Linkages: Development Strategies, Governance and Cooperation

A Comparative Perspective of Thailand and Cambodia

The Greater Mekong Subregion Capstone

Capstone Director: Professor Francois Bafoil

Capstone Researchers

Mohamed Abdul Aziz

Wei Li

Zoe Sinclair

Jinglong Yang

Executive Summary

This capstone has set out to understand the relationship between Special Economic Zones (SEZ), or Industrial Estates

(IE), and regional integration. Additionally, it looks at their role as vehicles for investment, particularly Foreign Direct

Investment (FDI), and links to growth. Initially the report analyses the concept of regional integration, the types and

ways of regional integration, and its context in the Greater Mekong Subregion(GMS). The issue of zones will be

considered which have a regional history and country specificities. Based on our conceptual research and field research,

this report will then expand on the factors involved in each issue and the flow-on effects – from resources and

governance to the implications of FDI and potential for value chains.

Regional Integration

Regional integration has been increasingly seen as a potential development tactic. But its forms, factors and implications

vary according to context. The Association of South-East Asian Nations, or ASEAN, was established in 1967 and expanded

over the years to its current form of ten member states: Indonesia, Malaysia, Philippines, Singapore, Thailand, Brunei

Darussalam, Vietnam, Laos, Myanmar and Cambodia. From its early stages, ASEAN was aimed at accelerating economic

growth and expanding trade

. As a result, ASEAN's concept of regional integration has predominantly been focused on

the market. Additionally, due to characteristics such as its policy of non-interference and a respect for sovereignty, there

has been little interest in the development of supra-national institutions. As such it has evolved to a relatively shallow

form of regional cooperation where briefings and meetings are regularly held and consensus occurs on a policy of

mutual interest. Plans for an ASEAN economic community are continually pushed back, although the most recent ASEAN

annual report places the goal at 2015.

The inclusion of the so-called CLMV states (Cambodia, Laos, Myanmar and Vietnam) had implications for ASEAN due to

their low GDPs. ASEAN took a number of steps to aid growth in these countries such that they might be more in-line

with the rest of the members. The Asian Development Bank (ADB) developed a specific GMS programme which also

includes the two south-western Chinese provinces of Yunnan and Guangxi. In 1992, the GMS Economic Cooperation

Program (GMS-ECP) was launched with the support of Asian Development Bank (ADB), setting out “to promote

sustainable economic development through closer economic linkages between its member states.

” This vision is

embodied in the 3Cs strategy of enhanced “Connectivity”, increased “Competitiveness”, and a greater sense of

“Community”

In 2002, the GMS countries compiled a strategic framework for subregional development based on sector priorities and

programmes. It focused on strengthening infrastructure linkages, facilitating cross-border trade and investment, and

Hussey, p. 1

Bafoil and Ruiwin, 2010, 80

ADB, 1996

enhancing private sector participation, developing human resources, as well as environmental protection. An integral

part of the program and ADB's work towards development in the region has been focused on infrastructure. As one ADB

official put it “roads are easier to build than cooperation”

. However, Economic Corridors (EC) are intended to be much

more than just roads but are “designed to attract investment and generate economic activities along a central transport

artery and the border regions.

” These corridors connect to SEZs and resources such as ports and major hubs. Priority

has also been placed on transport due to its role on regional development by enhancing trade and connectivity. The EC

approach to ‘development through connectivity’ was adopted by GMS countries during the 8

GMS Ministerial Meeting

in Manila in 1998. The three phases to the realization of the EC are: building infrastructures; instilling the logistics, and;

initiating economic cooperation activities.

Three main EC, with several sub-corridors create a network connecting the subregion. These are the North South

Economic Corridor (NSEC), East West Economic Corridor (EWEC), and Southern Economic Corridor (SEC). Along with

connectivity to key resources and zones, these corridors connect the GMS with the Indian Ocean and the Pacific Ocean –

providing connections to South and East Asia.

This development of hardware has been accompanied by 'software', most notably the Cross-Border Transport

Agreement (CBTA). This connection of infrastructure with software is important as it has been realised that many of the

benefits of infrastructure are held back by time and costs at borders. For this reason, the CBTA was not only important

but also significant for bringing together the region's leaders to a common agreement on the issue. The CBTA includes:

allowing through permits the movement on specific routes of vehicles, goods and license recognized drivers; using

single-stop and single-window inspection to reduce transaction time by providing advance and clear information on

clearance; providing customs transit, and guarantee system to avoid costly transhipment, and; enhancing CBTA effects

by increasing CBTA checkpoints

However, beyond the initial signing, members have not ratified all the principles contained within the CBTA and the

agreement's success has been limited. Furthermore, the agreement has not been incorporated in all the national laws.

While there are limitations to its success at a national level, there are also problems with its implementation at the local

level. The capacity of the local border authorities is weak, and the role of the private sector in complementing the

process is also lacking.

SEZs and Industrial Estates

SEZs are areas allocated within a country where the laws are more liberal to create an encouraging investment climate.

Specifically, they are identified by characteristics including: a large developed site; infrastructure and services; sale and

lease of factory buildings; control which allows benefiting the occupants and wider community

. In Cambodia, these

areas are called SEZs; while in Thailand they are Industrial Estates (IEs). While they have a number of differences, as will

be shown, their similarities are sufficient that they can be defined as economic zones. When convenient for discussing

both, they will be referred to as just 'zones'.

The development of industrial estate across Asia, as a tool for economic development especially in regional areas, began

in Singapore in 1951

. Japan, Korea, Malaysia and Thailand followed in the main wave in the 60s, but it is the Chinese

model that has gained the most recognition. The successes of these growth models have been replicated elsewhere with

Jean-Pierre Verbiest, speaking at GMS forum at CERI, 2011.

Bafoil and Ruiwin, 2010, 80

ADB, Greater Mekong Subregion Cross-Border Transport Facilitation Agreement, 4

Cited in Aveline-Dubach, p.175

Aveline-Dubach, p.175

varying successes and many differences

. It is estimated that are some 3,000 zones in 135 countries today, accounting

for more than 68 million direct jobs and more than $500 billion of direct trade-related value added within zones

Within the GMS, zones have been seen as tools to attract investments, create jobs, and boost industry competitiveness,

aimed at enhancing economic growth. Thailand was an early adopter and Cambodia has since also created a number of

SEZs. The subregion, particularly with ADB's infrastructure creation, as aimed for the zones to form key poles of growth.

As such, they form key points along the economic corridors, including at border areas and near key resources such as

ports. This strategy behind the zones’ locations often ties their success to the development of the corridors and the

corridors success. These links, between the corridors, zones, resources and growth, will be examined as part of this

report.

Industrial Policy

Industrial policy is seen as a critical strategy towards industrial and economic development. It is linked to economic

growth, employment and income. Often it is focused on particularly sectors and growth is generated from those

linkages. In particular, the stage of development of a country is often identifiable by industrial policy and its level of

technology. This often starts as absorption by developing countries, and they can experience a significant catch-up effect

by doing so

. FDI is often a key way by which technology is introduced to a country and firms. However, the links

between FDI, technology and improvements for local firms require a complex balance of factors including government

support and policies that push for integration into the value chain. By improving technological status, and innovation, it

is possible enhance the value-add to products, and thus for firms and the country to move up the value chain. Related

policies to achieve this often involve improving efficiency, capacity, innovation and linking upstream and downstream

economic activities.

However, each industry has differences in technology and in skills needs. The various different

approaches of developing the industry have been called industrial policy. Other critical components are macroeconomic

policies, sectoral polices and the investment climate. In the case of this report, the investment climate can be viewed

through the zones which are designed as a vehicle for investment. This thus links industrial policy to its role for growth,

the zones and regional integration. As this report will demonstrate, Thailand has essentially failed to upgrade and

incorporate an industrial policy that supports education and vocational training towards skills improvements and

innovation. Furthermore, there was limited support for entrepreneurs or state companies and a lack of place-based

policies to support the zones. Cambodia faces an issue of diversifying and strengthening its sectors for growth.

Government involvement in industrial policy is also extremely limited.

Case studies

Thailand and Cambodia share a number of commonalities and differences, both of which serve to make them

worthwhile case studies. Given this report's focus on regional integration, it was important to focus on studies that are

involved in ASEAN and GMS so as to examine their reasons for involvement and constraints to integration. Their

relations to each other are also interesting given their proximity, shared borders and gulf and other similarities.

Thailand's growth and development, based on FDI and comparative advantages of low cost labour, occurred during the

1980s and 90s. Crucial institutions were the Board of Investment and the Industrial Estate Authority Thailand (IEAT).

Zones and incentive schemes followed, aimed at encouraging development outside Bangkok. Cambodia, meanwhile,

has focused on developing various sectors and encouraging SEZs. The zones have typically been located near borders

although the most successful ones are centred around the key hubs and resources including Phnom Penh and

Aveline-Dubach, p.176

World Bank, 2008.

Kraemer-Mbula. E, Wamae.W (2010) ‘Innovation and the Development Agenda’, OECD, pp 40

Whitfield p.7

Sihanoukville. Cambodia also has a strong open market approach that has led to private investment in the zones but has

not translated to development.

Thailand has the highest GDP in the GMS and has witnessed successful growth over the past decades. Just as it has

learned through developments in East Asia, it too can serve to provide lessons to those less developed countries.

Theoretically, development stages were expected to progress similarly in different countries but there is a clear need for

contextualisation. Cambodia as a Less Developed Country (LDC) makes possible for a contrasting case and can

potentially learn from Thailand's successes and mistakes. However, it has its own characteristics, including a smaller

population and as such smaller domestic market and labour force. Given that many of the investors in Thailand started

there because of the domestic market, especially the Japanese, this could prove a critical difference for Cambodia.

Governance in Cambodia is also lacking, and similarly is capacity. The case studies illustrate the various advantages but

also challenges the countries have. With these in mind, it is possible to see their growth paths and strategies and the

implications for regional integration.

Conclusion

Regional integration, particularly with respect to Thailand and Cambodia, has been very limited. When considering these

factors of regional integration - hard and soft elements of infrastructure and cooperation – the concept is not fully

present.

Growth and development have been considered an important part of integration – in terms of allowing for it by having

countries of relative size and levels to provide a context for integration; and in terms of encouraging integration by

opening up new markets. As a tool for growth and development, the development of industrial estates has been the

key. Thailand was an early starter in this field but Cambodia too has developed a model of Special Economic Zones. As

such, we are interested in investigating industrial estates and special economic zones to understand growth and regional

development. The zones also rely on resources, access to markets, and good policies. Given this, they provide a way of

assessing these elements and regional integration. The zones also act as vehicle for FDI which has been attributed as one

of the main reasons for Thailand's growth. However, Thailand's growth has slowed and it faces challenges. What is

stopping the industrial estates policy from continuing the growth?

Given the role of FDI in SEZs, the actors and their influence need to be considered. The role of MNCs in the region's

zones, and globalisation, introduces the issue of value chains. Value chains have an impact on regional and international

integration and needs to be assessed as an additional influence on the process of integration.

This paper will argue a number of points, including that a) regional integration has been limited. This is due to political

economies and regional economic disparities, and secondly, to limited state capacity and governance. The report will

also illustrate that b) SEZs as a successful growth model are subjective to certain conditions c) an effective industrial

policy is needed to complement SEZs d) The private sector has a critical role and influence on growth and regional

integration through a need to establish value chains.

Contents

Acknowledgements ............................................................................................................................................................... 10

List of Acronyms .................................................................................................................................................................... 12

Introduction .......................................................................................................................................................................... 15

Chapter I: General perspective ............................................................................................................................................. 18

1.1 Regional Integration and South East Asia ....................................................................................................................... 18

ASEAN................................................................................................................................................................................ 18

Greater Mekong Sub-region (GMS) .................................................................................................................................. 20

1.2 Four Pillars ....................................................................................................................................................................... 22

Strategy ............................................................................................................................................................................. 22

Physical connectivity ......................................................................................................................................................... 23

Tax Incentives and Tools ................................................................................................................................................... 25

Governance ....................................................................................................................................................................... 27

1.3 Regional Integration Analysis .......................................................................................................................................... 29

1.4 SEZs as a vehicle for growth and investment.................................................................................................................. 31

1.5 Why Cambodia and Thailand .......................................................................................................................................... 35

Chapter II: Thailand ............................................................................................................................................................... 39

Introduction .......................................................................................................................................................................... 40

2.1 General framework ......................................................................................................................................................... 44

2.1.1 History ...................................................................................................................................................................... 44

2.1.2 Geography ................................................................................................................................................................ 48

2.1.3 Resources ................................................................................................................................................................. 49

2.2 Industrial policies and actors .......................................................................................................................................... 50

2.2.1 Industrial policy ........................................................................................................................................................ 50

2.2.2 Industrial Estates ...................................................................................................................................................... 51

2.2.3 Institutions ............................................................................................................................................................... 52

2.2.4 Investors ................................................................................................................................................................... 54

2.3. Case Study: Amata City Industrial Estate ....................................................................................................................... 58

2.3.1 Investment climate .................................................................................................................................................. 61

2.3.2 FDI ............................................................................................................................................................................ 61

CP Group Profile ............................................................................................................................................................ 64

2.4 Assessment ..................................................................................................................................................................... 65

2.4.1 Institutions ............................................................................................................................................................... 65

2.4.2 Value chains ............................................................................................................................................................. 67

2.4.3 Good Governance .................................................................................................................................................... 68

2.4.3 Regional Integration ................................................................................................................................................. 69

Chapter III: Cambodia ........................................................................................................................................................... 72

3.1 Introduction .................................................................................................................................................................... 73

3.2 Industrial sectors ............................................................................................................................................................. 74

3.2.1 Garment ................................................................................................................................................................... 74

3.2.2 Construction ............................................................................................................................................................. 75

3.2.3 Agriculture (Agro-industry) ...................................................................................................................................... 75

3.3 Economic reform ............................................................................................................................................................. 77

3.3.1 Privatization of SOE .................................................................................................................................................. 77

3.3.2 Attracting FDI ........................................................................................................................................................... 77

3.4 Investors .......................................................................................................................................................................... 79

3.4.1 Chinese Investment in Cambodia ............................................................................................................................ 79

3.4.2 Japanese Investment in Cambodia .......................................................................................................................... 80

3.4.3 Value Chain .............................................................................................................................................................. 81

3.5 SEZs (Industrial Estate) in Cambodia ............................................................................................................................... 83

3.5.1 Summary .................................................................................................................................................................. 83

3.5.2 Phnom Penh Special Economic Zone (PPSEZ) .......................................................................................................... 89

3.5.3 Sihanoukville Special Economic Zone (SSEZ) ............................................................................................................ 93

3.5.4 Sihanoukville Port Special Economic Zone (SPSEZ) .................................................................................................. 97

3.6 Key findings ................................................................................................................................................................... 101

3.6.1 The comparative advantages of Cambodia ........................................................................................................... 101

3.6.2 The main obstacles of Cambodia ........................................................................................................................... 102

3.7 Sub conclusion .............................................................................................................................................................. 107

Chapter IV: Comparison of Thailand and Cambodia ........................................................................................................... 110

4.1 Introduction .................................................................................................................................................................. 111

4.2 Governance ................................................................................................................................................................... 113

4.2.1 Institutional arrangement ...................................................................................................................................... 113

4.2.2 Capacity .................................................................................................................................................................. 114

4.3 Incentives ...................................................................................................................................................................... 117

4.4 Resources ...................................................................................................................................................................... 119

4.4.1 Labor ...................................................................................................................................................................... 119

4.4.2 Infrastructure ......................................................................................................................................................... 120

4.5 Strategy ......................................................................................................................................................................... 122

4.5.1 Overall strategies ................................................................................................................................................... 122

4.5.2 Investment ............................................................................................................................................................. 123

4.6 Regional integration ...................................................................................................................................................... 125

4.6.1 EC and CBTA ........................................................................................................................................................... 125

4.6.2 Integration vs non-integration ............................................................................................................................... 126

4.6.3 Constraints for regional integration ....................................................................................................................... 127

4.7 Sub conclusion .............................................................................................................................................................. 130

Chapter V: Recommendations ............................................................................................................................................ 131

5.1 Introduction .................................................................................................................................................................. 131

5.2 Thailand ......................................................................................................................................................................... 131

5.3 Cambodia ...................................................................................................................................................................... 132

5.3.1 Governance ............................................................................................................................................................ 132

5.3.2 Infrastructure ......................................................................................................................................................... 137

5.3.3 Labor ...................................................................................................................................................................... 138

5.4 Regional integration ...................................................................................................................................................... 140

5.4.1 Thailand .................................................................................................................................................................. 140

5.4.2 Cambodia ............................................................................................................................................................... 140

Conclusion ........................................................................................................................................................................... 143

Bibliography ........................................................................................................................................................................ 144

Acknowledgements

This report is the production of nearly one year collaboration between four Master of Public Affairs students at Sciences

Po, Paris.

Professor Bafoil, Director of Research at the Centre for International Research (CERI) and capstone leader, was of great

support. His guidance during the research, and comments on our draft, made a difference in our work.

Grateful thanks also go to both Mr. Jean-Pierre Verbiest of Asia Institute of the Technology and Dr. Hang Chuon Naron of

the Ministry of Economy and Finance of Cambodia. They gave us a very useful introduction and insight to the two

countries as well as assisting with coordination of interviews. Without this assistance, especially in Cambodia, we would

not have had access to many interviewees, particularly government.

A great deal of gratitude also goes to the people whom we interviewed during our trip in Thailand and Cambodia in

January 2012. We are especially grateful for their welcome, support, advice and information. Without them our work in

Southeast Asia would not have been as fruitful as it was.

Last but not least, we would like to also thank the 2011 MPA capstone team who worked on the Greater Mekong Sub-

region topic. The advice they provided about the field trip and the capstone report was a useful reference.

List of interviews

Date/time

Department/Firm

Name

Position

Thailand

01-09-2012

National Research Council

Chieanchuang Audi

Kalayanamitr

Businessman/advisor

International Affairs Bureau, Office of the Board of

Investment

Vasana Mututanont

Executive Director

01-10-2012

Charoen Pokphand Group Company Limited.

Sunthorn Arunanondchai,

CBE, Vice Chairman

Industrial Business Development, AMATA

Corporation PCL

Satha Vanalabh-patana

Department Manager

Vatchariya Ngaotheppitak

Business Development Officer

01-11-2012

Thailand Resident Mission

Rattanatay Luanglatbandith

Economist (Regional Cooperation)

University of the Thai Chamber of Commerce

Dr. Pussadee Polsaram

Head of School of Business

Cambodia – Phnom Penh

01-12-2012

Supreme National Economic Council

Ministry of Economy and Finance

Dr. Hang Chuon Naron

Vice Chairman

Secretary of State

Department of Investment and Cooperation

Ministry of Economy and Finance

Pen Thirong

Director

Cambodian Special Economic Zone Board, Council

for the Development of Cambodia (CDC)

Chea Vuthy

Deputy Secretary General

Ministry of Public Works and Transport

Tauch Chankosal

Secretary of State

Vasim Sorya

Planning and Administration General

Department,

Director General

Chan Dara

Planning and Administration General

Department, Deputy Director General

Cambodia Resident Mission, ADB.

Peter J. Brimble

Senior Country Economist

01-13-2012

Phnom Penh Governor’s Office

Huot Hay

Deputy Director of Administration,

Responsible for Investment, Planning and

Waste Management Division

East Asia and Pacific Region, World Bank

Huot Chea

Senior Economist

Cambodia Chamber of Commerce

Ngoun Meng Tech

Director General

Phnom Penh Special Economic Zone (PPSEZ)

Hiroshi Uematsu

Managing Director

PP SEZ

Minebea Cambodia

Kengo Katsuki

Vice President (COO)

Cambodia – Sihanoukville

01-16-2012

Sihanoukville Governor,

Ministry of Interior

Sbong Sarath

Governor of Preah Sihanouk Province

Sihanoukville Training Center of National

Employment Agency

Ton Shina

Accountant

Sihanoukville Special Economic Zone (SSEZ)

Michelle Zhang

Department of CSR, Manager

Amy Yan

Overseas Marketing Department

Vice Section Chief

Sihanoukville Office of the Ministry of Public

Works and Transport

Nub Heng

Head of Office

01-17-2012

Sihanoukville Office of the Ministry of Labour and

Vocational Training

Yow Khemara

Director, Department of Labour, Sihanouk

Province

Sihanoukville Autonomous Port (PAS)

Lou Kim Chhun

Delegate of the Royal Government in Charge

as Chairman and CEO, PAS

Norng Soyeth

Director, Marketing and SEZ Department, PAS

List of Acronyms

ADB – Asian Development Bank

ADBI- Asian Development Bank Institute

ADF – Asian Development Fund

AEC- Asian Economic Community

AFTA – ASEAN Free Trade Area

AIT- Asian Institute of Technology

ASEAN – Association of Southeast Asian Nations

ASW- ASEAN Single Window

BSEZ - Bavet Special Economic Zone

CDC - Cambodia Development Council, which heads the Sub-committee of the Cambodian Special Economic Zone (SEZ)

Board

CBTA - Cross Border Transport Agreement

CLMV- Cambodia, Laos, Myanmar, Vietnam countries

EC - Economic Corridors

EWEC – East–West Economic Corridor

FDI- Foreign Direct Investment

GMS - Greater Mekong Sub-Region Program

GDP - Gross Domestic Product

HR - Human Resources

IICBTA – Initial Cross Border Agreement

MICL - Medtecs International Corporation Limited

MSEZ - Manhattan Special Economic Zone

MRC – Mekong River Commission 14

OSS – One Stop Service

PPSEZ - Phnom Penh Special Economic Zone

SCGT - Southern China Growth Triangle

SEAME - Southeast Asia Ministers of Education Organization

SEA - South East Asian

SEZ - Special Economic Zone

SFA-TFI – Strategic Framework for Action on Trade Facilitation and Investment

SPS - Sanitary and Phytosanitary Stop

SSI- Single Stop Inspection

SIJORI- Singapore, Johor and Riau growth triangle

R&D- Research and Development

TFWG - Trade Facilitation Working Group – GMS

TTF- Trade and Transportation Facilitation

UJIC - Universal Joint International Group

UNESCAP – United Nations Economic and Social Commission for Asia and the Pacific

Chart of Figures*

Figure 1: Ports and Airports in GMS......................................................................................................................................................... 24

Figure 2: Expected GMS Power Interconnection in 2025 ........................................................................................................................ 24

Figure 3: Tax incentives and tools in GMS countries, Source: doing business in Asia and interviews in field trip .................................. 25

Figure 4: Governance model .................................................................................................................................................................... 27

Figure 5: Comparison of Socio-Economic Indicators: Thailand and Cambodia ........................................................................................ 35

Figure 6: GDP and GDP per capital in GMS .............................................................................................................................................. 36

Figure 7: GDP growth rate in GMS ........................................................................................................................................................... 36

Figure 8: Economic growth in Thailand between 1980-2005, Source: Apisek Panuwan and Jayant Routray (2010) .............................. 41

Figure 9: Structural Change in Thailand Economy. Source: Apisek Panuwan and Jayant Routray (2010) ............................................... 42

Figure 10: Net Flow of FDI in Thailand by Sector 1970 - 1995 ................................................................................................................. 43

Figure 11: Distance of some key destinations from industrial estates .................................................................................................... 44

Figure 12: Transportation and key destinations from Chon Buri and Rayong IEs ................................................................................... 45

Figure 13: Investment incentives in Thailand .......................................................................................................................................... 46

Figure 14: Electricity fees ......................................................................................................................................................................... 47

Figure 15: Water tariffs ............................................................................................................................................................................ 47

Figure 16: Locations of zones ................................................................................................................................................................... 48

Figure 17: GMS Economic Corridors ........................................................................................................................................................ 48

Figure 18: Technological and Innovative Indicators ................................................................................................................................ 50

Figure 19: Amata City location (source:http://www.business-in-asia.com/amata_industrial_estate.htm) ........................................... 58

Figure 20 : Amata City warehouses (source: http://www.amata.com/eng/corporate_history.html) .................................................... 58

Figure 21: Master Plan of Amata ............................................................................................................................................................. 59

Figure 22: Share of Net Flow of FDI by Sector ......................................................................................................................................... 63

Figure 26: Garment sector employment (Unit: Thou) ............................................................................................................................. 74

Figure 27: Cambodia's Garments and Textiles Export (Unit: Million USD) .............................................................................................. 75

Figure 28: Trend of FDI and FDI-Gross Fixed Capital Formation Ratio ..................................................................................................... 78

Figure 29: Investment Trends by Country in Cambodia 1994-Oct2010 ................................................................................................... 78

Figure 30: Japan's ODA disbursements to Cambodia (Net disbursements, USD million) ........................................................................ 81

Figure 31: Location of SEZs in Cambodia ................................................................................................................................................. 83

Figure 32: List of SEZs in Cambodia.......................................................................................................................................................... 84

Figure 33: Organisation chart of SEZ program ......................................................................................................................................... 85

Figure 34: Structure at CDC and at each SEZ ........................................................................................................................................... 86

Figure 35: Incentives in the SEZs .............................................................................................................................................................. 87

Figure 36: Comparison of Cambodian SEZs ............................................................................................................................................. 89

Figure 37: Utility cost in Cambodian SEZs ................................................................................................................................................ 89

Figure 38: PPSEZ ....................................................................................................................................................................................... 89

Figure 39: Location of PPSEZ .................................................................................................................................................................... 90

Figure 40: Organisation structure ............................................................................................................................................................ 90

Figure 41: Development Phase of PPSEZ ................................................................................................................................................. 91

Figure 42: Sihanoukville city .................................................................................................................................................................... 93

Figure 43: Location of SSEZ ...................................................................................................................................................................... 94

Figure 44: The Gate of the SSEZ ............................................................................................................................................................... 94

Figure 45: Illustration of plan of SSEZ ...................................................................................................................................................... 95

Figure 46: Garment factory in SSEZ ......................................................................................................................................................... 95

Figure 47: Firms list in SSEZ ...................................................................................................................................................................... 96

Figure 48: Location of SPSEZ .................................................................................................................................................................... 97

Figure 49: Cargo Throughput of the Sihanoukville Port ........................................................................................................................... 97

Figure 50: SPSEZ ....................................................................................................................................................................................... 98

Figure 51: Management structure of SPSEZ ............................................................................................................................................ 98

Figure 52: Master plan of SPSEZ .............................................................................................................................................................. 99

Figure 53: Comparative Monthly Minimum Wage for GMS Countries .................................................................................................. 102

Figure 54: Summary of comparison between Thailand and Cambodia in terms of four pillars ............................................................ 112

Figure 55: Comparison of tax incentives and tools between Thailand and Cambodia .......................................................................... 117

Figure 56: Main indicators about infrastructure comparison between Thailand and Cambodia .......................................................... 120

* This chart comprises all the images, graphs, tables and illustrations.

Introduction

This report aims to analyse the role of Special Economic Zones(SEZs), or Industrial Estates(IEs), and regional integration.

Given that regional integration has often been used as a development mechanism, and there is a critical role for

economic growth, drivers of economic growth will also be considered. This includes examining FDI and industrial policy.

These also have strong linkages with zones, both SEZs and IEs, as they often form vehicles for investment due to their

more liberal laws. Critical to these are considering the various factors involved: resources, governance and value chains.

This introduction will unpack these concepts named here before exploring the theory, and history behind them in the

General Perspective. The main component of this section is to present regional integration, its history in the region and

developments, the status quo of regional integration and the kind of regional integration. The report will then draw out

the implications of regional integration for the report before presenting the zones and the rationale behind the case

studies.

Regional Integration

This report considers regional integration in a number of ways. Beyond establishing in the general perspective that it is

very limited, it considers the role of key resources, particularly infrastructure. This is primarily due to its focus on

infrastructure as a means of encouraging growth and integration. The Economic Corridors were built along main roads

but designed to connect to SEZs and resources such as ports and major hubs. This priority on SEZs underlines their

importance towards harnessing the potential benefits from regional integration such as goods flows and connectivity. It

has been accompanied by ‘soft’ infrastructure, mainly the Cross Border Transport Agreement (CBTA). As will be shown,

the establishment of infrastructure has limited benefits without the accompaniment of agreements to improve the flow

of goods and transport at the least. The CBTA has been limited in a number of ways, including with ratification and also

at a local level. As such this report’s consideration of Economic Corridors and CBTA and SEZS and their linkages to

regional integration must consider both national and regional level policy and the firm or zone level. This is achieved

with documentation on policy statements indicating the level of ratification and similarly at the local level. Both are

complemented with field interviews talking to different actors. Senior government officials were important to

understand their constraints, capacities and policies. Interviews with firms and zone management provided an

understanding of their connectivity locally, in terms of resources, and regionally. Meetings also indicated their

perception of the potential role of regional integration, constraints and opportunities.

Drivers of Growth

SEZs/IEs

Zones have a links to growth, regional integration and investment. As was detailed, zones have played an important part

in plans for regional integration and function as poles with economic corridors. The zones act as a vehicle for investment

and have been successful in various scenarios as growth models but the factors encouraging the growth need to be

considered. Their design can often lead to clustering and innovation allowing countries to upgrade and move up the

value chain. Consideration must also be given to the types and effects of investment that flow from the zones.

FDI

Foreign Direct Investment (FDI) has typically had a strong role in encouraging growth, extending networks and

production chains. This was the case with Thailand and was critical to the development of industrial zones along the

Eastern Seaboard and in the sectors of automobiles and electronics. It is also key to increasing capital – an issue of key

concern to Cambodia. FDI’s links to technology are also important for allowing a country to develop, but it must be

harnessed.

Industrial policy

Industrial policy is also seen as a driver of growth and also indicative of a country’s strategy and policy capacity. From

this implications towards a country’s regional integration policy, capacity and governance in general, and indicate an

economy’s level of technology and place on the value chain.

Constraints

The environment within which these issues are being considered has a particular track of development, specifically

characteristic of the region. This includes the market-oriented approach and a trend towards economic regionalism due

to the prioritisation of economic growth as a strategy by ASEAN and ADB. It has implications for the extent of policies

supportive of integration, particularly soft infrastructure. Furthermore, there are issues of economic disparities, political

economies, and governance and state capacity which limit potential for integration. Ultimately, the result is that there is

limited regional integration and both Thailand and Cambodia face significant challenges for growth and in which these

key drivers need development.

Report Organisation

The report will cover four parts:

Part 1: This chapter, The General Perspective, considers the background and regional context. The paper will cover key

points of development for ASEAN and GMS and the kind of regional integration that has been developing. It will also

consider the four pillars, a tool designed to analyse critical aspects of the report: Strategy, Resources, Governance and

Incentives. The paper will present the rationale for examining Thailand and Cambodia as case studies. Generally,

Thailand is the most developed country in the region, while Cambodia is the least developed one; the former is the one

of the founder members of ASEAN, while the later is the last member of ASEAN; Thailand has experienced almost the

slowest economic growth rate, while Cambodia’s was the fastest. As such the countries provide for interesting

comparative cases. This section will also outline the grounds for focusing on industrial policies and zones to illustrate

and analyse regional integration. Finally, this part will present the research methodology.

Part 2 & 3: These chapters present the case study narratives and key findings. These sections focus on the field research,

examining in particular the industrial policies and estates in Thailand and Cambodia. Field research included interviews

with local governments, NGOs, enterprises, communities and other data. The cases will detail the development of

Thailand’s industrial policy and estates, the policy incentives and governances, investment climate and investors’

involvements, and development resources. This section will also analyse the key findings according to the case study of

the AMATA Zone. Regarding Cambodia, the study will focus on the development and performance of SEZs (industrial

estates). The paper will present three SEZs in Cambodia to analyse the main constraints and opportunities for

Cambodia’s industrial policies and estates. In addition, the chapters will cover the analysis of the countries’ main

investors, including Chinese and Japanese investors.

Part 4: This chapter forms the comparative part of the report. It analyses key aspects in Thailand and Cambodia

including institutional establishment, governance capacity and policy incentives among other factors. By using Thailand

as a potential model for Cambodia, it will allow for clarity on differences between the two and potential constraints for

Cambodia. This section will analyse the nature of different investors and their influence on local developments, including

the impact of Chinese and Japanese investors’ different strategies, performances and goals. Finally, this section will

assess the implications of these issues for regional integration to identify what Thailand and Cambodia should do to

achieve their development targets and improve regional integration.

Part 5: This concluding section, will propose relevant policy recommendations according to what has been established in

the analysis presented in the previous sections. This will include issues such as what Cambodia could learn from Thailand

and what Cambodia should do according to its endowments and place on the value chain, before a final conclusion.

Methodology

This report is a comparative - analytical research paper that explores SEZs and IEs and Industrial Policy as a focus in

regional and development literature; it draws from the research relevant models and typologies, and then identifies

both analytical and practical concerns regards to the industrial estates and industrial policies concerned and their roles

in accelerating regional integration and economic development.

The research process took place over an eight month period. In the first four months, the existing literature was

reviewed on the following topics: Regional Integration, Local Development, Special Economic Zones, ASEAN, Greater

Mekong Sub region, Investors’ Strategies, Background Summaries on each country along historical, political and social

lines, Economic Performance of these Countries and relevant fiscal data and trends on growth, trade and FDI etc.

Furthermore, to make the analysis clearer, we used big players’ strategies (involvement of Chinese and Japanese

investors), physical resources (infrastructure, natural resources), policy incentives and governance as four important

pillars to help us in identifying the key issues.

The primary sources of this report were cultivated through field research that took place over a 11 day visit to the two

countries including extended visits in the Four Industrial Estates (AMATA in Bangkok, SEZs in Phnom Penh and Sihanouk

Ville in Cambodia). During that process the group interviewed: Firms, Central and Local Government officials, Public

officers involved in SEZ organization, Developers of Industrial Estates, Education centre, Private actors, Expertises,

Consultant, NGOs, the World Bank and the ADB. There were additional interviews took place with experts in Paris during

the workshop of GMS, and in the last four months the report preparation phase was developed. The interviews were all

semi-structured interviews with primary sources of information, acknowledging the social interaction between

researchers and interviewees, including language barriers. Official data was collected as and when possible in a

systematic and non-intrusive way.

The main obstacles of the research were a) language barriers that affected the capacity to gather information; in turn

limiting our ability to develop strong relationship with interviewees and also restricting access to low management

workers and locals, both of which are key sources to understanding the conditions of labourers in the industrial estates

and b) insufficient time on the ground. Ideally, we would have been able to stay for a longer period of time in the region

as new actors are referenced in the process that we were unable to interview. There was a challenge since one of our

team members could not participate in the field trip because of diplomatic issues. However, the rest of team overcame

the constraint and improved cooperation and understandings by sharing more responsibilities.

Chapter I: General perspective

1.1 Regional Integration and South East Asia

Regional integration, and in particular regional trading groups, has been used as a development tactic more frequently

in recent years

. A World Bank report posits that the main goal of regional agreements is “reducing barriers to trade

between member countries”

and include the basic step of removing tariffs to non-tariff barriers and liberalization for

investment and potential economic union and shared institutions. The World Bank report charts a number of changes to

what it broadly terms Regional Integration Agreements including: a move from closed regionalism to a more open

model; a recognition that integration is more than reducing tariffs (in the GMS this refers to the ‘soft’ aspects such as

CBTA); and the development of North-South trade blocks.

One of the prime examples is the EU which had its origin in the European Coal and Steel Community before developing

into the European Economic Community. Its success is cited as causing other regionalism initiatives. The rationale

behind such initiatives are: conforming to better polices and signaling such to investors; access to markets; achieving

economies of scale for firms’ better access to labour and technology; safeguarding sovereignty by improving economic

standing; improve stability and prosperity in the region to avoid spillovers of negative issues

. Some of these can be

seen in ASEAN and the GMS, for example ASEAN was seen as a way to reduce tension between Indonesia and

Malaysia

. ASEAN officials have also been quoted as commenting on the creation of the organization as a vehicle for

attracting FDI

Theories that take into account the political, economic and institutional factors have attempted to explain how and why

regional integration occurs and what qualities define deep regional integration. The distinction has been made between

positive and negative integration whereby the latter involves the removal of discriminatory national economic policies

while positive refers to common institutions

. A stages approach is expected to progress as follows: free trade area;

customs union, economic union, total economic integration

. Finally, a distinction can be made between deeper

integration, beyond the removal of border barriers, and shallow integration, which is trade liberalization

. However,

ASEAN is generally seen as a relatively shallow form of regional cooperation where briefings and meetings are regularly

held and consensus occurs on a policy of mutual interest.

ASEAN

The Association of Southeast Asian Nations, or ASEAN, was established on 8 August 1967 in Bangkok, Thailand, with the

signing of the ASEAN Declaration (Bangkok Declaration) by Indonesia, Malaysia, Philippines, Singapore and Thailand.

Brunei Darussalam then joined on 7 January 1984, Viet Nam on 28 July 1995, Lao PDR and Myanmar on 23 July 1997,

and Cambodia on 30 April 1999, making up what is today the ten Member States of ASEAN.

Maurice Schiff and Winters, L. Alan, Regional integration and development, World Bank, 2003, p.ii

Schiff, p.1

Schiff, p.9

Schiff, p.192

Schiff, p. 7

Tan, Lay Hong, Will Asean Economic Integration Progress beyond a Free Trade Area?, The International and Comparative Law Quarterly, Vol. 53, No. 4

(Oct., 2004), pp. 935-967, Cambridge University Press on behalf of the British Institute of International and Comparative Law, p.943

Tan, p.944

Tan, p. 944

ASEAN’s main goals were intraregional economic development, social progress and cultural development and regional

peace and stability, as the declaration came to reflect

. It also aimed to accelerate economic growth and expand trade,

particularly in the field of agriculture and industries.

The region’s enlargement occurred in three phases beginning in 1995 and today, the organization’s members have a

total population of approximately 600 million people and in 2010, its combined nominal GDP was US$1.8 trillion. The

inclusion of Cambodia, Laos and Viet Nam was seen as a change in the description of ASEAN members. These states

were transition economies and had significantly lower GDPs. It had posed concern for the economic development and

integration of the region although the addition of different industries and a diversified regional economy are now seen

as an advantage. The CLMV states were also given time to meet the region’s programmes, including reducing tariffs and

liberalizing services and investment.

A number of events and issues since ASEAN’s creation and the declaration have helped characterize the regional

organisation’s policies. These policies involve: non-interference, security, and integration. Developments to the policy on

non-interference came in 1998 and resulted in a principle of “enhanced interaction”

. Steps were taken for data

collection to better understand financial and economic situations nationally with a view to addressing them as regional

issues and an informal foreign ministers retreat was organized as a mechanism to frankly discuss issues of regional

importance

. The ASEAN Security Community (ASC) was created in October 2003 in recognition of transnational security

problems

Policy on the integration front has been focused on a number of developments including: demographics, financial crises,

and institutions. East Asia was concerned that they needed organizations and cooperation regionally to protect them

and prevent a reoccurrence of the Asian Financial Crisis

. Although the attempt by Japan to create an Asian Monetary

Fund in 1998 failed, the idea behind it was reflected in the strengthening of ASEAN and APT and the Chiang Mai

initiative

. There have also been more than 40 bilateral trade agreements since the crisis

. Following the approach of

the EU, it would seem institutions are an important step towards closer integration. However, the non-interference

policy and strong sovereignty has inhibited institution building. However, various crises within the region have required

the establishment of institutions, although typically on an “ad-hoc” basis. ASEAN has taken the approach, sometimes

considered “soft institutionalism”, of setting up regular forums and informal meetings in order to address issues of

concern.

