determinants of foreign direct investment in cambodia

Determinants of foreign direct investment in Cambodia§

Ludo Cuyvers a,b,*, Reth Soeng c,1, Joseph Plasmans d,2, Daniel Van Den Bulcke e,3

a University of Antwerp, Kipdorp 61, 2000 Antwerp, Belgiumb North-West University, Potchefstroom, South Africac Research Centre for Foreign Policy and University of Antwerp, Lange Sint-Annastraat 7, 2000 Antwerp, Belgiumd University of Antwerp, Prinsstraat 13, 2000 Antwerp, Belgiume University of Antwerp, IOB, Prinsstraat 13, 2000 Antwerp, Belgium

1. Introduction

Cambodia became a destination of foreign direct investment (FDI) after the country’s first general elections which wereheld in 1993. Although Cambodia attracted certain amounts of foreign investment before the UN-backed general election in1993 (see further) no reliable firm level longitudinal data on inward FDI could be found.4 Based on approved foreign-investedprojects5 FDI in Cambodia originated from 32 countries during the period 1994–2005.6 According to this source the majorityof Cambodia’s inward FDI was of Asian origin, and came more particularly from Malaysia, Taiwan, and China, which togetheraccounted for about 60 per cent of the total. FDI from developed countries was quite small both in absolute and relativeterms. The FDI from the world’s largest investors i.e., the United States (US) and the European Union (EU) in Cambodia during

Journal of Asian Economics 22 (2011) 222–234

A R T I C L E I N F O

Article history:

Received 16 April 2009

Received in revised form 18 February 2011

Accepted 27 February 2011

Available online 5 March 2011

JEL classification:

C23

F23

Keywords:

Foreign direct investment

Country factor differentials

Cambodia

A B S T R A C T

This paper analyses the determinants of the factors that might influence inward FDI in

Cambodia by referring to its economic, geographic, and political characteristics. Using

exclusive unbalanced panel data sets during 1995–2005, for both approved and realized

FDI for, respectively, seventeen and fifteen home countries, the estimation results show

that the determinants of approved FDI and realized FDI are somewhat similar. The FDI

home country’s GDP, its bilateral trade with the host country and the exchange rate have a

positive impact on inward FDI flows into Cambodia. As expected, geographic distance

negatively affects the level of FDI inflows in Cambodia.

� 2011 Elsevier Inc. All rights reserved.

§ The authors are grateful for the many useful suggestions and comments from two anonymous reviewers on an earlier draft.* Corresponding author at: University of Antwerp, Kipdorp 61, 2000 Antwerp, Belgium. Tel.: +32 3265 50 34; fax: +32 327655026.

E-mail addresses: [email protected] (L. Cuyvers), [email protected] (R. Soeng), [email protected] (J. Plasmans),

[email protected] (D. Van Den Bulcke).1 Tel.: +32 3265 50 15.2 Tel.: +32 3220 41 49.3 Tel.: +32 3220 41 49.4 As far as could be verified reliable official data on FDI were only made available from August 1994 onwards. Because the FDI do not cover the complete

year, 1994 was not included in the period for which the econometric analysis was applied (see further).5 Approved investment (approved FDI) refers to projects that have been officially authorized by the Cambodian Investment Board (CIB) of the Council for

the Development of Cambodia (CDC).6 The riel is Cambodia’s currency.

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1994–2004 only reached 8.4 per cent and 7 per cent of total FDI in Cambodia, respectively. FDI from Japan was even morelimited, accounting for a negligible 0.4 per cent in Cambodia’s total FDI (Cuyvers, Soeng, & Van Den Bulcke, 2009).

The sectoral distribution of FDI in the Cambodian economy shows a very uneven pattern. FDI is concentrated in labour-intensive, export-oriented manufacturing industries, such as garments and is important in tourism-related sectors such ashotels and restaurants. Although the Cambodian Government encourages FDI in agriculture and the agro-industry, thecumulative FDI in these two sectors accounted only for about 5 per cent of the total FDI in the country.

FDI in Cambodia is very unevenly spread across the country. The capital city of Phnom Penh and the surrounding Kandalprovince attracted by far the largest share with 82 per cent of total FDI. Sihanoukville came in second position and yet onlyrepresented 8 per cent between 1994 and 2004. Although the Government promoted Special Promotion Zones/SpecialEconomic Zones in some parts of the country, most of these areas hosted virtually no FDI.

Three main contributions are expected from the study of Cambodia’s determinants of inward FDI by looking at theeconomic and geographic as well political characteristics of the country. First, the fact that the limited information about FDIactivities in Cambodia is relatively recent and only goes back to the middle of the 1990s makes it an interesting case,especially because the factors that have influenced the inflows are not well understood. Second, Cambodia evolved from astrictly regulated and centralized economy to a more dynamic and open business environment in general and for foreigninvestors in particular. Improvements such as the simplification of the investment law, the introduction of a competitivecorporate tax, a liberal investment policy and a wider openness to the rest of the world made the country and its large labourpool more attractive to foreign enterprises. It is useful to evaluate the success of these policy changes. Third, it will be tried toshed some light on the role that inward FDI played in the further economic development of Cambodia, particularly by takinginto account the scope for FDI from its more advanced ASEAN partner countries. For these reasons this paper intends tocontribute to the literature on the determinants of FDI in host developing and transitional economies in general and inCambodia in particular. The speed of regional economic integration during and after the successful implementation processof the ASEAN Free Trade Agreement, in which Cambodia took part when it became a member of ASEAN on 30 April 1999, andthe intended creation of the ASEAN Economic Community in 2015, is likely to strengthen and further increase the FDI flowsin the region and into Cambodia coming from more developed partner countries such as Singapore, Malaysia and Thailand.This study should allow a better understanding of how intra-regional investment liberalization by less-developed ASEANcountries has an effect on inward FDI and can contribute to ASEAN regional integration.

The remainder of this paper is organized as follows. Section 2 briefly describes the development of FDI in Cambodia. InSection 3 the relevant literature is reviewed and the hypotheses are outlined. Section 4 presents the econometric model,while the presentation of the data takes place in Section 5. The estimation methodology and estimation results are discussedin Sections 6 and 7. In Section 8 some conclusions are drawn.

2. Development of foreign direct investment in Cambodia

Inward FDI into Cambodia can be traced back to the late 1950s (Chap, 2006). During this period, the main countries oforigin of these investments were France, China and Japan. These investments were concentrated in industries such astextiles, rubber, plastics, paper, cement, automobile tires, chemicals, metal, and other manufacturing. In 1955, there were650 investment projects worth 36 million riels.7 The number of projects increased noticeably and reached 3707 in 1967 withinvestment amounts rising to 2521 million riels. In the 1970s, investment came to a complete halt as a result of civil wars andthe genocidal Pol Pot regime, which was overthrown in January 1979. During 1979–1989, all the remaining enterprises werestate-owned, and practically no FDI went into Cambodia as the country suffered from political upheaval, economic embargoand international isolation (Chap, 2006).

