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Cambodia

Executive Summary

The COVID-19 pandemic has had a significant adverse impact on Cambodia’s economy. Despite a surge of cases in 2021, Cambodia’s economy demonstrated resilience in some sectors (agriculture, manufacturing) and showed signs of gradual recovery from the previous year’s economic disruptions, achieving 2.2  percent gross domestic product (GDP) growth. This follows a 3.1 percent contraction of its GDP in 2020. Having adopted a “living with COVID” stance to reopen its economy and attract international tourists, the Royal Government of Cambodia (RGC) in March 2022 dropped all quarantine and testing requirements for fully vaccinated travelers. The World Bank predicts Cambodia’s GDP growth to rebound to 4.5  percent in 2022.

The RGC has made attracting investment from abroad a top priority, and in October 2021 passed a new Law on Investment.  Foreign direct investment (FDI) incentives available to investors include 100 percent foreign ownership of companies, corporate tax holidays, reduced corporate tax rates, duty-free import of capital goods, and no restrictions on capital repatriation.  In response to the COVID-19 pandemic, the government enacted economic recovery measures to boost competitiveness and support the economy, including a long-awaited Competition Law, a Public-Private Partnership Law, and provided tax breaks to the hardest hit businesses, such as those in the tourism and restaurant sectors. The government also delayed the implementation of a capital gains tax to 2024 and established an SME Bank of Cambodia to support small- and medium-sized enterprises.

Despite these incentives, Cambodia has not attracted significant U.S. investment. Apart from the country’s relatively small market size, other factors dissuading U.S. investors include: systemic corruption, a limited supply of skilled labor, inadequate infrastructure (including high energy costs), a lack of transparency in some government approval processes, and preferential treatment given to local or other foreign companies that engage in acts of corruption or tax evasion or take advantage of Cambodia’s weak regulatory environment. Foreign and local investors alike lament the government’s failure to adequately consult the business community on new economic policies and regulations. In light of these concerns, on November 10, 2021, the U.S. Departments of State, Treasury, and Commerce issued a business advisory to caution U.S. businesses currently operating in, or considering operating, in Cambodia to be mindful of interactions with entities involved in corrupt business practices, criminal activities, and human rights abuses. Notwithstanding these challenges, several large American companies maintain investments in the country, for example, Coca-Cola’s $100 million bottling plant and a $21 million Ford vehicle assembly plant slated to open in 2022.

In recent years, Chinese FDI — largely from state-run or associated firms — has surged and has become a significant driver of growth in Cambodia.  Chinese businesses, many of which are state-owned enterprises, may not assess the challenges in Cambodia’s business environment in the same manner as U.S. businesses.  In 2021, Cambodia recorded FDI inflows of $655 million, with approximately 52 percent reportedly coming from the PRC.

Physical infrastructure projects, including commercial and residential real estate developments, continue to attract the bulk of FDI. However, there has been some increased investments in manufacturing, including garment and travel goods factories, as well as agro-processing.

In 2022, both the Cambodia-China Free Trade Agreement (CCFTA) and the Regional Comprehensive Economic Partnership (RCEP) agreement entered into force.

Climate change remains a critical issue in Cambodia due to its vulnerability to extreme weather occurrences, high rates of deforestation, and low environmental accountability.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perception Index 2021 157 of 180 http://www.transparency.org/research/cpi/overview
Global Innovation Index 2021 109 of 132 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 1994-2021 $1.58 billion https://apps.bea.gov/international/factsheet/

http://www.cambodiainvestment.gov.kh

World Bank GNI per capita 2020 $1,500 https://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

3. Legal Regime

4. Industrial Policies

5. Protection of Property Rights

6. Financial Sector

8. Responsible Business Conduct

There is a small but growing awareness of responsible business conduct (RBC) and corporate social responsibility (CSR) among businesses in Cambodia despite the fact that the government does not have explicit policies to promote them. RBC and CSR programs are most commonly found at larger and multinational companies in the country. U.S. companies, for example, have implemented a wide range of CSR activities to promote skills training, the environment, general health and well-being, and financial education. These programs have been warmly received by both the public and the government.

A number of economic land concessions in Cambodia have led to high profile land rights cases. The Cambodian government has recognized the problem, but in general, has not effectively and fairly resolved land rights claims. The Cambodian government does not have a national contact point for Organization for Economic Cooperation and Development (OECD) multinational enterprises guidelines and does not participate in the Extractive Industries Transparency Initiative.

9. Corruption

Corruption in Cambodia is endemic and widespread. An increase in foreign investment from investors willing to engage in corrupt practices, combined with sometimes opaque official and unofficial investment processes, further drives the overall rise in corruption. In its Global Competitiveness Report 2019, the World Economic Forum ranked Cambodia 134th out of 141 countries for incidence of corruption. Transparency International’s 2021 Corruption Perception index ranked Cambodia 157 of 180 countries globally, the lowest ranking among ASEAN member states.

Those engaged in business have identified corruption, particularly within the judiciary, customs services, and tax authorities, as one of the greatest deterrents to investment in Cambodia. Foreign investors from countries that overlook or encourage bribery have significant advantages over foreign investors from countries that criminalize such activity.  In light of these concerns, on November 10, 2021, the U.S. Departments of State, Treasury, and Commerce issued a business advisory to caution U.S. businesses currently operating in, or considering operating, in Cambodia to be mindful of interactions with entities involved in corrupt business practices, criminal activities, and human rights abuses.

