EFFECT OF FOREIGN DIRECT INVESTMENT ON CAMBODIA

ECONOMY

Authored by: Lov Sokim

Tov Sophorn

Chhoeuth Racsa

Submitted to Professor Ky Sereyvath

CamED Business School

Submission date: 10/21/2020

 Table of Contents

1. Abstract………………………………………………………………………………….1
2. Summary …………………………………………………………………………….….2
3. Rational
4. Background
4.1 Research Question
4.2 Goal & Objective
4.3 Lecture Review
5. Methodology
6. Finding
6.1 Descriptive Statistic
6.2 Correlation Matrix
6.3 Multiple Regression analysis
6.4 Information about FDI on Cambodia economy
7. Discussion
8. Conclusion
9. References
10. Appendix.
 3

Abstract

Inflows of the foreign direct investment (FDI) were seen as the most principal to improve
the economy growth of most developing country as well as Cambodia. In this study aims to look
over about the effect of FDI on Cambodia economy. FDI Brings positive and negative effect to
the host country that will analysis in the though the data of economy growth of Cambodia from
2010 to 2018, import and export data series and also the employment of Cambodia. The outcome
of this study research divulges FDI have benefits to the economy of Cambodia growth up but
negative effect to the environmental issue, development industries and technologies.

Key word: Foreign Direct Investment, Effect, Economic Growth and Cambodia
JEL Classification: F21, F23, O53
Summary
 5

Rational

We conduct this research to explain how FDI affects our country and what we can do in
order to help our economy grow in the future. Foreign Direct Investment (FDI) refers to business
investments or owning a business in another country as a part of the existing business in one
country. Foreign companies invest in business ventures in other country to avail cheap wage
labor, tax exemption and other financial gains that they get here. FDI plays an important role in
the economic development of a country. Cambodia offers one of the region's most open
economies to foreign investment. Low tax rates, investment incentives, and a one-stop-service
for qualified investments all reflect the government's commitment to attracting foreign capital.
Tourism has traditionally attracted the most foreign investment. The capital inflow of foreign
investors allows strengthening infrastructure, increasing productivity and creating employment
opportunities in Cambodia. Foreign direct investment inflows in Cambodia will bring many
effects to Cambodia economic growth. In the developing countries FDI made an effect on the
labor and employment to the host countries in terms of labor market and wages also in Cambodia
that we saw the increase of employment and labor of Cambodian workers (Cambodian
Households survey data,2004-2014). Trade and FDI trends in Cambodia make the increase of
export of Cambodia that was the contributions make the economic growth (Cambodia exports by
sectors,1997-2015). FDI transforms and modernizes the industry of Cambodia to be the perfect
version and also presents a trend inward of stock manufacturing (2001-2014). After Cambodia
got invested by the FDI the financial, Banking and payments have been changed. The inflows
were directly toward the garment sector and increase in absolute terms from $3.2 to $2.6billion
in 2014(Central Bank of Cambodia,2001-2014).

Background

This paper investigates the effect of Foreign direct investment on Cambodia economy.
FDI is estimated to reach a high level in the future due to strong macroeconomic, stability,
economic growth and policy. In 2018, Cambodia opened the market investment reaching US
$3.1 billion which is increasing 11.51% compared to the previous year. FDI especially China
followed by the United States, Japan...etc. noticed that there is a huge growth in economy such
as real estate investment, travel, goods and other services which will give a lot of positive effect
to Cambodia economy because FDI will provide jobs for factory workers in the local. FDI is
pretty important in the banking industry too. As a result, the unemployment rate in Cambodia
dramatically fell.  Therefore, the goals of this research is going to cover and answer all of these
research questions and give opinions about the foreign direct investment (FDI).