In terms of steps towards regional development, and following from that increased integration, ASEAN began with three

economic projects, including, the ASEAN Industrial Projects (AIP) and the ASEAN Industrial Complementation (AIC)

project. The first was plagued by direction and project agreement problems, and financing issues. The second was

focused on the micro-economy and enhancing intraindustrial linkages and trade. Complex and lengthy processes

affected the success of this project. Trade barriers have also been an inhibiting factor. However, Preferential Trade

Arrangements was partly successful, especially for tariff preferences, although it progressed slowly on a product by

product basis

, and involved an extensive exclusion list

. Trade as a sign of integration has not evidenced increased

integration among ASEAN members as it is dominated by a few countries, mainly Singapore, and trade in minerals and

Antonia Hussey, Regional Development and Cooperation through Asean, Geographical Review, Vol. 81, No. 1 (Jan., 1991), pp. 87-98, American

Geographical Society, p. 1

Bertrand Fort and Douglas Webber. “ Regional Integration in East Asia and Europe: Convergence or divergence?”, Routledge. 2006, p.151

Fort, p.151

Fort, p. 166

Fort, p69.

Higgott, p31.

Higgott, p29.

Hussey, p. 90

Tan, p.938

fuels. Increased trade is inhibited by the lack of complementarity between members, both in types of goods and market

characteristics, and prohibitive nontariff barriers

Before evaluating ASEAN’s effectiveness towards regional integration, it should be noted that it was originally intended

for economic development and was fiercely protective of sovereignty, so progress towards supranational institutions

remains limited. This history of ASEAN, the development of its membership and ad-hoc adjustments to policy,

characterize the critical regional organization and provided for an understanding of why and how regional integration, in

general, is progressing the manner and style it is.

Greater Mekong Sub-region (GMS)

The Greater Mekong Sub-Region (GMS), which consist of Cambodia, the People's Republic of China (PRC, specifically

Yunnan Province and Guangxi Zhuangzu Autonomous Region), Lao People's Democratic Republic (Lao), Myanmar,

Thailand, and Viet Nam, is geographically located among the fast-growing economies of both South and East Asia. It has

a combined population of nearly 320 million—more than that of the United States of America—and a contiguous land

area of about 2.5 million square kilometers—roughly the size of Western Europe. The GMS is rich in human and natural

resources, and its people are bound by a shared culture and history

In 1992, the GMS Economic Cooperation Program (GMS Program) was launched with the support of Asian Development

Bank (ADB), setting out “to promote sustainable economic development through closer economic linkages between its

member states.

” As enunciated by the GMS leaders, the vision of the GMS Program is a sub-region that is prosperous,

integrated, and harmonious. This vision is embodied in the 3Cs strategy of enhanced Connectivity, increased

Competitiveness, and a greater sense of Community. The GMS Program seeks to enhance their economic relations,

building on their shared histories and cultures, covering nine priority sectors: agriculture, energy, environment, human

resource development, investment, telecommunications, tourism, transport infrastructure, and transport and trade

facilitation; moreover, GMS program planned to help the participating countries achieve the Millennium Development

Goals (MDGs) through “increasing connectivity, improving competitiveness, and engendering a greater sense of

community (the three Cs, ADB 1996).

In 2002, the GMS countries assembled the various sector approaches with their associated programs and projects into a

comprehensive strategic framework for sub-regional development with a focus on five strategic thrusts (strengthening

infrastructure linkages, facilitating cross-border trade and investment, and enhancing private sector participation,

developing human resources, as well as environmental protection) and 11 flagship programs, including the 3 economic

corridor (EC). Apart from hardware in the form of physical infrastructure, the GMS program has also tried to address

complementary software issues. A key initiative towards this end is the Cross-Border Transport Agreement, a

comprehensive multilateral instrument that supports a range of measures to facilitate trade and investment, which in

turn promotes integration.

“The formulation of the GMS–SF in 2002 took into account the global and regional trends relevant to economic

cooperation at that time, and these trends have continued and accelerated, bringing globalization and regional

integration to a higher level. The Framework Agreement on Comprehensive Economic Cooperation between ASEAN and

the PRC was signed in November 2002, shortly after the 1st GMS summit, and one year later, similar framework

agreements were signed between ASEAN and the Republic of Korea (ROK), and between ASEAN and Japan. These

Tan, p. 936

ADB, “Midterm review of the GMS Strategic Framework (2002-2012)”, 2007, p2

` Bafoil and Ruiwen, 2010,p 80

developments show that the environment and context for GMS development have changed dramatically over the last

several years because of accelerating globalization and regional economic integration (REI)”

In doing so, the program has indeed accelerated, delivering concrete results and contributing to economic growth and

poverty reduction in the sub-region, as well as to the broader realization of a prosperous, integrated, and harmonious

GMS. The pragmatic, action-oriented, and results-focused approach of the Program enabled GMS countries to expedite

the implementation of high-priority sub-regional projects and initiatives. It also mobilized an increasing amount of

financial assistance from development partners and other important stakeholders. During the past 2 decades, Gross

domestic product (GDP) in the sub-region has grown at over 8% per year on average, which was one of the fastest rates

in the world; real per capita incomes have more than tripled during the same period, the poverty incidence in GMS

countries based on national poverty lines has declined substantially, and GMS countries have made major progress in

meeting the other Millennium Development Goals.

By the end of 2010, GMS loans (grants) had financed 55 projects with a total investment of 13.8 billion dollars, of which

5 billion dollars was ADB’s own lending $ 5 billion, GMS governments matching funds of $ 4.3 billion co-financing of $ 4.5

billion; technical assistance 172 projects totaling approximately $ 230 million, of which ADB’s own lending $ 100 million,

GMS governments to provide matching funds of $ 20 million co-financing of $ 110 million.

In light of these successes and looking ahead, GMS countries wish to maintain the overall Direction of the GMS Program.

The GMS Program begins its third decade in 2012. The new ten-year (2012-2022) strategic framework of the GMS

Economic Cooperation endorsed at the Fourth GMS Summit in Nay Tyi Taw on Dec. 20, 2011. The strategic framework

for 10 years of the GMS Program builds on the substantial progress the program has made and the likely future global

and regional trends, as well as on the commitment that member countries have made in their national development

plans to the promotion of regional integration and, to encouraging greater GMS integration as part of a broader process

of greater integration within ASEAN and the Asia region. The new strategic framework proposes eight priority sectors for

cooperation: namely GMS economic corridor development, infrastructure linkages, energy, telecommunications,

tourism, agriculture, environment and human resources development.

ADB, “Midterm review of the GMS Strategic Framework (2002-2012)”, 2007, p11

1.2 Four Pillars

Strategy

One of the pre-field-trip research tools employed by the capstone group was to examine what was driving the various

actors and institutions in the region and how their strategies manifested. In this case, strategies can be considered ‘the

science and art of employing the political, economic, psychological, and military forces of a nation or group of nations to

afford the maximum support to adopted policies’. It also speaks to the potential geo-politics in the region. At a lower

level, it was considered important to also look at the main groups of investors and their interests and impacts on

development in the area. Some of these actors have already been discussed earlier and their strategies will only briefly

be illuminated.

China: China’s involvement in the GMS has occurred through the inclusion of South-Western provinces Yunnan and

Guangxi in the development project. It has also been critically involved in the development of the North-South Corridor,

which stretches from Kunming to Bangkok and from Kunming to Hanoi, and has contributed about US$4billion in

highway construction. The priority of the GMS has shifted to become a national policy issue. Beijing has also promoted

trade and investment in GMS by unilaterally removing tariffs. Meanwhile, plans have also been announced to expand

development projects in the GMS – including into human resources, trade and investment facilitation and

telecommunications. In terms of the country’s FDI policy, decentralised authority has been encouraged, the

development of better regulation and the creation of ‘State Level Economic & Technological Development Zones’ and

border economic cooperation zones. Trade between China and the GMS countries consists of mostly mineral

commodities, forestry items, agricultural goods and resource-based products. However, China’s investment in the GMS

had been increasing steadily. More importantly is the PRC’s Future Plan which involves: improving cooperation between

Guangxi and ASEAN; turning Yunnan into an important bridgehead open to southwest; and, according to local 12

5 year

plans, improving the cooperation between provinces and ASEAN, GMS, and accelerating the construction of the

economic corridors.

Japan: Japan has had a long history with South East Asia and has maintained a presence there for critical periods of

growth when China's involvement had retracted. Japan was the key to the development of networks and chains and

encouraging the flow of trade in the region. The Japanese automobile industry began its overseas operations in 1960,

starting with operations in Malaysia, Taiwan and Thailand. This initial start was due to the region's proximity to Japan

and a lack of local competitors

. However, its presence initially was mainly to serve local markets and maintain a

presence. The electronics industry took a greater interest in South East Asia in the 70s due to the appreciation of the

yen, and moved its labour-intensive processes to the region. These were generally concerned with low-end products. In

Thailand, it meant an important role of the Eastern Seaboard industrial area which is significant today.

Investors: Recent figures from Thailand’s Board of Investment indicate that Japan remained the largest foreign investor

in Thailand, with 101 projects and a combined investment value of Bt38.253 billion. In second place was the United

States, with 10 projects and Bt8.162 billion in investment value. Japan has been a significant investor in Thailand despite

China’s increasing presence. This is clear through statistics provided by BOI, however the more subtle details of their

different impacts on development through investment are the work of the case studies. However, foreign investment

into Cambodia has been much more dominated by China. Various sources say China is the main investor into Cambodia

and has maintained that status for about 14 years with nearly $6bn

. South Korea followed with nearly $3bn and

Malaysia with just over $2bn.

Intarakumnerd, Patarapong and Yveline Lecler. “Sustainability of Thailand’s Competitiveness: The Policy Challenges”, ISEAS Publishing. 2010, p. 210.

Business in Asia: http://www.business-in-asia.com/cambodia/investing_countries.html

Physical connectivity

In 1992, ADB started a set of projects in terms of infrastructure, energy, telecommunication, and so on to improve

physical connectivity within GMS, and these projects and actions have been designed to increase the physical

competitiveness in GMS.

Transport Infrastructures (Economic Corridors)

The transportation infrastructure is one of the most important issues of all GMS-EC promoted sectors due to the impact

of transport on regional development through trade and connectivity and the poor status quo caused by many years’

conflict in the region. Therefore, GMS-EC emphasized transport infrastructure, and transport corridors have played a

significant role.

Transport corridors in GMS are planned to eventually be transformed into Economic Corridors (EC), which are specific

road networks through which the infrastructures projects are complemented by economic activities. EC intersect the

central transport routes (such as rail or road) within a country, and connect remote regions. Such connectivity enhances

economic development of remote and border regions.

The EC approach to ‘development through connectivity’ was adopted by GMS countries during the 8

GMS Ministerial

Meeting in Manila in 1998. The three phases to the realization of the EC are: building infrastructures; instilling the

logistics, and; initiating economic cooperation activities.

Three main EC, with several sub-corridors, connect the GMS different regions

. Those corridors are less congested, and

have enhanced safety. In addition, custom facilitation is better at cross border where ECs road networks pass. For

instance, border areas in Laos, through which EWEC intersects, charge lower transaction fees for trucks transporting

between Thailand and Vietnam

However, to date the transport corridors in GMS have benefited national level movement more compared to cross-

national movement. Sub-regional benefits are likely to take more time to materialize. In addition, addressing the softer

aspects such as harmonization of procedures, standards and regulations is will enhance cross-national benefits from

GMS transportation

Ports and airports

During the ASEAN countries development history, there have been more than a few cities, such as Bangkok, Ho Chi Minh

City, Phnom Penh, Yangon, relying on their big population and close access to ports and harbours, which provide

connectivity to the world. Moreover, the promising cities in Cambodia, Laos and Myanmar including Sihanoukville,

Vientiane, Mandalay and Dawei also have the similar characteristics in terms of a big population and short distance to

ports. Therefore, it is clear that the connectivity provided by these ports or airports is an important factor for attracting

FDI and boosting development. Within the region, according to the statistics, Thailand has the most developed and

comparative ports and airports system, followed by Vietnam, while Myanmar, Cambodia and Laos are a little bit falling

These are the North South Economic Corridor (NSEC), East West Economic Corridor (EWEC), and Southern Economic Corridor (SEC). In addition to connecting the

different GMS countries, the economic corridors connect the GMS with the South and East Asia (for instance, EWEC connects the Indian Ocean with the Pacific Ocean

and intersects with the NSEC).

ISONO, Possible Alternative Routes for Further Connectivity in the Mekongs Region , 402

ADB, Transport and Trade Facilitation in the Greater Mekong Subregion, 55

Ishida Masami, Industrial Estates, Ports and Airports and Connectivity in the Mekong Region, 2011. p. 1

behind in terms of the number of containers and passengers. For example, the deep sea ports such as Laem Chabang

Port in Thailand and Tien Sa Port of Danang in Vietnam have become major international ports.

Grip interconnection

Besides transport infrastructure, GMS countries also have tried to

establish grip interconnection to achieve a fully interconnected

power system in 2025. At present, in terms of infrastructure

construction for grid interconnection, “the only high voltage cross-

border transmission line within the GMS is the line from Lao PDR to

Thailand. Work on the first high voltage transmission line between

Cambodia, Lao PDR, China, Myanmar, and Vietnam and several

other cross-border initiatives are ongoing”

. However, there are still

issues and challenges need to be addressed

to expanded

cooperation, including broadening cooperation from electric power

to energy, addressing social and environmental impacts of

hydropower projects more effectively

and improving policy

framework.

Figure 2: Expected GMS Power Interconnection in 2025

Telecommunication interconnection

GMS countries have developed the GMS telecommunications backbone,

and accomplished the optical fiber interconnection of the

telecommunications systems, particularly in Cambodia, Lao PDR, and

Myanmar. At the same time, the GMS countries also have been

implementing their respective telecommunications sector reform. Initiating

development of the GMS information superhighway network (ISN), and the

fist stage of ISN has been accomplished

. However, besides these

achievements, a number of approaches have to be implemented to realize

the long term goal of subregion cooperation, including improving

telecommunication infrastructure in GMS countries, increasing the

involvement of private sector, enhancing market access and integrated and

strengthening the institutional structure and policy framework.

Yongping Zhai, Energy Sector Integration for Low Carbon Development in Greater Mekong Sub-region: Towards a Model of South-South Cooperation”,

ADB. 2010. p. 4

Proposed by The Regional Power Trade Coordination Committee (RPTCC) met in Sanya, PRC on 16-18 May 2007

ADB, ADB’s midterm review of the strategic framework of the Greater Mekong Sub region, 2007. p 19-20.

Ibid, p. 21-22

Figure 1: Ports and Airports in GMS

Tax Incentives and Tools

Tax incentives and tools are vital components of many governments’ investment promotion strategies. Different

investment incentive policies have come into force to speed up industrial development. In principle, the primary

objective of incentives is to influence investment decisions by either directly affecting the potential profit streams of

projects or reducing the risks attached to it. Investment incentives include fiscal measures such as reduced tax rates on

profits, tax holidays, import duty exemptions and accounting rules allowing accelerated depreciation and loss carry

forwards for tax purposes. These incentives play an important role in attracting investment, nurturing domestic

production and encouraging firms to expand supply. They can help diversify the economy and move from the heavy

reliance on customs and commodity taxes often found in developing countries to greater reliance on the formal

economy, including a diversified tax base. More directly, in fast-changing high-tech fields such as Information and

Communication Technologies, they can also encourage investment, build local capabilities and promote technological

transfer

. Therefore, policy-makers have used a range of different tax incentives and tools to attract investment in the

broad economy, as well as specific sectors.

Country

Tax holiday

Corporate income tax

Import Duty and other taxes

Others

Land use

Cambodia

Up to 9 years

Standard: 20%

Tax exemption: import of

equipments, construction

materials and production inputs

Custom duty exemption

on the import of

machinery, equipment

for construction of public

services infrastructure.

Lease(Up to

99 Years)

China

Exemption for 2

years and

reduction for 3

years (local

portion).

Standard: 25%

15% preferential tax rate.

exempt from import duty and

customs-levied import tax; export

overseas exemption;

Financial support ;

The traffic fee incentives:

the traffic regulation fee

will be levied at a 20% to

35% discount

Depend on

the

permission

Laos

Up to 10 years

Standard:20%

Exemption of import duties and

taxes on equipment, spare parts,

vehicles directly used for

production, raw materials

Custom duty for plant/

equipment, raw materials

will be exempted.

Lease

(Up to 50

years)

Up to 8 years

Up to 4 years

Myanmar

Manufacturing:

5; High-tech : 8

Standard: 15%. 50% for

the second 5 years;

Free trade on export; Custom

duty free on import commodities.

Lease(Up to

60 years)

Thai

land

3 years

Standard: 30 %.

50%reduction on machinery; 1

year exemption on raw material

Ownership

or lease

7years

Exemption on machinery; 1 year

exemption on raw material.

8 years;

50% reduction in income

tax rate for an additional

5 years

Exemption on machinery; 5 year

exemption on raw material.

Double deduction on

public utility cost;

Vietnam

Up to 4 years

Standard: 25 %

10% in 15 years: EZ, HTZ;

10%: E&T, Health, etc

Raw materials, machinery and

equipment in preferential sectors

and locations

Lease (Up to

50 years)

Figure 3: Tax incentives and tools in GMS countries, Source: doing business in Asia and interviews in field trip

In many countries, government policy has sought to attract multinational companies with their large resources of ‘hot’

capital with specific subsidies and incentives. Especially for some Asian countries, in the last century, were among the

first to pioneer the use of fiscal and export incentives in reduced taxes or tax waivers to specific groups of investors to

build comparative advantage.

Meeting of Experts on “FDI, Technology and Competitiveness”, March 2007, Philippe BIGGS, UNITED NATIONS CONFERENCE ON TRADE AND

DEVELOPMENT.

In terms of the GMS countries, investment incentive policies differ from country to country (see table X). Especially for

Cambodia, Laos and Vietnam-as transitional economies, these countries require substantial amounts of investment to

transform their economies to meet the economic, social, and other development goals. The effects of incentive policies

on firms’ decisions to invest in SEZs will provide a basis for establishing the economic rationale for FDI incentives and

SEZs. Compared with Cambodia, Thailand, Viet Nam, the Lao PDR, and Myanmar, PRC has relatively lower investment

incentives, and narrower in scope and fewer preferential policies. The tax incentives and land use policies in Cambodia,

Viet Nam, the Lao PDR, and Myanmar, not only are of longer duration, but also cover a broader range; therefore, the

policies will be more attractive in the short run and will have a stronger effect.

Governance

GMS-ECP

GMS-ECP is coordinated at different levels. At the policy level, the GMS Summit guides GMS-ECP. GMS leaders set

GMS priorities in their triennial meetings. Biannual Ministerial Conference provides the overall support and

coordinates the sub-regional cooperation.

At the operational level, sectoral Working Groups (WG) and

Forums at national level are established to undertake the program

implementation including the ‘hardware’ infrastructure and the

accompanying ‘software’ agreements and reforms at sectoral

level

GMS Senior Officials’ Meeting undertakes annual review of the

WG, and if necessary, makes modification & recommendations.

SOM reports to the summit through the Ministerial Meeting.

The GMS-EC Government National Coordinating Committee

monitors and assesses the functioning and implementation of the

GMS-ECP. The Committee reports to Senior Officials’ Meeting

(which is represented by the various sectors), the Ministerial

Meeting annually, and the GMS Summit (represented by Prime

Ministers triennially).

ADB coordinates the GMS-ECP, and provides administrative, logistical, financial and technical support to member

countries.

CBTA

Since the early years of GMS road infrastructure discussions, it was obvious to GMS member countries that physical

road infrastructure is a necessary but insufficient step for significant flow of goods through borders

Member countries during the second Subregional Transport Forum meeting in 1995 requested introduction of ‘soft’

infrastructure in the form of reforms to remove barriers to free movement of goods and people. The insufficiency of

cross border movement was a result of bottlenecks at the border areas of GMS countries including; inspection at the

border of the country being exited and another at the country entered; different office hours at the borders, and

UNESCAP, ECONOMIC COOPERATION AND REGIONAL INTEGRATIONIN THE GREATER MEKONG SUBREGION,14

Efficient cross border movement of goods in GMS is more than alternative to conduct trade; GMS countries are building their development plans

around the premise of development of trade through infrastructure development. Thus, economic performance and competitiveness becomes a function of

successful CBTA implementation. Successful CBTA is also important to enhance social ties and mutual respect at border areas, which is a factor towards stability

in GMS. Since CBTA is a factor in connectivity, competitiveness, and community, successful CBTA implementation is one major step towards the realization of

the GMS 3C’s objective.

Figure 4: Governance model

thus, longer waiting time; trucks having to unload their goods at the border, where domestic trucks picks up the load

into their country, etc.

CBTA covers the important non-physical facilitation in cross-border road transport. This includes; allowing through

permits the movement on specific routes of vehicles, goods and license recognized drivers; using single-stop and

single-window inspection to reduce transaction time by providing advance and clear information on clearance;

providing customs transit, and guarantee system to avoid costly transhipment, and; enhancing CBTA effects by

increasing CBTA checkpoints

. CBTA is one of the five thrusts in the GMS strategic framework to achieve regional

development.

Three GMS countries, namely Laos, Thailand, and Vietnam signed trade facilitation agreements in 1999 after studies

have been undertaken to identify barriers to free movement of goods and people. Cambodia, China, and Myanmar

followed in 2001, 2002, and 2003 respectively.

The institutional setup in support of the monitoring and implementation of CBTA at the national level include

National Transport Facilitation Committees. Officials/front line workers of relevant ministries (including customs,

transport, health, immigration, etc) operate at the borders. At a regional level, the GMS CBTA Joint Committee

oversees the CBTA progress. ADB facilitates CBTA meetings during implementation, helps update CBTA legal

instruments, assist CBTA financial mobilization, and provides institutional capacity building for CBTA management

To date CBTA main agreements, containing the main principles, have been ratified by the six GMS member

countries. However, only four countries ratified the twenty annexes and protocols, which contain the technical

details of time-and site-related issues (ADB 2011).

In 2011 six borders were already implementing CBTA; single stop inspection, and customs transit pilot were

introduced on Lao Bao (Vietnam) – Dansavanh (Laos) cross-border in 2005 and 2009 respectively; single window

inspection, and customs transit pilot were introduced on the Mukdahan (Thailand) - Savannakhet (Laos) cross-border

in 2006 and 2009 respectively, and; single window inspection was started on; Hekou (China) – Lao Cai (Vietnam)

cross-border in 2007. The full implementation of CBTA is scheduled to take place by 2013.

In addition, customs transit, road permits, and temporary admissions system pilot operations are progressing on the

EWEC in accordance with CBTA road map. Goods, trucks, and drivers can go through Vietnam, Laos and Thailand on

the EWEC. Goods transit without having to reload thanks to operators guaranteeing transit goods/containers

CBTA has challenges despite its progress according to plan. ADB acknowledges the emergence of problems that

constrain the current implementation of CBTA

. Ratification of annexes by all countries has not yet taken place. The

second challenge is the full implementation of the CBTA. CBTA is still not incorporated in the national laws of GMS

countries. In addition, there is also lack of sense of ownership of CBTA at national level. At the local level, the

capacity of the local border authorities is weak, and the role of the private sector in complementing CBTA progress is

missing.

ADB, Greater Mekong Subregion Cross-Border Transport Facilitation Agreement , 2

ADB, Greater Mekong Subregion Cross-Border Transport Facilitation Agreement, 4

ADB, Implementation of GMS Cross-Border Transport Agreement (CBTA), 7

ADB, Greater Mekong Subregion Cross-Border Transport Facilitation Agreement, vi

1.3 Regional Integration Analysis

There are a number of critical characteristics about the kind of regional integration which has been developed in the

GMS and broader region, including economic growth and markets. Asia's growth, esepcially East Asia's, did not occur

in national isolation and was at least partly achieved based on the region's advantages. Lessons were learned as

economies developed, particularly Japan which largely led the way. Japan was critical to establish networks

throughout the region – as we will see this also included Thailand. As the economies progressed, this trade and

interdependence multiplied. It is from this background that it is clear that the region's economies are now well

connected through their markets, trade and financial flows. These connections, in and of themselves, speak more to

interdependence rather than any form of regional integration. However, with this interdependence, a need for

cooperation has arisen. These issues have already had cause to bring leaders together, including after the Asian

Financial Crisis. The impacts of this on ASEAN were already raised – the crisis prompted increased cooperation in

ASEAN, forcing the organisation, and its members, to evolve to deal with the situation. The increasing interest in the

region and potential moves towards regionalism, come as it has gained prominence in the international system due

to its growth. The approach in Asia so far has been described as 'pragmatic and cautious'. Improving markets has

been the focus while institutions have such have had less attention. However, in order to deal with markets and

economies, increased intergovernmental dialogue, often in the form of forums has been occurring. Steps such as

this have prompted discussion calling the increasing integration towards regional economic cooperation and a form

of 'open, outward-oriented regionalism'

Broadly, regionalism can be described as the “structures, processes and arrangements that are working towards

greater coherence within a specific international region in terms of economic, political, security, socio-cultural and

other kinds of linkages.”

Dent goes on to describe the processes that lead to regionalism: micro-level processes,

and public policy indicatives. The first arises from 'regional concentrations of inter-connecting private or civil sector

activities' – called regionalisation. The second includes free trade agreements and other state-led economic

cooperation and integration resulting from intergovernmental dialogue.

To examine for the approaches of ASEAN and GMS, it is apparent the different ways of approaching the issue. ADB is

seen as a “relatively flexible, activity-based program”

while ASEAN typically has much more of a “top-down” focus

with its emphasis on agreements and the common adoption of rules such as the reduction of tariffs. The philosophy

behind economic corridors was that speeding up the process of regional economic cooperation could occur by

working at the local level of countries and taking a “bottom-up” market-oriented approach

. At stake with this

contrast is whether the two approaches collide rather than complement. ASEAN's policy of respecting sovereignty

makes achieving common policy agreements difficult.

Essentially, “regionalism is thus more of a policy-driven, top-down process while regionalisation is more of a societal-

driven, bottom-up process.”

Despite the steps towards integration, more are needed in order to manage the

region's growth including more coordinated policies.

ADB, Emerging Asian Regionalism, p8

Dent, Christopher. East Asian Regionalism, Routledge. 2008, p.5

Bafoil and Ruiwin, 2010, p.106

Bafoil and Ruiwin, 2010, p.80

Dent, p.5

Implications for the report

ADB has said regionalism should be pursued as a way of achieving goals which cannot be done on national or global

level including: providing new regional public goods; managing spillovers among economies; exercising Asia's

influence in global economic forums; liberalising trade and investment; adding value to national policy making.

However, despite potential gains from regional integration, there are also concerns, particularly for poorer and less

developed countries such as Cambodia. More developed countries such as Thailand, are typically expected to benefit

from increased integration as they are better placed to take advantage of trade flows. But this economy too may

face firm movement to utilise other comparative advantages in the region – such as lower labour costs. This report

will tease out what the implications of regional integration are for the case studies.

Towards better understanding the regional integration that has occurred, it can best be identified as moving towards

economic regionalism, particularly with ASEAN's focus on economic growth and economic-focused agreements.

ADB's GMS programme, from a different approach, is also focused on enhancing economic growth. Additionally,

regional integration and its various forms are often used to enhance development. With this in mind the report will

examine the various mechanisms for growth at work in the region: particularly Special Economic Zones or Industrial

Estates and FDI.

Special Economic Zones, as they are called in Cambodia, and Industrial Estates, as they are called in Thailand, have

been associated with growth for many years in Asia. The next part will go into more detail on the specifics of the

zones, but suffice it to say that they are a dedicated area which has more liberal laws than the country it is located

in. The zones relations to regional integration are such that ADB has specifically encouraged the use of zones to

enhance growth and also oriented infrastructure around the zones and vice-versa. “SEZs are seen by the ADB as a

useful tool to attract investments, create jobs, and boost industry competitiveness, which, in the end, should result

in economic growth.”

It is described as one of the major components of ADB's plan and the economic corridors,

locating the SEZS at nodes on the network of infrastructure.

Zones also provide a vehicle for investment. FDI has been key reason for Thailand's growth achievements. The zones

are aimed at providing an ideal investment climate such that FDI can flow in bringing its manifold advantages,

including capital. For capital-scarce Cambodia this is critical. Thailand has seen flow-ons to growth and also

technology. But FDI, as this report will show in Thailand's case, can be tricky to harness for the maximum benefits of

technology and knowledge management gains, especially for local firms and labour. However, this report views FDI

has a necessary factor for growth, particularly as stated in the case of Cambodia. The specifics of FDI and its history

and implications in the case studies will be developed further, but it is discussed here to illustrate its importance in

enhancing growth to aid regional integration.

ADB,

1.4 SEZs as a vehicle for growth and investment

As we mentioned above, to achieve regional integration, ASEAN and GMS initiatives have made significant progress

and brought benefits and influences to GMS countries, including economic growth, poverty reduction,

industrialization, diversification in economic sectors, enlarging production base, improvements in infrastructure,

trade and investment facilitation, transport facilitation, energy and so on. Among all the factors relevant to Thailand

and Cambodia’s performance in regional integration, to make the analysis more specific, we would like to focus on

Industrial Policy and the Industrial Estate/Special Economic Zone (SEZ) Policy in both countries. Because we believe

that these issues are not only crucial for individual country, but also important for regional integration. They are

crucial for us to understand the two countries performance in regional integration and economic development, and

identify the main challenges and opportunities for future regional integration and economic developments.

Industrial Policy

Industry Policy is basically a set of instructions, laws and regulations which are formulated on the basis of the

requirements and priorities of an economy by the ruling power in the government. This policy decides the course of

action on different sectors of the industry of the economy.

Usually, a country develops its industrial policy according to its development strategies and its endowments. It

merits examination as it is a key strategy for modernisation and technical innovation that improves a country’s

economic status but additionally has implications for sectors, and institutions. As globalization and regional

cooperation became the main stream of contemporary world, transport costs decreased between neighbouring or

even distant countries. Thus, greater connectivity through regional integration or globalization to a neighbouring

country or even a distant country must also be considered when a country develops its sectors and specialisations.

Particularly for Thailand and Cambodia, their industrial policies represented the nature of these two countries

individual positions within the context of regional integration and their different goals, which are upgrading for

Thailand and diversification for Cambodia.

More importantly, the outcomes of these industrial policies proposed by the governments also have influences on

the regional integration and globalization. Although industrial policies are more national level issues, it is

unavoidable that these targets set by industrial policies will definitely affect the neighboring countries by increasing

competition or cooperation, so that they will reshape the relations and integration within the region. Meanwhile,

the neighboring regions or countries may also have to find new strategies or actions to readapt such changes. For

example, should Cambodia’s main comparative advantage be low labour costs, it will not be in competition with

Thailand (which has higher labour costs and is focused on higher value-added components). As such, an investor can

place different parts of production in each country – key to this will be connectivity between the countries and it will

be in both countries’ interest to cooperate for improved regional integration. The inverse would be that should both

be aiming for higher value-added components, there will be increased competition. Hence, industry policies,

whether targeting industry upgrading or diversifying, not only influenced by the status quo of regional integration,

but also can reshape the situation.

Industrial Estates and SEZs

Besides the industrial policies, industrial Estates and SEZs are related to industrial policies, and they are also playing

an important role in regional integration.

The United Nations definition of Industrial Estates (IEs) points to four characteristics: 1) A large site developed to a

plan 2) Served by infrastructure and services 3) Sale and lease of factory buildings for manufacturing purposes 4)

Controlled development for the benefit of occupants and wider community

. The World Bank defines them as:

“Industrial estates are specific areas zoned for industrial activity in which infrastructure such as roads, power, and

other utility services is provided to facilitate the growth of industries and to minimize impacts on the

environment.”

While SEZ is a generic term that covers recent variants of the traditional commercial zones. The

basic concept of a special economic zone includes several specific characteristics: (a) it is a geographically delimited

area, usually physically secured; (b) it has a single management or administration; (c) it offers benefits based on

physical location within the zone; and (d) it has a separate customs area (duty-free benefits) and streamlined

procedures (World Bank 2009). In addition, an SEZ normally operates under more liberal economic laws than those

typically prevailing in the country

SEZs are often treated as an innovative topic in development economics, city-wide free zones with goals and

methods not too different from those employed in modern zones were in place in Gibraltar and Singapore as early as

1704 and 1819, respectively. The rapid proliferation and economic impacts of special economic zones (SEZs) have

been documented in numerous studies. By some estimates, there are approximately 3,000 zones in 135 countries

today, accounting for over 68 million direct jobs and over $500 billion of direct trade-related value added within

zones

Industrial Estate/SEZs policy is not just about the industrial estate or SEZs, and it has to connect with other relevant

factors and policies. The overall performance of industrial estate doesn’t only depend on the location or

management efficiency, it also dramatically relies on relevant policy incentives, governance capacity and hardware

conditions. As policy incentives, land, trade, investment, immigration, labor, tax and other policies are crucial in

attracting investors and fostering the development of industrial estate. Furthermore, whether the government has

enough capacity to efficiently provide public service, or whether they can implement these policy incentives on the

ground critically influence the performance of an industrial estate. Moreover, whether there are enough hardware

conditions, including infrastructure connectivity, facilities, market access, and labor supply are crucial for the success

of an industrial estate. Moreover, industrial estate usually becomes the concentration of industrialization, which

may realize clustering or economic of scale. Hence, the government would give more privileges or preferential

Natacha Aveline-Dubach. “The Role of Industrial Estates in Thailand’s Industrialization, New Challenges for the Future”,

in Patarapong Inatarakumnerd, Yveline Lecler (eds), Sustainability of Thailand’s Competitiveness: the Policy Challenges,

Singapour, ISEAS, Singapore, 174-208. 2010. p.175

World Bank, Environment Department. 1995. “Industrial Pollution Prevention and Abatement: Industrial Estates.”

World Bank, “Special Economic Zones”, 2008, p9.

Ibid, p.7.

treatment to industrial estate. For example, according to Cambodia’s Law of SEZ, SEZ gets much better public

services in terms of OSS

and custom clearance, and special tax incentives. Last but not least, how the industrial

estates are operated, what the main trade and investment flows are, why investors choose to invest in these

industrial estates also provide the evidences for the extent of regional integration.

In GMS countries, SEZs (IPs) are regard as a useful instrument to attract investments, create jobs, and boost industry

competitiveness, which, in the end, should result in economic growth. China, Thailand, Cambodia, Laos and Vietnam

have integrated SEZs (IPs) development as part of national economic development strategy. Moreover, the creation

of SEZ is one of the major components of the ADB’s Action Plan towards the realization of “economic corridors.”

This report will provide analysis of Industrial estate/SEZs policy and some important industrial policies of Thailand

and Cambodia in terms of physical resource, incentives and governance. The analysis will allow for identifying the

crucial constrains and opportunities for the development of industrial estate and industries in Thailand and

Cambodia. Furthermore, the report investigates to what extent Industrial Policy, including Industrial Estate/SEZs,

could influence Thailand and Cambodia’s performance in regional integration. The team will propose some relevant

policy recommendations to help the two countries to improve its performance in accelerating regional integration

and economic development.

FDI, Investors, and Value Chains

FDIs can play a role in the economic growth of countries. They bring capital, employ workforce, enhance production,

and exports. However, countries too dependent on FDIs can suffer economic problems resulting from FDI decisions,

such as relocating, liquidating, etc.

Regional integration is important vehicle to increase FDI. The creation of one single economic entity with a larger

market and potential can have large direct and indirect effects on the whole local economy. Industrial Estates/SEZs

and regional integration are mainly in the interest of private companies. For the companies of emerging economies

such as Thailand and Vietnam, FDIs located just over the border in poorer countries such as Laos and Cambodia can

benefit from access to a cheap labour force and the available cheap land. It is also common practice for companies

to move a factory across borders in order to benefit from the preferential treatment that poor countries temporarily

receive through international trade agreements, such as in the case of a Cambodian garment company that has free

market access to the United States, Canada, Japan and Australia. Most importantly for China and Japan, as the big

player in the region, we will therefore expect to research their investment involvement in Thailand and Cambodia.

What’s more, regional integration can also encourage the formation of regional value chains and constitutes a

learning platform which can lead to improved competitiveness at the worldwide level (ECLAC, 1994). Multinational

firms’ participation and investment in the region would encourage the creation of regional and sub-regional value

chains. These value chains within the integration process is based on trade and FDI, that is seen as a modality by

which firms vertically and horizontally integrate separate economic activities located in different countries in order

to capture a set of transactional benefits derived from placing these activities under common ownership.

One Stop Service

It is unquestionable that, industrial policy, SEZ/IE, FDIs and value chains, are also important in relation to regional

integration. Thus, the performance of industrial estate/SEZs, reflecting the different dimensions, could be important

criteria in assessing the level of regional integration. Although industrial estate to some extent is only individual and

micro case within a country, our team believes that it can provide better understandings and evidences for the

extent and situation of regional integration, and it is also very helpful in defining main constraints for regional

integration by summarizing common problems of different industrial estate.

1.5 Why Cambodia and Thailand

The research is to understand the status quo of regional integration in GMS, and identify the most important driving

forces for further integration. Hence, it is crucial to make a comparative case analysis from GMS country samples,

and we believe that Thailand and Cambodia would be very suitable and helpful in achieving our research goals due

to their economic performance, location, strategic position and potential improvement.

Significant differences in development level provide better understanding of the issue

Among the other countries within the GMS, Cambodia is one of the LDCs, with small population and limited market

capacity. Its Per Capital GDP is the lowest one within the region, while Thailand’s one is the highest. During 2003 to

2008

, Cambodia’s economic growth got averaging 10.3%, with a record high of 13.3% in 2005. While Thailand was

the country with the highest GDP and human index, and almost the lowest GDP growth rate in the region, which is

regarded as the most developed country and becomes the development model in the region. Thus, such significant

different positions in development level in the two countries can provide us a more comparative and clear

understanding about the individual economic development level’s role in realizing regional integration.

