Connecting Cambodia’s SMEs to Regional and Global Value Chains: The “Bridging Gap” and “Missing Link”

SOK KHA

SOK KHA

Imagine there is this Japanese multinational corporation and a major food-processing producer. The company had owned multiple production plants in three Southeast Asian countries – Thailand, Vietnam, and Indonesia; before opening its first factory in Cambodia two years ago. The decision to open factory here is driven mostly by the firm’s operation diversification program while taking advantage of Cambodia’s proximity to the firm’s plants in neighboring countries, relatively inexpensive labors, pro-trade and -investment government policies, and the increasingly connected region where Cambodia resides.

The completion of all legal procedures to get the factory up and running including investment and operating permit application process was long but completed just fine, thank to some local “facilitators”. The factory employs over 300 Cambodian workers at its production facilities built in a plot of land within one SEZ in the Cambodia-Thailand bordering town, which has one of the best liberal business environments, effective administrative procedures, and efficient infrastructure capacity. A large number of workers are not equipped with the right skill for the food industry. The factory frequently runs into a situation whereby it is hard to retain the trained staffs and their positions are filled by expatriates from Thailand, Vietnam, and the Philippines.

The production machinery was imported from Japan and Taiwan. The company sources most input materials from Thailand, Vietnam, and China. Negligible amount of inputs is from domestic factories and farmers. The high rates of informality and weak production capacity among domestic businesses as well as lack of information about suitable domestic business partners make any effort to connect with them challenging. The factory talked to several “potential” local suppliers only to find out later that they are unable to sufficiently supply to its production needs, both in terms of quality, quantity, and lack of relevant certificates

The company’s snack products are sold at lower price segment of domestic markets. The company exports three higher-priced brands of the snack products and flour products to ASEAN markets, China, Japan, and India. The plants in Indonesia and China then use the flour products as inputs for their exporting finished products. The imports and exports frequently encounter excessive and time-consuming process, having to deal with insufficient logistics performance, the complexity in border measures, amongst others.

The description above presents a snapshot of the current situation as to where Cambodia stands in the regional and global value chain (GVCs). The vision of connecting the country to GVCs is not new but the result of decades-old strategic decisions. Since the return to a market-oriented economy in 1989, Cambodia has pursued policies and reforms to integrate itself into the GVCs by modernizing its industrial structure. These efforts have brought domestic small and medium-sized enterprises (SMEs) into public policy attention. However, the significance of SMEs in Cambodia has not been reflected in their GVC participation because of various constraint issues or gaps.

This ADBI working paper, with my co-authorship, discusses the current situation of SMEs in Cambodia, identifies what has worked (the “bridging gap”) and what has not (the “missing link”) in terms of promoting their GVC participation, and argues that while the growing reform momentum is showing signs of narrowing certain gaps, our assessment also highlights the remaining or even widening gaps that are the products of dissonant fundamental constraint issues facing SMEs.