• The rebound of the Cambodian economy (average real GDP growth of 9.5% between 2000 and 2006) after decades of political turmoil has injected new energy into Southeast Asia, and thereby offers Hong Kong companies with growing trade and investment opportunities.
  
  
• Empowered by its better market access (e.g. Generalised System of Preferences and preferential treatment as a least developed country under the WTO) to many developed markets and a cost-competitive labour force (minimum monthly wage for workers is US$50), Cambodia is a competitive production base outside Southern China, especially for garment manufacturing (in 2006, Cambodia exported over US$2.6 billion worth of garments, up 73% compared to 2005).
  
  
• As an emerging choice of investment, Cambodia received a net FDI inflow of around US$400 million in 2006, and is expecting the net FDI inflow to increase to US$600 million in 2011. For investment in the country, light-goods manufacturing, real estate and infrastructure, and tourism see the best potential. Further, the recent discovery of offshore oil reserves near Cambodia's coast is expected to afford the country a new and sustainable source of growth.
  
  
• Thanks to its growing economy and young population (median age: 20.6), Cambodia continues to provide export opportunities in spite of its low average household income. As an emerging market, Cambodia offers some potential for Hong Kong textile and apparel products (intermediaries), financial services, arbitration and legal services, and construction services.
  
  
• Intense competition with neighbouring economies, high governance risks and widespread low household income are evident challenges for Cambodia. Cautious optimism seems to be the right attitude when accessing the country.
  

With wages in Guangdong on a rising tide, alongside nationwide tightening of environment protection standards and reductions of export tax reimbursement, Hong Kong companies with operations on the Chinese mainland are facing intense cost pressures. In response, exploring alternative production bases within the Southeast Asian neighbourhood becomes an opportune option for those Hong Kong companies.

In the Southeast Asian region, Cambodia, Lao PRD, Thailand and Vietnam (hereinafter "the Mekong Four") are no unexplored territories to Hong Kong companies. In fact, many Hong Kong companies have already established light-industry production facilities or other forms of commercial presence in the Mekong Four. While there is no absolute answer as to which among the Mekong Four is the best production base, examining what Cambodia can offer against the other three is certainly a worthwhile exercise.

Starting with the labour costs for garment production, the minimum monthly salary for garment workers in Cambodia (US$50) is the second lowest among the Four, with only the Lao PRD trailing behind. When adjusted for workers' productivity and other benefits, Cambodia is offering one of the world's most cost-competitive (US$80 to US$130 per month) workforce.

Aside from competitive labour costs, Cambodia can offer more secure market access for garment exports to the US and the EU than the rest of the Mekong Four. Cambodia's "Least Developed Country (LDC)" status, which was granted as part of its WTO membership in 2004, affords garment exporters in Cambodia an opportunity to apply for tariff reductions, which, according to industry sources, can amount to a 15-20% saving for the buyers. This in turn explains why, despite the fact that Vietnamese workers are generally more productive than their Cambodian counterparts¹, Cambodia still has a distinct advantage in garment manufacturing in the Mekong region².

Hard on the heels of its labour costs and more secure market access, Cambodia also offers some very competitive transportation costs for its export-oriented manufacturing sector. According to a UN survey³, exporters in Cambodia paid US$736 per container on average in 2005/06, about 20% lower than the average cost in Southeast Asia.

Viewing beyond the bottom-line factor costs, Cambodia is regarded by many as the freest economy among the Mekong Four - unlike Vietnam and Lao PRD, Cambodia has no foreign exchange controls and is not a socialist state; in contrast to Thailand where foreign ownership restrictions appear to be tightening, the investment policy of Cambodia is liberalising. For corporate taxes per se, most businesses in Cambodia faced a total tax rate of 22.3% in 2005/06, compared to the regional average of 42.2%. During the same period, the average time spent by businesses in Cambodia on tax-related filings or preparations was 121 hours (OECD's and regional averages were 202.9 and 290.4 respectively). This relative simple corporate tax system is by far unmatched by Cambodia's Mekong neighbours.

