Country Risk Factors Analysis - Cambodia - Case Study Example

Country Risk Factors Analysis College: Name: Students ID: Date: Course Name: Unit Code: Time: Instructor: Executive Summary At present, doing business is more global in scale as humanity is becoming progressively more inter-reliant on trade and industrial advancement. Cambodia has recorded among the highest economic growth rates in Asia making it a spotlight in the international marketplace. This report details the potential risk that the company is likely to face should it choose to expand its operations into Cambodia along with the investment environment. Political risk is an important risk element that the company has to consider. Cambodia is a constitutional monarchy. Following the enactment of the constitution in 1993, Cambodia has enjoyed relative political stability. The government has been applauded for putting in place policies aimed at improving the private sector’s activities. The Cambodia Communist Party (CCP) is the biggest party. The Cambodian legal system is headed by the judicial arm of the government. Although improvements have been experienced in recent times, the system has been criticised for hindering human rights actions in the country. Cambodia has recorded a constant growth of its economy over the past 10 years and is among the fastest growing economies in Asia. Although the country is not highly ranked in the global competitiveness index, it is putting in place the right policies. The country has experienced a high inflow of foreign direct investment signalling it readiness for international trade participation. Table of Contents Executive Summary 1 Table of Contents 2 Introduction 3 Cambodia Country Profile 4 Risk Analysis 5 Political System 5 Legal System 5 International Trade Picture 9 Foreign Direct Investment 10 Foreign Exchange 11 Conclusion 11 References 12 Introduction This report details the potential risk that the company is likely to face should it choose to expand its operations into Cambodia. Cambodia has shown impressive growth in the past 20 years making it a likely destination for a multinational company. The country has one of the uppermost growth rates in Asia. This is due to support from a shift in the manufacturing investment from China, favoured tariff treatment mainly by the European Union along with other key trading partners. There is also a constant strong growth of overseas visitors from countries like Vietnam as well as China. At first, this report reviews Cambodia’s country general profile before looking into the risk factors and investment environment factors that the company possibly will have to mull over before considering to enter the country. Cambodia Country Profile Cambodia is located in South-Eastern Asia. The capital city of Cambodia is Pnomn Penh, which is also the country’s biggest city. The country has a somewhat small population of about 15 million people; the capital city has a population of about 1 million. Approximately 48 per cent of the population lies between ages 25 to 54 years. The major language spoken in Cambodia is Khmer. Close to 95 percent of the population in Cambodia practice Buddhism whereas about 5 percent practice Islam (BBC News, 2014a). Cambodia, at present follows the constitution enacted in 1993 that was adjusted in 1999 to allow for the creation of the senate. Under the constitution, Cambodia is a parliamentary monarchy with the King as its head of state. The King represents a symbol of unity and eternity of the nation. The Head of Government is an elected Prime Minister. Legislative power is vested in a bicameral parliament (the senate and the national assembly), while the judicial power is exercised by a constitutionally independent judiciary. The constitution provides for separation of powers between the Executive, the Legislature and the Judiciary. It also provides for the protection of fundamental human rights (Mann, 2009). Risk Analysis Political System In the past, Cambodia was a haven for political instability however this was overturned by the struggle involving the Khmer Rouge and pro-Vietnamese forces that ended in the signing of an agreement in 1991 to end their war. In 1993 the country enacted a constitution that resulted to the establishment of a constitutional monarchy. In the same year, the first national elections in Cambodia were held, with the constitution providing for elections to be held every five years. The country has gained some form of political stability as no major disturbances have occurred since that time. However, Cambodia’s political institutions are for the most part based on individual benefaction, corruption and oppression (Roland, 2000). By and large, Cambodia’s political condition is secure insofar as the current administration is expected to stay in power and develop