Indicators

Thailand

Cambodia

Income Level (World Bank Classification)

Upper middle income

Low income

GNI per Capita (US$)

$4105 (2010)

$750 (2010)

Population

69.1 million (2010)

14.1 million (2010)

Population (%) below national poverty line

8.1% (2009)

30.1% (2007)

Literacy Rate (% of people ages 15 and up)

94% (2005)

78% (2008)

Unemployment Level (% of total labor force)

1.2% (2009)

7.1% (2004)

Merchandise Trade (as % of GDP)

118.6% (2009)

111.5% (2010)

GDP Growth (3 year outlook)

2008: 2.5%

2009: -2.3%

2010: 7.8%

2008: 6.7%

2009: 0.1%

2010: 6.0%

Tertiary School Enrolment

46% (2008)

8% (2008)

Informal Payments to Public Officials (% of firms)*i

No data available

61.2% (2007)

Figure 5: Comparison of Socio-Economic Indicators: Thailand and Cambodia

Source: World Bank open data

Except 2009 and 2010, which were significantly influenced by international financial crisis

Figure 6: GDP and GDP per capital in GMS

GDP i n t he GMS

100000

200000

300000

400000

500000

600000

700000

2005 2006 2007 2008 2009 2010

US$ Mi l l i on

Cambodi a Lao PDR Thai l and Vi et Nam Chi na

GDP per Capi t al

2000

4000

6000

8000

10000

2005 2006 2007 2008 2009 2010

Cambodi a Lao PDR Thai l and Vi et Nam Chi na

Source: ADB and China yearbook

Figure 7: GDP growth rate in GMS

Source: World Bank open data

Similarly geographical location and physical connectivity with neighbouring countries help us in identifying the

common and collective problems

Geographically, Thailand and Cambodia are both located at the downstream areas of Mekong River, and the middle

of south region in GMS. They are both connected with the other GMS countries by South Economic Corridor oriented

by ADB since 1992. From east to west, Cambodia is well linked with Vietnam, Thailand, and Myanmar, and same is

Thailand. Meanwhile, both countries have privileges according to their locations since they are the linking points

between neighboring countries, Cambodia is the link point between Thailand and Vietnam, while Thailand is the link

point of Cambodia and Myanmar. Both of them have sea ports, although Cambodia’s port in Sihanouk Ville is quite

smaller than Thailand’s ones, it brings potential benefits and privileges for Cambodia in terms of future

development. This similarity in geographical location and physical connectivity not only provide us better

information in identifying common and collective problems in the region, but also reduce the influences of

geographical location on their performances in regional integration.

Memberships of ASEAN and GMS and active involvements in regional cooperation make them more important in

finding out the main constraints for further regional integration

Thailand and Cambodia are the members of both ASEAN and GMS. Particularly, Thailand is one of the founding

members of ASEAN which joined in ASEAN in 1967, while Cambodia became the last member of ASEAN in 1999.

Now, the two countries’ regional cooperation activities include a new regional grouping referred to as “ASEAN Plus

Three,” which brings in China, Japan and South Korea to the regional grouping. Furthermore, both countries are

actively involved in regional cooperation, including joint development initiatives under the “Mekong Economic

cooperation Strategy” among Cambodia, Laos, Myanmar, Thailand and Viet Nam; the Cambodia, Laos and Thailand

Emerald Triangle; and the Viet Nam, Laos and Cambodia development Triangle, etc. For instance, the Government of

Cambodia sees GMS regional integration program as one of the key pillars of its development agenda. Due to the

assistance from ADB and other donors, Cambodia was involved in a total of nine loan projects with a combined ADB

loan amount of $418 million and it has also participated in 128 RETA projects with ADB funding amounting to $61

million. Thus, both countries’ practices in regional cooperation bring more useful and important information to find

out the main constraints for further integration in GMS.

Thailand as a model and competitor

Thailand experienced significant economic growth and development during the 1980s and 1990s, largely reliving on

foreign direct investment and its low-cost base

. It began industrialising based on an import substitution strategy

until the 1980s when export-led industrialising began. The Board of Investment (BOI) was created and an incentives

scheme began and infrastructure in the form of Industrial Estates were created, initially in the Bangkok and then in

regional areas with the aim of boosting development. Although the Chinese model of SEZs is the most widely

recognised, Thailand’s industrial estates infrastructure actually predates China’s models. Thailand’s developments

resulted in an increase in FDI and firms congregated around the areas established, especially around Bangkok. It was

assumed that the involvement of foreign investors and ensuing technological transfer would lead to long-term

competitiveness for Thailand

. This has generally not proved to be the case. In particular, any innovation was

restricted to the process rather than whole-sale innovation or new products and processes. This then holds

implications for Cambodia and whether the same lesson potentially applies in that country. Is it poised to capture

technology transfers and harness them for the country’s own development? For how long can Cambodia rely on its

low-cost base? After the 1997 Asian economic crisis, Thailand was affected and its policies required a re-

examination. In particular, Thailand can no longer rely on its low-cost comparative advantage. Meanwhile, the

impacts of globalisation and the value chain have become apparent such that Thailand must consider the loss of

labour-intensive industries to competing countries. At the same time, it must look to competitors such as South

Korea, Taiwan, Malaysia and Indonesia by seeking to value-add to products

. This shake-up and the extent of

Thailand’s success have implications for Cambodia as well.

Analyzing Cambodia provides opportunities in identifying its development path according to Thailand’s successful

experiences and its own context in achieving regional integration

With a small but fast growing domestic market of over 14 million people, although Cambodia has emerged as one of

the safest places and most attractive economies in the region, it is obviously that Cambodia still falls far behind of

Thailand. There are dramatic needs for better actions and programs to enhance the economic and social

development in Cambodia. Hence, after looking through the development path of Thailand and summarizing its

successful experiences, it is critical for Cambodia to find out the useful and referential experiences from Thailand and

Sustainability of Thailand’s Competitiveness: The Policy Challenges, p.1

Ibid, p. 4

Ibid, p.5

identify its own development path according to its own context. Besides that, as a LDC, Cambodia may face a very

unique fate in terms of regional integration, concluded on the basis of “Dependency Theory”

, which is that

Cambodia may be impoverished during the process of regional integration, and other richer countries, such as

Thailand and China, will achieve more at the expenses of Cambodia, Laos and Myanmar. For example, the increasing

regional trade and the economic corridors are at the expense of the already poorest countries, such as Cambodia

and Laos, and in favour of the richest ones, China, Thailand and Vietnam. Therefore, by using Cambodia as a case

study, this report will obtain the unique understanding in terms of local development, and identify what really

matters for Cambodia in avoiding becoming a “Victim” in regional integration process, which we believe depends on

Cambodia itself, particularly its capacity building in governance, while not the implementation of“protectionist”

policies and to pursue this kind of “stop-and-go” policy (Openness and CBTA blockages) since they can not resolve

the problem fundamentally.

Dependency theory is a body of social science theories predicated on the notion that resources flow from a "periphery" of poor and underdeveloped

states to a "core" of wealthy states, enriching the latter at the expense of the former. It is a central contention of dependency theory that poor states are

impoverished and rich ones enriched by the way poor states are integrated into the "world system."

Chapter II: Thailand

Bangkok skyline

Introduction

Industrial development is important in economic development. It has a share in economic growth, employment, and

income generated by other sectors through linkages with the industrial sector (UNIDO 2005 in Pansuwan pp25).

Kaldor (1957) suggested that differences in development stages can be explained by the levels of technology

adopted. Gerschenkron (1962) studied technology gaps and showed that laggard economies have great potential to

absorb the accumulated knowledge created by technology frontier economies. Through using the accumulated

technology, lagging economies can reach technological frontiers through a ‘catch-up’ process. Furthermore, the

absorptive capacity is a key for successful catching up (Gomulka, 1971; Cornwall, 1977; Maddison, 1979; and

Abramovitz, 1979)

Technological upgrading can enhance productivity, leading to higher growth (Palit, 2006). Productivity is important

when costs (labour/setup/ land) in neighbour economies become more competitive. FDIs is one way through which

technology is incorporated at the firm level. In relation to value chains, technological capabilities and government

support are key factors for developing domestic firms to establish themselves at the high –end of value chains

Countries are considered technologically capable (or not) depending on their technological development. Developing

countries usually learn through importing technology. Domestic firms increase their productivity through using

indigenous technologies and adapting the imported technologies.

The first stage of technological progress is acquiring the ‘know-how’. For FDI dependent economies, this can take

place through spill-over effects through the interaction of domestic enterprises with FDIs. However, domestic firms

in developing countries have two challenges; to enter the value chains, and to move upward in the chain. This is a

result of the capabilities of the domestic firms in terms of learning and upgrading.

Initially, in least developed countries, economic development requires structural change to enhance productivity by

mobilizing capital and sourcing labour

. This is typically done through the low interest loans, tax incentives and

improving infrastructure and skills.

Later stages of development require upgrading through learning and linkages. This involves improving efficiency,

capacity, innovation and linking upstream and downstream economic activities.

However, each industry has

differences in technology and in skills needs.

Thus, states have often adopted ways of developing industry, whether manufacturing, agriculture, or tourism. The

ways states achieve this is typically called industrial policy

. This can be done through either functional policies such

as macroeconomic policies or sectoral policies.

Kraemer-Mbula. E, Wamae.W (2010) ‘Innovation and the Development Agenda’, OECD, pp 40

Palit, A. (2006) ‘Technology Upgradation through Value Chains: Challenges before BIMSTEC Nations’, CSRID, pp 2

Whitfield, Lindsay and Ole Therkildsen. “What Drives States to Support the Development of Productive Sectors? Strategies ruling elites pursue for

political survival and their policy implications”, DIIS Working Paper 2011:15. 2011, p.7.

Whitfield p.7

Whitfield p.8

The investment climate is also critical to understand in terms of how private investment is attracted. The investment

climate emphasizes relations between business and state to understand why investors are encouraged to establish

and continue business.

A number of models have been theorized to understand development and the institutions and factors underpinning

them, largely in order to replicate developmental success in different countries. The success of Japan and Northeast

Asian countries was explained by the Developmental State theory which speaks to focused intervention by the state.

However, this has since been revised to include an understanding of state-business relations, institutions, and

politics. Two new approaches resulted: The business-state relations approach and the political survival approach

The business-state relations approach is more relevant to examining Bangkok and Cambodia, given the nature of the

countries but also the field work. In this approach collaboration is required – “alliances of political elite, industry

actors and bureaucrats working together to solve problems for growth and investment. They can be general, but are

often industry specific. Such relations require institutionalized access to the state by industry actors – formally or

informally.. These coalitions or networks help to solve collective action and coordination problems, facilitate the

flow of information and increase the predictability /reduce uncertainty for entrepreneurs.”

.. However,

collaboration should not degenerate into collusion or rent-seeking relations with negative effects on economic

performance.

Thailand Economic Development:

Industrial development was crucial in Thailand’s impressive

economic growth. The increase in industrial activity was

coupled with an increase in economic growth and per capita

income. Between 1980 and 2005 the share of manufacturing

industry in GDP increased from 23 per cent to 39 per cent. In

addition, manufacturing industry activity was increasing by 13

per cent annually on average. This was reflected in a significant increase in per capita income from US$ 820 (1983) to

US$ 2,990 in year 2006, making Thailand a middle income country. As of 2011, Thailand is an upper middle country.

Development Phases:

Thailand had three development phases, beginning in the

1950s. Initially it modernised its public administration and expanded its infrastructure, while exploiting natural

resources. The 1970s saw the country continue to industrialise as demands for commodities grew.

Whitfield p. 14

Whitfield p.13

Figure 8: Economic growth in Thailand between 1980-2005,

Source: Apisek Panuwan and Jayant Routray (2010)

Between 1959-1970 industrial development was aided by the Thai-Chinese businessmen who were able to harness

investments from the Chinese diaspora

. These businessmen had close relations with the government and often

incorporated members of the civil service on company boards.

Between 1970-1985, Thailand continued to improve institutions such as BOI and diversify its economy. However,

initially it was not seen to be as attractive for FDI or MNCs compared with Singapore or even Penang, Malaysia

. The

country began to focus on export promotion. However, its industrial policy was still said to be poor and subject to

domination by some business groups

. The idea of industrial estates as a vehicle to attract foreign investment,

similar to those in Malaysia and Indonesia at the time, was promoted and the IEAT was created although

development was slow. Thai-Chinese businessmen continued to dominate in this phase in Thailand however

Japanese firms were becoming bigger players on the global scene.

Between 1986-1996, Thailand’s economy was growing strongly, capitalising on good macroeconomic policy and FDI

regulation changes. During this period, East Asia also experienced its rapid rise to the world stage and the world’s

economy went through a significant phase of globalisation. The reduced competitiveness of Japan’s exports forced

companies, especially automotive and electronics, to look elsewhere to produce. This led to increased investment in

Thailand as an export base.

Thailand achieved growth post 1997 financial crisis. However, new challenges were arising in the form of inability to

move upper in the value-added ladder. This is a consequence of the unpreparedness of institutions to fulfill the

expected roles in upgrading. Both macro-level (exchange and interest, labor market) and micro (firm level

technological and organizational progress) policies were not attended to in the previous stages, thus creating the

challenges Thailand faces today.

Emergence of the Industrial Sector:

During the 1960s and 1970s Thailand adopted Import Substitution (IS) approach to economic development.

Thailand’s development strategy resulted in balance of payment deficits due to high raw material imports for local

production. To fix the deficit, Thailand policy

shifted to promote international companies

producing in Thailand for export purposes only.

During the same period of Thailand’s new policy,

investors in neighbor countries (Japanese,

Koreans, Taiwanese) were already seeking export

bases outside their countries that could allow

them achieve competitiveness in lobour-

intensive production. labor costs were rising in

those countries, and their home currencies

Intarakumnerd, p23

Intarakumnerd, p25

Simon 1996, Tambunlerchai 1993, cited in Intarakumnerd p.27

Figure 9: Structural Change in Thailand Economy. Source: Apisek Panuwan and Jayant

Routray (2010)

appreciated, making it difficult for those economies to compete in intentional trade.

Thailand policy and neighbor countries economic strategies led to significant influx to Thailand of export-only

FDIs. However, despite the initial intention of manufacturing for exports, the domestic manufacturing sector

(and output) in Thailand experienced growth. The manufacturing sector was gaining significant importance in

the Thai economy.

Eventually, local and foreign investors were driving the manufacturing

expansion in Thailand. The industrial expansion led to workers moving

from the agricultural to the industrial sector, especially in industries

that benefited from international trade, such as clothing, and footware.

Percentage Share of All Activities

Sector

Industry

37.2

1.1 Food and Sugar

2.8

1.2 Textiles

2.8

1.3 Metal & Non Metalic

4.4

1.4 Electrical Appliances

13.1

1.5 Machinery & Transport

Equipment

3.3

1.6 Chemicals

5.8

1.7 Petroleum products

-0.1

1.8 Construction Materials

0.3

1.9 Others

5.0

Financial Institutions

6.9

Trade

17.4

Construction

10.0

Mining & Quarrying

5.5

Agriculture

0.8

Services

4.1

Investment

0.3

Real Estate

18.6

Others

-0.9

Total

100

Figure 10: Net Flow of FDI in Thailand by

Sector 1970 - 1995

2.1 General framework

2.1.1 History

Industrial Estates in Thailand

In 1972 the Industrial Estate Authority of Thailand (IEAT) was created as an agency with a mandate to develop

industrial estates regionally.

Today, Thailand has 34 IE in Thailand, either owned or managed by IEAT. IEAT also build IE jointly with the private

sector

. In 2004, there were 30 IE, of which 21 were developed jointly with the private sector. The IEs were evenly

spread, with only 7 IE in Greater Bangkok Region, 12 IEs in the central region, and 11 IE in remote regions. The

smallest IE is 80 hectares according to the law.

The IEs are classified into General Industrial Zones and Free Zones, with the Free Zones reserved for export

manufacturing only. Free Zones are part of the IE which is fenced and thus domestic market is segregated. The

majority of IEs have access to airports or seaports. Sixty to seventy percent of the IE is allotted for factories.

IE Location and Resources:

Most IEs are grouped in the following three areas:

Bangkok Area: The first group is those IE in or very near to Bangkok city. This includes IE in Bangkok, Chachoengsao,

and Samut Prakarn. Industrial Estates in this group benefit from proximity to Bangkok Port, both airports, and the

city center. Transport and communications are also convenient. However, congestion is a problem.

Destinations

(Point to Point: Km)

Location of the Industrial Estates

Ayutthaya

Chachoengsao

Chonburi

Rayong

Bangkok (Central)

117

Laem Chabang Sea Port

197

Map Ta Phut Sea Port

270

130

Bangkok Port (Klong Toey)

107

Suvarnabhumi Airport

Don Mueang Airport

120

137

Figure 11: Distance of some key destinations from industrial estates

Source: IEAT 2010, in SUPATN p.63

Ayutthaya: Estates in this region are also close to Bangkok city (65 kilometers). IEs in this group are also close from

facilities: Ayutthaya is 26 km to Don Meuang Airport; 75 km to Suvarnabhumi International Airport, and; 75 km to

Bangkok Port. IEs can use Don Mueang Toll Way from Ayutthaya to Don Meuang Airport to transport their freight.

IEs can also reach Bangkok Port using the same route, connecting at First Stage Expressway that takes them to Klong

Supatn, Industrial Estates, Ports, Airports and City Transport in the Greater Bangkok Area for Promoting Connectivity in the Mekong Region ,57

Toey seaport. Aside from rush hours, when congestion is high, the express route allows transportation at all time of

the day

Eastern Seaboard Area: The Eastern Seaboard is a major industrial Zone. This group is made of IE in Chonburi and

Rayong areas. The IEs benefit from two deep-sea ports (Laem Chabang and Map Ta Phut). In addition, One Stop

Service (OSS) is provided at the seaports. The Suvarnabhumi Airport is less than 50 km from Chonburi and less than

100 km from Rayong

Freight transport from IEs in this area is made smoother through the various highways developed, such as Sukhumvit

Highway, Bypass, Motorway and other connecting rural highways. Main highways have at least four lanes, and

vehicles travelling on those highways are less compared to urban areas. Thus, shipment to and from IE in this group

is very efficient

Figure 12: Transportation and key destinations from Chon Buri and Rayong IEs

Source: SUPATN, p. 66

IEs Specialisation:

Various productions are allowed to take place in a given IE. However, many IEs also specialize:

Electronics & ICT: those industries characterize Ban Wa High-Tech in Ayuttthaya IEs, Sinsakhon Printing City, and

Samut Sakorn IE.

Automotive: Laem Chabang is an automotive IE. Laem Chabang Port has one terminal dedicated for car exports, and

special arrangements are made for the automotive producers. Consequently, automotive companies are significantly

present in Laem Chabang and Eastern Seaboard.

Ibid, p.64

Ibid, p.66

Heavy Industry: heavy industry is concentrated in the Eastern Seaboard as a result of proximity to the port- a

proximity that saves higher shipping costs of heavy products. Besides, the heavy industry achieves cost effectiveness

through bigger shipments offered by Laem Chabang and Map Ta Phut that have deep waters.

Petrochemicals: Map Ta Phut IE hosts agro-industry and petro investments. Originally this estate was developed to

serve the fertilizer and petrochemical industries, and thus accordingly the infrastructures were developed.

Jewelry Business: Gemopolis IE in Bangkok near International Airport specializes in Jewelry production. Gempolois

also serves are trading center and wholsales spot for jewelry products.

Incentives:

Thailand classifies the whole country into three categories. IE in the different zones offer different privileges to FDIs:

Zone 1, made up of Bangkok and 5 nearby provinces offer three-year corporate income tax credit; Zone 2, made up

of 11 central provinces, provided seven-year holiday within IE compared to three-year holiday outside IE, and; Zone

3, the rest of the country, mostly remote regions, and have better package to encourage investors establish their

businesses in those regions

In addition to tax holidays FDIs operating within IE get access to the land, benefit from the readily available

infrastructure (though not all IE provide this), benefit from government other incentives, and are supported by the

estate developer in relation to start up approvals and local issues that could be a barrier due to the local

language/culture

Figure 13: Investment incentives in Thailand

Source: USAID

Free zones have additional incentives relative to general industrial zones. The Free Zone incentive package includes

machinery, import/export and input material tax exemption or reduction. In addition, it is possible to own a land,

remit foreign currency to home country, or bring overseas staff into the Free Zone (ch2 pp56). In addition, customs

Ishida, Industrial Estates, Ports and Airports and Connectivity in the Mekong Region, 7

Ibid, p5

officials check the imported part and the exported parts, and thus, the product is not inspected by the customs at

the boarder/ ports again once the products are sealed

Electricity and Water Supply Authorities at the provincial level provide IE with the services. The charges are the same

all over the country. Wastewater systems usually cover all customers in large IEs, while medium-sized IEs don’t have

similar capacity. Wastewater charges range between $0.20 and $0.80 for each cubic meter, while maintenance is

between $0.05 and $0.80

At Voltage of (KV)

Demand Charge (Baht/kW.)

Energy Charge

(US$/kWh.)

Total

(US$/kWh)

Peak

Partial

Off Peak

69 kV. And Above

224.30

29.91

1.6660

0.05-7.06

22-33 kV

285.05

58.88

1.7034

0.05-8.96

Less than 22 kV.

332.71

68.22

1.7314

0.05-10.45

Figure 14: Electricity fees

Peak: 06.30 PM – 09.30 PM daily

Partial: 08.00 AM – 06.30 PM (excess demand over Peak Recorded on Peak period)

Off Peak: 09.30 PM – 8.00 AM daily

Monthly Service Charge: US$7.13

Source: SUPATN, p.68

Water Volume (m^3)

Areas

Laem Chabang (US$)

Other Areas (US$)

0-10

0.52

0.39

11-20

0.61

0.48

21-30

0.70

0.58

31-50

0.80

0.67

51-1000

0.88

0.76

>3000

0.86

0.73

Figure 15: Water tariffs

Source: SUPATN, p.68

Ibid, p.6

Supatn, Industrial Estates, Ports, Airports and City Transport in the Greater Bangkok Area for Promoting Connectivity in the Mekong Region,67

2.1.2 Geography

Industrial estates in Thailand established under or in coordination with the

Industrial Estate Authority of Thailand (IEAT) generally have access to basic

infrastructure, from road and rail to water and power, and relatively cheap land

and infrastructure. However, private managers of industrial authorities often

have to organise and fund a large section of this infrastructure depending on

their relationship with IEAT.

The majority of industrial estates locate near the ports, airport and/or Bangkok.

In particular, the Eastern Seaboard has been critical to the location of estates,

in terms of infrastructure and incentives. Most of Thailand's car manufacturing

and petrochemical industries are located in the Eastern Seaboard. Here, Laem

Chabang, Thailand’s main container port, is located 185km from Bangkok while

Map Ta Phud, which mainly has bulk and liquid cargo, is also nearby.

The Eastern Seaboard now also connects to the Southern Coastal Corridor

which additionally makes the impacts of linkages to Cambodia and back to Thailand significant. The BOI official said

Thailand was best positioned to take advantage of

economic corridors. However, the official said SEZs

were not likely to happen anytime soon.

The BOI official said the regional strategy and

decentralisation policy aimed to send investment to

poor areas, largely through providing incentives

based on Zones. “However, most of those businesses

in Zone Three are on border with Zone Two,” the

official said

. “But you have to be near the resources

and infrastructure.”

Authors’ interview

Figure 16: Locations of zones

Figure 17: GMS Economic Corridors

2.1.3 Resources

Cheap labour had been one of the key factors in Thailand’s development and its attractiveness for investment.

However, this is no longer the case and cannot continue to be relied upon. Firms can look to other countries in the

region for lower wages and the general consensus is that Thailand must upgrade its education and technical

knowledge to improve its industrial development

In terms of school education, a level of universal primary education has been achieved in Thailand. However,

secondary education is increasingly important for the labour force but here Thailand’s policies have been lacking.

The government focused on higher education and instead missed the secondary school policies. The result has been

a less skilled work force with about 75 per cent of workers in manufacturing in Thailand unskilled

. In Malaysia,

however, this number is 49 per cent. Thailand has taken steps to improve high school education, including by

increasing the compulsory age of attendance and providing free access to fourteen years of education(including six

of secondary). However, there is a lag effect with this policy as that most recent step was only taken in 2004. But

questions remain over education. While admitting that Thailand’s school students scored low in science and maths,

the official said this was only in comparison with China. Meanwhile, a school for students gifted in maths and science

had been established as well as a vocational school – the Thai-German Tech School. The BOI official said Thailand

trained a lot of engineers and information technology specialists

The BOI official said a significant amount of training was

done within Thai factories. Despite competition over

labour between the countries, the BOI official said

Thailand often helped other countries with skills training

and a budget is set aside for such – largely for good

inter-country relations. The official denied the existence

of a labour shortage and said any shortage could hardly

be met by neighbouring countries, such as Cambodia

who only had a population of about 14 million. With the

minimum wage expected to be 300 baht/day from next

year the BOI official said firms were saying they

intended to move. Indonesia for example, offered a bigger labour force and had garment-making skills. While

recognising that Thailand’s labour wages had risen, a BOI official said Thailand still had a better investment climate

than some other regional countries such as Myanmar

Intarakumnerd, p.78

World Bank Productivity and Investment Climate Surveys, cited in Intarakumnerd, p. 80

Authors’ interview

Thailand Labour Force

1994

1998

2002

2006

2010

Population (million)

58.71

61.2

63.42

65.57

67.31

Labour Force (thousand)

31433

32410

34262

36429

38643

Employed

30164

30105

33061

35686

38037

Agriculture

15180

13407

14042

14171

14547

Manufacturing

4191

4264

5052

5504

5350

Mining

Others

10735

12389

13922

15953

18100

Unemployment rate (%)

2.6

4.4

2.4

1.5

Labour Force

participation rate

75.8

72.1

71.9

72.2

72.3

Male

80.3

77.7

80.6

80.9

80.7

Female

64.7

61.2

63.3

64.3

Source: Thailand Key Indicators 2011, ADB.

2.2 Industrial policies and actors

2.2.1 Industrial policy

Thailand was not successful in moving up the value-added chain after the impressive restructuring from traditional

agriculture to labor-intensive manufacturing

. The stagnation on the ‘ladder of comparative advantage’ was a result

of barriers such as the very low education quality, microeconomic policy that created rent seeking, and weak

infrastructure in the country

The government have only benefited from employment

generation and restructuring trend contributed by FDIs.

Little attention was paid to the technological

contribution and features of FDIs in Thailand. The

linkages between FDIs and domestic firms were

overlooked. This all resulted in lack of capacity building

of manpower, knowledge transfer, and R&D capabilities.

Source: Technology Upgradation through Global Value

Chains: Challenges before BIMSTEC Nations (2006)

The ICT deepening Thailand undertook has not been accompanied by technological deepening. The quality of the

scientific institutions also does not support technological advancement. The lack of sheer qualified manpower

hindered acquiring the ‘know-why’ which is above the ‘know-how’ in technological development level. Thus, the gap

between the use of high-tech assembly (through FDI foreign technology) and generating new technology hinders

Thailand’s aspiration on the upper-ends of the global value chains. Another factor negatively affecting efforts

towards the upper end of value chains is the role of R&D at the firm level, which involves implementation of

imported technologies, rather than increasing the absorptive capacities that could lead to innovation and upgrading.

Upgrading Strategy:

Weaknesses in the industrial sector identified by Thai government include low technological level, lack of supporting

industries, insufficient managerial skills, lack of skilled workforce, and a concentrated industry in Bangkok region

The restructuring thus emphasized: enhancing industrial productivity and upgrading processes; upgrading

technological capacities; improving product design and development; attracting FDIs in technology-for-the-future

industries; develop labour skills in selected industries, and; support SMES

The Thai government identified four factors through which the Plan will be implemented. The Japanese and the

private agencies are invited to contribute through those factors:

Brimble , Foreign Direct Investment: Performance and Attraction- The Case of Thailand,10

Flatters in Brimble, Foreign Direct Investment: Performance and Attraction- The Case of Thailand, 11

Inoue, Future Prospects of Supporting Industries in Thailand and Malaysia ,9

Ibid, p.13

Item

Rank out of 117

Firm-level technical absorption

Prevalence of tech licensing

Innovation Capacity

Utility Patent

Scientists & Engineers

University-Industry Collaboration

Corporate R&D

Quality of Scientific Institutions

FDI & Technology Transfer

Figure 18: Technological and Innovative Indicators

a) Long-term soft loans. This allows relocation, new machinery investment and improved processes;

b) Knowledge distribution by experts that will be useful for industrial employees, and also in firms obtaining

loans;

c) Tax allowance as in incentive for relocation of FDI into rural areas, and;

d) Training to be able to use the new technologies, processes and machinery.

The targeted sectors are: food and animal feed; footwear and leather; wooden products and furniture;

pharmaceutical and chemicals; rubber; plastic products; ceramic and glassware; electrical appliances and electronics;

automobile and parts; germs and jewelry; iron and steel, and; petrochemicals

. One criticism is that the

restructuring plan encompasses 13 industries, which raises the question of the delivery capability. The BOI official

said there had been some innovation in some sectors, mainly agriculture and automotive where the country’s strong

industries were

. Some MNCs had established research centres for specific components such as Western Digital and

Samsung.

2.2.2 Industrial Estates

A number of historical factors are critical to the development of Thailand’s industrial estates. Originally foreign

ownership rules and an idea to create economies of scale restricted industrial areas to limited spaces. The creation

of the IEAT led to the establishment of more estates and more sustainable use of resources and dedicated

infrastructure. However, these remained on the outskirts of Bangkok prompting the regional development strategy

which has had limited success. The Eastern Seaboard was later developed, after gas was discovered in the Gulf of

Siam, and industrial estates began to congregate around the improved infrastructure in this area along with access

to the ports. Railway services began and highways were constructed along the coast between Laem Chabang and

Map Ta Phut to Bangkok. IEAT developed two major estates and BOI allocated zone 3 incentives. The improvement

in the region at this time occurred at the same time as Japanese companies were looking for lower cost locations

and the area was now worthwhile investing in. It was in this context that Amata was established. Meanwhile,

automotive industries also sought out the location due to congestion in Bangkok and the zone 3 incentives.

The success of Industrial Estates in Thailand is mainly attributable to access to resources rather than any specific

incentive scheme. They face a number of significant challenges in terms of ‘ease of business’ or governance, and a

lack of place-based policy. The lack of success of the One-Stop Shop, in that it only covers a small percentage of

procedures, is indicative of the load carried by estate managers in order to provide ease of business to investors.

AMATA covers the majority of processes.

In terms of incentives of the zones, this acted mainly to draw businesses to those areas that were at the limit of what

was possible to maintain access to resources while gaining the incentives. This meant that businesses aligned along

the borders of zones, for example, to gain zone 3 incentives but being on the border with zone two to better access

Bangkok or a port. This pointed to the lack of success for regional development, which is also supported by industrial

estate managers commenting on needing access to Bangkok for staff purposes.

Thamavit and Nakamora, .“AFTA and Industrial Restructuring in Thailand”, 112

Authors’ interview

The estate locations also indicate the importance of resources, which AMATA officials highlighted. Specifically access

to Bangkok, the airport and port were crucial. However, the lack of access to other complementary facilities, such as

a university, created challenges particularly for innovation. The lack of a place-based policy, which built on an area’s

attractive for business based on its resources through complementary government policy, posed issues for labour

and for spillover and cluster effects occurring. These may well further incentivise businesses to solve these problems

themselves by leveraging the good infrastructure in the region to move certain sections of a process elsewhere.

Despite this, at least one interviewee commented that SEZs can provide a solution for organising value chains or

regional integration

. He said a key issue of SEZs was access to the market and linkages were required for such.

However, he said strategies for such were often led by investors such as Chinese and Japanese. He cautioned that

Thailand’s industrial estates were not SEZs.

2.2.3 Institutions

The Board of Investment (BOI)

The effective promotion and regional dispersion of industrial development were key factors to the success of

industrial development in Thailand. The Board of Investment, created in 1966 as the body responsible for promoting

investment, played a significant role in the decentralization and development of industrial policy in Thailand.

Dispersion

BOI after the revision of Investment Promotion Act (1972, and later 1977) promoted private investment in remote

regions through providing more generous incentive package for operations in certain provinces towards spreading

out industrial development activities. Categorizing the country into three zones , with regions furthest to Bangkok

offering more incentive packages to that offered by Bangkok, helped in the spread out IEs

. Prior to this, firms

would operate mainly in Bangkok Metropolitan Region (BMR) as a result of the developed infrastructure there. The

shipping and air ports were critical for importing raw materials and machinery required for production under the

Import Substitution regime

. Now there are three times more Industrial Estates outside of Bangkok Metropolitan

Region compared to those within.

Strengthening the Local Firms

The 100 per cent ownership provided to foreign firms, supported the development of local firms in Thailand.

Backward linkages increased in the 1970s promoted by export-oriented American semiconductor corporations.

By the second half of the 1980s, BOI policy was leniently protecting the local industries while supporting export-

oriented manufacturing. Japanese electronic/electric joint ventures were promoted by BOI, only if 80 per cent of

production was exported. For some product lines, 100 per cent export was required if there was local producer

Authors interview

Details of the incentive different regions offered are discussed in the Industrial Estates section.

Pansuwan, “Policies and Pattern of Industrial Development in Thailand”, .28

Jun Tsunikawa, “Fostering Supporting Industries in Thailand”, 8

BOI promoted industries included the agricultural (processing), chemical, electronic, mechanical, metals, ceramics

and others

100

. BOI approach was more focused on industrial widening instead of industrial targeting or deepening.

During the same period, incentive structures were rationalized in order to phase out inefficient production.

Structural adjustment was introduced to further support exporting industries. Resource based and labor intensive

production were promoted

101

In the 1990s, BOI pushed for competitiveness of local firms through equal eligibility for BOI investment privileges and

production of FDIs for local markets

102

. BOI continued to support industries through increased linkages between local

firms and FDIs

Creating Linkages

Through the years the role of BOI in the export promotion strategy moved away from regulating foreign investment

into becoming a modern service center for investors. Various departments/units within BOI such as BOI Unit for

Industrial Linkage Development (BUILD), and Investment Service Centre and Marketing Division were established to

links local suppliers with large companies and support subcontracting, and provides information on investment

opportunities.

BOI Unit for Industrial Linkage Development (BUILD) worked closely with local and foreign forms. BUILD supported

local firms through capacity building, and advising on the state agencies which local firms can reach to for services. In

addition, BUILD supported foreign firms procurement of intermediate goods for local firms.

The success in linking local and foreign firms is attributed to a comprehensive database that allowed BOI to match

local supporting industries with assembling FDIs

103

. The business-line level data made it possible to engage in

significant matching of local part suppliers and producers.

Outreach programs and publicity, including Vendor-Meets-Customers for automotive and electronic industries,

factory tours, workshops and tradeshows domestically and abroad supported, all supported visualize the

opportunities, including linkages, investors can have in Thailand

104

Partnership

When Japanese firms in the 1980s were not able to find qualified local suppliers (for instance moulders), BOI

attended to Japanese firms needs by; sending officers to Japan to promote the needed investments; increasing the

number of applications for Japanese smaller firms that would bridge the gap, and; reducing the minimum

investment requirements for those smaller firms, and providing tax benefits

105

. Such flexibility and swiftness in

finding solution to investors’ needs played an important role in the growth of industries in Thailand.

100

WB, p.18

101

Pansuwan and Routray , “Policies and Pattern of Industrial Development in Thailand”, 29

102

The minimum requirements to receive BOI benefits seems to favour FDIs

103

Jun Tsunikawa, “Fostering Supporting Industries in Thailand”, 10

104

Jun Tsunikawa, “Fostering Supporting Industries in Thailand”, 14

105

Jun Tsunikawa, “Fostering Supporting Industries in Thailand”, 8

2.2.4 Investors

China

China’s influence

106

: China’s influence can be seen on a number of fronts, additional to the economy, including

culturally. The head of a Thai business school said that the Chinese

government had been using institutes to promote Chinese language

while the influence of Thai-Chinese had already permeated culture. This

could be seen in the continuation of links between the two countries

and businesses. For example, the Thai Oil Company, which seeks to

consolidate a relationship with the Chinese government, ensures its’

staff goes to China and study the language which helps with maintaining

connections. CP group has been held up as an example for its success

and expansion in China.

Meanwhile, at the level of Chinese businessmen in the GMS, their

network provides business advantages within Chinese businessmen

within in the GMS or in China. He described these businessmen as being

well-integrated into the GMS community and often marrying locally and

adopting their new country’s nationality. He claimed this similarly

impacted China’s decisions in the area such as encouraging aid to

Thailand during the flood.

Thai/China government relations

107

: Despite greater integration

between the countries at the business level, government-to-

government relations still have tension. The business school speaker

claimed that although China was attractive in terms of its market,

Thailand had resisted the larger country’s advances on a number of

occasions. For example, in a discussion about truck movement over

borders, about three years ago, Yunnan had asked for the licences for

trucks coming from their province into Yunnan. Thailand delegates said

this was a discussion that needed to be had at the national level. While

there are differences in capacity and decentralisation between the GMS

and the two provinces, the example also indicates Thailand’s willingness

and capacity to negotiate its interests. However, it also causes friction

for Yunnan and Guangxi who are unable to have discussions at

provincial levels as the other GMS countries are typically more

centralised. These issues cause more friction for Yunnan coordinating

with GMS countries, whereas Guangxi has focused on links with

Philippines, Singapore, Indonesia, Malaysia and Vietnam where

106

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107

Authors’ interview

Profile: Thai-Chinese Investors

There is certainly a clear influence by

China and Chinese investors in Thailand,

but the category of Thai-Chinese must

also be considered. Thai-Chinese are

widely attributed as also playing a

dominant role in the business community.

A number of interviewees we spoke to

were Thai-Chinese and provided an

indication of their position both within

business but also government.

One individual could trace his family’s

background back seven generations to

China where his family had been one of

the wealthiest in his area. His family

possessed a fleet of ships which enabled

them to be able to expand into South East

Asia. In particular they were able to use

this fleet to undertake a protective role

for Thailand and brought weapons to the

country.

After China became more inward looking,

this family managed to maintain links to

Thailand and South East Asia. He claims

that of Thai people, about 40 per cent

have Chinese ancestors. “Chinese

investors come to Thailand before moving

to other areas,” he said. “So it’s very easy

for China to do whatever it needs,” he

said, referring to the possibility of using

this heritage for business links.

 continued next page.

discussions are more fruitful. The result for the GMS is clearly evidenced in transport again – with railway lines in

the GMS a width of one metre while in China it is 1.44m. Despite this, he later described Yunnan and Thailand as

having a good relationship.

Strategy

108

: He said China’s strategy was different for Yunnan and

Guangxi. The Chinese government perceived Yunnn as its

connection with the GMS while Guangxi connected with ASEAN. The

interviewee said other countries mainly had a reactive strategy

towards China. He said China was mainly interested in joining the

GMS to benefit from linkages rather than aiding development.

China, however, did not share the same idea of industry corridors

that Japan did(see Japan section below). The Chinese government’s

strategy revolved more around having access to different oceans.

One of their strategies had been to establish more of a farm sector

in Thailand which materialised with Thailand lending land to China.

