department of Taxation (GDT). Registration with MOC is possible through an online business registration portal (link) that allows all existing and new businesses to register. Depending on the types of business activity, new businesses may also be required to register with other relevant ministries. For example, travel agencies must also register with the Ministry of Tourism, and private universities must also register with the Ministry of Education, Youth and Sport. GDT also has an online portal for tax registration and other services, which can be located here.
The World Bank’s 2020 Ease of Doing Business Report ranks Cambodia 187 of 190 countries globally for the ease of starting a business. The report notes that it takes nine separate procedures and three months or more to complete all business, tax, and employment registration processes.
There are no restrictions on Cambodian citizens investing abroad. A number of Cambodian companies have invested in neighboring countries – notably, Thailand, Laos and Myanmar – in various sectors.
10. Political and Security Environment
Foreign companies have been the targets of violent protests in the past, such as the 2003 anti-Thai riots against the Embassy of Thailand and Thai-owned commercial establishments. More recently, there were reports that Vietnamese-owned establishments were looted during a January 2014 labor protest. Authorities have also used force, including truncheons, electric cattle prods, fire hoses, and even gunfire, to disperse protestors. Incidents of violence directed at businesses, however, are rare. The Embassy is unaware of any incidents of political violence directed at U.S. or other non-regional interests.
Nevertheless, political tensions remain. After relatively competitive communal elections in June 2017, where Cambodia’s opposition party won nearly 50 percent of available seats, the government took steps to strengthen its grip on power and eliminated meaningful political activity. In September 2017, the head of the country’s leading opposition party was arrested and charged with treason, and in November 2017, the same opposition party was banned. In July 2018, Prime Minister Hun Sen won a landslide victory, and his ruling party swept all 125 parliamentary seats, in a national election that was criticized by the United States as being neither free nor fair. The government has also taken steps to limit free speech and stifle independent media, including forcing independent news outlets and radio stations to cease operations. While there are few overt signs the country is growing less secure today, the possibility for insecurity exists going forward, particularly if a large percentage of the population remains disenfranchised.
Laos, officially the Lao People’s Democratic Republic (Lao PDR), is a rapidly growing developing economy at the heart of Southeast Asia, bordered by Burma, Cambodia, China, Thailand, and Vietnam. Laos’ economic growth over the last decade averaged just below eight percent, placing Laos amongst the fastest growing economies in the world. According to the World Bank, Laos’ GDP growth fell from 6.3 percent in 2018 to 4.8 percent in 2019 due primarily to natural disasters that affected the agricultural sector. The COVID-19 outbreak is expected to further intensify the country’s macroeconomic vulnerabilities in 2020, with limited fiscal and foreign currency buffers constraining the ability of the Government of Lao PDR to mitigate the economic impacts of the pandemic. Over the last 30 years, Laos has made slow but steady progress in implementing reforms and building the institutions necessary for a market economy, culminating in accession to the World Trade Organization (WTO) in February 2013. The Lao government’s commitment to WTO accession and the creation of the ASEAN Economic Community (AEC) in 2015 led to major reforms of economic policies and regulations aimed at improving the business and investment environment. Nonetheless, within ASEAN Laos ranks only ahead of Burma in the World Bank’s “Ease of Doing Business’ rankings. The Lao government is increasingly tying its economic fortunes to the economic integration of ASEAN and export-led development and is seeking to move toward greener growth and sustainable development.
The exploitation of natural resources and development of hydropower drove the rapid economic growth over the last decade, with both sectors largely led by foreign investors. However, the Lao government recognizes that growth opportunities in these industries are finite and employ few people, and has therefore recently began prioritizing and expanding the development of high-value agriculture, light manufacturing, and tourism, while continuing to develop energy resources and related electrical transmission capacity to export to neighboring countries.
The Lao government hopes to leverage its lengthy land borders with Burma, China, Thailand, and Vietnam to transform Laos from “land-locked” to “land-linked,” thereby further integrating the Lao economy with the larger economies of the countries along its borders. The government hopes to increase exports of agriculture, manufactured goods, and electricity to its more industrialized neighbors, and sees significant growth opportunities resulting from the China-Laos Railway, which will connect Kunming in Yunnan Province with Vientiane, Laos. The railway is expected to be completed and operational by 2021. Some businesses and international investors are beginning to use Laos as a low-cost export base to sell goods within the region and to the United States and Europe. The emergence of light manufacturing has begun to help Laos integrate into regional supply chains, and improving infrastructure should facilitate this process, making Laos a legitimate locale for regional manufacturers seeking to diversify from existing production bases in Thailand, Vietnam, and China. New Special Economic Zones (SEZs) in Vientiane and Savannakhet have attracted major manufacturers from Europe, North America, and Japan.
Economic progress and trade expansion in Laos remain hampered by a shortage of workers with technical skills, weak education and health care systems, and poor—although improving—transportation infrastructure. Institutions, especially in the justice sector, remain highly underdeveloped and regulatory capacity is low. Despite recent efforts and some improvements, corruption is rampant and is a major obstacle for foreign investors.