effective policies regularly that support real economic growth, catch the attention of foreign investors across the wide range of industries, and promote economic expansion, which is beneficial to the whole population. The steadiness in development of government policies diminishes the risk of shocks or variations in directions that may well upset businesses (El Kattab et al 2007). Legal System Cambodia’s legal system follows the French civil law custom in principle. However, the legal system suffered serious obstructions all through the 1975 - 1979 periods owing to CPK policies. Nevertheless as of 1998, the Ministry of Justice, which is the implementing agency as well as the justice administration authority, has made noteworthy accomplishments in reinforcing plus building a strong legal and judicial system of Cambodia. Working together with Legal and Judicial Reform Policy of the Royal Government of Cambodia, the ministry has enacted several hundred laws, which are now operational. Legislation forms the prime source of law in Cambodia. Additional sources of law comprise the Constitution, government decrees and policies as well as human rights conventions that have been sanctioned by Cambodia. Despite the major improvements in the legal system, there has been cut-throat criticism particularly from the human rights agencies. The Cambodian justice system has been accused of trailing legal action not in favour of human rights defenders even as perpetrators of evictions and members of security forces deploy too much force against protesters are not persecuted. The system has failed to act autonomously and failed to protect the rights and freedoms of citizens, as mandated by Cambodia’s Constitution. There also have been cases of land grabbing by influential individuals who hide behind on government concessions (Jurist.org, 2014). Economic System Cambodia has experienced a steady economic growth over the past fifteen years with an annual average growth of 8 per cent. Despite the impressive growth, Cambodia was affected by the 2008/09 global financial crisis that slowed down the growth. However, the country was able to counter the effects of the GFC rather quickly. Cambodia's GDP expanded by 6 per cent in 2010 and progressively grew to 7.1 per cent in 2011and 7.3 percent in 2012 with an expected growth of 7 percent in 2013 (Lee & Takagi, 2013). Figure 2: GDP and Per-Capita Growth over the past 10 years Source: World Bank (2014) According to the World Economic Forum (2012 – 2013 Report), Cambodia is still a factor driven economy (1st stage of development). In 2012 – 2013, the World Economic Forum ranked Cambodia 97/144 with a score of 4.1/7 in basic requirements (institutions (73, 3.8), infrastructure (104, 3.28), macroeconomic environment (91, 4.39), and health care and primary education (102, 5.25)). In terms of efficiency enhancers, it was ranked 85/144 with a score of 3.8 (higher education and training (111, 3.3), goods market efficiency (50, 4.4), labour market efficiency (28, 4.8), financial market development (64, 4.1), technological readiness (100, 3.3), and market size (89, 3.1)). In terms of innovation and sophistication factors the country was ranked 72/144 with a score of 3.5/7 (business sophistication (74, 3.9), and innovation (67, 3.2)) (World Economic Forum, 2014). Table: Global Competitiveness Ranking of Cambodia (2011/2012 – 2013/2014) Period Overall Rank Score (1 – 7) 2010 – 2011 109/139 3.58 2011 – 2012 97/142 3.89 2012 – 2013 85/144 4.01 2013 – 2014 88/148 4.01 Source: World Economic Forum( 2014); Country.com, (2014) The table above indicates that Cambodia has been improving albeit little by little in the global competitiveness index. However, the country’s institutional competence is still fragile and uneven, even though it is getting better. This inflates the business expenses, lowers the worth of governance, increases incompetence, and it turns out to be not easy to counter challenges such as corruption. Having weak institutions creates another problem of wasteful administration. This is further supported by a lot of vague and unwarranted regulations. The outcome is not only bureaucratic inertia, but also higher expenses as well as time delays for business that in the end are hurting the economy. This is evidenced by the fact that the factor that, for the most part, hinders business activities in Cambodia is corruption, with 21.5 percent followed by a workforce that is not trained adequately at 12.4 percent and inefficient government bureaucracy at 11.8 percent. In addition, Cambodia ranks quite low in intellectual property protection (85), ethical behaviour of firms (80) (World Economic Forum, 2014). International Trade Picture Cambodia is active in international trade market. The country joined Association of Southeast Asian Nations (ASEAN) in 