Cambodia again succeeded in attracting foreign direct investment in the late 1980s when the country was transformedfrom a centrally controlled to a free market-oriented economy. In 1989, a foreign investment law was approved by theNational Assembly. It was followed by a sub-decree, issued by the Council of Ministers in 1991, which detailed theinterpretation and implementation of the investment law. During 1991–1993, the country attracted FDI worth US$ 1200million into 638 projects (Chap, 2006), concentrated in tourism, banking, construction, manufacturing and agriculture,which mainly came from five economies, namely Thailand, Malaysia, Singapore, Hong Kong, and France. At that time therewas already a shift to Asian home countries.

After the UN-backed national election in 1993, which resulted in the creation of the new coalition government, theCouncil for the Development of Cambodia/Cambodian Investment Board became responsible for approving investmentapplications. A new law on investment was drafted and subsequently approved by the National Assembly in 1994. Comparedto other countries in the region, this new investment law was regarded as quite liberal, offering generous incentive packagesto investors, both domestic and foreign, on a non-discriminatory basis (Asian Development Bank, 2006). The 1994investment law was revised in 2003. As part of the new investment regime, a sub-decree was issued to provide a legalframework to establish Special Economic Zones (SEZs) in late 2005 in order to promote economic and processing activities.

Based on the CIB’s Cambodian Investment Statistics, 1994–2004, Cambodia attracted FDI of about US$ 5313 million infixed assets during 1994–2004. The main source economies of FDI were ASEAN and other Asian countries, particularly

7 The ASEAN member countries investing in Cambodia include Malaysia, Indonesia, Singapore, the Philippines, Thailand, and Vietnam.

L. Cuyvers et al. / Journal of Asian Economics 22 (2011) 222–234 223

Malaysia, Taiwan and China (Fig. 1). From 1994 to 2004, Malaysia was the leading country of origin with more than one thirdof the total inward FDI, although towards the end of the period under consideration Malaysia was surpassed by China as thedominant investing country. Malaysia’s investment in fixed assets in Cambodia went up from US$ 0.1 million in 2002 to 8.4and 38.7 million in 2003 and 2004, while China’s investment in fixed assets in Cambodia increased from US$ 24 to 33 and88.7 million during the same years. In contrast to the large share of inward FDI from ASEAN member countries of 48.1 percent of total FDI in the country over 1994–2004,8 FDI inflows from developed countries such as the US, the EU, Canada, andJapan only reached, respectively, 8.4, 6.9, 2.1, and 0.4 per cent.

There are two main modes of FDI entry in Cambodia, Cambodian-foreign joint ventures and wholly foreign ownedenterprises. Joint ventures were the most popular at the beginning of the country’s liberalization of FDI. Yet their importancesystematically declined afterwards. Wholly foreign owned enterprises gained momentum and continued to surpass the jointventures with foreign firms in terms of annual investment amounts with the former accounting for 60.6 per cent and thelatter for 39.4 per cent over 1994–2004.

The sectoral distribution of FDI was extremely uneven over the period 1994–2004. Light industries, particularly thegarment and textile sectors, were the most successful in attracting inward FDI into Cambodia. Garments and textilestogether accounted for 65.1 per cent of all FDI projects and for 29.1 per cent of all realised FDI. Foreign investment in thegarment sector is partly linked to the Most Favoured Nation (MFN) status that was granted to the Kingdom of Cambodia bythe United States and the decision by the European Union and other developed countries to accept Cambodia as abeneficiary of their Generalized System of Preferences (GSP). The second most important sector for foreign investors inCambodia was the service sector, in particular the hotel and restaurant business, which represented 19.6 per cent ofrealised FDI between 1994 and 2004. The popularity of this sector for foreigners lies in Cambodia’s rich cultural heritageand historical sites, especially the world-famous Angkor Wat temple complex. Also the government’s ‘‘open-air’’ policy,which allows direct international flights to the city of Siem Reap, where Angkor Wat and the other temples are located,plays an important role.

Also, the geographic distribution of FDI in Cambodia is extremely uneven. While 16 provinces and cities out of 24succeeded in attracting foreign-invested projects,9 Phnom Penh, the capital city of Cambodia, was by far the mostsuccessful as about three quarters (77 per cent) of total inward FDI measured both in fixed assets and employmentlocated there. Phnom Penh city and its surrounding province Kandal taken together represented 82 per cent of thecountry’s FDI in terms of fixed assets and 92 per cent of total employment in foreign controlled firms. Evidently,compared to the rest of the country, Phnom Penh offers better access to foreign investors in terms of communicationnetworks, transportation facilities, infrastructure, business-related services and the availability of technical andmanagerial personnel. The geographical concentration of inward FDI in Cambodia also results from agglomerationeffects caused by investors following others in the choices of their investment locations (e.g. the concentration of hoteland restaurant businesses in the Siem Reap province, as well as the industrial clustering in transportation and otherservice activities).

Although the government has promoted Special Promotion Zones10 in the provinces of coastal Sihanoukville, coastal KohKong (bordering Thailand), Poipet (town of Bantey Meanchey bordering Thailand), and Svay Rieng and Takeo (borderingVietnam), these provinces virtually attracted almost no FDI, except Sihanoukville.

[()TD$FIG]

0

500

1,000

1,500

2,000

2,500

3,000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004Year

Cum

ulat

ive

FDI

(US$

1 000

000)

USA EU ChinaNIE-3 ASEAN Others

Fig. 1. FDI stock in fixed assets in Cambodia by country/region of origin (Note: FDI stock is approximated by cumulative FDI in fixed assets; NIE-3 refers to the

Republic of Korea, Hong Kong, and Taiwan; while the EU consists of Belgium, France, Germany, The Netherlands, Portugal, and the United Kingdom as

investors in Cambodia.), 1994–2004.Source: Calculated from CIB’s Cambodian Investment Statistics, 1994–2004.

8 Some provinces such as Kampong Chhnang, Kratie, Mondolkiri, Oddar Meanchey, Pailin (formerly part of Battambang Province), Preah Vihear, Prey

Veng, or Stung Treng did not manage to attract any FDI during 1994–2004.9 Personal e-mail correspondence with the Deputy Director of the Project Monitoring Department, Cambodian Investment Board, Council for the

Development of Cambodia.10 While there is no evidence as to the relationship between the exchange rate and FDI in the long run, Pain and Van Welsum (2003) find a short-run effect

of the exchange rate on FDI inflows in Canada, the UK, Germany and France.