4.1 Research Question 

1. What is the relationship between FDI and Cambodia economy?

2. How does FDI affect the economic growth in Cambodia?  
3. What is the current status of FDI and economic growth?

4.2 Objectivities & Goals

               The main objectives of the study are as following:

 To investigate the relationship between FDI and economic growth
 To evaluate the impact of FDI on economic growth in Cambodia 
 To discover out the current status of FDI and economic growth  

4.3 Literature Review

Many recent studies have focus on the Foreign Direct Investment and economic growth
in Cambodia. Most of the major studies are review as the following:
Foreign Direct investment (for short FDI) simply mean that the capital inflow from
abroad that are invested in the host country. While Economic growth is defined as an increase in
the capacity of an economy to produce goods and services, compared from one time to another .
A study conducts by Kindle Berger, 1969, p.13, who says, “for direct investment to thrive there
must be some imperfection in markets for goods or factors, including among the latter
technology, or some interference in competition by government or by firms, which separates
markets”. Similarly, the study by Nistor (2014) found the positive effect of FDI on host
economies, manifesting differently depending on the area and the region of the foreign
 7

investment; its impact depends largely on the quality and quantity of the inflow. FDI boosts
economic growth indirectly. The direct technology transfer enlarges the stock of knowledge in
the host country through labor training and skill achievement, new management performs, and
organizational arrangements (De Mello, 1999). Cambodia is an open market system which allow
many foreign firms to invest in Cambodia. On the contrary, Cambodia's garment industry at
present continues to grow rapidly. This is can be attributed to the country's open economic policy
which has drawn in large amounts of foreign investment into this sector of the economy.
(Garment Factories by Ownership Nationality in 2010) In 2010, 236 garment export-oriented
factories were operating and registered with GMAC, with 93% being foreign direct investment
(FDI). According to 2020 World Investment Report by UNCTAD, Cambodia recorded its
highest ever FDI in 2019, USD 3,7 billion (a rise of 16% compared to USD 3,2 billion in 2018),
mainly due to robust investments in manufacturing and services. The total stock of FDI stood at
USD 34 billion in 2019. In the latest reports of Cambodia, Current Account recorded a
deficit of 1.5 USD bn in Mar 2020. Cambodia's Direct Investment Abroad expanded by
25.3 USD mn in Mar 2020. The country's Nominal GDP was reported at 24.6 USD bn in
Dec 2018. FDI encourages economic development by increasing the productivity and exports of
the host countries. Local firms can compete more successfully in the export markets by copying
the superior technology or management techniques used by the multinationals (Blomstrom,
1991). FDI have positive impacts on Cambodia such as increase in productivities, exports, labor,
real estates, and banking.

However, FDI also have negative effect came in many ways, the benefits also come with
a cost. A study done by CIF (2015) claimed that “In the case of profit repatriation, the primary
concern is that firms will not reinvest profits back into the host country. This leads to large
capital outflows from the host country.”  A large number of studies have been conducted so far to
find out the effects of FDI on the economy but there is no consensus. Almost all of the studies
have found a significant positive effect of FDI on economic growth. While others with negative
effects. Which is mean that FDI have both positive effect and negative effect. Some studies have
found that the effects of FDI depend on the absorptive capacity of Cambodia including the
political, economic and technological conditions. The literature review so far provides mixed
results, showing both positive and negative impacts of FDI on economy. However, on balance
the positive effects seem to outweigh the negative ones.
 Research Methodology

5.1 Research Design

This report is basically discovering whether the growth of Cambodia’s economy is

related to the number inflow of Foreign Direct Investment. As far as could be verified, there are
no official realize FDI Cambodian have been available for Cambodia yet. In order to conduct the
study, we will gather the record of Cambodia’s gross domestic product (GDP), FDI, CPI and
EXR from 2006 to 2016. The data were obtaining by the world Development Indicators (WDI)
data base publish by the world bank. After collecting the data, we will organize into table and
analyze the data by using Excel. Moreover, we would like to use table, line, pie and bar charts
method as the statistical technique that will be used in this study. Therefore, we selected FDI of
Cambodia as the independent variable while the GDP of Cambodia is the dependent variable.
Besides, we will show the results that we obtain from Excel in the findings section.

5.2 Model Specification

To test the association between foreign direct investment on Cambodia economic growth,

Inflation Rate and Exports variables, we estimated a linear regression model of the following

form by using the SPSS with Ordinary Least Squares (OLS) estimator.