Other strategies involved extensions of Guangzhou-like businesses

and establishing a market for Chinese products in Thailand. The

problem for Thailand with this is it involves the direct import of

Chinese products rather than making some of the products in

Thailand. This is not to say the strategy has been a failure and there

is significant economic growth at the border with China. Although

the focus is mainly on agriculture, Chinese companies are also

interested in projects involving hydro power and mining. The BOI

official said Chinese investment was big scale, such as chemical

industries. Differences in investor strategies saw Japanese industry

in Thailand focused on electronics, technology and food processing.

China’s strategy

109

: He was frank when he discussed his opinion of

China’s intended gains from participating in such associations and in

the region in general. “We are one of the colonies of China –

indirectly,” he said, asserting China’s plans relied heavily on access

to the ocean while their strategy is to continue their GDP growth. He

claims this growth would not be possible without expanding

business beyond China’s shores. “Now they can only grow through

colonialism,” he said. The tell-tale sign of China’s ‘colonialism’ is

infrastructure. “In everything in China does – road/train/sea – it’s

through infrastructure,” he said. “China’s three dead provinces have

no sea access. Most logically, and previously, went through

Vietnam.” However, he says relations between China and Vietnam have deteriorated thus jeopardizing

108

Authors’ interview

109

Authors’ interview

Profile continued:

The inheritor of this family position, with

close links to China and Thailand, was

educated in the US and only returned to

Thailand twenty years later. Here is family

had established a factory that mainly dealt

in components for end-products such as

two-way radios. Since his return he has

established himself as a law maker and

advisor to the government and expanded

the family business. Both have benefited

from the contacts and links the family

inherited and continue to develop.

The business has expanded into other

sectors. He told a story of visiting

Guangzhou after city officials claimed it

would become the ‘kitchen of the world’.

There he negotiated for supplying food

products to the region – “you can’t

become the kitchen of the world without

our food”. Now one food processing

factory has been established and another

two are on the way.

The businessman continues to develop

relationships between Thailand and China.

Meanwhile, he is part of a number of

associations including a Government-to-

Government group between Thailand and

China. The board reports directly to the

government and he says has always been

chaired by those with Chinese ancestors.

infrastructure links. Even in Laos plans for a bullet train have been halted as China wanted the condition that 50,000

Chinese be employed to construct the line. He claims such conditions, that Chinese are employed for projects, are

typical of the way that the country operates. The implication of the deterioration of such projects is that China

accessing the ocean through Thailand is more likely.

While relations between Thailand and China are close, especially at the government level, they are not without

problems. This businessman said that relations at the business level were very competitive. Furthermore, the period

when China was more inward looking, allowed Japan and Japanese investors to make in-roads. He claims Japanese

investors comprised about 80 per cent of the market at one point. While local businesses gained technology

transfer, the businessman claimed the majority of the profit went back to Japan. On technology and technology

transfer with China, he said that Thailand and China were on a similar level. Where previously Thailand would have

invested in European companies for high-tech products such as the first model of Bangkok’s sky train, the second

generation is produced in China – although by a European subsidiary – China Siemens. However, he says Japanese

investors look for particularly stable and transparent investment climates.

Japan

The Japanese automobile industry began its overseas operations in 1960, starting with operations in Malaysia,

Taiwan and Thailand. This initial start was due to the region's proximity to Japan and a lack of local competitors

110

(Thailand has never adopted a strategy of supporting a local automobile manufacturer)

111

. Typically these operations

took the form of manufacturing subsidiaries. Due to Thailand's early policies of import-substitution and restrictions

of foreign ownership, most Japanese companies established small knockdown plants. The electronics industry took a

greater interest in South East Asia in the 70s due to the appreciation of the yen, and moved its labour-intensive

processes to the region. These were generally concerned with low-end products.

Generally, the automobile industry in South East Asia was less a priority up until the 90s compared with other

manufacturing zones and markets such as the US. Additionally, there was a lack of support from other sectors or

clusters in Thailand. More recently, South East Asia is being seen as an important market for automobiles but

additionally a convenient and established location from which to serve the market of China

112

. However, the issue of

skills shortages has continued to reoccur with the common complaint now that technological universities do not

train enough engineers to expand higher quality production.

These major actors also have their own visions for the value chain in the region. What the ADB describes as

economic corridors, a business school interviewee said Japan saw as “industry corridors”.

113

He described this as the

segmentation of different parts of the process according to countries: “...from Bangkok-PP-Ho Chi Minh, like that

Bangkok takes textile, Cambodia makes garment, and it’s packaged and exported in Vietnam.” He said corridors

between Bangkok and Hanoi would be automotive industry corridors because of the investment in that sector in

both Hanoi and Thailand. He said that Japan had a comprehensive Asia development plan and the capacity to

110

Intarakumnerd, p210

111

Intarakumnerd, p217

112

Intarakumnerd, p.210

113

Authors’ interview

develop such corridors with their multinational companies. He said the movement of these goods could not be

described as a value-chain as such because there was no value-added to the products between cities.

Investors impact on the value chain

An interviewee

114

had doubts about Thailand’s capacity to upgrade and move up on the value chain and said success

in this area would depend on investors. Within the automotive industry most of the suppliers are joint-ventures led

by Japanese. However, it is difficult for the value chain to develop in the automotive industry because the wages and

car assembly aspects are expensive. The supplier is already well developed and there is no equivalent other supplier

to take over that function. He said developing a value chain in agriculture and food production was more likely.

In acknowledging the location of firms within the region, the BOI official

115

said Thailand had seen some industries

moving to neighbouring countries. “The camping gear market for example goes to Cambodia as it doesn’t require

high skills. Other countries don’t have the yarn,” the official said. The main issues result from producing

downstream, where Thailand had an advantage. In response to firms moving away to labour costs, the BOI official

said Thailand would focus on high-end products such as nano-technology in garments. The BOI official saw Indonesia

and Malaysia as Thailand’s key competitors, but said good marketing based on Thailand’s investment climate could

trump competitors.

The business school interviewee

116

cited Thailand’s higher skilled labour market as an advantage. Additionally, it had

more developed infrastructure than its immediate neighbours, and it had a medium-sized domestic market. Finally,

it had a long history with Japan and that country’s investment into Thailand. It can also provide some level of

guarantee and stability to investors despite political environment.

114

Authors’ interview

115

Authors’ interview

116

Authors’ interview

2.3. Case Study: Amata City Industrial Estate

Figure 19: Amata City location (source:http://www.business-in-asia.com/amata_industrial_estate.htm)

Figure 20 : Amata City warehouses (source: http://www.amata.com/eng/corporate_history.html)

Findings

Amata Corp is a Thailand’s main industrial park developer and manager with estates in both Thailand and Vietnam. It

first established Amata City in 1995. Initially,

companies in Thailand had to be a joint venture.

Company officials said they were originally drawn

by the location and the developed it and worked

with the authorities to do so. Investors from

Taiwan were the first to be interested followed by

Japanese businesses. However, the site began

shortly before the Asian financial crisis and

although company officials said the industrial

sector remained stable, investment generally

dipped and didn’t recover until after 2000.

After 2001, legislation was passed allowing 100%

foreign owned companies – something Amata

officials said was a comfort for investors. “We said

you don’t need to worry about management

culture. Just come and enjoy infrastructure,’’ one

official said. From 2000 to 2004, following the

recovery in growth and opening of the market to

foreign owned companies, Amata said they saw a

big increase in the number of companies coming to their industrial estate.

Basic facts

 Established June 5, 1995

 Number of factories to date: 116

 Total area to date: 1,353 ha (3,383 acres, 8,456 Rai) (clarify: website facts says

1,603 ha (4,007 acres, 10,108 Rai) and(112 factories of different stages

completion)

 Major industries: Automotive, Electronics, Consumer Goods, Light Industry

 Featured partners: Siemens; Electrowatt; Unocal; PTT; Itochu; CP Group; PS

Gardens; PCS Security etc.

 Location: 114 Km east of Bangkok, on Highway No. 331 in Rayong province, on the

Eastern Seaboard of Thailand. Bangkok International Airport: 142km. Bangkok New

Int. Airport 99Km. Laem Chabang Deep Sea Port: 27Km

 Resources: located close to a deep-sea port and other infrastructure.

 Incentives: Zone 3 entitlement – the maximum tax privileges.

 Industries (all factories to date): (Consumer Goods include clothing, accessories,

furniture, packaging for consumer products. Services, utilities and infrastructure

project are not counted)

o 1. Steel/ Metal/ Plastic (32.17%)

o 2. Automotive (24.35%)

o 3. Cons. Goods, Healthcare (18.26%)

o 4. Electronics (13.91%)

o 5. Service and Infrastructure (6.96%)

o 6. Chemicals and related (4.35%)

 Major nationalities (all factories to date): (by number of factories; joint-venture

projects are calculated as such nationality as major invested in the project)

o 1. Japan 28.70%

o 2. Thailand 20.87%

o 3. South East Asia / Europe / Asia Others : 9.57%

o 4. USA & Canada 6.09%

Innovation: In terms of how the park can be described, Amata said they were at 2

tier supply but were confident

that 3

tier would follow. Currently, about 60-70 per cent of products go outside the park for additional processing.

For example, a spark plug typically undergoes additional processes while only white goods export directly.

Amata companies key sectors are rubber, automotive, electronics, food and services. But Amata officials are wary

that the estate’s current success could disappear quickly if innovation doesn’t occur. “In five years this park could be

haunted without uniqueness – you can build a factory within eight months,” an official said. While Amata has

multiple sectors, they commented that most car factories are located closer to Bangkok.

They said they were trying to make the estate more innovation based. Currently, most companies buy technology

but Amata Science City has been established. Now about three to five per cent of companies have innovation. “It’s

mainly process-innovation. We know we can’t push whole-scale innovation. We know the government can’t. First we

need to upgrade products.” An official provided the example of Buildstone tyres, where staff at Amata Buildstone

changed the ingredients of the tyre and had success and suggested it to Japan. But the example indicates the

difficulty in the innovation process as even to conduct testing on the product the staff had to drive 80km to the

university where the test ground is located. Amata officials are studying the innovation business model in order to

inform the Thailand government.

Figure 21: Master Plan of Amata

(source: http://www.amata.com/eng/industrial_amatacity_plan.html)

Incentives/governance: Although industrial estates such as Amata are promoted as having a “one-stop shop”, a

service provided by BOI for bureaucratic paper work related to companies, the estate managers said the service only

covers about 30-40% of processes. Requirements including everything from registering buildings and expatriates,

construction licences (from the municipality) and certificates from the Ministry of Industry. Officials said there was

no “cross-functional work”, referring to the lack of capacity of BOI to encompass the various processes which are

actually handled by multiple different departments. “BOI is under the Ministry of Industry so they can give a

certificate – a tax incentive,” one official said.

“It took three years to create a law to create a new super body (BOI) – and it’s factional between ministers.”

The issues continue with the lack of clarity on regulations. For example, since 2000, companies have to apply for an

Environmental Impact Assessment (EIA) under the Ministry of Natural Resources. “But there are no clear regulations.

It’s more of an agreement with private sector and government – it goes under a committee. As innovations occur,

they bring new policy.”

Nevertheless, Amata managers were confident companies would “get used to” Thai culture and regulation. In the

meantime, the estate managers try and coordinate much of the paper work on behalf of companies in the park.

Resources: The park is well located in regards to resources with both a deep sea port and an international airport

nearby. “So it’s a natural boon and there is enough growth,” an official said. However, there was clear indication

from Amata managers that the park was not supported by any kind of “place-based policy” from the government.

Although the park is relatively near to Bangkok, the airport and port, given traffic conditions it is not possible for

staff to commute to the estate which makes it less attractive as a work location. Also, related industries are not

nearby.

“Ideally, we want to create a community so people can send their kids to school,” an official said. “What we dream is

a city”.

Legally, Amata recognises such a dream is beyond their jurisdiction and lies with municipality. However, they have

set up a deal for a 100-bed hospital; they already have a theatre and a school for 1,300 kids. But families are still

reluctant to come and the school is expensive for most workers.

“We do what we can but we can’t provide a community, a sense of belonging,” the official said.

Subconclusion Amata: Amata has made the most of its location and in filling the gap in service for its clientele. It

now comprises seven per cent of the country’s GDP. It attributes its success to government support, a strategic

location, multinational customer profiles and professional management.

2.3.1 Investment climate

The investment climate is the “fundamental socio-economic framework in which firms operate”

117

. It involves

economic and trade policies, regulation and financial markets, and resources including labour and infrastructure. A

better investment climate improves business returns and can impact absorption of technology and innovation. Two

rounds of the World Bank's Productivity and Investment Climate Survey (PICS) have been conducted in Thailand in

2004 and 2007. These assess two sets of indicators: those based on infrastructure and those based on perceptions.

Given the longer time frame involved in infrastructure development, the main difference in the surveys was a poorer

perception of Thailand's climate – most likely to be due to the political crises. In 2007, 38 percent of firms cited

political instability as a major constraint – second only to a shortage of skilled labour which 39 percent saw as one of

the biggest issues. Tax regulations and 'bureaucratic burden' were also highly ranked as issues. Other issues

included: weak macroeconomic environment and inadequate access to finance; and quality, price and reliability of

infrastructure. By comparison, Thailand placed 17

out of 178 economies for ease of doing business in a 2011 report

– down from 15

in 2008

118

. However, it was still ahead of most other countries in the region, with Malaysia the

closest at 18

. Singapore topped the rating. Of particular note are ranks for particular indicators where Thailand

ranks 78 for 'Starting a business' and 100 for 'taxes'. By comparison Malaysia was 50 and 41 respectively. Cambodia

ranked 138. What reports on investment climate indicate is that infrastructure is but one of several factors

important to a firm and it may not be the most critical – certainly feedbacks from firms indicate such in Thailand.

2.3.2 FDI

FDI’s role in development is expected to create new trade possibilities and introduce new technologies, knowledge

and managerial experience

119

. There is also a strong relationship between FDI, innovation and exports

120

. Firms that

export are expected to be larger, have more foreign equity and be more innovative.

FDI had a limited role in Thailand until the late 1980s and MNCs established mainly to access domestic Thai markets

or to take advantage of resources and infrastructure for infrastructure. The latter was represented by

petrochemicals, garments and electronic components. Between 1986-1996, Thailand’s growing economy and

improved investment climate, including FDI regulation changes, encouraged MNCs to view Thailand as an export

base. This occurred in a context of increased globalisation and the reduced competitiveness of East Asian companies,

especially Japan.

117

World Bank, Investment Climate, p1

118

World Bank, Investment Climate, p12. ; World Bank, Ease of doing business rank, 2011.

119

Intarakumnerd, p.20

120

Wignaraja, Ganashan, “Foreign Direct Investment, Innovation, and Exports: Firm-Level Evidence from People’s Republic of China, Thailand and

Philippines” ADB. 2008. p.1

The breaking-off of the electronics components sectors while conducting assembly elsewhere allowed companies to

reduce costs and control quality. Investors were looking for trade openness, access to international markets, a cheap

but skilled labour force and FDI-friendly regulations. The FDI regulation changes referred to earlier involved:

increased promotion by BOI; the implementation of zones and incentives; and zone incentives that allowed foreign

ownership outside Bangkok and/or exporting more than 80 per cent of their product. However, different rules

applied to industrial estates under IEAT. The chart “FDI’s role in East/South East Asia” shows the changes in FDI into

Thailand that resulted and compares to countries in the region. Japan’s FDI into Thailand in 1998 amounted to 30

per cent, the same amount as originated from NIEs

121

Although Thailand had a setback during the Asian Financial Crisis, most businessmen said it had recovered and begun

to grow again from 2000 when increased investment occurred again. Recent figures on FDI, from UNCTAD, shows it

remains an attractive place for FDI. In about 2001, BOI allowed for 100 per cent ownership in foreign ownership in

non-export-oriented companies and made changes to zoning restrictions

122

FDIs by Sector:

The manufacturing sector accounts for 80 per cent of all the investments, of which 54 per cent is in machine and

transport equipment. 60 percent of approved investments are export oriented manufacturing. There is some

indication FDIs are moving away from mass manufacturing, as a result of cheaper setup and labor costs in

neighboring countries such as China and Vietnam. FDIs inflow in Thailand in the mass manufacturing has dropped by

20 percent in the last five years. However, the evidence is conflicting: Rising production and wage costs in China has

led to global MNCs looking to move low-cost manufacturing to other destinations, including to ASEAN countries

123

China has instead been trying to attract FDI into its high technology sectors and services. This has implications for

Thailand’s attempts to move into high technology sectors and poses issues of whether it is competing with China in

these areas. Interviewees in Thailand frequently commented on the improved technology and capacity in China.

Meanwhile, Thailand has also begun investing in neighbouring countries such as Lao

124

, indicating its rise, but also

the increase of its own wage costs. FDI in Thailand are also declining in chemicals sector due to the presence of

strong domestic firms that serve domestic and foreign markets.

121

UNCTAD

122

Intarakumnerd, p.45

123

UNCTAD, p71

124

UNCTAD, p71

Figure 22: Share of Net Flow of FDI by Sector

Source: Own calculations based on Bank of Thailand data, 2012

FDIs for Export Markets:

Thailand plans to become a production center for export markets. As a result, 60 per cent of approved investment is

directed towards exports. In terms of sectors, 90 per cent of registered investments in electric and electronic

products are for export purposes, after which come minerals and ceramics with 89 per cent. Light industries and

textiles export-oriented investment are estimated at 81 per cent. The most locally demanded FDI production is

mainly machinery and metals, and chemicals (including papers). FDIs production serving Thai market is increasing for

the various sectors (except for textiles/ light industry, and minerals). On the other hand, manufacturing, by local

firms and FDIs, for both domestic and foreign markets in the metals and machinery and metal products sector

include that of office machinery, computing, automotive, and electronic parts.

FDIs by Country:

Bank of Thailand records show that FDIs in Thailand come from at least 53 countries. The sources for FDI into

Thailand are mainly regional – from ASEAN, Japan, China, and the Asian NIEs. During the period, 2005-2010,

Japanese FDIs in Thailand represented almost one third of all FDIs in the country. During the same period, ASEAN

FDIs in Thailand accounted for 20.9 per cent of all FDIs, of which Singapore accounted for 17.3 per cent. Chinese FDI

in Thailand makes 4 per cent of all FDIs.

Overall, Japanese firms still lead manufacturing FDI, now as in the 90s, due to the automobile and electronics sectors

they are involved in. Thailand is seen as having used FDI to become a leading electronics exporter

125

. However, it is

seen to have built its export experience from experience and learning imported technologies which resulted from

FDI. Japanese FDIs in Thailand produce electronics, textiles and transport machinery. On the other hand Japanese

outsourcing in Thailand is likely to be in the medium-end functions that need less technical skills (compared to high

value-added production) which Thai domestic firms possess.

125

Wignaraja, p.1

CP Group Profile

CP Group is one of few Thailand companies of this size, with a presence in 17 countries, about 280,000 employees, and occupying a leading

position in China. The company started in agriculture, mainly with plant seeds and used experts to improve its product. It provides an interesting

example of an MNC from Thailand and it’s regional strategy while also highlighting relations and linkages.

The company established itself in China 30 years and has become a household name – if under a different name mainly for marketing purposes

to the Chinese consumer. The interviewee said that the company’s strategy had been not to dominate Thailand and so had focused on expanding

internationally. CP Group began this process more than 40 years ago by operating a branch in Taiwan, with a market of about 68million. The

company’s strategy towards China had been to ensure its presence provided local benefits. “They must benefit,” he said. “We bring in new

technology. The first is local - income, employment.” He said more than 100,000 people now working for the company in China.

However, its strategy is limited by regulations and environments in some countries in the region. India requires businesses to be 100% locally

owned. Vietnam doesn’t have international credit. Since the Philippines changed regulation, CP group started there. He said the company was

considering Myanmar as the country made improvements. The company also has a presence in Indonesia, largely because of the size of the

market there.

The company is focused on conducting research to further innovation of its products. CP group has more than 1000 research centres outside

Bangkok. Meanwhile, he also praised the level of Chinese technology. The company is also establishing schools such as a Chinese College.

2.4 Assessment

Large scale capitalism started as state was enlarging in size, creating opportunities for money generation and rent

seeking. This allowed for the emergence of investor capitalists (tied to their state official positions). The capture of

natural resources and the follow of cheap labour lead to economic activities in specific areas. In addition, the state

provided the infrastructure (roads, etc) near those activities.

Thus, the emergence of new capitalist class, the follow of public and private investment projects to places were

exploitation was happening, and state ownership of areas, all lead to emerging locations of IEs. IE was one way

through which the state hands was overseeing capitalism.

2.4.1 Institutions

BOI Spatial Approach:

BOI zoning policy (categorizing the country into three zones) was important in dispersing IEs in different regions.

Thailand IEs in different zones enjoyed privileges in terms of tax and non-tax incentives, in addition to BOI local level

support (customs, labour, etc).

In addition, IEs were located near important ports and multi-lane road infrastructures helped investors decision to

locate outside Bangkok Metropolitan Area. The rise of some areas such as the eastern seaboard region is also

attributed to discovery of oil, and other related activities, thus brining to attention and IEs to that region.

Export Zone Privileges:

FDIs operating in Export Zones received generous packages, including ownership of the land, and bringing own

overseas staff, and family members. Exported goods were inspected only once, at the export zone exit, near their

production facilities. This made investors lives easier since BOI at the zone level facilitated the logistics.

Sequencing:

In addition to the zoning policy, BOI sequencing policy was important in economic development of Thailand. During

the different phases, BOI was also playing a role strengthening the domestic firms, and linking them with MNCs.

Without this gradualism, and guidance of the industry, performance (at least of domestic firms) would unlikely have

achieve the success it did.

Macroeconomic Policy:

The government macroeconomic policy provided important incentive for increased production. Non-floating

(undervalued) exchange rate policy adopted by Thailand Central Bank, and relaxed environmental regulations

permitted increased FDI flow and production. In parallel to Thailand’s macro policies, other Asian developed

countries search for bases outside their home countries helped increased FDIs and production in Thailand.

The focus of Thailand was on economic growth rather than development, thus allowing for environmental

degradation and overlooked labour decent work practices- issues that would be of concern today. However, the

effect of GDP growth rather than overall development, is being felt now, in terms significant inequality, and with

unskilled labour that can meet the challenges of upgrading the economy.

Thus, industrial development in Thailand happened at the ‘right’ time benefiting from different factors beyond the

country’s control as well as policies, which would be challenged today, as result of new processes such as

globalisation, FDIs and trade agreements. This limits replication prospects of Thailand’s development model.

Financial Sector:

The banking system is relatively developed, and contributed in private sector development in Thailand. Up until

the crises, over 90 finance companies, 15 banks and 12 credit unions existed. In addition, there are sector-

specific banks such and financial institutions with specialized products, including the Industrial Finance

corporation of Thailand and Small Industry Finance Corporation, and credit guarantee for the small industry

126

The developed the capital market, made of money and securities exchange, allowed for adequate financing for

firms in Thailand, and had played a role in Thailand’s impressive growth. However, some analysts view that

capital market financing is still limited, and SMEs access to financial services can be improved.

Partnership:

BOI created an environment of ‘principal –agent’ trust’. BOI was honestly and speedily addressing investors

concerns. FDIs satisfaction was given high importance by BOI. In addition BOI was approachable, and interacted

closely with domestic firms and FDIs. The private sector was actively participating, and helped shape the investment

reforms. This relationship based on trust and feedback supported industrial development in Thailand.

Regional Business Start-ups:

Business start-ups increased during Thailand’s boom years, from around 11,000 to 40,000 (1985-1995). SMEs

elasticity to labour is high. They contributed in employment generation during the growth years. SMEs were

supported by BOI, and contributed in the development of SMEs in the different provinces, thus leading to regional

and equitable development of Thailand

127

Labour Market:

Female participation in the labour force is significant, making 43 per cent of employment in 1998. Education

level of Thai females, allowed gender participation in the industrial development of Thailand. Urbanization has

taken women out of their houses and farms in which they worked to undertake opportunities in services and

other activities.

126

Somjay, “Entrepreneurship in Thailand”, 4

127

SMEs in 1997 made 80 per cent of the industrial establishments, and emploed 32 per cent of all employed in Thailand. However, their

contribution to value added is relatively small. However, due to low productivity and the 1997 financial crisis, SMEs suffered in Thailand.

The1998 upgrading strategy included SMEs.

Thailand SMEs Bank provides credit to SMEs, with a vision of To be the Bank that helps builds a Thai entrepreneurial society .

In addition, abundant labour, through moving from agriculture to industry kept wages low. The hard-working nature

of the people, obedience promoted in the education system, and cultural norms to obey officials contributed in

labour exploitation in production. This was in parallel with globally diffused manufacturing knowledge (and brought

by MNCs to Thailand). Unlikely high value-added activities, manufacturing did not require high skills

128

2.4.2 Value chains

A global value chain is the geographical

separation of activities in a firms process – often

called vertical specialisation. The concept has

evolved, alongside globalisation, and where

previously the comparative advantage of a

country was considered, now the emphasis is on

a country's comparative advantage in a particular

task

129

. A supply chain, while related, refers to

the sourcing, procurement, conversion and

logistics – including dealing with suppliers and

intermediaries

130

Firms follow two strategies in Thailand: either

vertical specialisation or horizontal diversification

of production

131

. The electronics industry lends

itself to vertical specialisation and when MNCs

entered the Thai market, labour-intensive low-end products were worked on. The automobile industry in Thailand,

by contrast, has followed the strategy of “build-where-you-sell”.

Conditions: The conditions needed for the establishment of a global value chain include:

 Infrastructure: transportation (land, sea, air), telecommunications, finance and insurance.

 Shipping and containerisation: Particularly, a port's ability and capacity to capture major shipping lines.

Thailand's container port traffic was less than that of Malaysia and Indonesia in 2009

132

 Air transport: for time-sensitive products.

 Information and communication technology (ICT): communication is vital for the various stakeholders

involved in the chain.

128

Walsh, John. “Thailand’s inadequate response to the 2008 Economic Crisis: Implications for Vietnam and other countries entering the East Asian

economic model”, 38

129

WTO and IDE-JETRO, Global value chains, p. 4

130

WTO and IDE-JETRO, p.14

131

WTO & IDE-JETRO, p. 18

132

World Development Indicators Database

 Border logistics: the possibility of firms becoming involved in the supply chain is impacted by cost and time

spent at borders.

Ultimately, Thailand's place in value chains has been limited. Even in 2000, supply chain graphs by IDE-JETRO only

show a connection to Japan and no other countries in East Asia. By 2005, this also included China. However,

comparable countries such as Malaysia were more

integrated(see figure above)

133

. However, given the

difficulty of tracking intermediate goods, much nuance

in Thailand's place might be lost – the opposite figure

indicating Thailand's share of high complexity

intermediate goods is more encouraging. But regardless

constraints remain. Foreign manufacturing firms have

often been constrained by skills shortages, specifically

higher-skilled staff. This additionally affects local firms

and prevents their development and as such their

ability to serve as supporting industries in the lower tiers. Across some sectors, especially electronics, the share of

domestic content to import content has grown. But figures pointing to the export value of products leaving Thailand

are all relatively low

134

2.4.3 Good Governance

Corruption in Thailand has been found to be especially prevalent. A Transparency International report(2011), rated

Thailand 80 out of 183 countries and 3.4 out of a possible 10(10 indicating very low corruption)

135

. A government

official

136

denied what other interviewees had said about a large amount of business being conducted informally.

The official said most businessmen wouldn’t talk without lawyers, especially MNCs. However, ADB has recognised

133

WTO & IDE-JETRO, p77

134

WTO & IDE-JETRO, p105

135

Transparency International, 2011

136

Authors’ interview

that there is a large section of unrecorded informal trade, by small businessmen, in and between the GMS

137

. It was

estimated that this could be between 30-50% on top of recorded trade.

One interviewee clearly presented some of the conflicts of interest involved in business and government. He has

been a businessman in Thailand for many decades, continuing the family business

138

. Meanwhile, links to the

government and the on-going regional cooperation. For example, he says he bought land on the border of Thailand

and China and he personally passed a bill for the land to be made an SEZ. The approximately 150ha will become a

depot for transport to aid with the transfer of goods over the border because of differences between driving sides –

essentially capitalising on border inefficiencies which he maintains.

Meanwhile, he is part of a number of associations including a Government-to-Government group between Thailand

and China. The board reports directly to the government and he says has always been chaired by those with Chinese

ancestors. But he said many business practices in Thailand remain informal and involve a degree of corruption. “It’s

a way of life in China and so in Thailand also,” he said. “We don’t want it eventually but it’s been there for 1,000

years and will be for 1,000 years.”

However, in the 2012 experts comment by World Bank, it was noted that Thailand had been taking steps to counter

corruption, including with the installation of information technology systems, such as the e-Revenue system. The

Independent National Anti-Corruption Commission (NACC) has been established, NGOs such as Transparency

Thailand are gaining track, and social media is being turned to.

The stability of Thailand's government has had an impact on perceptions of the country's investment climate.

Interviewees concurred with such findings

139

. It was also said to affect the border zones: “On the border between

Thailand and Cambodia, that conflict is between government and corporations and the Ministry of Foreign Affairs...

There is a pilot project road between Thailand, Laos and Vietnam – but not between Cambodia. Cambodia is left-

hand side drive and Thai is right-hand side drive. Plus there's customs - we don’t allow our gov officers to cross the

border so there's no one-stop.” More specifically on government relations, it was commented that there were good

relations between some comparable ministries and agencies in both Thailand and Cambodia. The same interviewee

quoted, attributed the issue to conflict over resources in the Gulf of Thailand: “There is no political will. The

government is interested in the Gulf of Thailand.”

2.4.3 Regional Integration

GMS-Trade:

137

Cited in Jayant, p15

138

Authors’ interview

139

Authors’ interview

The end of socialism in GMS countries neighbouring Thailand brought about new era of cooperation in the region.

Thailand trade with GMS member countries has increased significantly during the GMS-ECP. Trade between Thailand

and CLMV increased on average by an annual 23.5 per cent between 1990 and 2005.

Thailand’s export to CLMV increased at an annual average of 31.2 per cent between 1990 and 2005, with Thailand-

Vietnam trade accounting for nearly half of Thailand-CLMV trade. The other half of Thailand exports made 25 per

cent, 66 per cent and 20 per cent of Cambodia, Laos and Myanmar imports respectively in 2005

140

CLMV share of Thailand’s overall trade is small (less than 5 per cent). However, the share has increased from 1 per

cent in the 1990s to almost 4 per cent in 2000s. In addition, two countries in GMS are among the top ten

destinations of Thailand exports: China was ranked third in Thailand highest exports in 2007, and; Vietnam was

ranked ninth. The growth rate of Thailand exports to GMS is surpassing that of ASEAN

141

Thailand export growth surpasses imports in CLMV. However, Thailand is still considered an important purchaser of

some GMS countries. For instance in 2005 Thailand imported nearly 30 per cent of Laos exports, and 45 per cent of

Myanmar’s.

Social Development:

The development of the border communities through the increased economic activity associated with GMS-ECP is

likely to limit laxity in border regions. Human trafficking, and associated spread of epidemics, a current problem in

Thailand, is likely to be more controlled with the development of border areas.

Neighbouring Country Cooperation Development Committee (NCCDC) is the ultimate responsible body for GMS-EC

in Thailand, and deals with CBTA and other GMS-ECP challenges. The Committee is chaired by the Prime Minister

and contains relevant ministries (represented by ministers or senior officials), and three private sector

representatives. The National Economic and Social Development Board, under NCCDC, coordinates national

implementation of GMS-ECP. The Board develops the plans, and work with departments relevant to GMS-ECP and

ADB.

NCCDC holds close relationship and interaction with government agencies at the central level. It hosts meetings to

update relevant departments with information from Senior Officials’ meetings, and provide progress information of

GMS-EP projects

142

At the provincial level, the local authorities receive implementation plans through the Department of Local

Administration of the Ministry of Interior. However, there is inefficient bureaucracy and lack of information

dissemination mechanism between central and provincial levels; Information dissemination is delayed at the central

level, which affects the implementation, and; implementation at local level is delayed, and sometimes starts only

after local authorities have been sent reminders from central authorities

143

140 TSUNEISHI, “Thailand’s Economic Cooperation with Neighboring Countries and Its Effects on Economic Development within Thailand”,3

141 Cheewatrakoolpong, “Towards a better understanding of the political economy of regional integration in the GMS”.2

142 Cheewatrakoolpong, “Towards a better understanding of the political economy of regional integration in the GMS”, 17

143 “Towards a better understanding of the political economy of regional integration in the GMS”, 18

However, despite NCCDC efforts toward regional integration, the progress is considered slow. An interviewee

suggested, “If you look at the map, it can be done; but in practice, because of the institutional weakness, it is difficult

to cross. Cross border-CBTA, is totally a failure.”

144

However, he still cautioned that the government was taking steps

towards CBTA. “They are pushing it CBTA at the moment. A final paper said that the main difficulty of CBTA is the

local government - they don't want it.” Despite the paper saying the issue was due to local government,

responsibility for the issue lies at the national level to allow trucks in. Meanwhile the central government also lacked

capacity for developing policies that ensure CBTA’s effective implementation by border authorities. “So that's the

disconnect - the internal structural problem for each country. It is not difficult to make an agreement.” Additionally,

there is a high turnover of staff at the border – about every one or two years. He said ensuring good cooperation

between Thailand, Cambodia and Vietnam was the first and easiest step but extending the system to China and to

the Asian Economic Community (AEC) was difficult which faced similar institutional weaknesses. Most said the

possibility of an AEC by 2015 was unlikely and 2020 was now being touted. Indonesia however is pushing 2030 as the

date.

144

Author’s interview.

Chapter III: Cambodia

3.1 Introduction

As mentioned at the beginning of this report, making a comparative analysis is crucial to establishing a better and more

comprehensive understanding about the issues. Therefore, after using Thailand as a more developed case in the region,

this report would like to put Cambodia as the less developed case because of the significant development gap between

them. After the country was reunited in 1993, Cambodia’s economy has seen rapid economic progress in the last

decade. In 2010, Cambodia’s GDP reached US$30.18 billion and achieved a 6 per cent growth rate. However, its per

capita income, although rapidly increasing, is still the lowest in the GMS. In addition, as a LDC, the economy is

characterized by a very small and less developed industrial base and a large agricultural sector, which has always been

the backbone of the economy. The main domestic activity on which most rural households depend is agriculture and its

related sub-sectors. Manufacturing output is varied but is not very extensive and is mostly conducted on a small-scale

and informal basis. The garment sector is almost the only manufacturing industry in Cambodia, benefiting from the Most

Favored Nation (MFN) and Generalized System of Preferences (GSP) privileges granted by the US and EU. And the

service sector is heavily concentrated in tourism, trading activities and catering-related services. Moreover, most the

neighboring countries in the region, such as Thailand and Vietnam are more developed than Cambodia in many fields,

and to some extent, Vietnam and Laos are the main competitors for Cambodia in terms of trade and investment due to

the similar comparative advantages and endowments. Therefore, the state capacities of Cambodia are quite weak within

a very hostile environment which was contributed to by Cambodian historical legacies and an economic surrounding

with competitors.

According to related theories, the Industrial Policy of a country is its official strategic effort to encourage the

development and growth of the manufacturing sector of the economy to "stimulate specific activities and promote

structural change". Given the situation of Cambodia’s capacities and environment, Cambodia’s core industrial policy is to

focus more resources on, and provide more incentives to, attract investment into those sectors, where Cambodia has

comparative advantages as thrust areas for export promotion.

Therefore, as part of industrial policies, Special Economic Zones (SEZs) becomes a key bridge for Cambodia to attract FDI

by establishing better combination of policies incentives, infrastructure and facilities. According to the literature, an SEZ

is a generic term that covers recent variants of the traditional commercial zones and normally operates under more

liberal economic laws. The Royal Government of Cambodia recognizes that SEZs are an important part of the country’s

economic development because they create an investment climate conducive to the enhancement of productivity,

competitiveness, national economic growth, export promotion, employment generation. Therefore, in 2005, Cambodia

passed sub-decree 148 and formally introduced SEZ in Cambodia. Until now, 21 licenses have been granted by the

government and there are six zones are under operation and 15 zones being implemented.

This paper believes that SEZs are crucial in terms of understanding regional integration and identifying the key

constraints for further development for Cambodia. Besides that, the research team obtained more first-hand

information and experiences about zones by visiting three different SEZs in Cambodia during the field trip. Thus, it would

be more interesting and helpful to focus the analysis and reflection on SEZs in the Cambodia case study. In addition, the

status quo of industrial sectors and economic reforms are also important to establish a broad and representative picture

of Cambodia’s capacities in terms of strategy development, economic reform, FDI attraction and sector-specific policy

formulation. Therefore, this part will start with the presentation of the general picture of Cambodia which results in the

needed economic reforms mainly brought by foreign investors. Then, the report will focus on the result of the two

features, which is a very particular policy “SEZ Policy”, to better construct the analysis and reflection.

3.2 Industrial sectors

The Cambodian economy has experienced rapid growth for the last two decades. The gross domestic product (GDP) has

multiplied four times from USD 2.8 billion to USD 11.2 billion during 1994-2010, with an average annual growth rate of

approximately 9.05 per cent. The growth rate of the industry sector per annum was 13.2 per cent during 1994-2010.

Despite the high growth rate, the macroeconomic performance is considered poorly diversified and the main source of

growth is concentrated mainly in four sectors: agriculture, garment, construction, and tourism.

Cambodia’s endowment structure is characterized by a relative abundance of natural resources and unskilled labour and

a scarcity of human and physical capital. Its main industrial sectors include garments, food manufacturing, construction,

electricity and mining. Therefore, it is crucial to present the general picture of Cambodia’s sector-specific industrial

policies to establish a comprehensive analysis, and obtain relevant knowledge about economy diversification in

Cambodia. In order to see whether and how Cambodia’s government is working on industrial diversification, the report

will analyse in-depth the garment, construction and agriculture (agro-industry) sectors according to their contributions

on economy growth.

3.2.1 Garment

Garment, as nearly half of the industrial sector, is one of the most important industries and accounts for 70 per cent of

Cambodia’s exports. It has been the main growth engine for Cambodia. The employment in this sector rose rapidly from

only 18,700 people in 1995, reached its peak at 335,000 in 2007

145

. Therefore, Cambodia should pay more attention on

garment industry and develop related strategies and policies to achieve better performance. However, Cambodia’s

government has not yet developed very efficient and feasible strategies to accelerate the further development of

garment industry. Cambodia’s garment industry still “lacks other related industries such as fibre, dyeing, subsidiary

materials, etc. in the supply chain of the garment.”

146

Although Cambodia’s natural conditions are suitable for cotton

production, there is virtually no local textile manufacturing which can reduce 80 per cent cotton cost from import. These

factories remain at a level of sewing factories, focusing on offering Cut-Make and Trim (CMT) services, only 25 per cent

of the enterprises are involved in full garment production from fabric to CMT to packaging and shipping to abroad, and

Cambodia’s competitiveness in the global garment market is rated as very weak

147

. There is no clear evidence that the

government is trying to diversify garment sector by extending related industries from only sewing to fibre and dyeing

among others.