L. Cuyvers et al. / Journal of Asian Economics 22 (2011) 222–234224

3. Some theoretical background of FDI and hypotheses

Over the years, a number of paradigms and theories have been developed to explain the existence and the growth of theinternational operations of multinational corporations via FDI (Dunning, 1981; Dunning & Lundan, 2008; Hymer, 1976). Hymer(1976) applied the industrial organization approach to the theory of foreign production. For firms to own and control foreignvalue-adding facilities abroad, they must have some specific ownership advantages. The possession of such advantages must besufficient to more than offset the disadvantages they may face while competing with indigenous firms which are more familiarwith the situation in the host country and consequently do not suffer from the so-called ‘liability of foreignness’ (Zaheer, 1995).Dunning (1981) suggested that a firm will engage in FDI when three conditions are satisfied, i.e.: (i) it possesses net ownershipadvantages; (ii) it must have an advantage to internalize its activities by FDI rather than using the market e.g. by exporting orlicensing; (iii) it must have an advantage in locating in a foreign country rather than at home. This approach is commonly knownas the eclectic or OLI paradigm as it brings together ownership (O), location (L) and internalization (I) advantages.

This paper focuses on the following factors determining FDI: market size, international trade, labour costs, lendinginterest rate/borrowing costs, exchange rates, inflation rate, political risk, regional integration, and geographic distance.These variables have been widely used and tested in empirical studies for many developing and developed countries (Jun &Singh, 1996; Liu, Song, Wei, & Romilly, 1997; Zhao, 2003). The analyses by Liu et al. (1997) and Zhao (2003) are used to studythe factors that influence inward FDI in a developing country such as Cambodia.

3.1. Market size

A larger market size, better prospects for market growth, higher degrees of development, and higher per-capita GDPgrowth, are factors taken into account when investors consider locating in a foreign country. Countries that presentattractive market opportunities allow MNEs to exploit their ownership advantages and to benefit from economies of scale.The market size hypothesis stresses that inward FDI is a function of the market size of the FDI-receiving countries (Wei & Liu,2001). Davidson (1980) has argued that market size influences the locational decisions of MNEs for two main reasons. First,FDI becomes an economically sensible option only when the volume of production exceeds a level at which the average costof serving the market by exporting is larger than the average cost of production within the market. Second, market size ofhost countries is supposed to capture demand and scale effects. There must be sufficient domestic demand for final goods forproduction to take place in the host country. Several empirical studies have supported the hypothesis of a positiverelationship between FDI and market size of the host country (Braunerhjelm & Svensson, 1996; Grosse & Trevino, 1996; Wei& Liu, 2001). Pitelis (1996) argued that effective domestic demand deficiencies form an impetus for outward FDI, and foundsupport for this hypothesis.

Hypothesis 1. An increasing ratio of the host country’s GDP relative to the home country’s GDP is expected to attract FDIfrom the home country.

3.2. Labour cost

Lower labour costs make countries with abundant skilled and/or unskilled workers more competitive and attractive, andare likely to encourage FDI inflows (Jun & Singh, 1996). For firms that use labour intensively in their production process andfor which those labour costs present a large proportion of their total costs, production abroad in low-labour cost countriesprovides a cost advantage compared to potential competitors from the home country (Dunning & Lundan, 2008; Navaretti &Venables, 2004). However, previous empirical studies about the FDI–labour cost relationship do not present clear-cutresults. There is some evidence of a negative relationship between labour costs and FDI activities in the host economies(Bevan & Estrin, 2004; Wei & Liu, 2001), but several studies did not offer convincing evidence with regard to the hypothesisthat inward FDI is negatively associated with higher labour costs in the host country (Jun & Singh, 1996). Biswas (2002)indicated that low wages are not necessarily crucial for FDI, and that other factors such as e.g., natural resources or a largemarket, also influence FDI inflows. Similarly, Meyer (1995) argued that MNEs in Central and Eastern Europe are notnecessarily motivated by low labour costs. Veugelers (1991) even showed that labour costs are not an importantdeterminant for FDI inflows.

Due to insufficient data on labour costs/wage rates in Cambodia and the home countries, average labour productivity,measured by real GDP divided by labour force, will be used as a proxy variable for the real wage rate. Some authors have usedaverage labour productivity as a proxy for the real wage rate (e.g. Ioannatos, 2001).

Hypothesis 2. Inward FDI flows into the host country are expected to be higher, the lower is the ratio of the host country’sreal wage rate level compared to that of the home country.

3.3. Borrowing costs

The interest rate has also been considered as a factor influencing direct investment. Wei and Liu (2001) indicated thatthere are economic linkages between FDI and the cost of borrowing. If the cost of borrowing in the home country is lower


than in the host country, home country firms have a cost advantage over their rivals in the host economy, and are in a betterposition to enter the host country through FDI. Several empirical studies have supported this relationship (Farrell et al., 2000;Pan, 2003). However, the analyses by Bevan and Estrin (2004) and Onyeiwu and Shrestha (2004) fail to support thishypothesis for FDI inflows to Africa and to East and Central European transition economies.

Hypothesis 3. The lower the interest rate in the home countries relative to the host country, the higher will be the level of FDIin the host country.

3.4. Trade relations

To enter into a foreign market firms can use alternative modes of entry, e.g. arm’s length trade or foreign productionfacilities through FDI. The United Nations (1993) has shown that there are links between international trade and FDI,particularly for resource seeking and market-seeking FDI. The sign for the trade–FDI relationship, however, varies with theobjective of the investment initiative (Petri, 1994). Markusen (2002) indicated that trade and horizontal investment aresubstitutes. Moore (1993) stressed that firms are more likely to invest in a foreign country when the international productioncosts can be more than offset by savings which result from avoiding transportation costs, tariff duties and non-tariffimpediments. Yet, trade and FDI can also be complementary. The explanation for a trade–FDI complementarity relationshipcan be provided by the product life cycle theory (Vernon, 1966). Empirical evidence on the relationship between trade andFDI is mixed. On the one hand, many empirical studies pointed to a complementary relationship between FDI and exports(Hejazi & Safarian, 2001; Marchant, Cornell, & Koo, 2002), and for the US and Japan, Pantulu and Poon (2003) indicated thattrade creation occurs for East Asian countries as well as the advanced industrialized countries (France, Germany and UK). Onthe other hand, studies by Horst (1972), Blomstrom and Lipsey (1989), and Pain and Wakelin (1998) lend support to thethesis of FDI–trade substitutability.

Hypothesis 4. The higher the bilateral trade between the home country and the host country, the higher the FDI flows intothe host country.

