Non-Equity Modes of Trade in ASEAN
Promoting new forms of trade between
Japan and ASEAN

C

bo
m
a

dia

PAPER 2A U G U S T

2019For inquiries, contact ASEAN-Japan Centre(ASEAN Promotion Centre on Trade, Investment and Tourism)
1F, Shin Onarimon Bldg., 6-17-19, Shimbashi,
Minato-ku, Tokyo 105-0004 Japan
Phone/Fax: +81-3-5402-8002/8003 (Planning & Coordination)+81-3-5402-8004/8005 (Trade)+81-3-5402-8006/8007 (Investment)+81-3-5402-8008/8009 (Tourism & Exchange)+81-3-5402-8118/8003 (PR)e-mail address: toiawase_ga@asean.or.jp
https://www.asean.or.jp

Copyright © ASEAN Promotion Centre on Trade, Investment and Tourism.
All Rights Reserved.
Paper 2 / August 2019 / Non-Equity Modes of Trade in ASEAN: Cambodia
Promoting new forms of trade between Japan and ASEAN

Non-Equity Modes of Trade in ASEAN
Promoting new forms of trade between
Japan and ASEAN

PAPER 2A U G U S T

2019

ii

N O N-E Q U I T Y M O D E S O F T R A D E I N A S E A N – A U G U S T 2 019
P R O M O T I N G N E W F O R M S O F T R A D E B E T W E E N J A PA N A N D A S E A N

NOTESThe terms country and/or economy as used in this study also refer, as appropriate, to territories orareas; the designations employed and the presentation of the material do not imply the expressionof any opinion whatsoever on the part of the ASEAN-Japan Centre concerning the legal status of any
country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers orboundaries.

The following symbols have been used in the tables:• Two dots (..) indicate that data are not available or are not separately reported.
• A dash (-) indicates that the item is equal to zero or its value is negligible.
• Use of a dash (-) between dates representing years, e.g., 2015–2016, signifies the full period
involved, including the beginning and end years.
Reference to “dollars” ($) means United States dollars, unless otherwise indicated.

There are 10 papers in total. The other nine papers will be produced subsequently.
Paper 1. Brunei Darussalam
Paper 2. Cambodia
Paper 3. Indonesia
Paper 4. Lao People’s Democratic Republic
Paper 5. Malaysia
Paper 6. Myanmar
Paper 7. Philippines
Paper 8. Singapore
Paper 9. Thailand
Paper 10. Viet Nam

Prepared by Dr. Rajah Rasiah (University of Malaya, Malaysia) and the trade staff members of
the AJC, who assisted with research and statistical assistance. Errors and omissions are only
those of the authors and should not be attributed to the organization.

PA P E R 2 C A M B O D I A

iii

CONTENTS
1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Characteristics and scope. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.1 Scale and scope of NEMs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.2 NEM case studies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  12
3. Opportunities and challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
3.1 Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

3.2 Control. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  31
3.3 NEM modalities and industries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
3.4 Localization strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
3.5 Basic and science, technology and innovation infrastructure. . . . . . . . . . . . . . 33

4. Policy implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
4.1 Enhancing the capability of local firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
4.2 Improving investment regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
4.3 Promoting and upgrading skills and expertise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
4.4 Enhancing basic infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

4.5 Building science, technology and innovation infrastructure. . . . . . . . . . . . . . . . 38
4.6 Promoting connectivity and coordination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
4.7 Promoting integration into global markets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

4.8 Mainstreaming sustainable development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

iv

N O N-E Q U I T Y M O D E S O F T R A D E I N A S E A N – A U G U S T 2 019
P R O M O T I N G N E W F O R M S O F T R A D E B E T W E E N J A PA N A N D A S E A N