Figure 23: Garment sector employment (Unit: Thou)

Source: Ministry of Commerce of Cambodia

Note: The number of factories indicates the “effectively operating” factories, not the registered ones.

145

Ngov, Penghuy. ASEAN Economic Integration and Cambodia’s Industrial Policies, 2011, p. 79

146

Vathana Duong TE, Joosung J. LEE and Donghu Hahn, Cambodia's Industrial Growth Strategy and the Role of Social Enterprise-With focus on Garment

Industry , p. 1

147

Ibid.

Figure 24: Cambodia's Garments and Textiles Export (Unit: Million USD)

Source: Ministry of Economy and Finance of Cambodia

3.2.2 Construction

In addition to the garment sector, the construction sector has been booming since 2002 at an annual average level

growth rate of 15%, accounted for 7% of GDP and 0.7 point of GDP growth over 1998-2007

148

. Among industrial sectors,

construction accounted for 27% of the industrial sector and 33% of the investment in the sector. Construction of

infrastructure, accommodations, business and shopping centres flourished in the capital city of Phnom Penh and its

surroundings, creating lots of employments and rapid increase in GDP. However, in late 2008, together with the

international financial crisis, the construction sector in Cambodia was influenced. Many planned constructions were

forced to delay or downsize, which are due to two main reasons, first is the capital constraints for the supply side, while

the second is the reduction in market demand, particularly for condominium. The construction business, especially in

Phnom Penh, began to recover in 2010 after both the world and Cambodian economy improved. Cambodia’s

construction projects are mainly implemented by foreign companies, and only a small fraction of construction materials

are manufactured locally, such as simple bricks, other important materials, such as concreted pipes, slabs and panels,

and galvanized iron steel, are imported. With regards to further development, Cambodia’s National Strategy Plan (2009-

2013) made it clear that continued rehabilitation and construction of physical infrastructure would be one of the four

strategic “growth rectangles” for Cambodia, including transport infrastructure, water, energy, power grids, and IT. Thus,

construction will still be one of the most important sectors in Cambodia’s economy for future decades.

3.2.3 Agriculture (Agro-industry)

The Cambodia government also regards agriculture as another strategic “growth rectangles” and proposed to enhance

these aspects: “(1) improved productivity and diversification of agriculture; (2) land reform and clearing of mines; (3)

fisheries reform; and (4) forestry reform.” As one of the four development pillars, agriculture accounted for 35% of GDP

in 2009, and approximately 60% of the population relies on the sector for their livelihood. Therefore, the development

trend of this sector has a significant implication for poverty reduction and economic performance of Cambodia. The

agriculture in Cambodia is driven mainly by the production of crops and is dominated by rice. According to the World

Bank (2009), 80% of farmers grow rice, 60% of them for subsistence. Rice plantation covered 2.8 million ha in 2007,

which is equivalent to two thirds of arable land and 90% of cultivated land in Cambodia. The production of rice grew

from 4 to 7.2 million tons between 2000 and 2008, 80% increase in 8 years. As the domestic consumption of rice in

Cambodia is around 3 million tons, this means that there is a surplus of about 3-4 million tons of paddy rice in Cambodia

for export, including 2 million tons milled rice surplus.

In order to make full use of this rice surplus, the Cambodian government adopted the “Rice Policy”

149

in 2010, which

aimed at improving paddy rice production and milled rice export. In order to develop the “Rice Policy”, the government

and relevant research bodies accomplished the assessment on rice circulation, including production, collection, trade

148

Ngov, Penghuy. ASEAN Economic Integration and Cambodia’s Industrial Policies, 2011, p. 80

149

“Policy Document on Promotion of Paddy Rice Production and Export of Milled Rice”, adopted by Cambodian government in 2010

facilitation, and market expansion; identified the key constraints and problems for these processes; developed relevant

policies measures to address the key constraints and problems on the basis of Cambodia’s context; and established clear

working targets in terms of different processes. After one year of implementation, the outcome of this policy was quite

good, according to an interview with a WB economist. Within one year, the export of milled rice reached 100,000 tons

from 20,000 tons. In 2009, the milled rice were exported to 14 countries, while in 2011, the market reached to 32

countries. Cambodia is competitive in milled rice due to the lower price and similar quality comparing to Thailand,

Vietnam and Africa. However, the biggest constraint for Cambodia in developing processing rice was the lack of capital,

Cambodia attracted some investors and established some good milling factories, most of them are join ventures of

Chinese and Cambodian investments. Actually, the “Rice Policy” is the only sector-specific industrial policy which was

highly evaluated by the ADB and WB economists during the interviews.

3.3 Economic reform

The general picture of Cambodia shown above indicates a need for economic reforms which are mainly brought by

foreign investors. Since the creation of the Law on Investment (LOI) in 1994, Cambodia started its efforts towards

attracting FDI to the country. There was also a transition from a centralized planned economy to a market economy.

Therefore, there are important policies proposed and implemented by Cambodian government, which were mainly

economic reform policies, included the privatization of State-Owned Enterprises (SOEs) and the attraction of FDI as the

core policies.

3.3.1 Privatization of SOE

The main objective of the privatization of SOEs

150

was to reduce the government’s fiscal burdens in supporting the

enterprises and attract FDI to supplement the devastated domestic industry. As Cambodia’s SOEs were relatively small

in size and in technology accumulation, the privatization process was carried out rather smoothly. As one of the core

economic policies was to make Cambodia transform from a centrally planned economy to a market-oriented economy,

the reforms of SOEs have played a significant role in Cambodia’s economic history.

The stages of privatization of SOEs in Cambodia can be divided into two phases. The first phase happened in the late

1980s and continued to 1993. “During this phase, Ministries simply privatized their own enterprises under their direct

supervision, negotiating the terms of sales/leases and brought the revenues directly into the Ministries' budgets”

151

. The

second phase started in 1995, and its target was to tighten and centralize control over the whole process by an “inter-

ministerial privatization committee under the leadership of the Ministry of Economy and Finance”

152

Before the privatization, there were 187 SOEs in Cambodia. By the end of 2000, 160 SOEs had been privatized, of which

139 were leased to the private sector, 12 transformed into joint-ventures, and eight sold outright and eight liquidated

153

In 2007, there were 17 major SOEs operating in Cambodia with a total market capitalization of 6,195,887 million Riels

(approximately 1.5 billion USD), 14,251 employees, and 1,503,257 million Riels (approximately 375 million USD) total

revenue

154

The privatization of SOEs was a necessary policy choice for the country to move from a planned to market economy, and

the process itself was considered successful, because the actual existing period of SOEs' operation during the planned

economic system was quite short and the scale of SOEs was relatively small.

155

3.3.2 Attracting FDI

Encouraging private and foreign investor participation is the most important priority for the Cambodian economy

development. Recognizing the successful development experiences of other countries in the region, where FDI has

played an important and crucial role, Cambodia is determined to attract as much FDI as possible for the country. In

August 1994, the National Assembly passed the Law on Investment (LOI), signifying the beginning of the liberal foreign

investment regime in Cambodia. The law allowed FDI firms to engage in most sectors of the economy and to have 100%

ownership. Only a few sectors have some constraints for FDI in terms of conditions, local equity participation, or prior

approval from the relevant authorities, including the manufacturing of cigarettes, movie production, rice milling,

150

Ngov, Penghuy. ASEAN Economic Integration and Cambodia’s Industrial Policies, 2011, p. 83-84

151

Ibid

152

Chuon Naron, Hang, “Policy on State-Owned Enterprises”, 2008

153

UNCTAD, An Investment Guide to Cambodia, 2003, p. 74

154

Ngov, Penghuy. ASEAN Economic Integration and Cambodia’s Industrial Policies, 2011, p. 83-84

155

Ibid

exploitation of gemstones, publishing and printing, radio and television, manufacturing wood and stone carvings, and

silk weaving. Comparing to China’s three Laws and relevant Acts about FDI, Cambodia’s LIO is quite aggressive, which

reflects the strong political will towards attracting FDI to boosting domestic development.

In 2003, the 1994 LOI was amended to “limit discretion, improve transparency and reduce administrative burden, as well

as increase state tax revenues”

156

. According to the amended LOI, the corporate tax was raised to 20% from 9% for all

projects, except for natural resource businesses, which was raised to 30%, and 9% or 0% for existing and tax exempted

qualified investors. Furthermore, reinvestment of profits and repatriation of earnings was tax-free according to the 1994

LOI, while under the 2003 amended LOI they are now subject to taxation.

As indicated in Figure 28, FDI inflow into Cambodia was very low from the 1990s to the 2000s. Starting from 2004, the

annual FDI inflows rose rapidly, making a 10-fold increase from its low level in 2003 and reaching its highest level in

2007. However, due to the 2008-2009 international financial crises, this increasing trend was interrupted. FDI inflows

into Cambodia in 2009 dropped to 539 million USD from 815 million USD in 2008. In 2010, the FDI inflows recovered a

little bit because of the slowly recovery of FDI in the global level, and almost arrived the similar amount of 2008. By

September of 2011, the Ministry of Commerce (MoC) and the Council for the Development of Cambodia (CDC) approved

1,736 projects worth US$38.51 billion in total.

Similarly, the ratio of FDI inflows to gross fixed capital formation also started to increase from 2003, reaching 51.9% in

2007, indicating the increasing significance of foreign investment in the Cambodian economy. Although the ratio of FDI

inflows to gross fixed capital formation reduced dramatically due to same reason in 2008 and 2009, its average ratio

during 2001-2010 accounted for 29.6%, and almost twice that of Vietnam’s 17.1% during the same period. However, this

phenomenon also provides the strong evidence

of the underdevelopment of domestic

investment, so that Cambodia had no choice but

to rely on foreign capital and technology to

achieve economic and social development

targets. Thus, Cambodia’s government had no

position in selecting FDI by its natures and long

term targets; even they knew it is important for

scientific and rational industrialization.

Figure 25: Trend of FDI and FDI-Gross Fixed Capital Formation Ratio

In terms of the country of origin of investors to Cambodia, China ranked the first,

followed by South Korea shown in Figure. Investment from China during 1994-

2010 totalled USD7.7 billion and was allocated among many sectors, mainly

including garments, textiles, industrial parks, infrastructure, and hydropower.

Investments from China are strategic and a large portion of which directly

contributed to the basic infrastructure development of the country. FDI inflows

from South Korea were USD2.9 billion during 1994-2010. Their main investments

are in real estate development, the banking sector, and construction.

Figure 26: Investment Trends by Country in Cambodia 1994-Oct2010

157

156

UNCTAD, An Investment Guide to Cambodia, 2003, p. 74

157

Source: Council for the development of Cambodia

3.4 Investors

As the big players in the region, both China and Japan investment play a significant role in socio-economic development

in Cambodia particularly, especially in infrastructure and human resources development. Because of the historical and

political reasons, Cambodia has stronger economic relations with China (see figure 1). Recent years, Japanese investors

increased the investment in Cambodia because of the political relations between the two countries and investment

environment changes in Cambodia. It is hard to avoid the conflict of interests between China and Japan in Cambodia,

but from Cambodian perspective both China and Japan have good will to help Cambodia to get out of poverty rather

than competition to gain political interests.

3.4.1 Chinese Investment in Cambodia

In the history, bilateral relations of Cambodia and China dated back to 13

century. These two countries practiced

tributary type of international relations. Khmer Kingdom sent tributes to China which was regarded as the centre of

universe. The inflow of Chinese people into Cambodia since early provided a people to people linkage. These ethnic

Chinese bring with them culture and traditions which are latter integrated into significant part of Cambodian culture.

Chinese-Cambodians play an important role in the Cambodian commerce and business sector as well as being dominant

in the Cambodia's political scene. They also have very strong links with Guangdong, Hainan, and southern part of China.

The modern Cambodia-China relations started from 1950s after Cambodia gained independence from France. The first

meeting between Sihanouk and Zhou En Lai in 1955 at Bandung non-aligned movement meeting marked the beginning

of the modern relations between the two countries. Diplomatic relations between China and Cambodia started from

1958. Since 1990s, China-Cambodian relations turned to a new phase of development. Leaders of the two countries

maintained frequent contacts and exchanges of visits.

158

The relation between China and Cambodia was improved to

Comprehensive Strategic Partnership in 2010 under the background of globalization.

As to Chinese, Cambodia can reach loans more easily from China and it is Chinese strategic partner. In China, they have

the strategy of “GO Global”, the central government wants to improve capital to go global and encourage investors to go

out of China And Chinese investors could get financial support easily due to the government commitment. Moreover, the

investors from Yunnan province are active participating investment in Cambodia. The Association for Economic

Cooperation and Trade Promotion between Yunnan and Southeast and South Asia (ECTPA) signed an investor facilitation

cooperation agreement with Chinese Chamber of Commerce in Cambodia, aimed to seek business opportunities in the

country.

China was the biggest investment country in Cambodia. According to the reports of the Council for the Development of

Cambodia, from 1994 to October, 2011, there have been nearly 400 Chinese investment projects in Cambodia with the

accumulative investment of more than 8.8 billion U.S. dollars. Meanwhile, the bilateral trade between China and

Cambodia was 12.95 million dollars in 1992 and increased to 2.5 billion in 2011.Cambodian Prime Minister Hun Sen

hailed the Chinese government for encouraging her potential investors to Cambodia, saying the Chinese investment here

was hugely contributing to the country’s development

159

Chinese investment in Cambodia mainly in hydro-power dams, mineral resources, textile and garment industry, banking

and finance, tourism and agriculture concentrates on industry. There are more than 20 Chinese firms exploring mineral

resources such as metallic minerals, titanium, bauxites, and copper in Cambodia, adding that also hundreds of garment

factories in Cambodia are invested by Chinese. Almost 90 percent of the textile industries in Cambodia are owned by

Chinese investors. Almost most hydropower plants are invested by Chinese companies. China is also impressed with the

158

Chheang Vannarith, “ Cambodia: Between China and Japan”,2009, p4.

159

Dong Qing, “The trade between China and Cambodia in 2011”, 2012. http://www.chinadaily.com.cn/

development of special economic zones in Cambodia and pledged to attract Chinese investors to set up manufacturing

factories in the Sihanoukville Special Economic Zone

160

. Many Chinese products could be seen everywhere in Cambodia

since it is cheaper comparing with other imported products so it is suitable for Cambodian consumers.

3.4.2 Japanese Investment in Cambodia

Japan started relations with Cambodia much latter than China in the history. The modern relations between Japan and

Cambodia started in early 1950s after diplomatic ties established in 1953. However, because of cold war, the relations

between the two countries have been improved remarkably since 1990s when Cambodian conflict was resolved and the

liberal democratic political system was introduced. In 1996, Japan promised to increase foreign aid and investment in

Cambodia. Since then, Japan supported Cambodia in many fields especially conflict resolution and national

reconstruction

161

However, Cambodia-Japan trade volume is lower than Cambodia-China trade volume due to the lack of Japanese

investment and trade link between the two countries. Besides, Japanese investors do not have confidence yet in doing

their business because of the lack of rule of law and infrastructure. For Japanese investors, they care more about

environment, such as market size, investment climate, emerging market, rather than the incentives. According to the

reports of the Council for the Development of Cambodia, Japanese investments totaled US $ 250.6 million since 1994

through October of 2011. In recent years, Cambodia and Japan have seen better ties in trade and investments thanks to

the two governments' good relations and Cambodia's improving business environment. Meanwhile, Cambodia

government also continues encouraging Japanese investors to Cambodia, promising that the country now is full of

political stability. Moreover, in order to push bilateral economic relations between the two countries, both governments

of Japan and Cambodia signed an agreement for the liberalization, promotion and protection of investment in July 2008.

Because of the two countries' good cooperation in both economics and politics, Japanese investments in Cambodia have

increased by three folds in 2011, from 30 million U.S. dollars in 2010 to 120 million U.S. dollars in 2011. Meanwhile, the

number of Japanese companies doing business in Cambodia is increasing: the number of member-company of the

Japanese Business Association of Cambodia (JBAC) was expected to rise more than 70-80 companies at 2011.

For Japanese investors in Cambodia, they are more focus on manufacturing industries, and the main potential sectors

for the Japanese investment in Cambodia are garment and textile, food processing, agriculture and tourism. Japanese

investors have a clear strategy from west to east economic corridor and economic corridor. For Japanese perspective,

they called the industry corridors; This Industry Corridors is based on the network and on multinational with suppliers.

Japanese investors compare the labor, infrastructure and try to set up the network. This network is feasible because of

logistics linkage. Industry corridors have the linkage with the industry pools. They have the idea for example the industry

corridors; from Bangkok-PP-Ho chi minh, like that Bangkok takes textile, Cambodia make garment, packaged and export

in Vietnam.

In terms of the automotive industry, traditionally, the value chain: similar factories are in the middle, and the suppliers

are around 50 kilometers, maximum 100 kilometers. They have large automotives factories in Thailand. Usually, there

are components produced in Thailand, and further produced or valued in Laos or Cambodia and then final assembly in

Ho Chi Minh City and export. Some companies producing agriculture products prefer to locate near to the raw materials.

While in respect of financial development assistance, Japan has been always the top donor and China is emerging to be

main donor to Cambodia as well especially in the last few years. From 1999 to 2010, Japan’s ODA disbursements to

Cambodia were 3057 million dollars. In the past, Japan is more focus on hardware assistance, but now they have already

160

Xinhua news, 2011. www.peopledaily.com.cn

161

Chheang Vannarith, “ Cambodia: Between China and Japan”,2009, p6.

moved to software. Japanese ODA to Cambodia focuses mainly on demining, peace building, infrastructure development,

public institutional strengthening, and human resources development. They provided scholarships for students for

technical, education for officials to learn the Japanese experiences even ask them to work in Japan government (for 2

years or 6 months).

Year

Loan Aid

Grant Aid

Technical Cooperation

Total

1999

—

27.62

23.25

50.87

2000

1.53

65.32

32.35

99.2

2001

0.21

79.89

40.11

120.21

2002

7.47

48.46

42.65

98.58

2003

7.96

76.68

41.24

125.88

2004

7.35

38.27

40.75

86.37

2005

4.07

53.10

43.45

100.62

2006

9.50

56.93

39.83

106.26

2007

11.36

62.35

39.84

113.55

2008

4.82

70.21

39.73

114.76

2009

19.94

59.40

48.14

127.48

2010

13.54

80.83

53.10

147.47

Figure 27: Japan's ODA disbursements to Cambodia (Net disbursements, USD million)

Source: JICA

3.4.3 Value Chain

Value chains refer to the full range of activities from upstream to final stage of production, encompassing design,

processing, manufacturing, and marketing of a product. The initiative to form global networks is normally taken by

leading transnational corporations.

As for Japan, Electronic and automobile industries have been the major driving forces for remarkable economic

development. Since 1990s, Japanese investors have already established a comprehensive value chain in automobile and

electronic industries in Southeast Asia, such as Thailand, Indonesia. Until now, Japanese cars play a predominant role in

Southeast market. However, Japanese faces challenges in its value chain because of the high labor cost and atmosphere

calamity in Thailand. Especially, after the worst flooding in 2011 in Thailand, some Japanese investors are considering to

invest in Cambodia as the supplier of electronic or automobile industry. As of July 2009, there are several manufacturers

in Cambodia, such as Suzuki Motor Corporation. On top of these, Honda’s Thai subsidiary invested in Cambodia and has

assembled motorcycles in this country. Yamaha is preparing to construct assembly plant in the near future. In addition,

according to the CDC report, several of the 2011 investments included electric equipment assemblers, something hailed

by economists as Cambodia’s ascent up the manufacturing value chain. For example, Japan’s Marunix, a supplier of

electronic parts to companies such as Sony, IBM and Canon, set up an assembly plant in the Phnom Penh Special

Economic Zone last year.

In terms of Chinese investors, they are building a value chain in Apparel industry from China to Cambodia. The textile

and clothing industry in China has achieved strong competitive advantages since 1990s. However, now they are facing

many challenges including industrial upgrading and new forms of trade protectionism. The constant low-price

competition not only affects the bargaining power associated with export earnings, but has also resulted in constant

international trade friction over Chinese textile and clothing exports from both developed and developing countries

since 2005. What’s more, the low-end textile and garment firms in the coastal provinces of eastern China have been

under great pressure to meet workers’ demands for higher wages as well as the impact of the constant appreciation of

the Chinese currency. In addition, China government has been encouraging and supporting efforts by textile and clothing

firms to go global with a series of promotion policies and Special Fund

162

Therefore, more and more of the Chinese textile and clothing enterprises that have invested in Cambodia have a

relatively complete value chain in China. Cambodia has overtaken Viet Nam as the best investment destination for

Chinese textile and clothing enterprises in the Asia-Pacific region in recent years. It is showed that the subsidiaries of

Chinese textile and clothing firms in Cambodia had been gradually integrating into the vertically-integrated value chain

of textile and clothing firms in China, thereby becoming an important node in global textile and clothing value chain.

However, the majority of the garment factories in Cambodia have been engaged in the simplest activity on the value

chain, with the lowest value addition.

Moreover, both Chinese investors and Japanese investors have established a joint-venture company as zone developers

to develop SEZs in Cambodia since 2006. It has been known that Phnom Penh Special Economic Zone is the joint venture

between Cambodia and Japan. Japanese investors have the clear strategy to make the core parts produced in Thailand,

assembled in Laos or Cambodia, packaged and exported in Vietnam. They set up SEZ to attract a lot of Japanese

investors in the zone, and can form a value chain in Cambodia. China government has also been actively promoted the

establishment of overseas economic and trade zones. It is hoped that industries with domestic competitive advantages

and massive production capability, such as textiles, clothing, electronic appliances, construction materials, non-ferrous

metals and processing of agricultural products, will be transferred gradually to overseas economic and trade zones in

order to avoid trade friction as well as establish international marketing networks. Form SSEZ perspective, the value

chain in garment industry will be established in the Cambodia in the future.

162

Jinmin Wang, Jiebing Wu and Xianguo Yao, (2008)

3.5 SEZs (Industrial Estate) in Cambodia

3.5.1 Summary

Status quo

As a least development country, Cambodia realized the importance of FDI. The establishment of special promotion zones

(SPZs) has been an issue for Cambodia ever since the 1960s. From Cambodia perspective, the SPZs are widely recognized

as a major potential contributor to growth and development, since it can bring capital, technology, management know-

how, and access to new markets. However, the plan was not realized because the government didn’t achieve agreement.

Special Economic Zones (SEZ) was finally introduced in Cambodia for the first time in December 2005. Based on a 2005

sub-decree, 21 licenses have been granted by the Royal Government to develop SEZs until now. Most of them have been

developed rapidly along the Southern Economic Corridor, in particular in Bavet at the border with Vietnam, Poipet and

Koh Kong at the Thailand border. Metropolitan areas and port cities such as Phnom Penh and Sihanoukville have also

attracted more attention from investors. The first SEZ in Cambodia was approved in mid-2005 and developed by the

Manhattan International Group in Bavet. Now there are 6 zones are under operation and 15 zones under implementing.

Figure 28: Location of SEZs in Cambodia

SEZ

location

Area/capital

Licenses

from CDC

Sub-decree

Neang Kok Koh Kong SEZ

Koh Kong Province

335.43Ha; N.A

11/2002

10/2007

Suoy Chheng SEZ

Koh Kong Province

100Ha 14 million

11/2002

Not yet

S.N.C SEZ

Sihanoukville

150Ha 14 million

11/2002

Not yet

Stung Hav SEZ

Sihanoukville

192Ha 14 million

02/2005

03/2005

N.L.C SEZ

Sray Rieng

105Ha 13million

07/2005

Not yet

Manhattan SEZ

Svay Rieng

157Ha 15million

08/2005

11/2006

Poipet O’Neang SEZ

Babteay Meanchey

467Ha 15million

10/2005

07/2006

Doung Chhiv Phnom Den

SEZ

Takepo province

79Ha 28million

02/2006

12/2006

Phnom Penh SEZ

Kandal Province

350Ha 68million

02/2006

04/2006

Kampot SEZ

Kampot Province

99.6 Ha 15 million

05/2006

01/2007

Sihanoukville SEZ 1+2

Sihanoukville

1291Ha 420 million

06/2007

03/2008

Tai Seng Bavet SEZ

Sray Rieng

99 Ha 37 million

01/2007

04/2007

Oknha Mong SEZ

Koh Kong Province

100 Ha 40million

01/2007

Not yet

Goldfame Pak Shun SEZ

Kandal

Province

80 Ha 34.4million

01/2007

04/2007

Thary Kampong Cham SEZ

Kampong Cham

142Ha 69million

01/2007

07/2007

D&M Bavet SEZ

Sray Rieng

118Ha 52.27million

11/2007

Not yet

Sihanoukville Port SEZ

Sihanoukville

70 Ha 34 million

02/2008

Not yet

Kiri Sakor Koh

Koh Kong Province

1750 Ha N.A

12/2007

Not yet

Pacific SEZ

Sray Rieng

107 ha 70 million

01/2009

Not yet

Kampong Saom SEZ

Sihanoukville

255Ha 190 million

01/2009

Not yet

Stoung Hao SEZ

Sihanoukville

886Ha 128 million

05/2010

Not yet

Figure 29: List of SEZs in Cambodia

Source: Council for Development of Cambodia

Basic concept and condition for an SEZ in Cambodia

According to the “Law on the investment of Kingdom of Cambodia”, the Sub-Decree on the establishment and

management of the special economic zones define the SEZs and conditions as follows:

Special Economic Zone (SEZ) refers to the special area for the development of the economic sectors which brings

together all industrial and other related activities and may include General Industrial Zones and/or Export Processing

Zones. Each Special Economic Zone shall have a Production Area which may have a Free Trade Area, Service Area,

Residential Area and Tourist Area.

(a) It must have a land of more than 50 hectares with precise location and geographic boundaries.

(b) It must have a surrounding fence (for Export Processing Zone, the Free Trade Area and for the premises of each

investor in each zone).

and telecommunications networks, fire protection and security system. Based on each situation, the zone may have land

reserved for the Residential Area for workers, employees and employers, public parks, infirmary, vocational training

school, petroleum station, restaurant, car parking, shopping center or market, etc.

(d) It must have water sewage network, waste water treatment network, location for storage and management of solid

wastes, environment protection measures and other related infrastructures as deemed necessary.

(e) It must comply with technical requirements, regulations and basic rules on construction, environment and other

obligations in the development of Special Economic Zone as defined in the instructions issued by relevant ministries or

institutions taking into account the geography and specific size of each zone and pursuant to the existing laws, national

and international standards.

Management Framework

After the 1993 election, Laws and regulations

on investment in Cambodia are basically

designed to encourage investments. The new

1994 Investment Law was therefore enacted,

and subsequently another two sub-decrees: the

Sub-decree on the Implementation of the

Investment Law No. 88 ANKRBK issued in 1997

and Sub-decree No. 53 ANKR-BK on Restriction

on Some Sectors of Investment issued in 1999.

As the Law on Investment stipulates, FDIs are

treated in a non-discriminatory manner except

for land-ownership, which is stated in the

Constitution, and allowed to invest freely in

many areas.

Figure 30: Organisation chart of SEZ program

To govern the SEZ scheme, “Sub-Decree No. 148 on the Establishment and Management of the Special Economic Zone”

(the SEZ Sub-Decree) was issued in 2005. In addition, the “Law on the Special Economic Zones” has been drafted by the

CDC in 2008.

Council for the Development of Cambodia (CDC). CDC is the sole and One-Stop Service organization responsible for the

rehabilitation, development and oversight of investment activities. In 1990s, the Kingdom of Cambodia undertook a

program of reform to promote private sector investment when they recognized that the real economic growth

necessary to achieve the country’s developmental goals lies in the development of a healthy private sector. As part of

this reform program, CDC was established in 1994 according to the Law on Foreign Investment in the Kingdom of

Cambodia. This law made the CDC as the highest decision-making level of the government for private and public sector

investment. It is chaired by the Prime Minister and composed of senior ministers from related government agencies. On

29 December 2005, “Sub-Decree No.147 on the Organization and Functioning of the CDC” was issued to restructure the

organization of the CDC and a new wing of the CDC called the “Cambodian Special Economic Zone Board (CSEZB)” was

established to manage the SEZ scheme. The Cambodian Investment Board (CIB) and the Cambodian Special Economic

Zone Board (CSEZB) are the CDC’s operational arms for private sector investment. CIB deals with investment projects out

of special economic zones (SEZs) and CSEZB takes charge of investment projects in SEZs. They review investment

applications and grants incentives to investment projects meeting the requirements laid out in the Investment Law. This

law streamlined the foreign investment regime and provided generous and competitive incentives for direct private

sector investment

163

“Sub-Decree No. 148 on the Establishment and Management of the Special Economic Zone “apply to all activities of

relevant ministries or institutions of the Royal Government of Cambodia, Zone Developers and Investors in the Special

Economic Zones permitted to invest and have obtained Investment Incentives and guarantees from the Cambodian

Special Economic Zones Board and the Special Economic Zones Administration. The Management Structure of the SEZs

sees figure 10. Relative responsibilities are as follows:

Cambodian Special Economic Zones Board (CSEZB) refers to the Cambodian Special Economic Zones Board under the

authority of the Council for the Development of Cambodia which is established by a Sub-Decree. CSEZB is in charge of

the development, management and supervision of the operations of the Special Economic Zones.

The “Special Economic Zones Trouble Shooting Committee (SEZ TSC)”, which is located at the CDC, has a duty to

promptly settle all issues occurring in the SEZ, whether pertaining to technical or legal aspects, or issues under the joint

jurisdiction of ministries or institutions and beyond the competence of the SEZ Administration or the CSEZB. It has the

further duty to be a mechanism to receive any complaint, and find solutions to such complaints filed by Zone Developers

as well as by Zone Investors.

Special Economic Zone Administration refers to the State administration management unit which is the “One-Stop

Service (OSS)” mechanism at the site of the Special Economic Zone and set up by the CSEZB in order to be permanently

stationed in each SEZ. OSS has the duties to approve and issue permits, licenses and registration to the Zone Investors,

including the approval of incentives, pursuant to the full authority delegated by the line ministries and institutions, and

to address all requests related to the management competence of the State, concerning investments in the zone.

Zone Developer refers to a Cambodian or/and foreign natural or legal person, who implements the Qualified Investment

Project, and permitted to invest in the development of physical infrastructures in the zone, and organization of business,

services and ensuring the safety and security of the Zone Investors.

Figure 31: Structure at CDC and at each SEZ

163

Website of Council of development of Cambodia

Tax Incentives and tools

Cambodia has adopted a number of laws and regulations to improve its open economy and encourage foreign

investment. Currently, Cambodia offers investors one of the most liberal investments regime and tax incentive scheme

in Southeast Asia. Below are some key incentives:

General Incentive entitled as a QIP

Under the Law on Investment (Article 2 and 6, “Amended Law on Investment”), the investor can receive a Final

Registration Certificate (FRC) and enjoyed general Incentive entitled as a QIP (Qualified Investment Project)

Receive profit tax exemption or use special depreciation (selective)

1. Profit tax exemption: Tax holiday period is composed of “Trigger period” + 3 years + Priority period (Maximum

total 9 years);

a. “Maximum trigger period” is the first year of profit or 3 years after the QIP earns its first revenue,

whichever sooner.

b. “Priority period” is determined by the Financial Management Law (max. 3 years).

2. Special depreciation: 40% special depreciation allowance on the value of the new or used tangible properties,

which are used in the production or processing.

Incentives in the SEZ

The Cambodian Special Economic Zones Board examines and provides incentives to all Special Economic Zones in the

Kingdom of Cambodia. Based on “Sub-Decree No. 148 on the Establishment and Management of the Special Economic

Zone” (the SEZ Sub-Decree),

Beneficiary

Incentives

Zone

developers

- The exemption period for the Tax on Profit shall be provided for a maximum period of 9 years, in compliance with

article 14.1 of the Law on the Amendment to the Law on Investment.

- The import of equipments and construction materials to be used for infrastructure construction in the zone shall be

allowed and exempted of import duties and other taxes.

- The Zone Developer shall receive custom duty exemption on the import of machineries, equipments for the

construction of the road connecting the town to the zone, and other public services infrastructures for the public

interests as well as for the interests of the zone.

- The Zone Developer may request, under the form of a temporary admission (AT), the import of means of transport and

machineries used for the construction of the infrastructures in accordance with the laws and regulations in force.

- - The Zone Developer may obtain a land concession from the State for establishing the SEZ in areas along the border or

isolated region in accordance with the Land Law, and may lease this land to the Zone Investors.

Zone

investors

The same incentives on customs duty and tax as other QIP shall be entitled.

- The Zone Investor entitled to the incentive1 on Value Added Tax (VAT) at the rate of 0% shall record the amount of tax

exemption for its every import. The said record shall be disregarded if the Production Outputs are re-exported. In case

the

- Production Outputs are imported into the domestic market, the Zone Investor shall refund the amount of Value Added

Tax as recorded in comparison with the quantity of export.

Common

- Zone developers, investors or foreign employees have the right to transfer all the income derived from the investment and

salaries received in the zone to banks located in other countries after payment of tax.

- The Zone Developer and the Zone Investor are entitled to obtain the investment guarantees as stated in Article 8, Article 9

and Article 10 of the Law on Investment in the Kingdom of Cambodia and other relevant regulations.

- Non-discriminatory treatment as foreigners, non-nationalization and no-fixing price

Figure 32: Incentives in the SEZs

Special Customs Procedures

It has been decided that the special customs procedures shall be applied to the SEZ (Prakas No. 734 MEF on the Special

Customs Procedures to be implemented in SEZ, dated September 11, 2008).

1) SEZ located within 20km from the official border

- For importation: At border check point, only present and provide the duplicated copies of goods and not required to submit customs

declaration. No customs seal shall be affixed. The goods shall be transported through the Seamless Route. At SEZ gate, submit Customs

Summarized Declaration. Customs officers shall preliminarily verify the identification of involved staff, mean of transport and related

documents then allow the goods to be transported to investor’s premise. Importer can use the imported goods without the presence of

customs offices.

- For exportation: The customs procedure must be conducted in the SEZ. If no irregularity found, goods shall be immediately released to

the border with copy of relevant export documents. At border check point, present the customs export documents to customs officer for

verification. If no irregularity found, the goods shall be released for export.

2) SEZ not located within 20km from the official border

- For importation: Applying the National Transit Procedure. Containers must be sealed by customs officers.

- For exportation: The customs procedures must be conducted in the SEZ and the container be sealed before shipping out to border.

Incentive on VAT Exemption

Extended without specific time limit by the Prime Minister’s Notation on Letter #2128 SHV (MoEF) dated on 2 March

2010 of Ministry of Economic and Finance on the request to continue the temporary suspension of VAT for the investors

in the Special Economic Zones. The imposition of VAT shall be automatically suspended for the following. This incentive

shall not be applied to the immovable property development project in the SEZ.

-The construction materials, production equipments and materials to be imported by Export-oriented QIP in SEZ.

-The construction materials and production equipments to be imported by Domestic Manufacturing QIP in SEZ

-Products produced by QIP in the SEZ, which will become the production input to other QIP in the same SEZ.

Other unusual advantages to international investors

a) 99-year lease of land for foreign individuals and companies, the lease is renewable for another 99 years, and

transferable

b) No restrictions on international currency transfer and remittance

c) 100% foreign ownership for any business

Comparison of three SEZs

Dimension

Phnom Penh SEZ

Sihanoukville SEZ

Port Authority

Sihanoukville SEZ

Operating since

2008

Under construction

Size

360 hectares

178 hectares

70 hectares

Location

Inland (near capital)

Coast (Sea Port)

No. of investors

3 under negotiation

No. of operating firms

34 anticipated

Nationality of Developer

Japan & Cambodia

Chinese &Cambodia

Cambodia SOE

Primary nationality of investors

Japanese

Chinese

Cambodian

No. of jobs created to date

15,000

5000

No. of jobs anticipated

100,000

25000 to 30000

Investment to date

$138 million

$100 million

Sectors

Garment, footwear, food

processing, electrical

equipment

light industry, including

garment, bags and

electronics…

Products using more

shipment

Figure 33: Comparison of Cambodian SEZs

Source: Personal interviews

SEZ Name

Land Price

(US$)

Utilities Cost (US$)

Major

Markets

Land Price

Land use

Ready built factory

Electricity

Water

Waste

water

PPSEZ

50/m2

50/m2 (99

years)

Leasing 5 years

2.5/m2/year

0.15/kwh

0.30/m3

0.26/m3/

month

Dom

Foreign

SSEZ

22-27/m2 for

50 years

Opt.1:0.8/m2/month

Opt.2:2.5/m2/month

0.15/kwh

0.25/m3

USA

SPSEZ

55-65/m2

0.0025-

0.00275/KV

A/month

Figure 34: Utility cost in Cambodian SEZs

Source: SEZs websites and presentations

3.5.2 Phnom Penh Special Economic Zone (PPSEZ)

164

Over the past decade Cambodia has adapted a wide

range of free market policies, with a business-friendly

and proactive government seeking to encourage

investment and manufacturing in the country. The

capital Phnom Penh is strategically located in one of the

world's most attractive destinations for your long term

and secure investment. To compete in a highly

competitive global business environment, the Royal

Government of Cambodia has liberalized export policies

& licensing and implemented tax reforms providing

various incentives to investors. It has also promoted the

creation of economic zones – self-contained, fully

serviced SEZs providing a range of attractive incentives

164

PPSEZ website and personal interviews

Figure 35: PPSEZ

to their customers. The SEZs are considered growth engines that boost manufacturing, augment exports and generate

employment for the country.

Location

PPSEZ is located at the heart of the region's east-west corridor, and along highway NO. 4 connecting to Sihanouk Ville,

Cambodia's main sea port providing easy sea access to Japan (via Ho Chi Minh City) and Singapore. It is only 8 km away

from Phnom Penh International Airport and 18 km from (30 minutes drive) to the capital city center, where the Phnom

Penh port is located (Mekong river port). Furthermore, it also takes advantages of the South Corridor project oriented by

ADB which links Bangkok in Thailand and Ho Chi Minh City in Vietnam. In the near future, there will be linkage to the

main train line (passing Phnom Penh SEZ) from Phnom Penh to Sihanoukville (Kompong Som) and later Vietnam to offer

investors direct access to a global logistics network.

Figure 36: Location of PPSEZ

Developer

Phnom Penh SEZ, as a leading SEZ in the Kingdom of Cambodia and major industrial park, was approved by the Royal

Government of Cambodia on April 19th, 2006. It is operated by a joint venture of Lok Chumteav Oknha Lim Chhiv Ho and

Zephyr Co., Ltd. (Tokyo, Japan) with a 27 million US

dollars’ registered capital.