3.5. Exchange rates

The exchange rate between the host and home country is often used to measure the costs of production inputs. Cleggand Scott-Green (1999) indicated that ceteris paribus an appreciation of the home country’s currency should increaseFDI flows as it becomes cheaper to ‘hire’ a given amount of labour in that host country. Thus, an increase in the realexchange rate (a real depreciation of the currency of the host country) is expected to have a positive effect on inwardFDI in the host country. A certain number of studies revealed a negative relationship between the exchange rate andinward FDI (Dewenter, 1995; Froot & Stein, 1991; Grosse & Trevino, 1996; Kiyota & Urata, 2004; Wei & Liu, 2001). Yet,other analyses have illustrated that there is no clear evidence with regard to the long-run relationship (Pain & VanWelsum, 2003).11

Hypothesis 5. The higher the ratio of the host country’s currency per US$ to the home country’s currency per US$, the higherthe level of FDI inflows in the host country from the home country.

3.6. Country risk

Country risk is the probability that country-specific, governmental events or measures will adversely alter the perceivedvalue of the international firm (Grosse & Behrman, 1992). For instance, a host government may limit profit remittances bysubsidiaries to their parent companies. Investors are likely to be concerned with the potential negative impact of a country’seconomic, social and political instability on their planned and existing projects. It is expected that such risks are negativelyrelated to inward FDI. Therefore, the greater the degree of host-country risk relative to that of the home country, the lessattractive the host country will become to inward FDI. Findings of empirical studies about this relationship are mixed. Somesupport for the existence of a negative relationship between FDI flows and political risk at the beginning of the 1980s wasprovided by Loree and Guisinger (1995), and Jun and Singh (1996), while Tu and Schive (1995), Sethi, Guisinger, Phelan, andBerg (2003) and Li and Resnick (2003) showed that political stability is no longer considered as a significant determinant ofFDI.

Hypothesis 6. The higher the degree of host country risk relative to the home country risk, the less attractive the hostcountry will be for inward FDI.

11 The Cambodia Investment Board was created after Cambodia’s first-ever national election in 1993, and data on inward FDI in the country became

available from August, 1994 onwards. As FDI data only cover five months in 1994, it is excluded from the econometric analysis.


3.7. Regional integration

Regional economic integration initiatives among countries may play an important role in the locational choice of MNEs.The ensuing increase of market size theoretically makes it more interesting for firms to invest in the enlarged area. Accordingto Blomstrom and Kokko (1997), regional economic integration promises economic benefits for the integrating countries andstimulates investment in the short run. It is expected, in the long run, that the combined effects—larger market size, strongercompetition, more efficient resource allocation, and various positive externalities—will raise growth rates of theparticipating economies. This implies that regional integration is likely to attract FDI from outside the integrating zone as itbecomes more attractive for foreign investors when the combined market grows in size and becomes more accessible. Basedon previous work, Kreinin and Plummer (2008) concluded that the effect of regional integration on FDI is not clear-cut as itcould lead, on the one hand, to an increase in FDI flows into a member state and, on the other hand, to a decrease in FDIoutflows from partner countries in the preferential trading agreement. Empirically, they found that regional integrationgenerates both positive and negative effects on FDI, pointing to both FDI creation and diversion effects. Balasubramanyam,Sapford, and Graiffiths (2002) established that regional investment agreements result in an autonomous expansion in FDIbetween the member countries.

Hypothesis 7. The more a country takes part in regional integration and the more the host economy is integrated into therest of the world economy, the higher will be the level of FDI.

3.8. Geographic distance

Geographic distance is generally regarded as an important determinant of the locational choice of internationalproduction since market accessibility is one of the main motivations for firms to invest abroad (Wei & Liu, 2001). Distanceshould be seen as a measure of the transaction costs of undertaking investment activities in a foreign country (Bevan & Estrin,2004). Davidson (1980) and Wei (2004) argue that geographic proximity affects FDI by reducing informational andmanagerial uncertainty, lowering transportation and monitoring costs and allowing MNEs to be less exposed to risks.Therefore, MNEs, ceteris paribus, will prefer to invest in nearby host countries. The empirical results of studies aboutgeographic distance as a determinant of FDI flows are also mixed. Wei (1995), Grosse and Trevino (1996), Frenkel, Funke, andStadtmann (2004) and Gao (2005) find evidence to support the hypothesis of a negative relationship between geographicdistance and FDI inflows. However, Wei and Liu (2001) and Pan (2003) fail to confirm this.

Hypothesis 8. The larger the geographic distance between the home country and the host country, the less FDI will beundertaken in the host country.

A set of additional control variables has been chosen as possible determinants of FDI in Cambodia. These variables includethe relative inflation rate (INFLA), the impact of the Asian crisis of 1997–1998 on the host country (CRISIS), and the impact ofChina’s accession to the WTO in 2001 on the host country’s (Cambodia’s) ability to attract inward FDI (CHINA).

4. Model of FDI determinants

Cambodia has been able to attract FDI, mainly from Asian developing countries. However, the factors that havedetermined this inward FDI in Cambodia have not yet been studied in detail. This paper seeks to identify the most importantdeterminants of FDI flows into the Cambodian economy during 1995–200512 and to elaborate on some possible policyimplications. In the light of the discussions presented in Section three, the relationship between FDI and its influencingfactors in Cambodia is modelled as follows:

FDI ¼ f ðRGDP; DGROWTH; RER; RTRADE; RIR; DINFLA; RPOLRISK; RLP; DIST; ASEAN; CRISIS; CHINAÞ (1)

where FDI is the annual inflows of real FDI in Cambodia; RGDP is the ratio of real Cambodian GDP to the home country’s realGDP; RER is the ratio of the real exchange rate of the US$ to the home country currency13; DGROWTH is the differencebetween the annual GDP growth in Cambodia and the home country; RTRADE is the real Cambodia’s external trade (exportsand imports) to and from the home country; RIR is the ratio of Cambodia’s real interest rate to the real interest rate in thehome country; DINFLA is the difference between the inflation rate in Cambodia and the home country; RPOLRISK is the ratioof the annual political risk scores in Cambodia to the home country; RLP is the ratio of labour productivity in Cambodia to thehome country; DIST is the geographic distance between Cambodia and the home country in kilometres; ASEAN is the dummyfor the number of years Cambodia was a member of ASEAN (1999–2005); CRISIS is the dummy for the number of yearsduring the Asian crisis, defined as being equal to 1 for 1997 and 1998, and zero otherwise; CHINA is the dummy variable,defined as being equal to 1 for the years China became a member of the WTO (2001–2005) and zero otherwise.

12 Normally this variable should be defined as the ratio of real Cambodian riels per US$ to real home country’s currency per US$. However, as the

Cambodian economy is highly dollarized, the exchange rate of the riel to the dollar is irrelevant for all practical purposes.13 Some authors assume that the impact of all independent variables on FDI occurs instantaneously (see, e.g. Wei & Liu, 2001).