GDP = C + β1FDI + β2CPI + β3EXR + e

Therefore:

C = Constant term

β1, β2 and β3 = Regression Coefficients

GDP = Gross domestic Product

FDI = Foreign Direct Investment

CPI =Consumer Price Index (Inflation Rate)

EXR = Foreign Exchange Rate

e = Error term
 9

Finding

6.1 Descriptive Statistic

The bellow Finding in this Table 1 illustrate the descriptive statistic of variables between
2006 to 2016. The mean and standard deviation of GDP are USD 13.19 Billion and USD 4.06
Billion, respectively. Furthermore, the Maximum value of GDP is calculated as USD 20.02
Billion while the minimum value is only just 7.27 Billion in 2006. On the other side, the mean
and standard deviation of FDI are USD 1.38 Billion and USD 0.56 Billion, the maximum value
is 2.29 and the minimum is USD 0.48 Billion. At the same time, the mean value of inflation rate
and Foreign exchange rate are 5.6 and 1.17, respectively. And the standard deviation of this two
are USD 6.86 Billion and USD 0.14 Billion. The highest value of inflation rate is USD 25 Billion
and the lowest of value is USD -0.66 Billion. The Maximum value of EXR is calculated as USD
1.35 Billion while the minimum value is USD 0.97 Billion.

Table 1: Descriptive Statistics

Variable Mean Std.Dev Min. Value Max. Value

GDP 13.19 4.06 7.27 20.02

FDI 1.38 0.56 0.48 2.29

CPI 5.6 6.82 -0.66 25

EXR 1.17 0.14 0.97 1.35

6.2 Correlation Matrix

** Correlation is significant at the 0.01 level (2-tailed).

The correlation matric on Table 2 bellow show the positive related to GDP.
Table 2: Correlation Matric

Variables GDP FDI CPI EXR

GDP 1 0.935** -0.363 0.019

FDI 0.935** 1 -0.433 -0.222

CPI -0.363 -0.433 1 -0.019

EXR 0.019 -0.222 -0.019 1

6.3 Multiple Regression analysis

The study conducted multiple regression analysis to determine the relationship between
foreign direct investment and economic growth in Cambodia. The findings of the study are
presented in the tables below.
Std.
Adjusted Error of
Model R R-Square
R Square the
Estimate
1 .966a 0.934 0.905 1.2473
a. Predictors: (Constant), EXR, CPI, FDI
Table 3: Model summery

The three independent variables include FDI, inflation rate, and exchange rate that were
studied, indicate 93.40% of the variance in economic growth in Cambodia as represented by R 2. It
means that other factors not included in this study contribute 6.6% of the variance in the
dependent variable.
 11

Degree of
Sum of Mean
Model Freedom F Sig.
Squares Square
(df)
Regression 153.627 3 51.209 32.916 .000b
  Residual 10.89 7 1.556    
Total 164.517 10      
a. Dependent Variable: GDP
b. Predictors: (Constant), EXR, CPI, FDI
Table 4: ANOVA

The results show that the magnitude of significance is less than 0.05, so the model is
statistically considered to predict how Cambodia 's GDP is influenced by FDI, inflation rate, and
exchange rate. The measured value of F is greater than the critical value of F, which
demonstrates that the overall model is significant.

Table 5: Regression Analysise

Unstandardized Standardized
Coefficients Coefficients
Model T Sig.

B Std. Error Beta

(Constant) -5.718 3.912   -1.462 0.187

FDI 7.5 0.814 1.027 9.208 0

  CPI 0.051 0.065 0.086 0.788 0.456

Exchange
7.046 2.857 0.248 2.466 0.043
rate

a. Dependent Variable: GDP

 From the regression findings in Table 5 below, the results showed that a one-off rise in
FDI would lead to 7,500 increases in GDP; a one-off increase in the exchange rate would result
in 7,046 increases in GDP, while a one-off increase in the inflation rate (CPI) would lead to just
0,051 increases in GDP. FDI had a significance level of 0.000 at a 5 percent significance level
and 95 percent confidence level; the exchange rate was just 0.043, but CPI demonstrated
insignificance to GDP.

Information of FDI on Cambodia economy.

GDP Growth (Annual%) – Cambodia

This chart below will show the GDP growth (Annual%) of Cambodia from 2006 – 2016.

Chart Title
12 10.77
GDP Growth (annual %) - Cambodia

10.21
10

8 7.07 7.31 7.36 7.14 7.04 7.03

6.69
5.96
6

2
0.09
0
2004 2006 2008 2010 2012 2014 2016 2018
2006-2016

World Bank national accounts data, and OECD National Accounts data files.