Facilities

Totaling 365ha, Phnom Penh SEZ is being developed in

2 phases, with phase 1 providing 58 factory lots, and a

further 20 ha set aside for residential and commercial

development to support and provide the factories,

their management and workforce. Currently available

factory lots range from 0.4ha to 1.6 ha in size.

In Phase 1, the infrastructure work was completed in

April 2008 with independent power station, water

purification / sewage treatment plant and

Figure 37: Organisation structure

Telecommunication operated every day; in Phase 2, the work started from January 2011. Until now, there are quite

sound infrastructural facilities such as roads, generation and distribution of power, water supply, sanitation and sewage

systems, flood-safe dike and drainage system, telecommunication networks, dry port, commercial service, residential

and leisure units in the PPSEZs, which provide more attractions and conveniences to the investors.

Figure 38: Development Phase of PPSEZ

Source: PP SEZ website

Investment

Until February 2012, 36 investors have established their factories or operations within the SEZ or decided to invest here.

19 of them have already operated, 11 are under construction and the other 6 are preparing their investment

applications. Among them, 20 come from Japan, 7 are from China (including Taiwan), and the other 9 investors are from

Malaysia, Singapore, Cambodia, South Korean, Thailand and Vietnam. The total investment of the projects is about 140

million US $, and almost three quarters are from Japanese investors.

After the developer accomplished its Phase 1 construction, it faced significant difficulty in attracting investment due to

the international financial crisis. Thus, in 2008, the developer built office building and factory workshop for a Japanese

shoes company to invite them to come to the SEZ. Because of the success of this company, there are an increasing

number of Japanese investors recognizing the investment climate in the SEZ and deciding to invest here. Furthermore,

the developer targets on attracting small and medium size companies, which usually spending less time in selecting

locations, while the big ones always spend more time due to their complicated procedure in decision making. Moreover,

Industrial land selling price: 45US$/m

- Industrial land leasing price: 0.50US$/m

Month (Deposit: 6 months of leasing price)

- Factory rental fee: 1.60 US$/m

/Month (Standard Specification)

- Water Supply Cost: 10% cheaper than PPWSA (Est. US$ 0.30/m

)

- Sewage & Waste Water Treatment Cost: (Est. US$ 0.35/m

)

- (Calculation Method: based on 80% of purchase water volume)

- Electricity Cost: 10% cheaper than EDC (Est.US$0.15/kwh)

- Infrastructure maintenance Fee: US$ 0.06/m

/Month

- PPWSA: Phnom Penh Water Supply Authority

- EDC: Electricite Du Cambodge

the developer also takes care of the registration process for investors to facilitate their projects. Hence, the PPSEZ

becomes one of the concentrated locations of Japanese investors.

Main sectors

PPSEZ encourages light, medium and labor intensive industries to join Phnom Penh SEZ, such as:

 Mechanical and electrical products destined both for export and the local market

 Light chemical industries

 Garment, shoe and fashion industries

 Food processing and agricultural industries for regional and local markets

 Consumer products (pharma, transportation, packaging etc.)

 Assembly of pre-produced parts to final product for regional and local markets

 Logistics companies

Now in the PPSEZ, the main sectors are garment, shoes, food processing and some other light and labor intensive

industries. Meanwhile, there are also a few of companies producing motorcycle, medial device, and small motor.

However, they are more about assembly or less innovation oriented production, which are always located in the lower

level of value chain.

One Stop Service (OSS)

Companies investing in Phnom Penh SEZ are enjoying a wide range of support from government institutions based on

site - minimizing administrative efforts and providing direct access to solutions, particularly for the OSS. The PPSEZ

Administration Office (One Stop Service Center) has started operation since 1 September 2008, H. E. Chea Vuthy, the

Deputy Secretary General of CDC, is the Chairman of the PPSEZ Administration Office. The OSS services are in

partnership with relevant government authorities, including: Council for the Development of Cambodia, Customs &

Excise Department, Import Export Inspection & Fraud Repression Department, Ministry of Commerce, and Ministry of

Labor and Vocational Training. They are in charge of Investment Application, Import / Export permit, Custom Clearance,

Issuance of Certificate of Origin, Work Permit and Support for Labor Issues.

Furthermore, there are more institutional arrangements of Cambodia government to deal with private investment,

which could help PPSEZ in attracting more investors. The Council for the Development of Cambodia (CDC), chaired by

H.E. Samdech Hun Sen, Prime Minister of the Royal Government of Cambodia, has 2 arms to deal with private

investments: firstly, the Cambodia Investment Board (CIB) with 24 provincial/municipal investment sub-committees

responsible for investments in Cambodia; secondly, the SEZ committee, chaired by the Prime Minister, responsible for

addressing investments in the Special Economic Zones (SEZ). On top of this structure, the investors' feedback, and their

input are addressed in a government-private sector forum held every 6 months under the chairmanship of the Prime

Minister, with deep interaction of key members of the Royal Government with representatives of the private sector.

Opportunities

Location: easy access to airport, river port, sea port, central location in Cambodia, and better road network with

Thailand and Vietnam.

Infrastructure: sound infrastructures, including independent power supply, water supply, sewage system, flood dike

system, reliable telecommunication and internet.

Market access: Phnom Penh itself provides a market of 2 Mio consumers within 30 minutes from the SEZ. Moreover, the

PPSEZ offers easy and highly profitable access to the Japanese, US and European markets. Most of Cambodia's export

products enjoy duty-free and quota-free (DFQF) treatment by the European Union, Canada, Australia, New Zealand and

Norway. Cambodia also enjoys DFQF for more than 8,000 tariff lines in the USA and Japan. Furthermore, the Republic of

Korea and China have extended similar treatment for many products from Cambodia, while ASEAN's 6 founding

members provide duty-free access for Cambodian products under the ASEAN Integration System of Preferences (AISP).

Hence, Producing in PPSEZ for export to the above markets is an economic and fast way for investors to propel their

products to the world market.

Labor: Comparing to the other regions of Cambodia, Phnom Penh has more population and better education, which

leads to more reliable labor supply and better labor skills. Furthermore, compare to Thailand, the average labor cost in

Cambodia is quite low. The minimum wage set by government is only 61$, while Laos is 66$ and Bangkok is 200$.

Sound service: As the SEZ operators, they closely cooperate with all government authorities to create an investor-

friendly environment able to accommodate investors at the PPSEZ. They established an international management team

from Cambodia, Malaysia, Japan and Singapore to provide assistance in facilitating various investors’ local management

and work force with different languages and cultures.

In addition to administrative services for set-up and investment registration, they also provide value-added services in

legal, accounting, assisting with customs clearance and labor management through relevant government agencies.

Improve service

To train PPSEZ staff to enhance customer-first attitude; to provide full support for investors to facilitate transactions by

coordinating with government officials; to support for recruitment of workers from local communities and provinces,

and promote smooth relations between employers and employees by advising adequate knowledge of labor

management for new foreign investors labor management; to open a vocational school by collaborating Cambodian

government and international organization targeting next year; to invite more commercial service providers to locate in

PPSEZ to improve the convenience for investors.

3.5.3 Sihanoukville Special Economic Zone (SSEZ)

165

Sihanoukville: the Gateway to the world.

Sihanoukville is located on the coast of Cambodia, between Ho Chi Minh City Eastern Economic Area on one hand and

Bangkok and Western Seaboard Economic Areas on the other hand, where the industrial clusters have been formulated

especially by Japanese manufactures. The area connecting Bangkok and Ho Chi Minh City is expected to achieve further

165

Personal interviews

Figure 39: Sihanoukville city

economic growth, thanks to the improvement and development of road networks as well as the liberalization and

facilitation of cross border trade.

Rehabilitation of Preah Sihanouk Province International Airport has also been completed. The airport has acquired the

extended runway with 2,500m long, which can accommodate jet planes. The operator of the airport, SCA, also plans to

expand the runway to 4,000m in future. In addition, Cambodia Angkor Air, a national airline of Cambodia, was officially

launched in July 2009 and intends to provide regular flight services between Phnom Penh, Siem Reap and Preah

Sihanouk.

Moreover, the Sihanoukville Port is the only international deep seaport in Cambodia. The Port is directly connected with

the two major international hub ports: Singapore Port and Hong Kong Port, and further linked with the overseas major

markets through these two hub ports. Therefore, Sihanoukville, is the gateway to the world.

There are four SEZs in Sihanoukville, but now only two are under construction, including Sihanoukville Special Economic

Zone and Sihanoukville Port Special Economic Zone.

Sihanoukville special economic zone is currently the biggest one in the Kingdom with the investment from China (and

Cambodia), which again testifies the close economic and political ties between Cambodia and China and those between

the top leaders of both countries. This SEZ was approved in 2008.

Location

SSEZ is located in the sole international port city in

Sihanoukville. It is 3 km from Sihanoukville deep water

port, 12 km from airport, close to no.4 national highway

and only 210 km away from the Phnom Penh. It has

good location and convenient transportation.

SSEZ has a total plan area of 11.13 km

. The planning of

5.28 km initial area will be a total investment of 320

million USD with textile & clothing, machinery &

electronics and high-tech products as the leading

industries. It will be an integration of EPZ, Bonded zone,

Trade zone and living zone.

At present, there are 17 firms and 5000 employees in SSEZ. The investors are from all over the world, including China

Japan, Unite States, France, and Ireland. But most of them are Chinese investors from east and south part of China, such

as Jiangsu, Zhejiang and Guangdong province.

The zone developer has built 1000 dormitories in the zone and later plan to build more.

But because of more investors come in, they need more workers. Now, most of

employees live near the zone. So some of them need to come to work by trucks or

bikes, it takes them 30 minutes from home to the zone.

Zone developer

Sihanoukville Special Economic Zone, is a joint venture SEZ, Co-operated by China

Jiangsu Taihu Cambodia International Economic Cooperation Investment Co.,Ltd. and

Cambodia International Investment Development Group Co,.Ltd. It is one of the first

batch of overseas economic and trade cooperation zones approved by ministry of

Figure 40: Location of SSEZ

Figure 41: The Gate of the SSEZ

commerce of PRC. It has been paid high attention by top leaders including the Premier Minister of the two countries and

has gained preferential policies which supplied by two governments. Jiangsu Province maintains close and friendly

communication with Cambodia. The province's Wuxi City is sister city to Cambodia's Sihanoukville City.

Jiangsu’s HongDou Group won the bid to build the zone. Construction started in February 2008. Hongdou Group Co., Ltd.,

is a Jiangsu-based enterprise in clothing, tire, biological pharmacy and real estate.

Strategies/Objectives

The initial area of 528 Ha of SSEZ will develop textile &

garments, metals & machinery, and light industry & home

appliance as the leading industries, and be integrated by

Export Processing Zone, commercial and living area as well.

It is supposed to attract over 300 investors and

accommodate nearly 100,000 people when completed.

In the future, the zone developer also plants to set up

industry chain in the zone. Such as garment, they plan to

build textile factories, garment factories, and some could be

the buyer and some could be the supplier. The zone

developer also wants to open Scholl and training centre in

the zone. Besides, power plant is under consideration.

Key sectors

The Sihanoukville Special Economic Zone mainly targets

companies in textiles, light machinery, and the home

appliance and electronics sectors. The master plan

about the zone divides the zones in sectors, some area

for garment; some area is high-tech; some area for

electronics, and some area for others.

Now, Key sector in SSEZ now is light industry, including

garment, bags and electronics, etc…Japanese investor

in the zone now is electronics; and US, Ireland and

France investors are garment.

Figure 42: Illustration of plan of SSEZ

Figure 43: Garment factory in SSEZ

Number

Name of firms

sector

status

investors

NanGuo Garment Co.,Ltd

garment

open

China

Wan Hai Hanger Co.,Ltd

hanger

open

China

The Brilliant Shoes Co.,Ltd.

shoes EVA

open

China

Hongdou International Garment Co.,ltd

garment

open

China

OUFEIYA Leather Co.,Ltd

Leather

open

China

Galey Global Cambdia Co.,Ltd

garment

open

USA

Keeptop Sporting Goods Co., Ltd

diving dress

open

China

Forest wood (Cambodia) Co.,Ltd

Manufacturing

open

China

ZhongZheng (Cambodia) Co.,Ltd.

bags

open

China

Horseware Products Ireland Ltd

horseware

open

Ireland

Worldtec Cycles(Cambodia)Ltd

bicycle

open

China

Wealth Steel Industry Engineering Co.Ltd

Steel

open

China

Asle Electronics (Cambodia) Co.,Ltd

Electronics

open

Japan

Rebacca Hair products Co.Ltd

Hair

preparing

China

Izumi Electronics (Cambodia) Co.Ltd

preparing

Hongkong

Cambodian Gateway Underware CO.Ltd

Underware

preparing

Hongkong

Sure Success Industrial Co.,Ltd

Stationery

preparing

Hongkong

Figure 44: Firms list in SSEZ

Source: Personal interviews in the field trip

Governance in the SSEZ

According to the law, SSEZ is governed by CDC. At first, the zone developer builds the infrastructures and factories after

they got the permission from CDC. When the investors come, they can have both choices, lease the land or lease the

factory.

Relative services provided by Sihanoukville Special Zone:

“One-stop” management service: project approval, planning management, building management, labor and human

resources; one-stop-service will under operation after the Spring Festival in 2012.

“Package service” support: registration, visa application, product and equipment export and import customs

declaration, commodity inspection, recruitment and training assistance, service of Cambodian speaking personnel.

“All-round” perfect service: tailor the plant and associated facilities to the investors; provide basic facilities for

production, living; assist in financing, provide economic and trade information and recommend business partners.

Other services to the investors in the future, such as training, security, etc…

3.5.4 Sihanoukville Port Special Economic Zone (SPSEZ)

166

Location of SPSEZ

The Sihanoukville port locates in Thailand gulf, and operated by a state

enterprise- Port Authority of Sihanoukville, which is under the ministry

of finance (MOF) and ministry of public works and transport. From

MOF, they could get finance support and they ask for technical support

from MPT.

The port is linked with Phnom Penh by national road NO.4 and national

road NO.3 and almost 260 km railway. The port is the southern part

transportation, the sole international deep sea transportation, and

multiple transports of the state. It has direct connection with many

Asian ports without any changing to different methods. There are 5

lines (shipping companies) call for the port. RCL is the biggest one, and

there are also MUC, SITC, ITL, APL and COTS (local company). The

capacity of PAS in its present condition estimated at about 950,000 tons

per year and PAS can accommodate ships of 10,000-15,000 tons

deadweight.

The port has experienced 5 phrases in its development (details on the brochure). They are working on the SEZ phrase in

2009 and 2011 and the phrase of Multiple-purpose terminal development project (2012-2014).

Sihanoukville Port SEZ (SHV Port SEZ) is adjoining the SHV Port, directly connected with Phnom Penh, the capital city, via

National Road No.4, which is the most reliable and well rehabilitated road in this country.

2006

2007

2008

2009

2010

2011

Total cargo throughput (tons)

1,586.791

1,818,877

2,057,967

1,874,095

2,217,150

2,439,384

Container throughput (TEU)

231,036

253,271

258,775

207,861

222,928

237,941

General cargo throughput (tons)

197,573

193,572

291,114

241,494

374,801

372,554

Figure 46: Cargo Throughput of the Sihanoukville Port

Source: Sihanoukville Port

The distance from Phnom Penh is about 230km and 3.5 hours by car. Also, the SHV Port SEZ is connected with the Thai

and Vietnamese borders within 3 hours by national roads.

166

SPSEZ website and personal interviews

Figure 45: Location of SPSEZ

Figure 47: SPSEZ

Furthermore, the SHV Port SEZ is adjacent to the Sihanoukville railway station, which is the final destination of the

Southern line of the National Railway. At present, the rehabilitation project funded by the Asian Development Bank is on-

going. The utilization of railway will provide significant benefit for the investors in the SHV Port SEZ in future.

Developer

Sihanoukville Port SEZ (SHV Port SEZ) is the only Zone developed by State-owned Company. Port Authority of

Sihanoukville (PAS), is the executing agency of this project and therefore, is a zone developer of the SHV Port SEZ. SHV

Port SEZ was established for materializing the concept proposed in “the Master Plan (MP) Study for Phnom Penh –

Sihanoukville Growth Corridor Development” carried out in 2003 by JICA, as ODA of the Government of Japan. One of

the MP’s concepts was to establish a special promotion zone which develops new industries in Cambodia in order to

diversify the export commodities and accumulate new technologies by Foreign Direct Investment (FDI) in the city of

Sihanoukville.

Figure 48: Management structure of SPSEZ

Strategies/Objectives

SHV Port SEZ is aiming to supporting Phnom Penh-Sihanoukville Growth Corridor, reducing the Poverty of Cambodian

People, Supporting the Private Sectors, creating around 25,000 to 30,000 employment opportunities for younger

generation in Sihanoukville, and Providing opportunity for human resources development through new employment ,

auxiliary training and transferring technology, as well as supporting the Sihanoukville Autonomous Port as a backup

service.

Figure 49: Master plan of SPSEZ

As to the SEZ project, it covers 70 hectares area, and now it is under

construction: the entire infrastructure, such as building, roads,

electricity, water, etc. furthermore, there are also several investors are

still under negotiation. For the multiple purpose terminal project,

which includes two main parts, dry bulk cargo terminal and oil

exploration logistic base. Furthermore, there was a new airport put into operation in the city, which is 16 km away from

the port.

Investment in SHV Port SEZ

Sihanoukville Port SEZ is the only SEZ developed as an ODA project with cooperation between Cambodian and Japanese

Governments.

on March 20th 2006, Japan government signed an ODA loan agreement totaling up to JPY318 million with the Royal

Government of Cambodia (RGC) for design stage of the SHV Port SEZ development project, and subsequently signed on

March 31st 2008 another ODA loan agreement totaling up to JPY3,651 million for the construction stage.

Preferential sectors

Sihanoukville Port SEZ was planned to complete construction at the end of 2011, and the investor will come to zones in

2012. As the zone developer, PAS prefers the firms who could produce more goods and use more cargos. Furthermore,

as a public owned company, they are more focus on social responsibility. They concern about how many containers and

how many jobs could be created by the SEZ. Preferential industries of the zone as follows:

a. Assembling (motor bike, bicycle, electric, vehicle, etc…);

b. Manufacturing (Metal processing, Rubber processing, Plastic processing, , etc...)

c. Food processing;

d. Jewelries;

e. High-end international brand goods;

f. International logistics.

100

Advantages of SPSEZ

Sihanoukville Port SEZ is the most strategic and potential location for Cambodian Industrial Base, along the Cambodia

Growth Corridor, adjoining the Sihanoukville Port which is the only deep sea port in Cambodia. From the port to another

Sihanoukville SEZ to the port, the cost is only about 90 US$; Compare with the cost to Phnom Penh SEZ, it costs 250 US$.

The cost of transportation and custom procedure of SPSEZ are low, there are only 2 times for custom procedure.

However, in other SEZ in Sihanoukville, custom procedures are 4 times. The containers can move from SPSEZ directly to

the ship. In addition, as the state owned company, zone developer can get special support from the central Government.

101

3.6 Key findings

3.6.1 The comparative advantages of Cambodia

In order to attract the investors to Cambodia, the government lists several advantages included, but not limited to: free

market, sound macroeconomic environment, strategic location, Preferential Trading Status, low labor cost and tax

incentives.

Sound Macroeconomic Environment with Stable political environment

Cambodia has transformed to an open economy since early 1990s, and has improved year-by-year on the level of

economic freedom. Cambodia real GDP growth averaged over 9% during 2000-2007, the highest rate of any low-income

countries in Asia, while the inflation was controllable at a low rate compared to neighboring countries. In addition to

strong dollarized economy of the country, local currency (Khmer Riel) is pegged to US dollar within a stable range.

Moreover, Cambodia has also offered confidence to foreign investors through its recent political stability and improving

legal system, i.e. introducing Anti-Corruption Law and the investment law can protect investors’ benefits.

Conveniently Located

Cambodia is located at the heart of what has been known as the most dynamic region of the world economy for the past

several decades: South-East Asia. The country borders Thailand to the west and northwest, Laos to the northeast,

Vietnam to the east and southeast, and the Gulf of Thailand to the south. Moreover, Cambodia has easy access to

seaports and airports. It has an access to ASEAN and World Markets. Deep sea port

Preferential Trading Status

According to the Paris Peace Accord in 1993 and open sky policy from the Royal government, Cambodia joined and

became a member of various international and regional organizations that facilitate trade, which in turn the country can

enjoy preferential trading status on duty-free privileges for exports and Most Favored Nation (MFN) treatment,

including ASEAN, WTO, and ASEAN-China Free Trade Area (ACFTA). Moreover, Cambodia also possesses other beneficial

agreements such as ASEAN-China comprehensive Economic Cooperation Agreement, ASEAN-Japan Comprehensive

Economic Partnership, ASEAN-Korea Comprehensive Economic Cooperation Agreement and a dozen other multilateral

agreements with developed countries including USA (Generalized System of Preference – GSP) and European nations

(Everything But Arms policy). With these regional integration and agreements, investors have the greatest opportunity

to reach billions of customers with preferential access. Any trading companies of Cambodian or foreign nationalities,

registered with the Ministry of Commerce, are allowed to freely engage in import-export activities, 0% import duty or

reduced import duty for Cambodian exports.

Cheap Labor Cost

Low labor cost is another reason for investing in Cambodia. The population of Cambodia is 14 million and more than 8.8

million (or 61%) of total population and the median age is only 23 years. Among the emerging countries in the region,

Labor cost is lowest. The minimum wage of Cambodia is 61 USD/month in 2011.

102

Countries

Cambodia

China

Laos

Vietnam

Thailand

Monthly minimum

wages(USD)

173

295

Figure 50: Comparative Monthly Minimum Wage for GMS Countries

Source: global wage report 2010/2011; Interviews in Cambodia.

3.6.2 The main obstacles of Cambodia

Governance

A top-down manner in policies design and implementation

The Cambodia government seems able to elicit information from a selection of the business sector on an ongoing basis

about the constraints that exist and the opportunities that are available, however, the spaces for interaction with non-

state actors in terms of policy making is too limited, particularly for the participation of poor stakeholders. Moreover,

the lack of transparency and evidence-based analysis make the policies and actions represent particularistic interest

groups rather than overall. Central government is strong and seems capable of coordinating different public sector

institutions with regard to policy formulation and implementation, while local governments almost have no position in

policy making even they are the main actors in policy implementation

167

Highly centralized regulatory framework in terms of SEZ issues

Regarding to the relevant institutions, they are more administrative perspective, and do not have too much autonomy,

and the final decision power related to SEZ issues are dominated by CDC. Meanwhile, the horizontal interactions among

different ministries seem not enough. During the interviews, when we raised questions related to SEZ, almost all the

non-CDC officials suggest us to get information from CDC. Besides that, as local administrative bodies, local authorities

are isolated from the management and regulation of SEZ. Because all the issues related to SEZs are decided by central

government and controlled by CDC. Meanwhile, local government has no position to deal with the issues related to SEZs

unless invited by CDC to take part in the process. Furthermore, there is not direct benefits for local authorities to

booster and develop SEZs. Because all the tax generated in SEZs are collected directly by central government and go to

the national revenue and will be re-allocated according to central government budget, which is not directly related to

local authorities and local revenue. Even the economic performance of SEZ will not be calculated as local performance.

Thus, although better development of SEZs may bring more jobs, economic activities, prosperities to the local

communities, it is not directly related to local authorities and their benefits. Hence, they are reluctant to participate into

the process of SEZs issues.

167

Maharajh, Rasigan, Case Study on “Industrial Policy in Cambodia”, 2009, P. 40

103

Lack of capacity building in administration

The state remains structurally weak; it has proved unable to make effective decisions and to implement them

successfully. The state still has a poor administrative system and continues to provide inadequate public safety and

order. Administrative structures in the country are rudimentary, inefficient and subject to both military and political

manipulation. Overall, the administrative structure has improved in recent years, but continues to suffer significantly

from widespread corruption and extremely low levels of technical skill

168

In terms of human resources in government, getting support from the human resources training projects oriented by

ADB, officials’ capacities have been improved in terms of public management. However, the official capacities are still

not enough for present requirements and lower than other East Asian countries’. Furthermore, many interviews pointed

out that there is problem of lack of human resources within public sector. The officials are reluctant to go to SEZs

located near the border and far from Phnom Penh where their family lives. Thus the government has to recruit some

local people to work in the SEZs; however, sometimes they don’t have very good capacity in terms of administrative

managements.

High level of rent-seeking within the government system

Cambodia suffers from a range of governance and anti-corruption challenges, including vote-buying and political

financing scandals to privatizations that have tended to favor a small group of wealthy elites. Judicial appeals offer little

redress for most citizens or small businesses: “For politically-related [court] cases, the following is the rule of thumb: For

my friends, everything they want. For my enemies, the law."

169

The NIS study of Cambodia found that corruption is “so

widespread and deep-rooted [that it] will take years of reform and restructuring of [the] existing systems”. Corruption

has “permeated almost every aspect of Cambodian life”. Many Cambodians have to pay bribes and informal fees for

medical care, school grades, court verdicts, traffic “violations” and marriage and birth certificates. It is not surprising that

“the average Cambodian views most sectors of the economy as corrupt”

170

. During the interviews, when talking about

the corruption issues and anti-corruption law, almost all the officials denied the existence of corruption and emphasized

the significance of the law, while the interviewees from non-public sectors obviously stood for a contrary position.

Incentives

Widely existing non-standard tax administration and informal fees

Although there are tons of aggressive incentives, the actual implementation and enforcement are not at the similar

level. In the interviews, investors claim that government officials exact tax penalties excessively and some investors

regard the non-standard tax administration as a major constraint. And “a large number of administrative fees, including

informal fees, present a major burden although zone investors report that unofficial fees are lower inside than outside

the zones. Even among zone investors, the fees paid by individual firms varies widely because these fees are usually

negotiable and without any payment proofs”

171

. Our field trip shows that the developers provide the payment receipts

for enterprises in terms of various administrative fees, while the government departments in the OSS don’t have it.

Thus, the unpredictability of the administrative fees, including informal fees, makes it difficult for firms to plan long

term. Given that the majority of firms operating in Cambodia are in the manufacturing sector and small investments, it

seriously impacts their operations and competitiveness

172

. Moreover, it is very common that the officials working in SEZ

168

Bertelsmann, 2008

169

Global Integrity Report, Cambodia, 2008

170

Transparency International, 2007

171

World Bank. “Promoting Special Economic Zones for Export Development in Cambodia”. 2011. p. 14

172

Ibid

104

OSS or other public service sectors getting allowances from the SEZs developers because of their low salaries, which

further increase the investors’ cost of doing business in Cambodia.

Resources

Shortage in labor supply

Although the labor cost in Cambodia is low, the labor supply is not sufficient for manufacturing development. The

population of Cambodia is very small and it is only 14 million, which is smaller compare with Indonesia and other

neighbor countries. Thus, if more investors come to Cambodia and establish more manufacturing factories, the labor

force will not be sufficient enough. Moreover, many interviews show that there is difficulty in labor recruitment both for

local authorities and firms. In some regions, the local authorities have to work together to recruit more workers for

firms. Besides that, there is also a tradition in favor of keeping children with their family in the rural areas in Cambodia.

Therefore, in order to recruit enough workers, firms have to pay more salary and benefits, including accommodation,

travel, food subsidies even education, to attract workers rather than just provide minimum salary.

Low level of labor skills

In another hand, the lack of labor supply is not only in quantity, but also in quality. The quality of labor in Cambodia is

quite low due to the lack of education. Because during the period of 1975-1978, when the Khmer Rouge took power, an

estimated one to two million reportedly died. And most of them are well educated. Thus, after that, it is quite difficult

for Cambodia to improve education due to the lack of proper teachers and scholars. Furthermore, before 1990s, there

were the absences of political and social stabilities in Cambodia, and its economy experienced stagnation. They all

contributed to the low education rate and low level of labor skills. Until now, the annual education expenditure only

accounts for 1.4% of GDP and due to the limitation of public budget; there are few public investments in education,

while the public investment has played a significant role in the improvement of education system in other East Asian

countries. During the trip, when we asked some TukTuk drivers to write their names on the receipts, they said they don’t

know how to write their names even in their own language. Hence, with such kind of labor skill level, it is dramatically

difficult to attract high technology companies to invest in Cambodia. Meanwhile, the overall innovation system,

including technology, education, policy, management, etc, is quite falling behind too. This increases the difficulties in

economic diversifying process.

Missing linkage between actual labor demand and education system

By analyzing the interviews with different stakeholders in related to labor training, it is clear that there is missing

communication and cooperation among them in the field of vocational education, particularly in SEZs. There currently is

very little interaction between firms and local universities or technical institutes or among the local employment

agencies, and the SEZs developers. In fact, firms have to train their low-skilled workers in-house, while the vocational

training institutes design their training plans according to the financial supports from Ministry of Finance rather than the

actual labor demands of firms. According to World Bank’s report, “currently 48.35% of Cambodian-based firms offer

formal training to their workers compared with 47.05% and 34.37% for the region and globally, respectively”

173

World Bank. “Promoting Special Economic Zones for Export Development in Cambodia”. 2011. p. 14

105

Lack of market capacity

The market capacity of Cambodia is quite small due to its low level of per capital GDP and a small population. Thus, only

the investors benefitting from Cambodia’s preference market access for EU, U.S, Japan, and other developed countries

will have more intend to invest in Cambodia comparing to other countries in the region. Furthermore, because of the

similar development level and economic structure within the region expect Thailand, the overall regional market is not

mature enough in terms of high value added products. Thus, it raises a concern for these investors producing

commodities targeting local consumption and reduces their interests in investing in Cambodia. In fact, domestic market

capacity is very important for investors in investment decisions making, particularly for the MNEs.

Poor infrastructure

Road network in Cambodia is not good enough. All the national roads in Cambodia are Two-lane motor ways. And it is

always be quite busy on the motor way from PP to SV. Although there is only 220 km distance, it takes more than 6

hours to take a bus from PP to SV. Because there are lots of heave trucks with containers running quite slow on the

motor way, and it is very difficult and dangerous for the buses to overtake since it has to use the opposite way to

overtake the heave truck. Just near the Autonomous Port in SV, there is a hill and all the vehicles have to climb on the

hill. We found how difficult and dangerous when a bus or a truck overtaking another vehicle. Furthermore the situation

of the road is not good enough; it is obviously that there are lots of holes and potholes made by heavy trucks. Electricity

costs remain high, even though somewhat lower than outside the zones. A large portion of the country does not have

reliable electricity sources. Not all the SEZs has its own generation capacity, some SEZs rely on the imported electricity

from Thailand and Vietnam. Furthermore, compare to Thailand and Vietnam, other physical connectivity in Cambodia,

such as ports capacity, railway, and telecommunication system in Cambodia is not good enough. For instance, during the

trip we spent 4 days in Phnom Penh, both of the two hotels we stayed didn’t have internet access which are mainly the

accommodation for foreign tourists.

Strategy

Lack of strategies for SEZs from central government

Among the 21 SEZs in Cambodia, only 6 SEZs are operated, and most the others can’t smoothly finish construction or

even start construction because of their geographic locations, which may not connect with market, road, port, airport,

or lack of labor supply, raw materials or investors. This situation indicates that the lack of overall planning of SEZs

location and development from government perspective. Even in the market economy, government should have very

clear strategies and efficient tools in establishing a business-friendly environment to stimulate private sectors. However,

Cambodia government doesn’t take actions to the SEZs without further construction and operation after being

approved. In fact, the idle of large amount of lands without any planting, construction, and other economic activities is a

huge waste in essence. The governments’ attitude to these SEZs could be one of the evidences that the government

doesn’t have overall strategy in terms of SEZs’ development and just leaves these SEZs themselves.

FDI focusing on elementary industries

Although Cambodia government has established very aggressive targets and policies to attract FDI and diversify

economic components, the main stream of FDI is still limited within garment, construction, food processing and tourism

sectors, which are mainly elementary industries and located at very low level of the whole value chain. Therefore, these

industrial value added that Cambodia could obtain from the whole value chain are quite limited due to the highest value

added parts are usually R&D and circulation, not the manufacture process. Meanwhile, Cambodia also has less capacity

in establishing technology or capital intensive industries due to its low level labor skills and shortage in capital. Thus,

106

because of the extremely shortage of domestic investment capacity, Cambodia’s government has to rely on FDI and has

no position in selecting FDI by its natures and long term targets, even they knew it is important for scientific and rational

industrialization.

Different natures of main investors

In Cambodia, Chinese and Japanese investors have played very significant roles in terms of FDI. Compare Japanese and

Chinese investment, the nature of them are different. For Chinese investors, they are more state-played and closed to

Cambodia government. And Chinese historically has been longer here than Japan in terms of investment. But they don’t

have regional strategies and localized attitude. They don’t focus on manufactures. They are more on infrastructure,

hydropower, construction and garment industry. The environment requirements are not as perfect as Japanese. And

Chinese system sometimes is similar to Cambodia. For Japanese, private firm decision and less closed to local

government. They prefer to a clear, transparent, and precise invest environment, as well as legal system. These investors

are more focus on manufacturing; moreover, some companies producing agriculture products prefer to locate near to

the raw materials. In terms of assistance, Japan is the biggest donors. They provide funds both on hardware and

software.

Regional integration

Uneven development in cooperation with neighboring countries

Geographically, Cambodia plays as a linkage between Thailand and Vietnam, and has been linked with these two

countries by Southern Economic Corridor project initiated by ADB. However, Cambodia’s cooperation with different

neighboring countries is various because of many political and technical reasons. Regarding the GMS-CBTA, all the 20

documents attached to CBTA have been ratified in Cambodia, and there are some implementations in Laos, Vietnam,

and Cambodia on the basis of sub-trilateral agreement. Furthermore, Cambodia issues 300 licenses to vehicles

transporting goods and passengers between Cambodia and Vietnam, while they don’t have the similar licenses with

Thailand. Moreover, because of different technical standards of Thailand and Cambodia, it is difficult for Thailand and

Cambodia reach a consensus regarding to trans-border transportation.

Different departments means differences in regional integration

Just as mentioned that although all the relevant documents of CBTA have been ratified, the implementation of CBTA in

Cambodia involves many departments, such as Ministry of Transport, Ministry of Immigration, Ministry of Sanitation,

Custom Department, etc. At the same time, the different departments have different targets, risks perceptions, and

facilitations. For instance, for the Ministry of Transport, they concerns about the different transportation standards in

terms of vehicles, logistics and so on, for the Custom Department, how to prevent smuggling and collect tariff and duties

are the most important commissions for them, while the Ministry of Immigration will think about the illegal immigration.

Therefore, concerning about losing tariff revenue and different inspecting standards became the main reasons for

custom’s reluctance in implementing CBTA and trade facilitation issues. Furthermore, they are also worried to be locked

by Thailand and Vietnam if they implement the CBTA.

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3.7 Sub conclusion

Regarding to the industrial policy, the Cambodia government actually doesn’t have the capabilities for managing

industrial policy programs effectively, and doesn’t succeed in creating a consensus on key strategic elements. The

political elite are strongly committed to industrial development and structural change with the object of reproducing the

current distribution of rents as a means to stay in power. Non-state actors assess the government’s industrial policy

management capacity is very poor. In addition, although Cambodia has its national strategic 5 year plan which proposed

to focus on education, transportation, rural development, economy, water supply, irrigation, health and so on, there are

not enough practical and feasible strategies and tools for them to achieve these ambitious targets, particularly in

industrialization. From many interviews we experienced, Cambodia’s government doesn’t have enough knowledge and

experiences in terms of sector-specific industrial policy to stimulate sectors’ development in a more comprehensive and

efficient way. Therefore, although there are some industrial diversifications in Cambodia, such as export of milled rice,

high quality shoes, bicycle, motor cars, electronics parts, it is not enough for economic diversification in Cambodia,

particularly in terms of the lagging industrial policies, which are still relying on several specific sectors.

However, fortunately the government has already recognized the significance in these issues, in the end of 2011, they

held a forum and invited Japanese experts to give lectures and help them in establishing a better and deeper

understanding about Japan’s industrialization, particularly in terms of developing industrial strategies and policies.

Because they held that the status quo of Japan after the World War II was similar as Cambodia’s situation nowadays.

The Japanese experts showed the incentives they used, how to attract investment in particular sectors, and how to

mobilize internal resources to stimulate economy development. This could be evidence that the Cambodia government

is making their efforts on formulating better industrial policies to achieve their targets and diversifying their economy.

Cambodia understands that it is not enough to rely on domestic capital since its economy scale and endowments

available were too limited to provide enough resources for economy development. Moreover, Cambodia’s economic

concentration on a few of specific sectors increases risks and vulnerability for Cambodia in related to inside or outside

shocks. Therefore, being stimulated by China’s experiences in SEZ, Cambodia recognized the importance and functions

of SEZs in attracting investments, creating jobs, and reducing poverty, and started to establish SEZs after the creation of

sub-decree 148 in 2005.

After several years’ practice, the most important factor for SEZ development is investors; however, they won’t make

decisions just because of endowments, location or physical connectivity of SEZ. It is undeniable that SEZs operated in

Cambodia have made contributions to local economy development in terms of attracting FDI, diversifying sectors,

creating employments, transforming technology, improving labor skills. However, the contributions of SEZs are still quite

small due to the few numbers of functioning SEZs. More than 70% SEZs in Cambodia have not been normally operated

yet, and most of them are located along the borders, where are supposed to be good locations since they are close to

Thailand and Vietnam. Cambodia was thinking to put SEZs along the borders to take advantages of increasing

cooperation and integration between Cambodia and these two countries, and reduce poverty in these regions. But in

fact, it is not the same as the government previous tentative ideas. SEZs functioning well are those located in Phnom

Penh, SihanoukVille and Svay Rieng Province, which are not along the borders, but having convenient transport links

with raw materials, markets or related industries; not near the cheapest labors, but having enough and better skilled

labors; not targeting regional markets, but the EU, U.S. markets in the global level. Thus, it is obviously that most

investors decided to invest in some Cambodian SEZs because of the preferential market access, cheap labors and

convenient transportation links to world markets or related industries, while not because there are integrated regional

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value chain, and integrated regional market, which obviously have not been achieved within GMS due to the obstacles.

This provides strong evidence for the low level of regional integration in GMS, particularly for Cambodia.

Besides that, it also proves that SEZs could not be a proper solution in poverty reduction unless some other conditions

could be satisfied, including better infrastructure, qualified and sufficient labors, convenient links to upstream or

downstream industries, and easy market access etc. So Cambodian government should not have used these SEZs located

at the borders as engines for local economic and social development, at least not now. Because they don’t have

qualified labors, links to downstream industries, and market access, they only have physical links and access to raw

materials, which are not enough for attracting investors, establishing regional value chain, or even accelerating regional

integration. In addition, some of the SEZs are very close to each other which may cause strong competitions among

them and reduce the advantages of all of them. Thus, these SEZs are doomed to failure and can’t become engines for

local development and poverty reduction unless the government develops proper strategies in terms of labors, links to

relative industries, market access, etc for them.