Without much surprise, Cambodia's bettering macro environment and competitive production costs has caught the attentions of foreign investors. According to the National Bank of Cambodia, the country's FDI has seen an increasing trend since 2003. Net FDI inflow has risen from US$74 million in 2003 to US$121 million in 2004, soaring to US$381 million and US$400 million in 2005 and 2006 respectively. Looking into the future, Cambodia is expecting to receive nearly US$600 million of net FDI inflow in 2011. Up until now, investment in Cambodia, be it domestic- or foreign-owned, has been concentrated in the "three legs" of the Cambodian economy: (1) tourism, (2) construction and (3) garment manufacturing (jointly accounting for about 70% of Cambodia's total investment in 2006).

Regarding the first leg (the tourism sector), Cambodia had about 1.7 million visitors in 2006, following a prolonged trend of growth since 2000. The tourism and hotel industry sector as a whole experienced a growth rate of over 23% in 2006. According to the Cambodian Ministry of Tourism, the average length of stay of international visitors was 6.5 days in 2006, with US$95 being their per capita daily spending in the country. South Korea (16.8%), Japan (9.3%), the US (7.3%), Taiwan (5.0%), the Chinese mainland (4.7%) and Vietnam (4.6%) were the top six sources of tourist inflow to Cambodia in 2006. Looking into the future, the tourism sector is forecast to generate annual revenue of US$1.5 billion by 2010. As covered below, the expanding tourism sector of Cambodia has attracted overseas investment in constructing hotels and resorts, including Hong Kong investment.

Concerning the second leg (the construction sector), strong demand for construction work is witnessed, after decades of war and political strife ruined much of the country's infrastructure and buildings. In 2006, construction activities across Cambodia went up by 15.7%, with urban centres like Phnom Penh and Siem Reap taking the lead. Among the various segments within the Cambodian construction sector, hotels and resorts, and commercial and residential spaces demonstrated the best potential. Eyeing this potential, the Cambodian subsidiary of the Sunwah Group of Hong Kong has undertaken a major development project in Phnom Penh. Upon completion, Sunwah's residential-cum-retail/hotel complex will be a landmark sitting next to the new Cambodian Parliament, overlooking the Mekong River.

On the front of public infrastructure, assistance from international donors has been the main source of financing as tax revenue has been rather limited in Cambodia (tax collected by the tax department amounted to US$189 million in 2006). Nevertheless, the recent discovery of offshore oil reserves near Cambodia's coast is expected to provide another fillip to the country's public finance. According to local reports, contracts have already been awarded for four of six offshore blocks, with one block containing around 700 million barrels of crude oil. Industry experts estimate that oil can start flowing from these blocks as early as 2010, which can provide the Cambodian government with an annually accruing sum of tax revenue and profit-sharing proceeds.

Pertaining to the third leg (garment manufacturing), Cambodia already held the ninth position on the US list of major global garment suppliers back in 2006, thanks to the aforementioned cost advantages. Of the some 300 garment factories currently operating in Cambodia, 60 are originated from Hong Kong, placing Hong Kong the second biggest garment investor after Taiwan in Cambodia. Well-known garment investors from Hong Kong include Tack Fat Garment and its subsidiary Supertex, Goldfame Knitters, Terratex Knitting & Garment, Winner Knitting Factory and SL Garment Processing.

Behind the glamour, however, Cambodia is far from a challenge-free market. Intense competition with neighbouring economies has imposed constant downward pressure on Cambodia's price per export unit. For garment exports per se, Cambodia is also facing intense competitive pressure from manufacturing giants like the Chinese mainland and India. On the front of institutional governance, Cambodia's corruption risk⁴ ranked among the highest worldwide (ranked 151 out 163 countries/economies in the world) while transparency and efficiency of the country's legal system remain issues at stake. For Hong Kong companies interested in Cambodia, cautious optimism seems to be the sensible attitude.

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