The relationship between the dependent variable and the explanatory variables in Eq. (1) can be re-written explicitly inthe following log-linear form:

LFDIict ¼ a1LRGDPict þ a2DGROWTHict þ a3LRERict þ a4LRTRADEict þ a5LRIRict þ a6DINFLAict þ a7LRPOLRISKict

þ a8LRLPict þ a9LDISTict þ a10ASEAN1999�2005 þ a11CRISIS1997�1998 þ a12CHINA2001�2005 þ eict i

¼ 1;2; . . . ;N and t ¼ 1;2; . . . ; T ðfrom 1995 to 2005; inclusiveÞ (2)

The subscripts i, c and t refer to the home country, Cambodia and time, respectively. eit, denoting a composite error term, isequal to ai + uit, where ai is home country-specific, accounting for the unobserved heterogeneity among the home countries,and uit is a white noise. The model underlying Eq. (2) is in line with the current theoretical and empirical literature on thedeterminants of FDI flows (see Bevan & Estrin, 2004; Gao, 2005; Pan, 2003; Wei & Liu, 2001). As the assumption of aninstantaneous impact of the explanatory variables on the dependent variable may not be met14 and as the process ofdeciding about and implementing FDI abroad is time-consuming, Eq. (2) is estimated with one year lagged explanatoryvariables.

In Eq. (2), both the dependent variable and the explanatory variables are in logarithms and differences, and are denotedby L and D, respectively. Eq. (2) is estimated by using both approved FDI and realized FDI. The difference between the twomeasures is that approved FDI is the qualified investment project that was authorized by the Cambodian Investment Board(CIB). Realized FDI shows the direct investment projects that have started their operations after having received approvalfrom the Cambodian investment authorities.

5. Data and variables

This paper uses detailed, unpublished data on FDI applications, approvals and actual investments, provided by theCambodian Investment Board (CIB). The original data are company-level data on projects owned by Cambodians andforeigners. Cambodian investments are not taken into consideration. The data are transformed into country-level data andare used in the estimations as the explanatory variables at national levels (such as GDP and country risk). Because certaindata, for one or two years, are equal to zero or are missing, we opted for unbalanced panel data sets to measure bothapproved and realized FDI. Based on the approved FDI projects, there were 32 home countries that have companies withinvestments in Cambodia during 1995–2005. When the countries are excluded that accounted for only a few projects, thenumber of home countries included in the analysis is reduced to 17.15 Yet this smaller group of countries included in theanalysis, represents more than 99 per cent of total approved FDI during 1995–2005.

As far as could be verified, no official figures about realized FDI in Cambodia have been made available for Cambodia sincethen. Therefore, the realized FDI data from CIB, which were classified as ‘‘active’’ and ‘‘former active’’ by the ProjectMonitoring Department (PMD) of CIB are used.16 Two more countries (Portugal and Vietnam) had only a few observations forrealized FDI between 1995 and 2005 and consequently were dropped from the analysis, which brought down the number ofhome countries to 15 in the analysis of realized FDI.17 Yet, they account for practically all (99 per cent) of the total estimatedrealized FDI in Cambodia during that period. Contrary to previous studies of the determinants of FDI in developed anddeveloping countries, the variables in the present paper are deflated to remove the influence of price changes, exceptpolitical risk, distance, and a set of dummy variables. ‘‘Push’’ and ‘‘pull’’ factors in both home and host countries areincorporated into the analysis.

When the investors in the home country decide to set up production facilities in a particular host country, they normallywill compare the economic, political and institutional factors between the home and potential host countries. Thus, theattractiveness of the business environments in the host countries in which the investors may conduct their business, lies inthe differences between the home and host country factors, at least as perceived by the investors. Therefore, explanatoryvariables in relative terms are used in the analysis. They are from international institutions such as the InternationalMonetary Fund, the World Bank, the Asian Development Bank, or other sources such as Euromoney Magazine and Taiwan’sMinistry of Economic Affairs (MOEA). The definitions of the variables and the description of the data as well as their sourcescan be consulted in the Appendix A.

14 The 17 countries are Australia, Canada, China, France, Hong Kong, Indonesia, Japan, Korea, Malaysia, Portugal, Singapore, Switzerland, Taiwan, Thailand,

United Kingdom, United States, and Vietnam. The majority of other countries have only one or two observations for the period under study, and are

therefore dropped.15 When the projects are operational they are called ‘‘active’’ and when they were implemented several years after receiving approval from CIB they were

labelled as ‘‘former active’’. ‘‘Non-active’’ and ‘‘deleted’’ projects refer respectively to the ones that were never implemented after the approval and

consequently were eliminated.16 The 15 economies are: Australia, Canada, China, France, Hong Kong, Indonesia, Japan, Korea, Malaysia, Singapore, Switzerland, Taiwan, Thailand, the

United Kingdom, and the United States.17 Im et al. (2003) indicate that their panel unit root test technique is generally better than previously proposed tests, and is usually simpler. The minimum

time observations for the Im et al. (2003) results are five times greater than observations in the case of ADF regressions with intercepts, and six times greater

than the observations in the case of ADF of regressions with intercepts and linear time trends.


6. Estimation methodology

As mentioned above, official data on FDI inflows became only available after August 1994. Consequently the analysis willconcentrate on the period 1995–2005. Taking into account the relatively short time period covered by these FDI data, it is notappropriate to use time series analysis for the estimations. Cross-sectional estimations are also known to be inefficient asonly seventeen and fifteen home countries for approved FDI and realized FDI, respectively, are available. It was thereforedecided to opt for a panel data set in the estimations of Eq. (2).

Panel data sets (Hsiao, 2003, 2005; Plasmans, 2006) allow for several advantages including the use of three estimationprocedures, i.e.: pooled OLS, fixed-effects (FE), and random effects (RE) estimations. If the assumption holds that theunobservable individual country-specific effects are not very different, pooled OLS estimations are the most simple andefficient method. The FE estimations allow for the unobservable country heterogeneity. However, the use of a fixed-effectsmodel will ‘‘kill’’ the time-invariant variable DIST which is considered to be an important factor influencing FDI, and willmake FE estimations less efficient than the RE estimation counterpart. Like the FE model, RE estimations take intoconsideration the unobservable country heterogeneity effects, but incorporate these effects into the error terms, which areassumed to be uncorrelated with the explanatory variables. One model against another will be tested using appropriatetesting techniques for a panel data set.

To avoid spurious regression results, it is important to carry out unit root tests of each variable. A number of panel unitroot tests are available in the econometric literature (e.g. Choi, 2001; Im, Pesaran, & Shin, 2003; Levin, Lin, & Chu, 2002; Quah,1994). Since the time span of the individual series in the available panel data set is relatively short, the panel unit root testbased on Im et al. (2003), also known as the IPS test, is used, as it allows for residual serial correlation and heterogeneity oferror variances across groups, and also as it is more powerful even with relatively short sample periods.18 The t-bar statisticof the IPS test is simply based on the average value of the Augmented Dickey–Fuller test statistics. Under the null hypothesisof unit roots, the t-bar statistic is shown to be normally distributed. The rejection of the null hypothesis will lead to theconclusion that the variable considered is stationary. To obtain stable estimated slope parameters, additional tests such asthe collinearity check and heteroskedasticity tests (Greene, 2003) are also carried out.