PA P E R 2 C A M B O D I Av

KEY MESSAGES• Non-equity modes (NEMs) of production are gradually spreading in Cambodia with major
expansions experienced in services, the garment industry and agriculture.
• Cambodian firms are in the initial stage of being involved in various types of NEMs throughsubcontracting, management contracts and franchising arrangements.
• Contract farming has evolved through both land leases and subcontract agreements, while in
the garment industry NEMs have grown sharply through subcontract linkages with foreign
firms operating in special economic zones (SEZs). Franchising and management contracts havedominated hotel NEM operations.
• Ownership in the garment industry is dominated by transnational corporations (TNCs). The
industry is among the highest generators of exports and employment in Cambodia. The volume
of NEM exports was estimated at $5.6 billion in 2017, accounting for over 80 per cent of overall
garment exports from Cambodia.
• Through aggressive promotion by the government, contract farming of cassava is poised to makeCambodia a major global supplier of the vegetable.
• International hotels are expanding rapidly into Cambodia through either management contracts
or franchise agreements, or long-term leases of land on which hotels are built. Local partnerships
with foreign hotel owners are mushrooming because Cambodia does not allow foreign ownershipof land.
• As TNCs can easily terminate contracts, long-term relationships cannot be easily established,particularly so when the quality of services or goods does not meet TNCs’ standards and local
firms in other countries are more competitive.
• Development of the local community, including local NEM firms and employees, is important whenselecting NEMs for government support.
• Worker training should focus on local firms to stimulate technological upgrading so that NEM
firms can move up the value chain.
• Although NEMs are characterized by national equity, refinement of regulations to attract foreignand domestic investment is necessary to stimulate NEM activities in Cambodia.
• NEM firms and complementary foreign and joint-venture firms can pursue upgrading strategies if
the required skills and expertise are in place. The government should build more schools to raise
the literacy rates to complement technical and vocational training in the country.
• The growth of NEM and Cambodian exports, employment and revenue can be further enhanced if
the government strengthens the basic infrastructure where firms operate.
• Although strong basic infrastructure is critical to raise the efficiency levels of firms, thedevelopment of science, technology and innovation (STI) infrastructure is important to stimulate
firms’ participation in innovation activities. Organizations such as science-based universities,
standards organizations and research and development labs will help solve collective action
problems faced by local firms.
• Local employees should be shielded from unreasonably exploitative conditions. This protection
would also help raise productivity.
• The government should tighten regulations and offer incentives for local firms to “green” theirbusiness activities.

vi

N O N-E Q U I T Y M O D E S O F T R A D E I N A S E A N – A U G U S T 2 019
P R O M O T I N G N E W F O R M S O F T R A D E B E T W E E N J A PA N A N D A S E A N

PA P E R 2 C A M B O D I A

1

1. INTRODUCTION
An extensive account of trade between countries can be presented using aggregate statistics, on
the basis of broad ownership patterns, and broken down largely by national and joint-venture firms
and by foreign firms. However, few accounts have examined non-equity modes (NEMs) of ownership,
in which trade links appear with supply chains, or in many cases as part of the global value chains(GVCs) of transnational corporations (TNCs). They tend to dominate trade in industries, such as
clothing and electronics, and even manifest in the form of TNC trade, vertically or horizontally. NEMs
linked to trade in GVCs started gaining significance following the successful export expansion offirms from Japan, the Republic of Korea, and Taiwan Province of China into global markets. Given
the capacity of NEMs to generate foreign exchange, and the deeper and broader implications they
have for overall economic development, there is growing recognition that NEMs associated withtrade would help not only to check resource outflows from national economies but also to help
national productive capabilities evolve. Trade between Japan and ASEAN members promises sucha development.
As in other ASEAN countries, NEM-related trade is also gradually spreading in Cambodia in theform of international subcontracting in manufacturing industries, such as garments and electronics;
especially since 2015 when Cambodia established the Cambodia Special Economic Zone Board andopened special economic zones (SEZs). Other forms of NEMs have also emerged in Cambodia: e.g.
contract farming in agriculture and contract manufacturing; international franchising in fast foodand retail stores; variations of build-own-operate transfer arrangements and other concessions ininfrastructure projects; and management contracts (e.g. in international hotel chains). This reportexamines the case of Cambodia in the overall framework of the ASEAN-Japan Centre (AJC) project(box 1), targeting NEMs particularly in the garment, food manufacturing, and hotel industries.
Clothing is the largest manufactured export of Cambodia; in nominal prices its value more thandoubled between 2010 and 2016, from $5.1 billion to $11 billion (table 1). More than 70 per centof clothing and textile exports from Cambodia goes to the United States and the European Union(EU), thanks to the generalized scheme of preferences (GSP), which allows vulnerable developing
countries such as Cambodia to pay no duties on exports within the allowed quota limit. Cambodia
still enjoys the “Everything but arms” clause with Europe. Many foreign apparel manufacturers thatutilize the preferential schemes have set up operations in Cambodia.
Other industries in Cambodia with growing exports include bicycle manufacturing and electriccomponents manufacturing, such as insulated electric wire and electrical transformers. In 2017,
Cambodia exported 1.4 million bicycles to the EU to become its number one exporter, taking theplace of Taiwan Province of China. In fact, Taiwanese bicycle manufacturers, such as A&J, Smart
Teck and Worldtec Cycles, have also established production operations in Cambodia. They enjoy thebenefit of the duty- and quota-free status allocated to Cambodia. Exports of electronic components
grew rapidly after 2012 when Japanese electronics makers, such as Sumi (Cambodia) Wiring System
and Yazaki, started producing wire harness products in Cambodia’s SEZs. Exports of insulated wires
increased by more than five times between 2012 and 2016, from $34 million to $186 million. These
foreign companies chose Cambodia as an ideal production base, to benefit from their “China PlusOne” and “Thailand Plus One” strategies.
Market liberalization and the rising importance of FDI to Cambodia is now well documented (Rasiah,
2009a). In Asia, technological catch-up assisted the transformation of national firms in the Republicof Korea, Taiwan Province of China and China from a focus on low value added activities to high value
added ones through integration with GVCs (Rasiah, Kong and Zhang, 2013). Although the number