This trends indicate the Gross Domestic product. The minimum value of GDP in 2009

is0.087, while the highest value of GDP is 10.771.

 13

16
14.15
13.58
14
12.49 12.37
11.99
12 11.1
Cambodia-FDI %of GDP

10.04 10.1
10 8.93
7.87
8 6.64
6

0
2004 2006 2008 2010 2012 2014 2016 2018
2006-2016

Foreign Direct Investment (%in GDP) – Cambodia

Cambodia 's FDI registered a growth of 12.37 per cent of the country's Nominal GDP in
December 2016, a record high of 14.1 per cent in December 2012 between 2006 and 2016 and a
record low of 6.64 per cent in December 2006.

CPI, Inflation rate (annually %) – Cambodia

Chart Title
30
Cambodia-CPI, Inflaton (annually%)

25
25

20

15

10 7.69
6.14 5.48
4 2.99 2.94 3.86 3.05
5
1.22
-0.66
0
2004 2006 2008 2010 2012 2014 2016 2018
-5
2006- 2016
 Cambodia 's inflation posted a growth rate of 3.045% in December 2016, a record high of
24% in December 2008 between 2006 and 2016, and a record low of -0.67% in December 2009.

Economic trends in Cambodia by the effect of FDI

Through this analysis show that in an economy there is a good trend of investment which
ultimately results in increasing the GDP and growth of the country as we have found in our
research as a matter of fact increasing trend of FDI also increases the GDP of Cambodia. 

From 2015 until now we saw that the inflation of FDI to Cambodia has flowed in and
made Cambodia economic increase and decrease by cause some of the main factors of country
economic growth. This bar chart shows the Cambodia economy data from 2015 to 2019. GDP of
capital is one of the important factors that has to be focused on when we talk about the economic
trends. This graph shows that GDP in 2015 was 1160USD and its growth in 2018 was 1631USD.
We look at the inflation rate of 5 years. In 2017 the inflation rate such as CPI, annual variation is
very high then every year but it fell down in 2019 from 2.9% to 1.9% that is equal to 10%
 15

different. The Exports section increased and fell in 2017 that was because of the high inflation
rate. Burgeoning exports and strong FDI inflows have contributed to further accumulation of
gross international reserves, which in 2018 reached 10.1 billion US dollars or about six months
of prospective imports.

Taking everything in to consideration of The National Bank of Cambodia (NBC)

forecasts the inflow of foreign direct investment (FDI) into the country will rise 10 percent in
2020. On top of that Lim Heng, vice-president of Cambodia Chamber of Commerce, sat that at
present, more FDIs are pouring into all sectors. He added that the growth of real estate,
construction in general and agriculture are also on the rise. He said that said the growth rate of
imports and exports will remain strong in Cambodia in 2020 for the reason that there are more
new businesses registered in the Kingdom in 2019.

The major component of total exports was Garment, Footwear, Electrical Part, Bicycle,
Wood Products, Rice, Rubber, Vehicle part, Fish, and other agricultural Products. The major
components of total import were Fabric, Oil, Equipment Construction, Vehicle, Food, Beverage,
other electronic Equipment, Garment, Medicine, Fertilizer, Cigarette, Steel and Cements. The
Pie chart below will show the percentage of export and import product in 2020 from the General
Department of Cambodia.

Cambodia continue to attract more FDI in the future with another $21 million investment
and 3500jobs. According to The Council for the Development of Cambodia, the five approved
projects cover the production of eco-bags, garment, cakes boxes, fiber optic cable, and packaging
materials. These projects belong to five different companies located in the capital of Phnom Penh
and the provinces of Takeo, Preah Sihanouk and Svay Rieng. Phal Sophanith

The labor also effects from FDI and the economizer predict that in next 2021 the rate is
still the same from the previous year because in 2020 when the world meets the covid 19
situation, foreign investment will decrease. In the Quarter 1,2,3 was the same amount but it
increased in the last quarter because of coronavirus disease.

Cambodia Industries effect by FDI

About 90% of FDI is in light industry, service and infrasture construction. More investment in
manufacturing activities are now taking advantage of special trading rights under the most
favored Nation and Generalized system of preference that has now been extended to Cambodia
by many industrial countries.