7. Estimation results

Tables 1 and 2 show basic descriptive statistics and unit root test results (IPS test statistics) for approved FDI and realizedFDI, respectively. On average, both approved and realized FDI is about 8 standard deviations in logarithmic scale. From Table1, the mean logarithm of relative GDP is�3.30, suggesting that on average Cambodia’s GDP is three times less than that of theinvesting country. Similar interpretations can be given for the relative exchange rate, political risk and other explanatoryvariables.

As can be seen from the last columns of Tables 1 and 2, the standardized t-bar test statistics of almost all coefficients arehighly statistically significant at 1 per cent, except for LAFDI and LRIR which are statistically significant at the 5 per cent level.These results show that both dependent and explanatory variables are all stationary. However, on the basis of theintercorrelations, the variance inflation factor (VIF), it is found that labour productivity LRLP, used as a proxy for the relativereal wage rate, is highly correlated with some other explanatory variables. Dropping LRLP significantly reduces VIF,suggesting less collinearity between the remaining explanatory variables, which in turn increases the usefulness and thedegrees of stability for the estimated coefficients.19 Also, when included in the regression, the LRLP variable is highlyinsignificant. Consequently, LRLP has been excluded from the model for both approved and realized FDI.20 The test forheteroskedasticity and the collinearity check are reported along with the econometric results.

It is likely that FDI may not instantaneously react to changes in the explanatory variables as the investors’ decisions tocarry out FDI abroad take time. Therefore, the determinants of approved and realized FDI are estimated using one-year lags,which can also reduce the endogeneity problem. Both the pooled OLS model and the RE model are estimated together withthe Breusch and Pagan (1980) LM test for random effects. The LM statistic (20.36) for the estimation with the one-year laggedexplanatory variables is significant at 1 per cent, suggesting that the RE model is statistically superior to the OLS model.21 Asfor realized FDI, however, the LM statistic (0.48) for the estimations with one-year lagged explanatory variables isinsignificant at any conventional significance level, suggesting that the pooled OLS model is statistically better than the

18 It is widely accepted that VIF> 10 is the indication of high collinearity (Baum, 2006).19 To drop a statistically insignificant variable from the model does not affect the statistical significance of the remaining explanatory variables. Moreover,

Zhou and Lall (2005) have indicated that there is only a small theoretical rationale for using the level of wages as a determinant of FDI, as market-seeking

and resource-seeking FDI are not affected by the wage level and export-oriented FDI is influenced by overall efficiency rather than wages per se. A number of

authors excluded the wage variable for their studies on determinants of FDI in developing countries, see, e.g. Zhao (2003), Pan (2003) and Zhou and Lall

(2005).20 Since the RE model is better than its OLS counterpart in all the cases as shown by the LM tests, only results of the RE model are reported. Hausman’s

specification test (FE vs. RE) was also carried out excluding the time invariant distance variable and the test statistic of 8.87 confirms that the RE model is

also preferred to the FE model.21 The presence of heteroskedasticity does not cause a bias or inconsistency, but it instead makes some important tests invalid (see, e.g. Wooldridge, 2009).

Woodridge suggests a heteroskedasticity-robust estimation in order for statistical tests to be valid. The authors are grateful to Christopher F. Baum for

suggesting the Stata command for the estimations.


RE for estimating realized FDI. Therefore, approved FDI and realized FDI estimation results are given by RE and OLS,respectively.

From Table 3, the diagnostic test for groupwise heteroskedasticity shows that the null hypothesis is strongly rejected atless than the 1 per cent level, suggesting that heteroskedasticity is present across the countries in all the regressions.Consequently, the model is estimated by taking into consideration this heteroskedasticity.22 The VIF values are ranging from2.52 to 2.58 for the realized FDI and the approved FDI data sets, suggesting no damaging multicollinearity.

Table 3 shows that the slope parameter estimates of relative GDP are negative, and significant at the 5 per cent level. Thissuggests that a larger market size of the home country tends to induce FDI from the home country into Cambodia because thelarger country tends to have more firms that can expand into the international markets. The estimated coefficient of �0.4implies that a 1 per cent increase in the GDP of the home country relative to Cambodia’s GDP ceteris paribus leads to a 0.4 percent increase in FDI of the investing country into Cambodia. It might be that this finding is driven by investments fromcountries of larger economic size, such as Malaysia, China and Taiwan. However, other variables such as the rate of growth,the relative interest rate, the inflation rate, trade, ASEAN and Crisis are all not statistically different from zero.

The relative exchange rate variable has the expected positive sign, and is significant at less than the 5 per cent level. Thisprovides evidence that the exchange rate is positively related to FDI inflows into Cambodia. As mentioned earlier, sinceCambodia’s economy has been highly dollarized, the exchange rate variable is defined as the ratio of the US dollar in realterms to the home country’s currency-per-dollar real exchange rate.23 There are several reasons why a real depreciation inCambodia possibly leads to an increase in FDI from the home country. First, a real depreciation of the US dollar relative to thehome country’s currency will provide investors from the home country a cost advantage in terms of Cambodian labour costs.Second, a depreciation of the dollar makes assets, valued in dollars, cheaper in Cambodia. This provides an incentive forforeign investors to buy Cambodian assets. Third, a depreciation of the US dollar will make goods produced in Cambodia

Table 2

Descriptive statistics and unit root test results for realized FDI.

Variable Minimum Maximum Mean Standard deviation t-Bar test

LRFDI 10.2 19.4 15.6 1.8 �3.9***

LRGDP �6.2 �1.3 �3.4 1.3 �16.2***

DGROWTH �4.7 18.1 4.1 4.1 �3.0***

LRER �9.2 0.7 �2.2 2.7 �8.9***

LTRADE 14.2 21.1 18.1 1.4 �4.6***

LRIR �0.8 2.3 1.0 0.5 �2.8***

DINFLA �65.0 12.2 1.3 7.7 �4.4***

LRPOLRISK �2.1 �0.3 �1.4 0.4 �4.2***

LDIST 6.3 9.6 8.2 1.0 –

Notes: LRFDI = logarithm of annual realized FDI in Cambodia. See notes in Table 1 for variable names.

Table 1

Descriptive statistics and unit root test results for approved FDI.