2

N O N-E Q U I T Y M O D E S O F T R A D E I N A S E A N – A U G U S T 2 019
P R O M O T I N G N E W F O R M S O F T R A D E B E T W E E N J A PA N A N D A S E A N

Box 1. The NEM project, ASEAN-Japan Centre
Other than arms-length relationships, equity is not the only means of exerting control overinternational value chains. Companies also enter into contractual relationships with otherindependent firms, which is gaining importance following rising integration into global value
chains. In light of its importance, this report seeks to fill an important void in which there is alacuna in knowledge and research gap in ASEAN. It also calls for an overall analytic framework toassess development impacts in order to propose a generic policy framework for dealing with suchtransactions. The fundamental difference between NEMs and normal trade is that non-equity
forms of trade relate to contractual relationships between private firms with little or no equity
ownership by the contracting firms. The role of the state related to this partnership is limited tofacilitating the creating favourable conditions within which private parties can freely negotiate theterms of their cooperation. By understanding better this phenomenon, including scale and scope,
the AJC seeks to provide a profound policy analysis to offer ASEAN governments recommendations
that they could consider to appropriate benefits from these new forms of trade and investment.
In order to understand the scale and scope of non-equity involvement in major industrial sectors, acase study methodology is used. The reasons for taking this approach are two-fold: (1) balance of
payments and supplementary statistics do not provide the details necessary to measure accurately
cross-border NEM activities; (2) the relevant microdata are fragmented and disconnected; and (3)it is only through case studies that we can draw actual reasons that shaped firms’ conduct inthe development of NEMs. Nevertheless, the case studies are used to complement rather thansubstitute existing research and statistics.
New opportunities are opening up for ASEAN countries, which are largely emerging from changes
in TNCs international innovation networks (IINs). While attracting foreign direct investment (FDI)
and encouraging foreign TNCs to establish affiliates remain an important option for ASEAN
countries, ASEAN governments need to review their current regulatory regimes in the context
of NEMs and IINs. A key objective of this study is to make policy relevant recommendations on
investment, trade and industrial policies that ASEAN governments can consider to benefit fromthese emerging opportunities.

of national firms overwhelms the number of foreign ones, firms from China, Hong Kong (China),
the Republic of Korea and Taiwan Province of China actively support GVCs through integration withbrand holders in the United States and Europe (Rasiah, 2009b; Rasiah, Gopala and Sanjivee, 2013).
Attempts to examine the factors that make locations attractive and conducive to NEMs requirea profound screening of overlapping factors that contribute to both FDI and NEMs. As with FDI,
locational factors include political and social stability, effective competitive policies, attractive
incentives for companies, smooth trading procedures and sound macroeconomic policies.
In addition to the policy-related factors considered as standards for FDI selection, there are also
factors that provide particular support for NEM development in host countries. First, as NEMs arein essence forms of contract-based engagements that are often integrated in TNC networks inhost economies, stable contract and commercial law is important. For example, for franchises andcontract farming, it is important that there is sufficient protection of intellectual property rights.
Second, as with FDI, facilitation measures to promote business are very important for attracting
NEMs. For example, promotion activities and incentives should be applied with a broad scope; forexample, investment promotion institutions should explicitly include foreign franchisers as partners
for promising local companies. Regional enterprises’ access to capital is also an important factor,
given its potential for promoting the expansion of NEM production.