1999 and World Trade Organisation (WTO) in 2004. Cambodia’s mainly exports footwear and garments to the United States and the European Union. In 2011 the country gained US$ 2.7 billion (17.8 per cent climb) and US$ 1.62 billion (51.1 per cent decline due to the Euro Crisis) from the export of the items respectively (KPMG, 2012). Figure: Import and Export of Goods and Services from 2005 – 2012 Source: World Bank (2014) The figure shows that imports have been more than exports over the stated period. Apparently, the difference between imports and exports has been rather steady. Foreign Direct Investment Cambodia accepted the free market economic system and welcomed foreign direct investment in 1989. Ever since that time, the country has received foreign direct investment inflow of over US$ 27 billion. Despite the fact that Cambodia has taken on a competitive investment strategy, it is still not yet at par with other Asia-Pacific countries in terms of investment facilities along with other factors such as roads, ports and other infrastructural developments. The figure below indicates that, foreign direct investment inflow in Cambodia has grown in leaps and bounds from 2003 to 2012 save for the effect of the global financial crisis that slowed down the growth (KPMG, 2012). On the other hand, the incessant growth of foreign direct investment is pushing up the demand for labour with a wider variety and refined skilfulness. However, the Cambodian educational system has not been stretched out and improved quick enough to convene this new-fangled demand. This poses a big human resource confrontation. Figure: Foreign Direct Inflow (FDI US$) from 2003 – 2012 Source: World Bank (2014) Foreign Exchange Cambodia’s local currency is the Riel (KHR) that was introduced in 1980. However, Cambodia is greatly dominated by the United States dollar. Approximately 80 per cent of deposits and credits in the country’s banking system are in U.S. dollars. For that reason, Cambodia is classified as a partly dollarized country. In such economies, the U.S. dollar is circulated together with the authorized national currency as opposed to wholly dollarized economies where the dollar is the sole official legal tender. Generally, Cambodia continues to benefit from better exchange rate steadiness than any other ASEAN economy (Bank of International Settlements (BIS), 2008). Conclusion At present, doing business is more global in scale as humanity is becoming progressively more inter-reliant on trade and industrial advancement. International business approach is the incessant and ample organizational system intended to support companies do business and participate successfully across nationalized borders. Thriving companies make the best out of opportunities anywhere and they will be ready for failures. However, ahead of venturing into international markets the company has to consider the business operating environment in the host country. Cambodia is a country that has shown an impressive growth over the past 20 years. It offers a good investment environment supported by ASEAN membership that presents regional trade advantages. Trade is further supported by being a WTO member that supports increasing integration of trade. The country offers duty free/preferential export to numerous developed countries. It also has a cheap labour force (among the cheapest in Asia) together with a self-motivated labour force (North 2003). References BBC News, 2014a, Cambodia Profile Overview, viewed 14 February 2014, BBC News, 2014b, Cambodia Profile Facts, viewed 14 February 2014, Bank of International Settlements (BIS), 2008, Progress in Reducing Foreign Exchange Settlement Risk, CPSS Publications No 83. Country.com, 2014, Global Competitiveness Index: Cambodia, viewed 18 February 2013, El Kattab, A, Anchor, J and Davies, E. 2007, Managerial perceptions of political risk in international projects, International Journal of Project Management, 25: 734-743. Jurist.org, 2014, Cambodia’s Judicial System Criticised by Rights Organisations, viewed 20 February 2013, KPMG, 2012, Investing in Cambodia, retrieved 20 February 2014, Lee, C.L and Takagi, S, 2013, Deepening Association of Southeast Asian Nation’s Financial Markets, ABDI Institute Working Series Paper. Li, Xue and Richter, Frank-Jurgen, 2001, Advances in Human Resource Management in Asia, Palgrave, 219. Mann, I, 2009, D&B Country Report: Cambodia, viewed 21 February 2014, North D.C. 2003, The Role of Institutions in Economic Development, Discussion Paper Series No. 2003.2. Geneva: United Nations Commission for Europe. Roland, G. 2000, Transition and Economics: Politics, Markets and Firms. Cambridge, Mass.: MIT Press. World Bank, 2014, Cambodia Data, viewed 19 February 2014, World Economic Forum, 2014, Global Competitiveness Report 2012 – 2013. Read More