US investors put off by uncertainty and corruption

Burger King is one of the US companies targeting Cambodia’s rising middle class
Burger King is one of the US companies targeting Cambodia’s rising middle class. Pha Lina

US investors put off by uncertainty and corruption

While American companies have more than $1 billion invested in the Kingdom, the West’s largest economy remains lukewarm on doing business here

Despite high-profile US companies like Coca-Cola announcing plans to expand their footprint in the Kingdom, foreign investment from the US remains low compared to regional heavyweights.

Large US businesses appear reluctant in setting up in the Kingdom due to corruption concerns, an unpredictable regulatory environment, and a lack of economic attractiveness that allows US interests to thrive.

According to the Ministry of Commerce, the US ranked sixth on the list of total approved investments from 1994 to September 2014, with $1.3 billion invested, well below China, which was ranked first at $10.1 billion.

Meanwhile, total foreign direct investment in Cambodia hit $4 billion last year, with China, Malaysia, and Japan taking the top three spots.

Corruption remains one of the major factors keeping US companies away.

According to an American Chamber of Commerce survey for 2015, 82 per cent of American businesses in Cambodia were dissatisfied with corruption – the second highest in the region after Laos.

But the cost of payoffs to the bottom line is far from the only worry.

American businesses operating abroad are subject to the US Foreign Corrupt Practices Act, a stringent law that prevents US companies from engaging in bribery. Coupled with unpredictability in Cambodian laws, it can make US investors think twice before committing to Cambodia.

In 2011, the Cambodian government banned facilitation payments, such as paying officials fees to speed up regular services, like processing paperwork. It wasn’t until this was made illegal in Cambodia that this type of fee became punishable under the FCPA, creating further difficulties for US businesses eying the Kingdom.

“It used to be you had to pay the guy who would do your VAT return, now that’s technically illegal,” said Daniel Mitchell, board member at the American Chamber of Commerce and CEO of Phnom Penh-based SRP International. Mitchell said Cambodia’s government lacked a clear dialogue with the private sector, especially when compared with neighbouring countries. “American companies like predictability.”

One way of driving foreign investment in developing countries like Cambodia is through governments’ development agencies, which, to varying degrees, pave the way for private companies to enter the market.

However, US development assistance, via USAID, to Cambodia has largely focused on health, education and agricultural assistance.

In contrast, Japan’s development agency JICA has opened the door for Japanese investors by playing an increasingly active role in the Kingdom’s infrastructure development.

“Once JICA sprinkles the holy water, the gates are open for Japanese investment,” Mitchell said.

Although US companies have a small presence in Cambodia – Coca-Cola’s new $100 million plant in the Phnom Penh Special Economic Zone will be surrounded in a sea of over 40 Japanese manufacturers – US-Cambodia economic ties remain critical to the Kingdom’s economy.

The relationship is dominated by garment exports to the US, leaving Cambodia’s endemic corruption to be tackled by non-US producers across the Pacific.

“The United States is Cambodia’s largest single country trading partner, with more than $3 billion in two-way trade in 2014,” said US Embassy spokesman Jay Raman.

While the US and Cambodian governments persist on the investment front, repeated Ministry of Commerce trips to the US have induced few large companies to come.

But according to Hiroshi Suzuki, president of the Business Research Institute of Cambodia, the low presence of US business in Cambodia is not surprising given Cambodia’s low stage of economic development.

“The US has already graduated from labour-intensive industries and concentrates in the high value-added industries, such as IT and finance,” he said.

“So, in many Asian countries, the share of investment by US companies itself is not so high.”

Suzuki saw a bright spot, however, in deepening regional integration.

“After the establishment of AEC [ASEAN Economic Community], such affiliates based in ASEAN could come into Cambodia, especially in the service sector, such as [fast] food, hotels and retail.”

But while Cambodia’s business environment doesn’t yet possess the high-end services capacity American investors are looking for, there is potential in catering to the tastes of the Kingdom’s rising middle class, said Saing Ngorn, chief executive of RMA Cambodia, which holds the franchising rights for US brands such as Dairy Queen and Krispy Kreme.

“With changing lifestyle and standard of living, and emerging middle class, I am sure that Cambodians, visitors and residents will enjoy more choices,” he said.

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