Owners hip by Number of

Nationality of Owners hip percentage factories
owned
Cambodia 5% 13

China 19% 44

Hong Kong 17% 39

Malaysia 6% 14

Others 4% 10

Singapore 4% 10

South Korea 13% 31

Taiwan 28% 66

USA 4% 9
 17

By the data of table above we saw that in Cambodia have a lot of foreign business
owner and factories. In this data, Taiwan and China was the high value of ownership by
percentage 28%, 19%. By the way we compare this value of FDI to the worker in Cambodia. We
saw that the worker value also increases and labor that it was the cause of FDI.

FDI effect to the real estate in Cambodia

Since the beginning of the 1990s, real estate became a key element of the economic
growth strategy in Cambodia. Phnom Penh, the capital city, welcomes a large number of
domestic and foreign real estate investments. FDI in real estate can create major inflows of
funds that can enchanted domestic investment to achieve a higher level of real estate
development. FDI can certainly bring the funds at the reasonably cheaper rates, beside new
idea and technologies which would enhance the efficiency of Cambodia Construction
industry. The foreign developers and investors come mainly from Singapore, South Korea,
Taiwan, Japan, Hong Kong, and mainland China. According to my interviews, the 60 to 70
percent of the units are mostly bought by foreigners. Most of the foreign developers and

investors advertise the finished product in their country of origin . In this following data
available from 2012 to 2016 which represent the total investment in Cambodia in USD
Million according to World Bank group.
 Discussion Result

This research paper revealed that the outcome of Foreign Direct Investment is
exceptionally interesting in the line of results obtain by other researchers who analysts on the
relationship between financial development and the FDI. Our major finding is that increases in
foreign Direct investment are positively related to economy growth of Cambodia. By comparison
also show parallel with the outcomes by mean of other researchers on the relationship between
FDI and economic growth. In the neighborhood of the Capital a study done by CIF (2015)
claimed that “In the case of profit repatriation, the primary concern is that firms will not reinvest
profits back into the host country. This leads to huge capital outpouring from the host country .”,
recent work also points to some potential risks in capital outflow: it can be reversed through
financial transactions; it can be excessive owing to adverse selection and fire sales; its benefits
can be limited by leverage; and a high share of FDI in a country's total capital inflows may

reflect its institutions' weakness rather than their strength. In spite of the fact that in the result of
FDI also bring several benefits into the host county such as Cambodia along the lines of
employment, management resource, modern technology, and competitive goods. One big
advantage brought about by FDI is the development of human capital resources, which is also often
understated as it is not immediately apparent. As a matter of fact, human capital is the competence and
knowledge of those able to perform labor, more known to us as the workforce. The attributes gained
by training and sharing experience would increase the education and overall human capital of a
country. Its resource is not a tangible asset that is owned by companies, but instead something that is
with reference to loan. Due to this reasons Cambodia GDP growth rate have growth gradually
increased in these years. With this in mind, a country with FDI can benefit greatly by developing its
human resources while maintaining ownership. In the final analysis of the Finding has a positive
effect on economic growth both in short-run and long-run.
 19

Conclusion

By the way of conclusion, this paper has investigated the impact of FDI on Cambodia
economy unpublished data from the latest Survey about Cambodia economy had been crashed
down on the occasion of Pol Pot regime that destroy all of the infrastructure, human resources,
and approximately two million innocent live. Even through from all of what had happened
Cambodia still have nature resource, land, and human capital to bring the economy back and
stronger than before. In order to rebuilt the economy, Cambodia needs a large amount on capital
that strongly come from FDI. Since the result of this research show that FDI have a lot of
positive effect to Cambodia economy. The study would recommend that Cambodia should have
stabilized strong macroeconomics political, development of human capital resource enlarge
physical infrastructure, eliminate restrictions against inward FDI, enhance the monetary sector
progress, and promote more environments for trade and investment. In the event that there is
political instability in the country, it will lead to adversely affect the economy as a whole that can
prevent FDI in Cambodia. Due to the world meets the covid 19 situation in 2020 foreign
investment will decrease for a short period of time. On the occasion that this situation still
continue government will need to find more solution to solve this problem.
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 21

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