Corruption, policy and regulatory ambiguity, and the uneven application of laws remain disincentives to further foreign investment in the country. The Lao government, under the administration of the new Prime Minister Thongloun Sisoulith is making efforts to improve the business environment. Its current five-year plan (2016 – 2020) directs the government to formulate “policies that would attract investments” and to “begin to implement public investment and investment promotion laws.” The Prime Minister’s publicly-stated goal is to see Laos improve its World Bank Ease of Doing Business ranking, and in February 2018, he issued a Prime Minister order laying out specific steps ministries were to take in order to improve the business environment. These efforts are having some impact – for example, it now takes to less than 40 days to obtain a business license, whereas just 4 years ago it took 174 days, and other nonessential steps were eliminated. The current administration remains active against corrupt practices, with the government and National Assembly in 2019 disciplining hundreds of officials for corruption-related offenses. Despite these efforts, the Laos’ Ease of Doing Business ranking has fallen from 139 in 2016 to 154 in 2019. Furthermore, the multiple ministries, laws, and regulations affecting foreign investment into Laos create confusion, and thus, require many potential investors engage either local partners or law firms to navigate the confusing bureaucracy, or turn their efforts entirely toward other countries in the region.
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Toward Foreign Direct Investment
The Lao government officially welcomes both domestic and foreign investment as it seeks to keep growth rates high and graduate from Least Developed Country status by 2024. The pace of foreign investment has increased over the last several years. According to Lao government statistics, mining and hydropower account for 95.7 percent of Foreign Direct Investment (FDI), and agriculture accounted for only 2 percent of FDI in 2019 China, Thailand, France, Vietnam, and Japan are the largest sources of foreign investment, with China accounting for a significant share of all FDI in Laos. The government’s Investment Promotion Department encourages investment through its website www.investlaos.gov.la, and holds an annual dialogue with the private sector and foreign business chambers though the Lao Business Forum process.
The 2009 Law on Investment promotion was amended in November 2016, with 32 new articles introduced and 59 existing articles revised. Notably, the new law, an English version of which can be found at www.investlaos.gov.la, clarifies investment incentives, transfers responsibility for SEZs from the Prime Minister’s office to the Ministry of Planning and Investment, and removes strict registered capital requirements for opening a business, deferring instead to the relevant ministry. Foreigners may invest in any sector or business except in cases where the government deems the investment to be detrimental to national security, health, or national traditions, or that have a negative impact on the natural environment. Nevertheless, even in cases where full foreign ownership is permitted, many foreign companies seek a local partner. Companies involved in large FDI projects, especially in mining and hydropower, often either find it advantageous or are required to give the government partial ownership.
Foreign investors are typically required to go through several procedural steps prior to commencing operations. Many foreign business owners and potential investors claim the process is overly complex and regulations are erratically applied, particularly to foreigner investors. Investors also express confusion about the roles of different ministries, as multiple ministries become involved in the approval process. In the case of general investment licenses (as opposed to concessionary licenses, which are issued by Ministry of Planning and Investment), foreign investors are required to obtain multiple permits, including an annual business registration from the Ministry of Industry and Commerce (MOIC), a tax registration from the Ministry of Finance, a business logo registration from the Ministry of Public Security, permits from each line ministry related to the investment (i.e., MOIC for manufacturing, and Ministry of Energy and Mines for power sector development), appropriate permits from local authorities, and an import-export license, if applicable. Obtaining the necessary permits can be challenging and time consuming, especially in areas outside the capital.
There are several possible vehicles for foreign investment. Foreign partners in a joint venture must contribute at least 30 percent of the company’s registered capital. Wholly foreign-owned companies may be entirely new or a branch of an existing foreign enterprise. Equity in medium and large-sized SOEs can be obtained through a joint venture with the Lao government.
Reliable statistics are difficult to obtain, yet with the slowdown of the world economy, there is no question that foreign investment has begun to fluctuate in comparison to previous years. According to the United Nations Conference on Trade and Development (UNCTAD), FDI inflows to Laos decreased 17 percent to USD 1.3 billion in 2018 after peaking in 2017 but still 30 percent higher than 2016. Laos received around USD 1.07 billion in FDI from China in 2019. Total FDI stock in Laos has increased from USD 5.7 billion in 2016 to USD 8.6 billion in 2018.
Limits on Foreign Control and Right to Private Ownership and Establishment
As discussed above, even though foreigners may invest in most sectors or businesses (subject to previously noted exceptions), many foreign companies seek a local partner in order to navigate byzantine official and unofficial processes. Companies involved in large FDI projects, especially in mining and hydropower, often either find it advantageous or are required to give the government partial ownership.
Laos does not have a central business registration website yet, but the Ministry of Industry and Commerce (MOIC) has improved its online enterprise registration site, http://www.erm.gov.la, to accelerate the registration process. As discussed above, over the last four years the total time for business registration has been reduced significantly. The timelines and the different government agencies involved in the process can still vary considerably, however, depending on locations and the type of business. As a result, many investors and even locals often hire consultancies or law firms to shepherd the labor-intensive registration process.
The Lao government has attempted to streamline business registration using a one-stop shop model. For general business activities, this service is in the MOIC, http://www.erm.gov.la. For activities requiring a government concession, the service is in the Ministry of Planning and Investment. For SEZs, one-stop registration is run through the Ministry of Planning and Investment or in special one-stop service offices within the SEZs themselves (under the authority of the Ministry of Planning and Investment), as is the case at Savan Seno SEZ.
Business owners give the one-stop shop concept mixed reviews. Many acknowledge that it is an improvement but describe it as an incomplete reform with several additional steps that must still be taken outside of the single stop. Businesses also complain that there are often different registration requirements at the central and provincial levels.
The Lao government does not actively promote, incentivize, or restrict outward investment.
10. Political and Security Environment
Laos is generally a peaceful and politically stable country. The risk of political violence directed at foreign enterprises or businesspersons is low. There was a string of unexplained attacks on vehicles traveling in remote areas of Xaysomboun province in late 2015 and 2016 which caused several diplomatic missions to issue travel warnings to their citizens, but such incidents have not been repeated in recent years. There has been little-to-no political violence in the last decade, and Laos’ political stability is an attractive feature for foreign investors.