Variable Minimum Maximum Mean Standard deviation t-Bar test

LAFDI 10.2 21.2 15.8 1.9 �2.1**

LRGDP �6.2 �1.3 �3.3 1.3 �16.3***

DGROWTH �4.7 18.1 4.2 4.3 �3.0***

LRER �9.6 0.7 �2.6 3.0 �16.9***

LTRADE 10.8 21.1 17.9 1.8 �4.0***

LRIR6¼ �0.8 2.3 1.0 0.5 �2.1**

DINFLA �65.0 12.2 1.1 7.1 �4.5***

LRPOLRISK �2.1 �0.3 �1.4 0.4 �4.2***

LDIST 6.3 9.6 8.2 1.0 –

Notes: L and D refer to the values in logarithms and in differences, respectively. 6¼ refers to unit root test for the variable covering only sixteen countries from

1996 to 2004. LAFDI = logarithm of annual approved FDI in Cambodia; LRGDP = logarithm of ratio of Cambodia’s real GDP to home country’s real GDP;

DGROWTH = difference between Cambodia’s real GDP growth and home country’s real GDP growth; LRER = logarithm of the real exchange rate of the US$ to

the home country’s currency; LTRADE = logarithm of Cambodia’s real trade from and to home country; LRIR = logarithm ratio of real lending interest rate in

Cambodia to real lending interest rate in home country; DINFLA = difference between Cambodia’s inflation rate and home country’s inflation rate;

LRPOLRISK = logarithm of ratio of political risk scores in Cambodia to political risk scores in home country; LRLP = logarithm of the ratio of labour

productivity in Cambodia to labour productivity in home country; LDIST = logarithm of distance between capital city of Cambodia and that of home country.** Significance level at 5 per cent.*** Significance level at 1 per cent.

22 Also estimations were carried out, using the ratio of Cambodian riels per dollar to the home country’s currency-per-dollar real exchange rate. Yet, these

calculations have no effect on the results.23 The country risk variable is defined as the ratio of the annual political risk scores in Cambodia to the home country, measured on a scale of 0–100, with

100 indicating a risk-free country.


relatively cheaper than the same goods produced in the home country. Therefore, foreign investors may be enticed to investin the Kingdom.

The country risk variable has the expected positive sign and is highly significant at a 1 per cent level. This suggests that animprovement (higher score) in political risk positively affects FDI inflows into Cambodia. The estimated slope parameter of1.4 implies that a 1 per cent increase in the political risk score relative to the investing country results in a higher FDI fromthat country in Cambodia. The estimated coefficient has a large economic and statistical significance.

The coefficient estimate of the geographical distance variable has, as expected, a negative sign, and is significant at lessthan the 10 per cent level, implying that distance is a significant deterrent of FDI inflows into Cambodia. The result isconsistent with the theory of economic geography, which postulates that geographical distance is positively associated withthe costs of obtaining relevant and detailed local information as well as the costs of managing foreign production facilities inforeign countries. Distance therefore acts as a measure for international transaction costs between the home and hostcountries of the investors.

An interesting result is the significant ‘China’ factor in Regression 1. As mentioned earlier, the China variable is used tocapture the effect of China’s WTO accession and membership on the FDI inflows into Cambodia. The negative, significantparameter associated with the China variable suggests that China’s membership of the WTO had a negative impact onCambodia’s ability to attract inward FDI. This result contrasts with several other studies on the impact of China’s rise onAsian developing countries (Eichengreen & Tong, 2007; Liu, Chow, & Li, 2007; Zhou & Lall, 2005), which stress that China’semergence actually complemented, rather than crowded out FDI inflows into Asian developing economies. However,Cambodia was not included in any of these studies. A closer look at Cambodia FDI inflows provides some support for China’sFDI complementarity to the Cambodian economy over the period under investigation, and shows that FDI from Chinaincreased during this period. However, annual total FDI inflows into Cambodia declined from about US$ 977 million duringthe sub-period 1994–1996, to US$ 366 million during 1997–2000 and to US$ 304 million from 2001 to 2004 (Cuyvers et al.,2006).

Regression 2 presents the estimates for realized FDI in Cambodia, which are by and large consistent with the findings forapproved FDI (Regression 1). The estimated coefficient for the total trade variable shows the expected positive sign and issignificant at the 1 per cent level. This is not surprising as realized FDI affects directly the production of goods. The highlysignificant trade variable indicates that bilateral trade between Cambodia and the FDI home countries is positively related to

Table 3

Slope parameter estimates of elasticities for approved and realized FDI in Cambodia.

Variable Regression 1 (approved FDI) Regression 2 (realized FDI)

Constant 22.1*** 16.3***

(3.9) (3.5)

LRGDP �0.4** �0.4**

(0.2) (0.2)

DGROWTH �0.1 �0.0

(0.1) (0.1)

LRER 0.3** 0.2***

(0.1) (0.1)

LTRADE 0.2 0.4***

(0.1) (0.1)

LRIR �0.2 �0.0

(0.4) (0.4)

DINFLA �0.0 0.0

(0.1) (0.0)

LRPOLRISK 1.4*** 0.9*

(0.4) (0.5)

LDIST �0.8*** �0.9**

(0.3) (0.3)

ASEAN �0.4 �0.2

(0.6) (0.7)

CRISIS �0.8 �0.5

(0.7) (0.6)

CHINA �0.9* �0.5

(0.5) (0.4)

Number of observations 137 109

Overall R2 0.4 0.4

VIF 2.6 2.5

LM statistic x2(1) 20.4*** 0.5

Wald test statistic for groupwise heteroskedasticity 113.6*** 84.7***

Notes: L and D refer to values in logarithms and in differences, respectively. Standard errors are groupwise heteroskedasticity robust standard errors in

parentheses.* The slope parameter estimates are statistically significant at the level of 10 per cent.** The slope parameter estimates are statistically significant at the level of 5 per cent.*** The slope parameter estimates are statistically significant at the level of 1 per cent.


inward FDI in the Kingdom, which is in line with the findings of Yamagata (2006) and Cuyvers et al. (2006). FDI projects werefound to import raw materials and machinery from the home country, for use in their final production activities in Cambodia,of which the output goes to the rich countries, in particular, the US and the EU. The imports of these materials are stimulatedby the incentives in Cambodia’s investment law, which eliminates the import tax on intermediate goods for FDI projects andby the lack of these inputs in Cambodia.

The coefficient of the relative exchange rate variable for realized FDI becomes more significant at less than 1 per cent. Yet,its economic significance is less than is the case of approved FDI. The GDP variable retains both statistical and economicsignificance while political risk is now significant at the 10 per cent level. However, the coefficients of the China variable turnout to be insignificantly different from zero.

The geographical distance variable for realized FDI is significant at the 5 per cent level and provides evidence for anegative relationship between distances and realized inward FDI in Cambodia. As mentioned before, Cambodia was mostsuccessful in attracting FDI from its Asian neighbours, while investment from the developed countries was limited, aphenomenon which may be explained by the longer distance between these developed countries and the Kingdom. From1994 to 2004, Cambodia’s inward FDI from ASEAN member countries represented 48.1 per cent, Greater China (China,Taiwan and Hong Kong) 26.7 per cent and other Asian countries 7.8 per cent, while FDI that flowed into Cambodia from thedeveloped countries—the US, Canada and the EU combined—accounted for only 17.4 per cent over the same period (Cuyverset al., 2009).