According to China’s experience, most of the border regions’ developments follow the market-oriented path, which

started from civilian trade and resulted in a Border Trade Zone approved by the government with more openness

policies especially trade policies. Within these Border Trade Zones, the accumulation and development didn’t start from

attracting investment, while started from civilians’ spontaneous trade practices. Trade happens much easier than

investment, because the driving forces of investment are more complicated than those of trade. In general, foreign

investors’ decisions on investment location depends more on market access, including related transportation. Therefore,

assuming that the administration environment is in favor of foreign investment, if the local market is not big enough,

compare border and coast regions (including Metropolitan areas), the foreign investors will prefer to invest in coast

regions even the endowments in border region are similar as those in the coast regions, unless the benefits obtained

from border regions can overweigh the losses generated by not located in coast regions. On the contrary, if the local

market is big enough, then the connection to outside world through ports doesn’t account as much as it does in the

previous situation. Thus, whether located in border regions or coast regions depends on other factors, such as raw

materials, infrastructure, labor force, etc.

Under the context of GMS and Cambodia, it obviously belongs to the first scenario, which local market is quite small,

even plus regional market. Besides that, due to the obstacles for regional integration, actually there is not unified

market generated in GMS. Thus, the foreign investors will prefer to invest in coast regions and Phnom Penh. More than

that, most Cambodia border regions are not just far from ports or connections with the world, but also lack of

infrastructures, labor supply and other public services. These factors significantly reduce the comparative advantages for

these regions. Therefore, the strategy to establish SEZs in these regions is not feasible. Cambodia government may

consider about encouraging civilian trade along the borders to boost local development than just approving

disoperation SEZs.

However, The good news is there are also increasing number of investors considering to move part of their production

chains to Cambodia to reduce the business risks caused by concentrated investments, particularly after the Thailand

flood. Although one of the reasons of moving to Cambodia is the cheap labors, since the labor costs in Thailand and

China have increased dramatically and some sectors will lose their competitiveness if they still stay in Thailand and

China, it is fairly helpful for Cambodia in terms of diversifying economy sectors, establishing regional value chain and

spilling out technology. But it is just a beginning trend, how it will develop and influence regional integration has not

been clear. At least there is one thing confirmed, Cambodia should learn from Thailand, to seize the opportunity, accept

the industry transferring and attract FDI as much as possible.

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For these SEZs functioning well, it is no doubt that there are many issues and problems constraining their further

development and reducing their competitiveness, including political aspect, administration capacity, labor issue, market

development, vulnerable infrastructure and uneven regional cooperation. In order to achieve further development and

accelerate regional integration, these issues and problems must be addressed by the collective efforts of public and

private sectors in Cambodia.

Last but not least, since Cambodia has a more dependency on FDI due to its poor capacity and resources, which has

already limited the autonomy of Cambodia in terms of selecting FDI according to its long term strategy, it is crucial for

Cambodia government to consider the situation and try to develop a more independent economic system when they

accumulate enough capital and resources. Otherwise, it will not be out of imagination that Cambodia would always be

the lowest level of value chain, and it might become the “victim” of regional integration.

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Chapter IV: Comparison of Thailand and Cambodia

Bangkok & Phnom Penh

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4.1 Introduction

This report is focused on understanding the status quo of regional integration in GMS, and identifying the most

important pillars and driving forces for further integration by using a comparative analysis of two GMS countries,

Thailand and Cambodia. This country comparison considers the factors of their economic performances, locations,

strategic positions and potential improvements. Because this report believes that: significant differences in their

development levels provide better understanding of the issue; the similar geographic locations and physical

connectivity with neighbouring countries will aid the identification of common and collective problems; active

involvement of both countries in the ASEAN and GMS mean analysis will be more insightful into the main constraints for

further regional integration; Thailand, as a more developed country in GMS, could be the model and competitor for

Cambodia, while Cambodia also provides opportunities for identifying its development path according to Thailand’s

successful experiences and its own context in achieving regional integration. In the second part, this report reflects in a

comparative analysis on relevant information raised earlier in the country studies, including: Industrial estates, industrial

policies and investment. These factors and method of analysis are crucial for establishing a comprehensive

understanding of the two countries’ performance and identifying the main challenges and opportunities for future

regional integration and economic development. Therefore in the third part, the report will focus on a comparison of the

two countries in terms of four important pillars (driving forces): governance, incentives, resources and strategies. By

analyzing the performance and constraints of the two countries in terms of the four pillars, this report will identify the

main differences and development gaps between Thailand and Cambodia. In addition, this report will also analyze the

performance and main problems of the two countries in terms of regional integration, and emphasise the significance

and opportunities for the two countries by providing scenarios of regional integration. By doing so, this report identifies

to what extent Thailand could be a “Model” for Cambodia, including transparency improvement, incentive designing,

infrastructure and education enhancement, and investment attracting. Besides that, in some fields in terms of strategy

development, Cambodia may have to find a more independent way to go through, particularly in innovation system. In

addition, this report will also establish fundamentals for developing relevant policy recommendations to help the two

countries to improve their performance in accelerating regional integration and economic development.

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Source: Transparency International; World Bank open data; IEA; interviews

Four pillars

Thailand

Cambodia

Governance

Institutions

Decentralization

Highly centralized

Capacity

Policy making

Government dominated

Corruption & Transparency

Score: 3.4; Rank 80

Score: 2.2; Rank 160

Participation

Few involvements of non-government sectors

Human resource

Shortage and low level skills

Revenue (%GDP, except Grant)

20.1 (2008)

11.1 (2009)

Incentives

Tax holidays

Up to 8 years in Zone III

Up to 9 years after first sales

Reduced CIT

50% reduction for 5 years after tax

holiday in Zone III

9% (QIP) for five years; 20% thereafter.

Resource

Labour

Total labour force

39.6 million

7.6 million

Literacy Rate (% of people ages 15

and up)

94% (2005)

78% (2008)

Infrastructure

Better

Worse

Market

Market capacity

Large

Small

Market access

Free market

Transition/ Preferential treatment

Strategy

Target

Upgrading

Diversification

Investment (FDI/GDP)

3.6% (2010)

7.3% (2010)

Figure 51: Summary of comparison between Thailand and Cambodia in terms of four pillars

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4.2 Governance

4.2.1 Institutional arrangement

Institutions

In Thailand, BoI is the lead agency related to industrial investment which is within the Ministry of Industry (MOI). The BoI

is responsible for setting investment policies, executing investment promotion programs, and administering and

monitoring the investment incentives that are provided to investors. The BoI also provides incentives to real estate

developers for Industrial Estates and Parks. The IEAT is also housed within the Ministry of Industry and is involved in

developing, participating in joint ventures, or approving Industrial Estate projects.

In Cambodia, the CDC is basically what would be described in Thailand as MOI, which is the highest decision-making

body in defining the framework for investment strategies and accepting or rejecting investment proposals. It is also the

institution responsible for overseeing foreign direct investment and business development in Cambodia. CDC is chaired

by H.E. Samdech Hun Sen, Prime Minister of the Royal Government of Cambodia. Under the Council for Development of

Cambodia, CIB and CSEZB are two boards related to investment and SEZs.

Management/regulation

For investors looking to set up manufacturing facilities within Industrial Estates, the IEAT has a number of approval

requirements related to land use, construction, and operations. Beyond that, there are a myriad of standards to ensure

that the facility possesses all necessary infrastructure and serves a beneficial economic and social purpose. The IEAT also

has a one-window operation. If a firm would like to be granted BoI incentives, it must obtain BoI approval by showing

that it meets certain criteria such as having no more than a 3:1 debt to equity ratio, utilizes modern equipment and

processes, and has adequate environmental protection systems in place. Investments of more than about US$14.5

million must also submit a feasibility study. For other regulatory matters, industrial firms must obtain Ministry of

Industry approvals for safety and environmental issues. Firms in sectors with a smaller environmental impact are subject

to far fewer regulations and many are allowed to skip the licensing process altogether.

The CDC/CIB has a centralized structure in Cambodia. It has 24 provincial/municipal investment sub-committees

responsible for investments in Cambodia, and the SEZ committee, chaired by the Prime Minister, responsible for

addressing investments in the SEZ. As the lead investment promotion and facilitation agency in Cambodia, it

coordinates all the sub-committees in provincial level. The sub-committees have defined area (territorial) or sectoral

responsibilities and coordinate effectively. However, those provincial and municipal sub-committees have competed

with one another due to attracting the same investment projects in its territory and wanted its province to be centre or

regional hubs. All sub-committees in provinces and municipalities differ significantly in effectiveness due to limited

resources and potential for investment. In addition, the CDC set up a “one-stop service” within the CIB to facilitate the

investment application process, with government officials stationed on-site to provide administrative services. The OSS

is responsible for providing regulatory approvals and registration procedures necessary for establishment of foreign

businesses in the host country. However, there are some institutional challenges in SEZs governance according to the

interviews in the field trip:

 Inadequate information required by the CDC;

 SEZ management should work much more efficient and transparent;

 CDC has a set of documents in each step and cost too much working time;

 OSS should come earlier to the zone and work permanently.

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Analysis: The implications of these different arrangements are immediately apparent. Given the highly-centralised

nature of Cambodia's government, the placement of CDC within the Ministry of Economy and Finance, means it is vested

with considerable power. This was clear in meeting with officials from the ministry but also in reflections from provincial

officials who were vested with few resources or authorities and needed to refer to CDC for regulatory matters among

other things. This should mean the CDC has the power to implement wide-ranging incentives for FDI while also

supporting local companies. Instead, officials said they were hamstrung by free-market policies which left them. BOI

and IEAT are also relatively strong agencies in terms of the power they are vested in and have been cited as having an

instrumental role in the development of Thailand's economic growth. However, they lack the capacity to coordinate

with other ministries such that the one-window service for applications isn't effective. Their document services only

comprise the 30 per cent covered by the Ministry of Industry. As such, the private sector – the management of industrial

estates - has to provide the remaining services to assist their investors.

4.2.2 Capacity

Policy making

Comparing to Thailand, Cambodia’s capacity in policy making or legislation is not good enough since its National

Assembly and Senate play a limited role in policy making process, and most of the legislations originated from

government. The National Assembly and Senate tend to review and enact bills drafted by the government, which is

constrained by the limited time and lacking the expertise

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. In addition, the capacity of the government in terms of

policy making or law drafting also need to be improved since many interviews of non-public sectors mentioned that

there is not very sound and useful industrial policies except the “Rice Policy”, and the poor capacity of the government

in terms of environmental assessment of Hydro power projects. The imbalance and inefficiency in the legislation or

policy making system has led to the poor performance of Cambodia in Good Governance.

Human resources in government

In terms of human resources in government, Cambodia suffers a lot from the shortage of human resource and the

extremely low levels of technical skills. The overall level of human resources in Cambodia’s government system is lower

than Thailand’s, though the officials’ capacities have been improved through training from ADB’s human resources

projects, particularly in local government. In addition, the human resource issues are more serious in SEZs in terms of

OSS. Many interviews showed that there is significant lack in human resource for OSS, particularly in some SEZs far from

downtown. Actually, this problem has become one obstacle for OSS to improve service delivery in SEZs.

Revenues

Thailand tax revenue was higher than the world average during the last few years. In addition, revenue to GDP is nearly

20 per cent. Such increase in government revenues allowed the government to continue boosting infrastructure

investments after the 1997 crises slowdown. The pro-investment infrastructure approach of the government has been

critical to Thailand’s success in maintaining FDIs (which make nearly half of the registered private investment in the

country)

Compared to Thailand, the revenue of Cambodia is low and insufficient. Each year, the ODA accounts more than 30% of

total public budget in Cambodia resulting into the situation of low salaries, low public investment, less financial support

for political reform and decentralization, and insufficient social security system. Furthermore, it also increases the

174

Soksreng TE, Good Governance in Cambodia: Exploring the Link between Governance and Poverty Reduction, Yokohama International Social Science

Research Journal, volume 11. 2007. p. 61-62

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dependency of Cambodia on foreign investment so that the government has no position in selecting different foreign

investments in accordance with its long term development strategies, such as diversifying economy.

Corruption

According to the Transparency International’s Corruption Perceptions Index

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, Cambodia got 2.1 and ranked 164 in

2011. Although its score increased from 1.8, its ranking fell from 151 in 2008. Meanwhile, Thailand got 3.4 and ranked

80 in 2011. It is quite clear that the corruption level of Cambodia is much higher than Thailand. During the interviews,

almost all the officials denied there was wide-spread corruption or rent seeking in Cambodia. However, the interviewees

from the private sector in Cambodia discussed with us about the negotiable administrative fees and taxation system.

Some interviewees believe that even they have to provide payoffs to officials to negotiate the administrative fees and

taxes, they could benefit from that since the payoffs are much lower than the reductions in fees and taxes. In fact, this

contributes to the loss of public revenues, which is supposed to be the main resources for officials’ salaries, public

investment, etc. Despite the differences in ranking, Thailand still did not score well in terms of corruption. Networks are

strongly rooted in the system and conflicts of interest abound. However, international organisations and government

officials say steps are being taken and transparency has increased both through the use of technology for government

systems and with the rise of social media.

Transparency

The high level of corruption in Cambodia is closely linked to the low level of transparency within the Cambodian

government. For instance, the public's access to administrative information is limited and cannot readily or easily be

accessed, such as through government websites. When the capstone group tried to collect relevant information and

statistics of the two countries, although there are both languages barriers for us, it is very hard to get the newest data

and regulations from Cambodian websites, so we have to rely on some other data resources, such as World Bank, ADB.

While the Thailand’s ones are much better, and we can easily get very rich and comprehensive information from

Thailand’s websites. Moreover, the lack of transparency and evidence-based analysis make the policies and actions

represent particularistic interest groups rather than overall. Critical to transparency is the role of civil society which has

started to grow in Thailand and will complement transparency initiatives.

Analysis: For both countries, the role of civil society needs to be encouraged such that the government is held

accountable and transparency is demanded. However, civil society has typically been seen as essentially political

resistance in Asia, including Thailand. Furthermore, in Thailand, a culture of self-reliance does not encourage

participation in association (which also impacts participation of non-state actors below).

Participation

Federation of Thai Industries represents Thailand manufacturers at BOI. In addition, MNCs and local enterprises are

represented in government negotiations through the Board of Trade, a nongovernmental organization. The civil society

in Thailand also plays a strong role in influencing industrial activities at the local level, to the extent of blocking the

establishment of special economic zones due to environmental concerns. Thailand encouraged the participation of

government officials on company boards in the country to generate coordination and cooperation. This was successful in

creating a mechanism to feed policy issues to the government. However, it now seems that this has led to an unhealthy

mix of government and private sector – personified with an individual capable of influencing laws that complement his

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Transparency International's Corruption Perceptions Index (CPI) is the best known of our tools. First launched in 1995, it has been widely credited with

putting the issue of corruption on the international policy agenda. The CPI ranks almost 200 countries by their perceived levels of corruption, as determined by expert

assessments and opinion surveys.

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business. But despite this, the private sector, especially management at AMATA said it took considerable time to get

their issues on the government agenda and then additionally for consensus to be achieved such that policy could occur.

In Cambodia, despite the Prime Minister’s requirements for the fast resolution of problems raised by SEZs management

and its investors, there is the lack of efficient civil society participation in terms of policy making, implementation, and

other administrative managements. As discussed before, the spaces for interaction with non-state actors in terms of

policy making is too limited, particularly for the participation of poor stakeholders, including SMEs and NGOs. In fact,

even the local authorities in Cambodia do not have very much access in policy formulation and implementation,

particularly in terms of SEZ issues.

Analysis: The issue for both Thailand and Cambodia is the creation of effective mechanisms by which the private sector

can access the government and raise policy comments. The need to increase cooperation was recently raised in Thailand

as part of its bid to have a higher ranking recognising its competitiveness

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. Mechanisms in Thailand include the “Joint

Standing Committee of Private Organisation”, which includes the Federation of Thai Industries (FTI), the Board of Trade

and the Thai Bankers Association.

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Nation Multimedia, Public Private Sectors Must Tighten Cooperation, 2011

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4.3 Incentives

Base on the findings in last chapter, both Thailand and Cambodia have been using investment incentives to promote the

development of specific industries and geographical regions, as well as IEs/SEZs. Comparing investment incentives

between them is difficult because they are provided along many dimensions. These Investment incentives include tax

incentives and non-tax incentives.

Tax incentives and tools

In terms of the tax holiday and terms of eligibility for direct and indirect tax exemptions, investment incentives in

Cambodia appear to be more attractive than those provide in Thailand. The maximum duration of the tax holiday of

Cambodia is up to 9 years comparing Thailand’s maximum 8 years. In addition, the start of the holiday is triggered by

different factors. In Thailand, the tax holiday starts after the project has commenced operations. In contrast, for

Cambodia a project’s commencement period does not trigger the start of the holiday. Instead, a necessary condition to

start the holiday is that a project results in sales.

Thai EPZ/IE (industrial estate)

Cambodia

Tax holidays

• 3 to 8-years tax holiday from the

commencement of operations:

• 3 years in IE of Zone I

• 3–5 years in Zone II (5 years in IE)

• 8 years in Zone III

Holiday not limited by commencement of operations

• Either: 6–9 years after first sales

• Or: 3–6 years from the last day of the tax year immediately preceding

the tax year in which profits are first derived

Reduced CIT

• 50% reduction (thus 15% tax) for

• 5 years after tax holiday in Zone III

• 9% (QIP) for five years (starting from the tax year occurring after 2003

LoI promulgation)

• 20% thereafter

• Special depreciation of 40% in the first year of operation as an

alternative to the tax holiday

Other taxes

• 0% withholding tax

• 5-year loss carry forward

• VAT exemption for EPZ

• Duty exemption for EPZ

• Exempt from 1% turnover tax for QIP

• 5-year loss carry forward

• VAT exemption for QIP

• Duty exemption for QIP

• VAT exemption on both inputs and sales of supporting industries (their

contractors receive only VAT exemption on sales) to export-oriented

garment and footwear

Land use

Investors can own the land

Lease(up to 99 years)

Figure 52: Comparison of tax incentives and tools between Thailand and Cambodia

Source: IMF Country Report No. 06/265, 2006. Cambodia: Selected Issues and Statistical Appendix.

In terms of the coverage of the tax incentive, investment incentives In Cambodia are provided under the investment law.

Qualified Investment Projects can enjoy available incentives in the whole country. Moreover, Cambodia follows the

international best practice of avoiding different tax incentives for firms located in SEZ/EPZ. Thailand, however, does not

follow this practice, develop a system of incentives like EU and provide some additional incentives in their promotion

zones. In Thailand, the entire country functions as an economic zone in those incentives are available throughout the

nation. These zones are groups of provinces in which investors are qualified to receive incentives which are inversely

proportional to the province’s stage of economic development and infrastructure i.e. with the greatest incentives

available in the poorer provinces. The different preferential policy in different zones can better promote the investors to

invest in poor regions, which can help harmonious development for the country.

In terms of land use, Thailand follows the European or American system of land ownership and fee simple property

ownership (the maximum level internationally) is available to Thai citizens. According to Thai law, foreigners, in general

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are prohibited from owning freehold land in Thailand. However, there are some of the ways in which foreigners in

Thailand can control property, such as company ownership with BOI privileges. Comparing to Thailand, foreigners

cannot own 100% of land in Cambodia. Land in Cambodia may be privately owned by individuals with Cambodian

citizenship or by legal entities having Cambodian nationality. For a foreign investor, they must find and partner with a

Cambodian co-owner. Cambodia registered companies with majority Cambodian ownership are able to buy land in

Cambodia. Another option available to foreign investors is a long-term lease, Cambodia lease law allows a 99-year

maximum lease period.

Analysis: A large motivator for Thailand's incentive schemes was to encourage development in the regional areas.

However, they have not been entirely successful as industrial estates largely grouped around resources such as ports.

The impact of the incentives was to locate on the border of a zone but within reach of the resources needed. FDI

increased significantly upon the development of such resources rather than the incentive scheme. Cambodia attempted

to attract FDI to border areas to capitalise on border trade and economic corridors – but despite the sale to investors,

development of the sites has been slow compared to those based around resources such as Phenom Penh and

Sihanoukville. Furthermore, tax holidays in general, remain a policy of questionable cost effectiveness: the fiscal costs

can be high while the international evidence is not whelming about their effect on FDI.

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4.4 Resources

4.4.1 Labor

Quantity

Both Thailand and Cambodia have a shortage of labour shortages. Thailand has considerable demand for skilled labour

and this is considered to be one of the key sticking points for its progression. The government's policies on access and

quality of education have been slow to impact and it is losing ground to comparable countries as a result. It is also losing

the potential for both its domestic firms and MNCs to expand.

Cambodia’s total population is only 14 million and its total labour force is about 7.6 million, while Thailand is 69 million

and 39.6 million respectively. A key issue for Cambodia is the uneven allocation of labor force. On one hand, the

traditional culture is in favour of keeping children with their family, and this reduces the possibility to recruit workers

from some rural areas. On the other hand, in some regions rich in labor, there are not enough jobs for all job seekers,

however, these surplus labour don’t always want to immigrate to a poorer region to find a job. These factors make it

difficult for the firms in recruitment, and they have to provide more salary and benefits, including accommodation,

travel, food subsidies even education, to attract workers rather than just provide minimum salary, which increases the

average cost for firms. Despite the shortage within Cambodia, the country's workers often prefer to go to Thailand and

Malaysia to find a job due to the higher wages they could get there, particularly those with higher education.

Quality

Besides the shortage in labour, the extremely low level of skills becomes another disadvantage for Cambodia when

comparing with Thailand. The quality of labour in Cambodia is quite low due to the lack of education, according to World

Bank’s data, the literacy rate in Cambodia is only 78, while in Thailand it is more than 90. Thus, although the average

labour cost in Thailand is almost 4 times of that in Cambodia, the high technology companies who need lots of high

skilled labours will not consider investing in Cambodia since there are not enough skilled labours to start the business.

Moreover, the overall innovation system, including technology, education, policy, management, etc, is quite falling

behind than the other countries in the region.

Vocational Training

Interviews with firms made it clear that they have to train the workers themselves. While, interviews proved that there

is not integration or communication among authorities, education institutes, and firms about the kinds or skills of

labours the market needs. Actually, most firms have to train their low-skilled workers in-house, and almost half of

Cambodian-based firms offer formal training to their workers compared with 47.05% and 34.37% for the region and

globally, respectively

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. Besides that, there is huge gap for high educated labor in Cambodia; the Tertiary School

Enrolment is only 8% in Cambodia, while it is about 46% in Thailand. As mentioned by interviewees, there are some

Cambodian engineers in firms, but majority are semi skilled. Hence, they have to send them to Japan or China to get

further education.

Analysis: In Thailand's case, the government has been asked to increase spending on education as it is considered to be

significantly lower than necessary to meet its targets. Vocational training, other than that provided by firms, for both

177

World Bank, “Promoting Special Economic Zones for Export Development in Cambodia”, 2011. p. 14

120

Thailand and Cambodia is an issue. Another aspect of vocational training was the need for coordination between the

needs of firms and the courses run by facilities. In Thailand, firms complained of a lack of engineers and technicians.

While in Cambodia, most vocational training students were expected to develop their own business and vocational

training projects were not developed on the basis of firms’ needs, while firms have to educate their workers themselves.

4.4.2 Infrastructure

Indicators

Thailand

Cambodia

East Asia & Pacific

(developing only)

World

Logistics performance index Overall

(1=low to 5=high)

3.3 (2010)

2.4 (2010)

2.7 (2010)

2.9 (2010)

Quality of port infrastructure

178

5.0 (2010)

3.9 (2010)

4.0 (2010)

4.8 (2010)

179

4.3 (2010)

Road density (km of road per 100 sq. km

of land area)

35 (2006)

21 (2004)

20.1 (2004)

36 (2008)

31.1 (2004)

30.2 (2008)

Paved road (% of total road)

98.5 (2000)

6.3 (2004)

14.4 (2004)

30.7 (2009)

45 (2004)

64.9 (2009)

Rail Network, Length per Land Area

8.7 (2009)

3.7 (2005)

Air transport, registered carrier

departures worldwide

123541 (2009)

3304 (2009)

Electrification rate

99.3 (2009)

24 (2009)

81 (2009)

180

80.5 (2009)

Electric power consumption

(kWh per capita)

2045 (2009)

131 (2009)

2094.9 (2009)

2803.8 (2009)

Fixed broadband Internet subscribers

(per 100 people)

181

3.87 (2009)

0.25 (2009)

6.0 (2009)

Figure 53: Main indicators about infrastructure comparison between Thailand and Cambodia

Source: World Bank Open Data/ ADB Database/ IEA, World Energy Outlook 2011 ( until 23 April 2012)

Transport

War and continuing fighting severely damaged Cambodia's transportation system — a system that had been

inadequately developed in peacetime. The country's weak infrastructure hindered emergency relief efforts and created

tremendous problems of transport. From the table above, it is easy to find out that the transport and logistics

performance of Cambodia is lower than world average level and Thailand, particularly in terms of port infrastructure,

paved road, railway network, and air transport. In fact, all the national roads in Cambodia are two-lane motor ways, and

it is very easy to be crowded by trucks, cars and buses. For instance, it is only 220 km from Phnom Penh to Sihanouk

Ville, and it takes more than 6 hours to travel by bus. As the biggest sea port in Cambodia, the Autonomous Port of

Sihanouk Ville is very small comparing to Thailand’s ports, so too the airports in Cambodia. Regarding to the railway

network, only two rail lines exist, both originating in Phnom Penh and totalling about 612 km, while Thailand has 4,044

km rail ways has been utilized. The significant gap in transport does not only reflect Cambodia’s trail, but also reduce

the competitiveness of Cambodia.

178

WEF (1=extremely underdeveloped to 7=well developed and efficient by international standards)

179

East Asia & Pacific (all income levels)

180

Developing Asia

181

Fixed broadband Internet subscribers are the number of broadband subscribers with a digital subscriber line, cable modem, or other high-speed

technology.

121

Electricity and other utilities

As to electricity issues, Cambodia falls very behind to Thailand. The access rate is only one quarter of Thailand’s, while

the per capita power consumption only accounts for 6% of Thailand. Meanwhile the cost of electricity generation

remains high and Cambodia has to import power from Thailand and Vietnam to satisfy the manufacturing and

residential use. Since electricity is crucial for establishing a manufactory enterprise, the lack of electricity becomes one

of the most salient problems. At the same time, Cambodia is very rich in terms of hydro resources and has 28

hydropower plants. However, the level of hydro development is still low due to the lack of technology and financial

resource. Besides, electricity, some other utilities, including telecommunication, water supply, drain system and housing,

need to be improved to satisfy the requirements of investors. For instance, during the trip we spent 4 days in Phnom

Penh, both of the two hotels we stayed didn’t have internet access which are mainly the accommodation for foreign

tourists, and even some rooms of them have no window at all.

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4.5 Strategy

4.5.1 Overall strategies

Diversification Vs. Upgrading

Thailand in the past achieved growth through ‘labour-based’ economy in which natural resources and cheap labour costs

and mass production was utilized. However, the increase in manufacturing share of GDP and FDIs was not coupled with

technological upgrading. With the resulting science-based production at the lower-end of the technology spectrum in

the manufacturing sector, and lack of highly skilled labor force, Thailand needed to introduce new upgrading strategies

to address the upgrading challenges. Clustering plans were introduced for specific industries. In 2009, Thailand went

further to introduce Creative Thailand Policy.

In terms of economy development, Thailand and Cambodia are facing really different situations which lead to different

targets in the two countries, with diversification for Cambodia and upgrading for Thailand. It has been a long time that

Cambodia developed its economy relying on the four important pillars, agriculture, garment, construction and tourism.

However, they are obviously not sufficient for future development since the highly concentrated economy would be

very vulnerable to outside or inside shocks. Therefore, it is crucial for Cambodia to diversify its economic components

and establish more labour intensive sectors. While, for Thailand, as the most developed countries in GMS, it faces the

challenges coming from the increasing labour cost and cannot rely on labour intensive industries anymore. Thus, it has

to find ways to upgrade its economy and move upper along the value chain to make better use of its endowments.

Strategy for industrial estate

BOI and IEAT played a significant role in IEs performance. BOI dispersion, and zoning strategies resulted in over 60 per

cent of IEs outside Bangkok that supported economic activities and income of those regions. In addition, BOI

involvement at the local level, addressing private sector constraints, and creating linkages between domestic SMEs and

FDIs, all supported business activities in IEs. Export processing zones within IEs offered privileges highly important at the

time. On the other hand, IEAT location choices near ports and infrastructure, and partnership with private sector in

developing the IEs helped supported the attraction of businesses to the IEs.

Different from Thailand, who classified developing areas according to their distances to Bangkok and provided different

policy incentives to encourage investors to go to some remote areas which may be called “Zoning”, Cambodia just

provide different incentives for foreign investors and SEZs no matter where they located. Because they was thinking that

incentives are so important that the investors will go to the SEZs because of the incentives. However, it is not the case.

Among the 21 SEZs in Cambodia, only several SEZs are operated, and most the others can’t smoothly finish construction

or even start construction. This situation indicates that the lack of overall planning of SEZs from government perspective.

In addition, it needs to be considered whether Cambodia government should learn from the idea of “Zoning”. In fact, the

role of government is very weak in developing SEZs due to its little revenues and less capacity in strategy developing.

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4.5.2 Investment

Nature of investment

In the last 10 years, Thailand was one of the best performing in Asia despite the political instability in the country. In

Ease of Doing Business Ranking, Thailand ranked 12

. Key industrial investments included Hard Disk Drive (HDD) and

natural rubber, where Thailand is the world largest producer in both. Thailand automotive industry is the world’s 12

largest industry. However, Thailand industrial production involves various other sectors. This likely since Thailand did not

pursue industrial targeting. Instead, Thailand promoted several industries, and provided incentives structure for based

on location. As a result of non-targeting, and other micro (firm technological development) and macro policies, Thailand

did not achieve industrial deepening through moving the upper end of value-added ladder.

Due to the different levels of development stages, Thailand and Cambodia varies significantly in terms of the nature of

investment, particularly for the foreign investment. In Cambodia, the FDI ratio of GDP is higher than Thailand, and the

FDI ratio of Gross Fixed Capital Formation in Cambodia reached 51.9% in 2007. These evidences reflected the higher

dependence on foreign investment of Cambodia, which should be taken into account by Cambodia government in

developing future strategies. Besides that, many infrastructure projects were done with FDI or ODA due to its shortage

in domestic capital. The higher dependence on foreign capital reduced the autonomy of Cambodia in selecting different

kinds of foreign investments in favour of the national development strategy, environment protection, economy

diversification, etc. In addition, the existing FDI in Cambodia concentrated on garment, construction, food processing

sectors, which are mainly elementary industries and located at the lowest level of the value chain. Therefore, Cambodia

obtained very limited profits from the whole value chain.

Chinese and Japanese investors’ involvement

Japanese investors make one third of all foreign investors in Thailand. They came to Thailand in the 1950s, making them

among the first FDIs in the country. This started with a result of macroeconomic policies in Japan that prompted firms to

seek other bases for production and export. Thailand was a good choice due to the proximity, investment promotion

packages and acceptable infrastructure. Thailand continues to be production base for Japanese firms to the rest of the

world. The increased presence of the Japanese results in a more vigorous value chain. In addition, Japanese investors

tend to emphasize technology transfer, education of local employees and contribution to strengthened domestic

institutions.

Because of different contexts in Thailand and Cambodia, the main players, such as Chinese investors and Japanese

investors, have very different strategies in these two countries. Comparing to Thailand, Chinese investors play more

important role, while Japanese just started in Cambodia. For Chinese investors, they are more state-played and closed to

Cambodia government, and historically have been longer here than Japanese in terms of investment. However, Chinese

investors more concentrated on infrastructure, hydropower, construction and garment sector. Regarding to Japanese

investors, only cheap labours and raw materials are not enough, they care more about the investment climate, including

rule of law, corruption, governance, and so on. Therefore, there are not many Japanese investors considering investing

in Cambodia until 2011. Here, they brought more manufacturing projects to Cambodia. In terms of assistance, Japan is

the biggest donors and provides funds both on hardware and software, while China pays more attention on

infrastructures and access to the seas.

Investment competition and links

It is obviously that Cambodia and Thailand could be competitors in terms of foreign investment which locates at the low

level of value chain and benefits from the similar endowments of these two countries. Particularly, for the SEZs in

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Cambodia, they are more competitive in attracting investment than some of Thailand remote regions due to their

liberalized incentives. However, in another hands, according to their different positions on value chain, Cambodia may

not become a competitor for Thailand in attracting FDI in some fields, such as some capital or technology intensive

industries. Actually, Cambodia could benefit from Thailand’s upgrading process. Because during the process, many

labour intensive enterprises may consider moving to other countries with lower labour cost since the rapid increase in

labour cost in Thailand. In addition, because of the huge flood in Thailand last year, many electronics and motor

producers are thinking about finding other locations to reduce the risk of investment concentration. Therefore,

Cambodia is one of the most suitable target countries due to its close location and convenient connectivity to Thailand.

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4.6 Regional integration

4.6.1 EC and CBTA

It is difficult at this stage to evaluate the benefits of EC on Thailand and Cambodia (and regional integration in general)

especially given CBTA is not completed yet. However, different studies on Impact of EC on GMS countries have been

conducted, some of which are simulation models while others analyze progress to date.

Compared to international norms, poor performance of GMS economic corridors in terms of saved transportation time

or shipment costs is well documented. ADB acknowledges the need for improvements, especially in terms of CBTA, in

order to achieve EC objectives. OECD review also confirmed same conclusions.

However, there are some positive results already. For instance, the impact on Cambodia of the Southern Economic

Corridor shows increase in trade and fall in trade costs at cross-border points. In addition, domestically, improved health

care, education, and access to market increased in parallel

182

. Similarly, Thailand is also witnessing reduced transport

time and cost along the North South Economic Corridor. Along EWEC, 75 per cent reduction time was witnessed

between 2001 and 2007. In addition, buses along the corridor increased by 160 per cent, while freight operators

doubled between 2000 and 2005.

Analysis:

In Thailand construction of roads is almost completed, E-customs has been rolled out in 2011, and CBTA implementation

started. Cambodia is still piloting its e-customs and IT capacities.

However, in general there is slowness in regards to implementation of Economic Corridors and CBTA. Stakeholder

analysis of the importance and influence in the implementation of GMS economic corridors and CBTA shows national

states, rather than ADB, civil society, MNCs or SMEs, are the key factors influencing implementation. National states

have governance and full market liberalization challenges.

In Thailand’s case for instance, within the line ministries there is varied interests. The NESDB and International Transport

Division put their efforts to progress with CBTA implementation, while the customs officials are not so keen since lost

revenues due to the single stop puts Thailand at a disadvantage

183

. On the other hand, Ministry of Trade has its own

agenda, and the parliament is required to vote on CBTA protocols, prolonging the ratification processes. Those non-

aligned interests delay the progress.

In general, Thailand benefits from regional integration more than Cambodia. Thailand however is moving slowly for

market reasons. Some policy analysts suggest this delay is a deliberate strategy Thailand uses to slow the opening its

market. Economic corridors and CBTA progress is slow in lagging GMS countries, and infrastructure is deficient. Thus,

Thailand will not significantly benefit, compared to the losses incurred- losing domestic market to china. Thailand

already lost to China the transport services on Mekong, as well as being overtaken by Chinese business in Laos.

Therefore, Thailand self interested strategy, of gradualism is clear. However, this strategy if prolonged is likely to clash

with other policies Thailand is engaged in (such as the FTA).

182

ADB Institute, pp 9

183

Single window at the inflow. However, Thailand goods flow out, and thus customs loses revenue.

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4.6.2 Integration vs non-integration

184

The GMS-cooperation is an extension of the growth quadrangle (parts of Thailand, Laos, China, and Myanmar). Triangle

and quadrangle models are based on exploiting complementarities among geographically close countries

185

. This model

is considered a specific resolution to problems at different stages of economic development, and with different social

and economic system

186

. The ‘non-exclusionary’ approach does not lead to retaliation from other regions.

Cooperation between Thailand and Cambodia is a natural development of the economic forces at play. Thailand is an

open economy, and Cambodia in the last 15 years embarked on market-led approach. Liberalization, and increased

trade has had lead to higher income and more interdependencies. Cooperation based on the GMS –ECP can lead to

increased specialization, and better use of human resources, which can make the region more competitive in global

markets. The specific endowments and factors of production in each country provide an economic incentive for

economic cooperation, and thus mutual interest in keeping such cooperation. Other common interests the countries

have included

187

Cultural Heritage: The GMS countries have cultural ties in terms of ethnic groups’ ties and the language spoken.

Investors are based in the region, outside of their home countries. You can easily see Laotian business at the Thailand

border provinces. Also, Chinese investors in Thailand acknowledge such ties for their decisions to invest in Thailand.

The Mekong river: The river ties all the countries. How one country uses the river can affect other countries. Thus

cooperation is important for economic development of individual countries and the region due to the role of the river in

transportation, energy, agriculture, etc. Thus, better integration positively impacts the use of the river.

Intraregional-trade: Trade between GMS is significant and increasing, despite being more in favour of the more

developed (Thailand and Vietnam), and thus it can further be enhanced through greater cooperation. Integration

reflected through more infrastructure projects and greater trade will serve enhance trade ties

Weak Domestic capital: Due to weak internal capital, private should be allowed to move freely, and preferably into the

GMS countries, thus brings real and monetary development in the region. Coordination of both countries to increase

the returns on investment in both countries (and the region) will further bring private investors.

Thailand: For Thailand specifically, there are a number of benefits including access to resources, increased security and

leadership potential in the region.GMS countries, except for Thailand, have relatively recently adopted a market-

oriented approach to managing their economies. Therefore, through better integration, Thailand can capitalize on the

investment potential the rest of GMS countries offers. Thailand no longer has a comparative advantage of cheap labour,

and thus Thai businesses can increasingly use cheaper labour from other GMS countries for their lower-end value-added

production. Thai businesses can relocate to neighbour countries, or facilitate the inflow of labour into the country.

Thailand-GMS trade is already significant (figures introduced in Thailand in GMS section). Increased integration is likely

to further reduce barriers to trades, and other inefficiencies, thus increasing gains from trade. Stability in the region is

important for increased investment in the region. Thailand is engaged in big investment projects (such as power

projects) in other GMS countries which secures supplies in Thailand. Stability, associated, with development of GMS

countries, and the created interdependencies, will strengthen the reliability of those supplies, thus ensuring

184

Lolette Kritzinger-van Niekerk, “Regional Integration:Concepts, Advantages, Disadvantages and Lessons of Experience”, Senior Ecconomist, World Bank

Country Office in SA.

185

ADB 1992

186

Krongkaew, pp979

187

ADB 1993

127

uninterrupted production in Thailand. Thailand's social stability associated with increased integration involves control of

illegal workers, human trafficking and related increased diseases and social instability. Being the most developed and

most trading with GMS countries, greater integration can allow Thailand play a backbone role in the region through

shaping its evolvement. Increased integration can bring increased leadership opportunities for Thailand in steering

development in the region (and possibly push for a ‘Baht Zone’?). Thailand aspires to become a regional logistic hub.