Cambodia adopted an Anti-Corruption Law in 2010 to combat corruption by criminalizing bribery, abuse of office, extortion, facilitation payments, and accepting bribes in the form of

donations or promises. Under the law, all civil servants must also declare their financial assets to the government every two years. Cambodia’s Anti-Corruption Unit (ACU), established the same year, has investigative powers and a mandate to provide education and training to government institutions and the public on anti-corruption compliance. Since its formation, the ACU has launched a few high-profile prosecutions against public officials, including members of the police and judiciary, and has tackled the issue of ghost workers in the government, in which salaries are collected for non-existent employees.

The ACU, in collaboration with the private sector, has also established guidelines encouraging companies to create internal codes of conduct prohibiting bribery and corrupt practices. Companies can sign an MOU with the ACU pledging to operate corruption-free and to cooperate on anti-corruption efforts. Since the program started in 2015, more than 80 private companies have signed an MOU with the ACU. In 2018, the ACU completed a first draft of a code of conduct for public officials, which has not yet been finalized.

Despite the passage of the Anti-Corruption Law and creation of the ACU, enforcement remains weak. Local and foreign businesses report that they must often make informal payments to expedite business transactions. Since 2013, Cambodia has published the official fees for public services, but the practice of paying additional fees remains common.

Cambodia ratified the UN Convention against Corruption in 2007 and endorsed the Action Plan of the Asian Development Bank / OECD Anti-Corruption Initiative for Asia and the Pacific in 2003. Cambodia is not a party to the OECD Convention on Combating Bribery.

10. Political and Security Environment

Incidents of violence directed at businesses are rare. The Embassy is unaware of any incidents of political violence directed at U.S. or other non-regional interests. In the past, authorities have used force to disperse protestors.

Nevertheless, political tensions remain. After relatively competitive communal elections in June 2017, where Cambodia’s opposition party won 43 percent of available seats, the government banned the opposition party and imprisoned its leader on charges of treason. With no meaningful opposition, the Cambodian People’s Party (CPP) swept the 2018 national elections, winning all 125 parliamentary seats. 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 COVID-driven economic problems persist and if a large percentage of the population remains disenfranchised.

11. Labor Policies and Practices

The COVID-19 pandemic has had a significant impact on Cambodia’s labor sector. In particular, Cambodia’s garment and manufacturing sector, which is heavily reliant on global supply chains for inputs and on demand from the United States and Europe, experienced severe disruptions due to COVID-19. Cambodia’s labor force numbers about 9.2 million people. A small number of Vietnamese, Thai, and Bangladeshi migrant workers are employed in Cambodia, and in recent years Chinese-run infrastructure projects and other businesses imported an increasing number of Chinese laborers, who typically earn more than their Cambodian counterparts.  Cambodia’s garment sector employs 800,000 people, mostly female. Most of Cambodia’s factories producing for export are foreign-owned, and top managers are also almost all foreign.

Around 65 percent of the population is under the age of 30. The United Nations estimates that around 300,000 new job seekers enter the labor market each year. The agricultural sector employs about 40 percent of the labor force.

The country has a substantial number of informal workers. Estimates vary, but only 19 percent of the nearly 9.2 million-strong workforce enjoy social protection under the National Social Security Fund, with the remaining 81 percent therefore meeting a common definition of informal workers. Such workers dominate the agricultural sector. These workers are not covered by wage, hour and occupational safety and health laws and inspections.

Cambodia’s 2016 Trade Union Law (TUL) erects barriers to freedom of association and the rights to organize and bargain freely. The International Labor Organization (ILO) has stated publicly that the law could hinder Cambodia’s obligations to international labor conventions 87 and 98. To address those concerns, Cambodia passed an amended TUL in early 2020, but the amended law does not fully address ILO, NGO, and union concerns about the law’s curbs on freedom of association. In addition, Cambodia has only implemented and enforced a minimum wage in the export garment and footwear sectors. All labor laws apply in Cambodia’s SEZs, but independent unions report that zone and SEZ factory management are often hostile to unions and that union formation and activity is particularly difficult in SEZs.

Unresolved labor disputes are mediated first on the shop floor, after which they are brought to the Ministry of Labor and Vocational Training. If reconciliation fails, then the cases may be brought to the Arbitration Council, an independent state body that interprets labor regulations in collective disputes, such as when multiple employees are dismissed. Since the 2016 Trade Union Law went into force, Arbitration Council cases have decreased from over 30 per month to fewer than five.

A strike and demonstration at Cambodia’s largest casino and hotel complex that began in December 2021 has drawn global attention from the ILO, international unions, and media, and may pose an investment risk. Rights groups and the ILO have expressed concerns in particular about the criminalization of peaceful union activity; government authorities charged 11 union leaders and members with “incitement” and put them in pre-trial detention for more than two months. In response to this dispute and broader concerns over freedom of association, the ILO sent a fact-finding mission to Cambodia in March 2022.

14. Contact for More Information

Moses An
Economic and Commercial Officer
U.S. Embassy Phnom Penh
No. 1, Street 96, Sangkat Wat Phnom, Phnom Penh, Cambodia
Phone: (855) 23-728-000
Email: CamInvestment@state.gov

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