Although the results of approved FDI and realized FDI are similar, Regressions 1 and 2 show that the sets of determinantsof approved and realized FDI do not perfectly coincide. This should not be too surprising, however. A possible explanation isthat the conditions under which approved FDI is arranged and planned are different from those of realized FDI. Aseconomic, political and institutional conditions are changing over time, the level of realized FDI is likely to deviate fromapproved FDI.

8. Concluding remarks

This paper has examined the factors that might affect the inflows of FDI into Cambodia’s small open economy over theperiod 1995–2005. Panel data sets were used for both approved and realized FDI. The data from 17 home countries forapproved FDI and 15 countries of origin for realized FDI were pooled over 1995–2005. Even though some countries are notincluded, these panel data sets for the approved and realized FDI represent almost all (about 99 per cent) of Cambodia’s totalFDI inflows during this period.

The major difference between the above findings and a number of previous empirical studies about other countriesresides in the use of explanatory variables in relative terms and in the application of several diagnostic tests for choosing thebest possible econometric estimation technique. Another important feature of this paper is that unit root tests wereconducted for all time-variant variables to avoid spurious regression results.

Random effects estimation proved to be most suitable for estimating approved FDI, while a pooled OLS model performedstatistically better for the estimations of realized FDI. One-year lagged explanatory variables were used to estimate theirimpact on FDI inflows. The results show that the determinants of approved FDI and realized FDI are similar. The FDI homecountry’s GDP, bilateral trade, and the exchange rate have a positive impact on inward FDI flows into Cambodia.Geographical distance negatively affects the level of FDI inflows in Cambodia. This explains that a large share of FDI inflowsover the period under consideration largely came from developing Asian neighbouring countries.

With respect to the policy implications for Cambodia, it is interesting to stress that international trade is shown to have amajor impact on FDI inflows into the country. Therefore, a further liberalization of Cambodia’s international trade shouldattract more inward FDI, which in turn is expected to generate some positive externalities in the economy. Improving thepolitical risk score is shown to have created a favourable environment for attracting foreign investments. As the homecountry GDP is a main driving force of inward FDI flows into Cambodia, it follows that the country’s ability to attract inwardFDI is, to some extent, beyond its control and depends on the GDP growth of the world economy and specific homecountries. Thus, the Cambodian Government should devote much more effort in creating ‘‘pull factors’’ for the country, e.g.by improving its institutions, infrastructure and legal systems, by the removal of administrative barriers, etc. which canresult in dynamic positive effects of inward FDI and economic growth, in addition to stimulating technology transfer to thecountry.

As to the role that regional economic integration played in the inflow of FDI in Cambodia, it is found that investmentinflows driven by increased international trade with the other member countries has been significant. Yet, no additionalimpact was detected from Cambodia’s ASEAN membership per se. Much impact on inward FDI in the countrycan be assigned to the costs associated with doing business abroad (information cost, monitoring cost, transportationcosts of supplying raw materials and intermediate inputs to the host country, etc.) which was proxied by distance. In thefuture, the role of international trade and distance will increase further, as they will be much affected by the regionalintegration process. With the deepening of ASEAN integration and the creation of the ASEAN Economic Community, it cantherefore be expected that more FDI will flow into Cambodia from the more developed ASEAN neighbours Singapore,Malaysia and Thailand. It remains to be seen, however, how investment from China, Japan and South Korea, as the threemajor partner countries involved in the so called ‘ASEAN+3 process’, and from the ASEAN countries into China, willdevelop.


Appendix A. Definitions and data sources of variables

Variable name Definitions and data sources

AFDI Real annual approved FDI inflows into Cambodia from 1995 to 2005. Real approved FDI is computed as approved FDI in

current dollars divided by Cambodia’s GDP deflator in the corresponding years. Sources: Cambodian Investment Board, and

IMF’s International Financial Statistics Yearbooks

RFDI Real annual realized FDI inflows into Cambodia from 1995–2005. Real realized FDI is annual realized FDI in current dollars

divided by Cambodia’s GDP deflator. Sources: Cambodian Investment Board, and IMF’s International Financial Statistics

Yearbooks

RGDP Relative real GDP—the ratio of Cambodia’s real GDP, measured in Purchasing Power Parity, to the home country’s real GDP

in Purchasing Power Parity. Sources: IMF’s World Economic Outlook’s database

DGROWTH Difference between GDP growth rates of host and home country. Source: World Development Indicators and Taiwan’s

Ministry of Economic Affairs

LRER Relative real exchange rate, defined as the real exchange rate of the US$ to the home country’s currency. Source: IMF’s

International Statistical Yearbooks, World Economic Outlook database and Taiwan’s Ministry of Economic Affairs

RTRADE Cambodia’s real international trade (exports plus imports) to and from the home country, derived from Cambodia’s trade in

current US$ deflated by Cambodia’s GDP deflator in the corresponding years. Sources: IMF’s Direction of Trade Statistics

CD-ROM, Direction of Trade Statistics Yearbooks, and World Development Indicators

RIR Relative real interest rate, defined as the ratio of Cambodia’s real interest rate to the home country’s real interest rate.

Source: World Development Indicators, ADB’s Key Economic Indicators, and Taiwan’s Ministry of Economic Affairs

DINFLA Difference between the inflation rate of Cambodia and the home country. Inflation rate is the rate of change in GDP deflator.

Source: IMF’s International Financial Statistics Yearbooks, Asian Development Bank’s Key Economic Indicators, and Taiwan’s

Ministry of Economic Affairs

RPOLRISK Relative political risk, defined as the ratio of the annual political risk score of Cambodia to the home country in the

corresponding year. Source: Euromoney (various issues)

RLP Relative labour productivity, computed as the ratio of real GDP to the labour force of the country. Sources: IMF’s International

Financial Statistics, and Asian Development Bank’s Key Economic Indicators and Taiwan’s Ministry of Economic Affairs

DIST Geographic distance between Cambodia and the home country, measured in kilometres between Cambodia’s capital city

and the home country’s capital city. Source: Great Circles Distance

ASEAN Dummy variable, equal to 1 for the years 1999–2005 when Cambodia was admitted to the Association of Southeast Asian

Nations (ASEAN) and 0 otherwise

CRISIS Dummy variable, equal to 1 for 1997 and 1998, the years of the Asian financial crisis, and 0 otherwise

CHINA Dummy variable, equal to 1 for the years 2001–2005, when China was a member of the World Trade Organization (WTO),

and 0 otherwise

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