Increased regional cooperation, movement of goods, and trade will help Thailand realize its objectives.

Cambodia: As the least developed country in GMS, it is obviously that Cambodia could benefit a lot from improving

regional cooperation and achieving regional integration, which may include trade gains, market enlargement, access to

capital, improving security, signalling and even accelerating domestic reforms. Through better regional cooperation and

coordination, Cambodia could expand market capacity by using a unified regional market, which is crucial for investors

targeting local consumption market. Cambodia could attract more investors considering relocating their investments

within the region due to the rapid increases in labor cost in Thailand and China, and Cambodia could also benefit from

the integrated regional value chain which is still missing in GMS and become the location for some very low level value

added industries, such as construction materials, fiber, dyeing, food processing, etc. Through trade facilitation, firms in

Cambodia could dramatically reduce the cost in terms of money and time and increase their competitiveness, and

Cambodia might get the opportunities expending its trade scale. In addition, compare to other more developed

countries within the region, another big gain for Cambodia in terms of regional integration is the security and signaling,

which are quite important for Cambodia due to its small size and poor capacities. Moreover, regional cooperation will

become a power for Cambodia to deepen and widen its domestic reforms and institutional arrangements to match the

requirements raised by further regional integration. However, although it seems that Cambodia may obtain a lot from

regional integration, there is also very strong reluctance in Cambodia constraining the process of regional integration.

Firstly, because Cambodia’s lagging situation in terms of economic, political and social perspectives, Cambodia has to

make more reforms and pay more to achieve regional integration. Secondly, during the process of regional integration,

there are not only gains, but also losses for Cambodia, particularly tariff and duties, which are crucial for Cambodia’s

public revenue. Thirdly, the competition from neighbouring countries increases the concerns of Cambodia to pursue

deeper regional cooperation.

4.6.3 Constraints for regional integration

188

Cambodia

According to the related research, besides what we have discussed above, there are some other specific constraints for

Cambodia to achieve regional integration in GMS and mainly focusing on capacity building, political will, stakeholders,

information and public awareness issues.

Capacity building

Standardization: The different policies, regulations, and standards in terms of relevant sectors exist within GMS, which

remain highly problematic and increase costs for transport, trade and investment.

Capacity and resource: The uneven and low level of capacity and available resources both in the private sector and

some government agencies working hard to increase institutional capacity cause obstacles for further integration.

Moreover, the capacity of monitoring the related agreements’ implementation is still low in Cambodia.

188

Khieng, Sothy Towards a better understanding of the political economy of regional integration in the GMS: Stakeholder coordination and consultation for

subregional trade facilitation in Cambodia, 2009

128

Mechanism: There is a lack of clear and realistic timeframe and mechanism for enforcement of the implementation of

regional agreements, particularly for CBTA.

Political will

There are uneven political will and lack of commitment to fair and effective implementation of regional arrangements

among the GMS member states, and continuing protectionist tendencies by some GMS member states. Cambodia’s

cooperation with different neighbouring countries is various because of many political reasons. For example, Cambodia

and Vietnam have much better cooperation than Cambodia and Thailand in terms of transportation management.

Moreover, Cambodia also concerned about being locked by Thailand and Vietnam if there is high regional integration. In

addition, the concern of becoming a “victim” may influence the political level to implement the “protectionist” policies

and to pursue this kind of “stop-and-go” policy.

Stakeholders

Coordination: There is the lack of coordination among relevant stakeholders, particularly for the higher level

coordination between and among relevant authorities. Therefore, the different interests, risks perceptions, and

facilitations from different departments make it more complicated and difficult to implement regional agreements. For

instance, the Custom Department got 75 million US$ revenue in December. Therefore, concerning about losing tariff

revenue and different inspecting standards became the main reasons for Custom’s reluctance in implementing CBTA and

trade facilitation issues.

Participation: Too much power/authority is concentrated in a few key ministries/agencies with too limited capacity.

Local level authorities do not have enough opportunity to participate in implementation process. There is also lack of

effective representations from related private sectors and NGOs. ADB and other donors should have better plans and

better coordination and involvement with related stakeholders.

Vested interest: Some of the key agencies responsible for implementation have strong vested interests, including access

to informal payments or fees, and are resistant to change. In addition, the strong vested interests among some major

private sector stakeholders, particularly commercial advantage for competing businesses also increase difficulty in

regional integration.

Information and public awareness

There is the lack of awareness and uneven information distribution of related initiatives and programmes to all

stakeholders, especially at lower level of the government, law enforcement officers and private sector, which has been a

key barrier to effective involvement and cooperation from stakeholders in sub-regional and regional integration

projects.

Thailand

Despite, the potential benefits for Thailand from greater regional integration, a few issues that need attention remain.

Minimum Development

Thailand could face challenges to work with poor, previously centrally-planned economies. Institutions need to be

developed to a certain level before countries can engage in mutually beneficial cooperation. Thus, Thailand might need

to further increase its ODA assistance to GMS and mobilize and push ASEAN and ADB to increase support to GMS

countries.

Political Economy

129

Political economies and a lack of capacity are the main constraints affecting Thailand's regional integration. Interviews

made it clear that regardless of policy from the central government, even when that policy is pro-integration, there is a

lack of capacity at the border areas to follow through and implement the plan. Thailand stands to lose the lower-end of

some of its firms which is politically unsavoury – particularly if within these strata domestic firms are concentrated.

Additionally, regional integration can be used as a political tool to some extent – Cambodia stands to gain from regional

integration while Thailand is interested in resources in the gulf. The project of regional integration in and of itself entails

development projects funded mainly by ADB.

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4.7 Sub conclusion

By making a comparison in terms of governance, incentives, resources and strategies on the basis of part two, this

report has established a comprehensive analysis to identify the most important constraints and driving forces for further

economic development for Thailand and Cambodia. As mentioned before, Thailand is a much more developed country

in the region and has “comparative advantages” in many fields and should become a model for Cambodia, while

Cambodia also has some unique advantages for development. These similarities and differences will help us in

understanding the different contexts in these two countries and developing relevant policy options shown in part IV,

which include what and how Cambodia can learn from Thailand in terms of transparency, incentives, education, and

what Cambodia should go through its own path according to its own context, particularly in terms of trying to develop

an independent economic system by improving domestic innovation, which has been lacked in the path of Thailand’s

development and become one of the main reasons why Thailand has been got caught by “Middle Income Trap”.

In addition, through analysis of different scenarios and main constraints for regional integration in these two countries,

this report makes much clearer about the significance and opportunities in terms of regional integration, and finds out

that the governance and political perspectives is the most important obstacles for Cambodia in accelerating regional

integration. Besides that, capacity building, political will, stakeholders, information and public awareness issues are also

the main constrains need to be addressed for Cambodia to improve its performance in accelerating regional integration.

Based on that, this report will develop relevant policy recommendations in the fourth part.

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Chapter V: Recommendations

5.1 Introduction

After the comparison analysis between Thailand and Cambodia, this report identified the important constraints and

driving forces for further economic development and regional integration, which mainly focus on governance issues,

particularly for Cambodia. Meanwhile, this report also found out that, as a more successful model in the region,

Thailand’s experiences in improving transparency, building capacity, enhancing infrastructure and education could be

very helpful for Cambodia. However, since Cambodia has its own characteristics and unique factors in terms of political

system, resources and other endowments, and the international and regional situation has been dramatically changed

from when Thailand’s economy took off in the 1970s in terms of economic surrounding, power allocation, civil society

strengthening, and so on, it is very crucial for Cambodia to develop relevant strategies and plans on the basis of its own

context by considering the new international and regional situations to avoid the outcome raised by “Dependency

Theory”, which emphasises that the poor countries may become more impoverished by joining in world system.

Therefore, in the fourth part, this report provides some policy options for Cambodia in many fields by focusing on

improving governance capacity, which this report believes is the most important issue for Cambodia both in economic

development and regional integration. In addition, through analysis of the main constraints for Thailand, this report also

makes some relative recommendations in terms of governance, strategies, labours, and investment.

5.2 Thailand

Upgrading

Scientific-based production has been increasing in Thailand, but at the lower end. Therefore, Thailand needs to progress

relatively faster in upgrading especially to take advantage of regional and global opportunities and avoid lagging behind.

Towards that end, Thailand needs to ensure the upgrading framework put in place is achieving its objective. In addition,

different initiatives, such as the 2005 clustering and 2009 creative economy, need to be aligned within the overall

upgrading framework, to ensure effectiveness of the different efforts. Governance thus becomes important, and

Thailand needs a well-coordinated mechanism to guide industrial upgrading. Thus, Thailand needs to bring the

governance of the industrial upgrading to the top of the agenda list.

Linkages (Labour Force and Education)

Industrial deepening requires sheer reserve of skilled labor in Thailand. While the shift from agriculture to manufacturing

did not require a massive skills upgrade, progressing towards the creative economy would require much higher skills and

institutional reforms in the education sector and labour market.

Thailand only recently undertook serious education reforms. Therefore, the government again needs to be progressive in

restructuring the education sector to meet the upgrading demands of Thailand. New curricula, and increased training of

existing labor force are important for labor market responsiveness.

In addition, BOI needs to coordinate the creation of new linkages between higher education institutions, local firms and

companies that will address the new shift.

132

Improve state capacity

State capacity is limited in a number of respects including implementing policy at the border areas, coordination across

ministries and in addressing the private sectors. Customs officers need a range of incentives: financial, lifestyle and

contractual obligations, to encourage them to stay in the border areas such that skills are not lost due to a high-turnover

of staff. The lack of coordination across ministries is not just an issue for improving document services for investors, but

also for policy. A holistic approach from ministries such as the Ministry of Industry, Commerce, Labour, Education, and

Environment is necessary to address the need of firms. Additionally coordination is needed with local government to

encourage policies such as place-based policies to develop areas like the Eastern seaboard into areas with

complementing industries, residential, health, education and other facilities.

Business Climate

While Thailand is a sought base for production and export, Thailand is likely to gain more attention in the future

especially given its proximity to the giants China and India. The emergence of China and India, aspirations for Thailand to

become a regional hub, expectations for Asia to make half of the economy in 2020, and the increased capital movement

and trading in Asia, all alert Thailand to improve the business climate and further develop the infrastructure. Few of the

important priorities Thailand should consider include measures to ensure political stability and risk governance (eg. In

relation to floods), good governance (reducing corruption).

5.3 Cambodia

The Kingdom of Cambodia government has made great success related to the business and investment climate Since

1990s, such as the improvement in the administration and implementation of the Law on Investment (2003) create a

more direct way to improve the climate of attracting FDI and technology transfer. However, there are still some aspects

need to be improved in the coming years. According to the case study and comparison analysis above, this report has

already identified the biggest obstacles for the future development and regional cooperation of Cambodia, which are

inefficient and non-transparent government bureaucracy, missing local governance, weak infrastructure and poorly

educated workforce, etc. Therefore, relative policy recommendations on the following related to good governance,

infrastructure development and human development, as well as regional cooperation should be considered. In addition,

since it is a policy oriented research, the recommendations will focus on the governance issues. Because it is critical that

the role of governance in the improvement of infrastructure and workforce.

5.3.1 Governance

In general, the good governance means an ideal governing system that is inevitable for political, economic, social and

cultural development of a country. The good governance with sound economic management based on (i) Accountability;

(ii) Participation; (iii) Predictability; and (iv) Transparency

189

. Transparency is one field that Cambodia should learn from

Thailand. In terms of Cambodia,

Strengthening Decentralized Governance

In general, decentralization is defined as "the transfer of responsibility for planning, management, and the raising and

allocation of resources from the central government and its agencies to field, units of government agencies, subordinate

units or levels of government, semi-autonomous public authorities or corporations, area-wide regional or functional

189

Soksreng TE,"Good governance in Cambodia", 2007, p.57

133

authorities, or non-governmental private or voluntary organizations."

190

In practice, local government in Cambodia has no power to approve the investment. Furthermore, local government

cannot get tax revenues from SEZs to better promote the local development. As a result, they are lack of initiative and

positivity to attract investors or provide better services in local level.

Therefore, the Royal Government should further pursue the Decentralization and De-concentration policy by developing

legal and regulatory framework and laying out new measures to ensure effective implementation of the "Organic Law on

the Administrative Management of the Capital, Provinces, Municipalities, Districts and Khans", especially the

development and implementation of the legal and regulatory framework related to the transfer of power from the

national to sub-national administrations by clearly identifying roles, authority, power, and accountability. In Particular,

some services and powers of CDC should transfer to local government.

Enhancing Transparency

191

As one of the key issues for good governance, transparency has not been achieved in Cambodia’s bureaucracy and

Cambodia should learn more from Thailand. In fact, there is huge gap between the status quo and basic requirements.

Moreover, transparency is believed to be crucial in terms of anti-corruption, which has been a serious problem for a long

time in Cambodia. In order to improve transparency within public sector:

Firstly, it is necessary to publish timely relevant information and necessary data on investment opportunity, country‘s

potentials for investment, legal and institutional arrangements, SEZ, and industries in proper ways to establish a better

business environment. In addition, it would be important to provide this information into different languages in favour

of foreign investors or traders.

Secondly, it is crucial to improve transparency of license management, particularly in terms of requirements, conditions,

time line, procedures, and outcomes. For instance, The CDC‘s service should be more transparent and more responsive

to manage investment. The procedures of investment should be more standard. Meanwhile, it is also important to

implement biding method for government‘s mega projects, such as infrastructure, power plants and new satellite towns.

The Concession Law should be enforced to avoid granting licenses especially in forestry and mineral concession and BOT

projects without a proper bidding.

Thirdly, the governments’ websites should be updated regularly to store all important and updated information related

to laws and regulations, fact sheets, newsletters, etc. Other important website links should be created so that the public

can find required information on relative issues, for example, investors can find some useful information about business

opportunities in various provinces or SEZs in Cambodia.

Improving Participation

In Cambodia, the policy making process is a top-down and government dominated process. In addition, the inefficient

mix of centralized and deconcentrated service delivery mechanisms limits the participation of local communities and the

capacity of government to match services to local needs. Therefore, it is really critical to improve participations of

different stakeholders including public sectors, private sectors and NGOs.

190

Rondinelli, D., and Nellis, J, “Assessing Decentralization Policies: A Case for Cautious Optimism”, Development Policy Review IV, 1 (1986), p. 5

191

Sotharith, Chap and Chheang Vannarith. Cambodian Economy, Cambodia Institute for Peace and Cooperation, Funded and Supported by Economic

Research Institute for ASEAN and East Asia. 2010 . p. 39-40

134

Firstly, within the public sectors, it is important to provide more opportunities for line ministries or local authorities to

participate into different stages of policy cycle and improve coordination among the authorities. For example, to

establish a Joint-Management system, to invite them to take part in the OSS, etc.

Secondly, other stakeholders, like private sectors, NGOs, and local community should play a more active role in terms of

policy making and implementation process, such as public hearing, public survey, collecting comments or feedbacks

from relevant interests parties, public monitoring, and so on.

Building Capacity

Civil service system in Cambodia is weak in terms of human resource and other relevant resources. For example,

Cambodian civil servants have low salary and few resources available, which will dramatically reduce their capacity and

motivation to deliver services. Therefore, in order to resolve these obstacles:

Firstly, the Cambodia government has to provide more training and education to civil servants, particularly these officials

at the CDC. They should participate in country and regional seminars, workshops, study tours abroad for building

capacity in public management especially FDI and SEZ management, such as dealing with computers, compiling data,

analyzing data, relevant law, contracts formulation, investment promotion skill, negation skill, dispute settlement skill,

etc

192

Secondly, the relevant ministries or local authorities also have to enhance training or education for their officials

working in OSS or at borders or at other ground levels, and provide better working conditions and incentives. This will

contribute to the increase of personnel stability at the very local level and improve the implementations of policies,

laws, and regulations since they are the officials implementing policies directly. One-stop service in the CIB should be

improved through appointment of more capable staff in the CIB as well as from line ministries, who have adequate

knowledge and can decide on behalf of their own ministries.

Thirdly, there is a urgent need for the establishment of relevant databases which can provide comprehensive and

accurate database for policy makers, officials, investors, SEZ developers, or other non-government sectors, such as the

database for the investors in all sectors, covering potentials for investment, trade data, the trend of investment, market

access, information on comparative and competitive advantage between Cambodia and other countries and so on

193

Fourthly, the government should increase the available revenues by obtaining grants or loans from World Bank, ADB,

and other donors, particularly for infrastructure and capacity building projects. As Japan preferring to provide assistance

for improving “software” recently, while China prefers to focus on infrastructure assistance. Cambodia could make use

of their different strategies and obtain more financial support from them. In addition, the taxation system also needs to

be improved to increase revenue collections by reducing negotiable taxes and fees.

Developing Related Strategies

Cambodia government is lack of capacity in terms of strategies development, which has to be improved.

Firstly, since Cambodia can’t achieve its development without taking part into the world system, to avoid the potential

outcome raised by “Dependency Theory”, Cambodia should develop relevant strategies in terms of establishing an

independent innovation and technology system. For example, in attracting FDI, government should consider the

measures to accelerate technology transmission through FDI, and try not just to be the provider of cheap labors and

other resources; government also should invest more on technology innovation projects and education system. So that,

192

Ibid. p. 41

193

Ibid.

135

Cambodia’s economy sectors could get the opportunity moving up along the value chain and being increasingly

independent by accumulating enough capital and skills, just like what China has done for the last 30 year. Because, as

both agreed by the Latin American Structuralist and the American Marxist schools, “the core of the dependency relation

between center and periphery lays the inability of the periphery to develop an autonomous and dynamic process of

technological innovation. Technology – the Promethean force unleashed by the Industrial Revolution – is at the center of

stage. The Center countries controlled the technology and the systems for generating technology”

194

Secondly, the government should develop different policies and incentives for different sectors to extend industrial

chains or establish new industries according to Cambodia’s comparative and competitive advantages. For instance,

developing beneficial policies to extend garment industries from only sewing to fiber, dyeing and so on by stimulating

domestic and foreign investors (main China, Vietnam )to reduce the cost and increase competitiveness; identifying other

agriculture products for further processing according to Cambodia’s context, by accomplishing the assessment, finding

out obstacles, developing policies measures and establishing clear working targets just like what they have done for

“Rice Policy”, which could mainly rely on agricultural experts, argo-firms, associations of peasants and agriculture, IOs

and NGOs.

Thirdly, establish development strategy for SEZs in terms of locations, main sectors, incentives, targeting markets, labors

recruitment, and guidelines in practical and feasible ways. For example, which parts of Cambodia would be the best

locations for SEZs, along the borders whether SEZs would be the only means to accelerate investment and local

development. SEZs should be encouraged to develop in those coastal provinces, especially in Sihanouk Province to bring

production base nearer to the deep water port and the new International Airport.

Fourthly, government should identify a long term strategy in developing economic growth corridors for transports and

logistics, especially along the lime of regional Economic Corridors. In addition, government also should take special

consideration in coastal development by investing in building main highways and other supporting infrastructures such

as water and electricity to the coastal provinces which are now neglected for development such as Kep, Kompot, Koh

Kong and Sihanouk Province

195

Fifthly, develop different strategies in related to the differences of Chinese and Japanese investors’ preferences.

Moreover, it is important for Cambodia government to seize the opportunities to attract more investment from

Japanese investors due to their concerns on diversification on investment locations and upgrading process in Thailand

and China. Moreover, it is also important for Cambodia to develop financial sector so that it can mobilize domestic

capital to stimulate economic development.

Sixthly, improve strategy development in terms of territorial dimension by identifying different comparative advantages

and obstacles, setting up different targets, policies options and incentives for different “zonings”. Until now, except

some main tourism areas have been defined in the country, the rest regions have not been clearly defined their

positions in terms of development. This is also very crucial for stimulating and improving involvements of provincial and

local authorities to establish a systemically multi level governance within Cambodia.

Last but not least, improve capacity in terms of project assessment. Particularly, for the mega infrastructure projects and

investments, such as hydro power, roads, ports, transmission line, water supply and drain system, industrial estates,

factories, the authorities have to enhance the quality of assessment in terms of the impacts on local development,

environment, poverty reduction, etc, and make them as the fundamentals in decision making and license allocations.

194

Technology, Finance and Dependency, op cit. p. 3-4.

195

Sotharith, Chap and Chheang Vannarith. Cambodian Economy, Cambodia Institute for Peace and Cooperation, Funded and Supported by Economic

Research Institute for ASEAN and East Asia. 2010 . p. 86

136

Establishing welcoming investment climate

196

Although Cambodia has been trying hard in attracting investment, there are still some factors needed to be reformed

and improved.

Firstly, improve relevant legislation. Legislation is crucial to establish an accountable and predictable business

environment for investors, which is quite important for Japanese investors. The legislation related to investment in

Cambodia is inadequate and Cambodian National Assembly and government should establish more sound legislations

and regulations to improve accountability and predictability for investors.

Secondly, simplify administration procedures. In order to be more effective in attracting investors, it requires

strengthening service delivery through more simplification of approval procedures, as well as elimination of unnecessary

steps for applying investment licenses. All trade procedures including various inspections should be as simple as possible

to simplify and facilitate the trade development in the country. Especially, in terms of trade facilitation, the government

should implement the WTO, General Agreement on Tariffs and Trade, Article VIII (1) (c) which states that ―The

Contracting Parties also recognize the need for minimizing the incidence and complexity of import and export formalities

and for decreasing and simplifying import and export documentation requirements

197

Thirdly, build confidence for investors. Cambodia should develop a climate of business confidence as a first step toward

an effective strategy for promoting investment. This can be done by adopting new investment promotion strategy,

instituting sustainable economic policies and eliminating tax and non-tax disincentives. Frequent tax changes should be

avoided. In addition, military police (MP), police and other related Cambodia‘s security authorities should strengthen

public security in the country and ensure that anybody, who comes to Cambodia, is safe and enjoys a memorable

souvenir. For investors, who already operate their investment projects, aftercare services provided by the CIB, CSEZB

and CDC would be very important such as providing advices and help in trouble shooting when they face problems. For

example, to establish investment project tracking system to ensure that the projects are closely monitored and the

investors are well taken care throughout the investment cycle starting from contacting, applying to licensing and

operation. This will also facilitate the government to know the status of all investment projects

198

Fighting Corruption

To build accountability and predictability for Cambodia government, it is critical to fight corruption within the public

sector since it has become widespread and undermined Cambodia’s further economic and social development.

Therefore, Cambodia government has to work on these factors: increasing the risks associated with engaging in corrupt

activities in the public sector, making public officials more accountable for their behaviors, setting standards and

strengthening enforcement and scrutiny, strengthening implementation of anti-corruption law, eliminating unofficial

fees such as security charge, tea money and charity for different purposes, introducing outside audit into public sector in

terms of monitoring public revenues collection and expenditure, increasing cooperation with international organizations

to fight against corruption, expending the scope of implementation of Public Procurement mechanism, etc. In addition,

during many other general reforms, such as those involving public finance, the legal framework and judiciary, and public

administration, have to take anti-corruption into account and make it become part of the general reforms

199

196

Ibid. p. 74

197

UN, Compendium of Trade Facilitation Recommendations , 2001. p. 18

198

Sotharith, Chap and Chheang Vannarith. “Cambodian Economy” 2010, page 40

199

Soksreng TE, Good Governance in Cambodia: Exploring the Link between Governance and Poverty Reduction, 2007. p. 71

137

5.3.2 Infrastructure

One of the main obstacles of diversification in Cambodia has been the poor infrastructure; in particular the high cost of

electricity and telecommunications and their unreliable supply, and they are the factors most fall behind when

comparing with Thailand. Apart from these issues, Subordinate infrastructure including rural roads and rural market

places are in poor condition and need upgrading. With weak infrastructure, it is considered to be a major structural

weakness that holds back economic growth and development. Furthermore, it difficult for Cambodia finds its process of

economic integration to the sub-region. Therefore, the Cambodia government should have its strategy to better develop

these infrastructures.

Developing National Transport and Logistics

The development of industries and transport infrastructures mutually need each other. The Government should

formulate a comprehensive transportation plan consistent with the medium-long Socioeconomic Development Plan and

other plans and to carry out programs based on this transportation plan. The notion of economic corridors is noble and

appropriate to the concept of integrated planning, Cambodia should think about how a transport corridor can be

converted into the economic corridors. Spreading and expanding transport infrastructure network is effective for the

remote villages to sell their goods to major markets in the region as well as overseas. Furthermore, investments should

also be directed toward improving physical transport infrastructure that links Cambodia with countries in the region,

especially Thailand, Lao and Vietnam, as well as toward enhancing sea and air access to international destinations.

However, the Royal Government does not yet have the sufficient financial, technical, and human resources necessary for

infrastructure development. As a result, on one hand, the Royal Government should Cambodia needs to build up the

government’s capacity to maintain and manage the transport infrastructure. They need to secure equipment and

construction materials, develop human resources and improve technical capacity concerning the transport facilities that

it maintains, manages, and operates on its own. On the other hand, they also need to seek help from donor community

or the loan from ADB continuing to invest and provide technical support in infrastructure development. In addition, a

comprehensive transport policy framework should be developed to address issues such as development of a balanced

construction and maintenance program, increased involvement of the private sector, etc. government should use its

resources to encourage Public Private Partnership or attract foreign investors for investment in logistics and transport

corridors because the projects require big investment, and PPP offers benefits to Cambodia in the financing,

construction, operations, and management of infrastructure.

Developing more stable and cheap electricity supply

Now that the supply and demand situation for electricity has more or less stabilized, and the electricity supply currently

does not meet the basic demands, where 24-hour supply of electricity is not assured and the quality of electricity is not

reliable, at issue are the stabilization of power charges and increase of the power supply. Furthermore, according to the

Power Development Plan of the Kingdom of Cambodia in 2007, electricity demand is expected to show a rapid increase

until 2020. To address these challenges, securing stable electric power resources in the long term and reducing the cost

are the key issues.

Firstly, Cambodia now needs to formulate a long-term plan for electric power supply to secure stable power resources

and electrify rural areas. Cambodia should continue to develop renewable power sources such as hydropower and

thermal energy to meet the demand of economic development, and electric power sources should be developed using

private funds and that funds from the ADB, World Bank or ODA from donors. The four LMB countries of Cambodia, Lao

PDR, Thailand and Viet Nam have an estimated national hydropower potential in the order of 50,000 ‐ 64,750 MW, of

138

which 30,000 MW is available in the Lower Mekong Basin. Over the past few years, investors and developers mostly

from China, Malaysia, Thailand and Viet Nam have submitted proposals for twelve hydropower projects for the LMB

mainstream drawing on concepts from past decades. Among these projects, ten proposed mainstream projects would

involve constructing dams across the entire river channel – 8 in Lao PDR, two of which are on the Lao‐Thailand reaches

of the mainstream and 2 in Cambodia

200

. Secondly, Cambodia needs to set up power grids throughout the country,

especially between major cities in southern and western regions in order to construct large-scale power generating

plants and to import electric power from neighbouring countries during the construction period of such power plants.

Thirdly, Cambodia should seek neighbour countries to support the government’s Power Sector Strategy by helping the

country to access low-cost sources of electricity, including imports from Thailand, Laos, and Vietnam. In addition, the

government should support the participation of the private sector in electricity generation. Such as, encouraging the

zone developers to built small power plants in the zone.

5.3.3 Labor

Enhancing education system

To address poor youth preparation for the labour market, it is vital to adopt an integrated approach that addresses poor

quality of education, high dropout rates and the need for training for out-of-school youth, which Cambodia can learn

some experiences from Thailand.

First of all, the government should increase access to schooling and completion of basic education. In the Cambodian

context, financial constraints severely affect poor households’ schooling decisions. Therefore, the tuition fee should be

low or free, and the government should require every child in Cambodia must receive 9 years of compulsory education.

Furthermore, improving the quality of education is as important as keeping children in school, since early school dropout

may be a rational choice if the labour market provides greater skills accumulation opportunities than schools.

In addition, the government should offer more training opportunities to out-of-school youth. Given the large share of

out-of-school youth in the labour force and their low productivity, training programs for unskilled youth should be

expanded to improve their technical and soft skills, along the lines of programs currently offered by NGOs, as well as

zone developers in the SEZs. Trade unions in the firms should develop a pre-employment orientation program for formal

job entrants.

Last but not the least, the stakeholders, including employers, government, unions, and education and training

institutions, should operate the National Training Board with a system for conducting workforce assessments,

developing skills standards frameworks, and translating these frameworks into practical curricula and certificate/degree

program designs about poor skills and the quality of jobs.

Improving cooperation among local authorities

In order to increase labour supply for industries and SEZs, it is important to improve cooperation among local

authorities, SEZ developers, and investors. For instance, like what Chinese government has done to resolve the labour

shortage in coast provinces, establish direct connection between the provinces with labour surplus and the provinces

short in labours so that they could share the labour and recruitment information and work together to get enough

labour for industrialization, and cooperate with investors and SEZ developers to provide incentives, such as housing,

education, health care, and other better public service, for rural area residents to encourage them to leave their lands

200

International Centre for Environmental Management ,“Strategic environmental assessment of the hydropower on the Mekong mainstream”

139

and work for factories.

Considering immigration from other countries

The another way to resolve labour shortage is to immigrate labour from neighbouring countries, such as Vietnam, Laos,

even China. Although Laos’ population is quite small, it is still possible to recruit labour from rural areas. Thus,

government should improve the involvements and cooperation of local authorities. As for Vietnam and China, it is

helpful to attract skilled labour with better education as engineers, teachers, etc. Therefore, the Cambodia government

should improve cooperation with these countries’ governments, provide platform for enterprises and investors to

recruit foreign labours and simplify immigration procedure.

140

5.4 Regional integration

5.4.1 Thailand

Towards better regional integration, Thailand government needs to play a leading role in pushing neighbour countries to

raise their development levels to increase the benefits of regional cooperation for GMS countries, while reducing the

costs Thailand may incur. Towards that end, Thailand should increase development assistance to neighbour countries and

provide guidance and technical assistance similar to that provided by ADB.

Despite the history of state sovereignty in South East Asia, the increased interdependencies, new economic system, and

diffusion of ideas and globalization in the region, Thailand can push neighbour countries to collaborate more and take

actions towards reforming their economies and introducing the required institutional and regulatory mechanisms to

move forward with regional cooperation. This is usually the role played by ADB. However, Thailand impact is expected to

be more significant, since GMS cooperation established ‘rules of the game’ do not seem to incentivise the actors enough

to progress fast. The slow response could be a result from the fact that ADB established itself as an advisor, and not

enforcer. But, even Thailand 20 years ago would not have been able to establish itself as an enforcer. But today, increased

interdependencies means more rules of the game, and more power, and thus ability to influence and enforce.

In-house, Thailand needs to speed up the voting process to ratify the protocols of CBTA, and fix and align the various

trade and cooperation agreements in order to harness the benefits of cooperation.

Locally, Thailand needs to further develop its border areas in preparation for better integration with the rest of the

region. E-customs and other border infrastructure is still weak, and coordination between the centre and local

authorities needs to be strengthened. While developing its borders to fully implement CBTA and realize the economic

corridors objectives, Thailand can also cooperate with borders of neighbour countries to ensure alignment of procedures

and logistics.

5.4.2 Cambodia

As the most important obstacle for Cambodia’s development, governance issue also is the toughest difficulty in

accelerating regional integration. Therefore, all the related recommendations for improving Cambodia’s governance

capacity and economic development will also become part of the policy options for further regional cooperation

between Cambodia and other countries. In addition, this report would like to discuss about some other aspects, mainly

focusing on governance and political perspectives, need to be addressed by Cambodia government and other

stakeholders.

Strengthening of political will in favor of regional cooperation

It is crucial to strengthen political will and commitment in terms of improving regional cooperation, establish co-trust,

reduce protectionist tendencies, eliminate conflicts and establish a fair competition environment through negotiations

and dialogues among GMS countries, key stakeholders, IOs and NGOs. In addition, GMS countries should establish a

clear and realistic timeframe and mechanism for enforcement of the implementation of regional agreements,

particularly for CBTA. Regard to national level, Cambodia needs to unify and strengthen political will to support further

regional cooperation, which will contribute to market enlargement, smooth movement of people and goods, and better

resources allocation.

141

Unification of relevant standards and administrative procedure

Unify the GMS countries’ different policies, regulations, and standards in terms of relevant sectors, especially for

transportation, trade facilitation, and investment. For instance, find solutions for Thailand’s different transport

standards to avoid truck reload at the borders, unify custom and inspection regulations and procedures among GMS

countries. Such as “Where the nature of the consignment could attract the attention of different clearance agencies, e.g.

Customs and veterinary or sanitary controllers, Contracting States should endeavour to delegate authority for clearance

to customs or one of the agencies, or where not feasible, take all necessary steps to ensure that clearance is carried out

simultaneously, at one point and with a minimum of delay”

201

.‖

Increasing coordination among stakeholders

Increase coordination among stakeholders, particularly the higher level coordination among relevant authorities.

Cambodia and other neighbouring countries should identify the solutions and methods that can resolve the conflicts and

disagreements among different interests, risks perceptions, and facilitations of different departments. For example,

regard to transportation and the implementation of CBTA, it is necessary to address the benefits and risks allocation

problem among member states, which means how to divide tariffs, fees, and taxes, and how to share the risk of

reducing criminals, illegal immigration, and infectious disease among them. Particularly for the LDCs like Cambodia,

other more developed countries, such as China, Thailand and Vietnam should take more responsibilities and leave more

benefits for Cambodia, Laos and Myanmar, ADB also has to develop relevant strategies and plans to allocate more

resources to the less developed countries. Such as providing training and equipments for border officials to improve

their capacity in simplifying procedures, monitoring goods, fighting against criminals and infectious disease. This can

reduce the concern of being locked by some countries and losing revenues and benefits by simplifying custom and

inspection procedures, which are important for countries with small revenues like Cambodia to be confident in

implementing regional agreements without worrying about the losses. Furthermore, it is also important to reduce the

probability of achieving regional integration at the expense of the poorest countries like Cambodia.

Eliminating vested interests

One of the most important obstacles for regional integration is the widespread vested interests among some key

authorities and agencies. In addition, the strong vested interests among some major private sector stakeholders also

increase difficulty in achieving regional integration. Hence, ADB and Cambodia government should develop strategies

and plans to reduce and eliminate the vested interests, including decentralization, deregulation, anti-corruption,

enhancing fair competition, and so on.

Improving information sharing and public awareness

Another main obstacle for local involvement is the lack of awareness and uneven information distribution. Therefore,

Cambodia government should start a public campaign to increase public awareness of main initiatives and programmes,

and the benefits to their lives through regional cooperation. In addition, it is also important to improving information

sharing system among stakeholders, especially the lower level of the government, law enforcement officers and private

sectors, so that to eliminate the barrier to effective involvement and cooperation in sub-regional and regional

integration projects.

201

Sotharith, Chap and Chheang Vannarith. “Cambodian Economy”, 2010. Convention on International Civil Aviation, Annex 9 (4.30)

142

More opportunities for local participation

The status quo is too much power concentrated in a few key ministries or agencies in a very high level, while the local

level authorities do not have enough opportunity to participate, and the private sectors do not have enough influences

on those issues. In fact, to achieve regional integration, only top-down process is not enough, bottoms-up process is also

necessary. Therefore, Cambodia government, ADB and other donors should have better plans and coordination to

improve the participation of local authorities and make them play a more active role in regional integration especially

implementation process. Furthermore, during negotiation and policy making process, it is necessary for ADB and

Cambodia government to provide effective representations for related private sectors and NGOs, so that the

agreements and policies would be more practical and feasible due to the increasing involvement of actual users.

Obtaining assistance for capacity building

Since lack of necessary capacity and resource, ADB, World Bank and other donors should consider to increase technical

and financial assistance for improving “software” issues in terms of capacity building for Cambodia, which may include

legislation, human resources, anti-corruption, strategy formulation, policy implementation and SEZ development. In

addition, these kinds of assistance, should not only applied in high level officials, but more for lower level and local

officials who are responsible for implementation. By doing so, it won’t only contribute to Cambodia’s capacity building,

but also enhance understandings, trust and cooperation within neighbouring countries by helping and learning from

each other.

143

Conclusion

Regional integration, in terms of connectivity and cooperation, has been limited in the GMS. This report considered

industrial estates and special economic zones because of their role in growth and increasing competitiveness. Their

locations were intended to be strategic to capitalise on factors such as economic corridors and border trade. What this

report has established, is that considerably more factors are involved in the location of a zone and its success.

Infrastructure has helped in encouraging a welcoming investment climate, such as the historical development of

Thailand's Eastern Seaboard, but specific resources remain the key attraction for investors – ports, airports, access to

major cities and thus labour resources. Sihanoukville has had some success attracting industries but continues to

struggle with labour needs – meanwhile, many industries have established themselves around Phnom Penh rather than

the border zones for this very reason. This was clear in the development of Thailand's estates which initially grouped

around Bangkok until the introduction of incentives. But incentives too only have a limited effect as has been

established. Our study of estates also provided an understanding of policies in place and the impact on the investment

climate and regional integration. Issues of capacity and political economies are rife in both Thailand and Cambodia.

These affect the implementation of policy at the border and CBTA, including a high turnover of customs staff but also

the financial benefits of customs fees and in capitalising on inefficiencies. These issues also effect investors who were

reluctant to come to Cambodia initially due to the policy and regulatory environment, while in Thailand firms are unable

to expand due to short-sighted policies which have not addressed education and skills needs. Due to a lack of capacity

on the side of the governments of Thailand and Cambodia, the private sector has played an important role. The estate

managers in both countries work to provide services for their firms and a better business environment. Their needs for

labour mean the onus is on firms to train staff. The sectors firms are established in, the style of management, the type of

training, all has flow on effects for the economies. It speaks to a lack of clear overarching industrial policy that, among

other effects, does not encourage local firms to take up some of the roles in the value chain. As such, firms are

impacting regional integration by their need to establish value chains. The lower-end components are being established

in Cambodia, and some originate from Thailand. This push-and-pull effect may help to untangle regional integration. The

implications for each country's strategies and regional integration are this: Thailand needs to invest in education, skills

and local entrepreneurs in order to move to higher value-added exports; Cambodia needs to strengthen those areas it

has strengths in(rice, agriculture) but also to make cross-cutting improvements in government(capacity,

decentralization); both need to invest more in improving capacity and reducing political economies to encourage

regional integration, based on the understanding that solid national industrial policies work on a country's advantages

and the two have more to gain than lose. In summary, this report has shown a) regional integration has been limited due

to political economies, limited state capacity and regional economic disparities b) IEs/SEZs as a successful growth model

are subjective to certain conditions c) an effective industrial policy is needed to complement IEs/SEZs e) The private

sector has a critical role and influence on growth and regional integration through a need to establish value chains.

144

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