Export
RCA*
Major Import Items

268

268

186

170

1 672

18 400Cassava

Trunks and cases

Insulated wire

RubberOthers

Total

100

7

1

1

2

2

2

2

11

12

60

33.4

1.0

5.4

59.8

5.8

42.1

4.6

17.2

16.2

Total

OthersRaw fur skins

Raw sugar

Flavoured water

Rolled tobacco

Two-wheel vehicle parts

Cars

Gold

Refined petroleum

Textiles

14 500

7 388

159

234

275

281

287

381

585

1 300

3 610

100

50

1

2

2

2

2

3

4

9

25

32.6

6

14.8

8.2

20.2

0.6

1

3

10.7

Import
RCA*

Source: Global Atlas/UN Comtrade.
Note: RCA means revealed comparative advantage, a measure of whether a country is an exporter of a product based on the relative advantage or disadvantage a country has in the export of a certain good.

331

Rice

1 960

Precious metals/Gold

415

2 130

Footwear and headwear

Bicycles

11 000% of Total
ImportImport Value(M$)% of Total
ExportExport Value(M$)

TextilesMajor Export Items

Major import items (% of total import)

Major export items

Table 1. Major export and import products, Cambodia 2016

PA P E R 2 C A M B O D I A
3

4N O N-E Q U I T Y M O D E S O F T R A D E I N A S E A N – A U G U S T 2 019
P R O M O T I N G N E W F O R M S O F T R A D E B E T W E E N J A PA N A N D A S E A N

TNCs must establish footholds from which they can support NEM businesses. That could be aminimal threshold of having a commercial presence, as do purchasing and quality management
organizations that provide support for outsourced manufacturing operations or logistics support
operations that provide connectivity to franchise locations for retail and quick services restaurant
businesses.
The existence of reliable and capable regional enterprises, and the ability to access them effectively,
are important factors for NEM operations. Most NEMs require local partners that are strong, andsometimes promoters, capable of taking on risks on behalf of TNCs. For example, where TNCs do
not enter contracts directly with individual farms, agricultural cooperatives can act as intermediaries
to reduce business risks and provide reliability (Barrett et al., 2010).
Third, the degree of economic development and the strength of economic and social capital in acountry is important to the growth of NEMs in that country. For example, consumer market scaleand growth, and access to regional markets, are as important to NEMs – such as franchises andout-licensing contracts – as they are to FDI. Other major areas of interest to companies are theprovision of basic infrastructure and the costs of transport, energy and communications.
Technological capabilities and the capacity to improve the quality and productivity of regional
enterprises are critical elements for both TNCs and NEM firms. Government policies targeted at
improving such capabilities in national firms, as well as regulations to stimulate strong corporatesocial responsibility (CSR) practices, including the observance of specific minimum labour conditions,are also important, to stimulate the upgrading of production in both TNCs and NEM firms. Suchinitiatives also help expand the pool of NEM firms that are available to network with TNCs. For
example, in Malaysia the government has introduced a law specifically concerning franchises
and has implemented other measures to promote TNC participation in its local economies. In
the Philippines, the government has promoted services outsourcing, specifically the information
technology and business process outsourcing (IT-BPO) industry. In Cambodia, the government has
no specific initiative to promote NEMs.
Whereas several factors have thus contributed to increase the overall allure of countries as sites
for various types of NEMs, some factors are decisive in the development of specific modes. Table 2
summarizes the major locational determinants of each mode.

PA P E R 2 C A M B O D I A

5Table 2. Location determinants, FDI and NEM
Relevant for FDI and NEMs

More relevant for FDI

More relevant for NEMs

Policy framework• Economic, political and social
stability• Competition policy• Trade policy• Tax policy• Rules regarding entry andoperations• Standards of treatment offoreign affiliates• International investment
agreements• Privatization policy• Stable general commercial andcontract law• Specific laws governing NEM
contractual forms• (e.g. recognizing licensing,franchising contracts)• Intellectual property protection

Business facilitation• Reduction of hassle costs• (e.g. cost of doing business)• Investment promotion• Investment incentives• Provision of after-care• Provision of social amenities(e.g. quality of life)• Facilitation efforts aimed at-u pgrading of technological quality,
productivity standards of local
firms- e nterprise development,
increasing local entrepreneurial
drive, business facilitation- s ubsidies, fiscal incentives forstart-ups- information provision, awarenessbuilding on NEM opportunities
with local groups- s upport for minimum standardsof working conditions and CSR in
local firms

Economic determinants• Infrastructure• Market size and per capita
income• Market growth• Access to regional and global
markets• Country-specific consumer
preferences• Access to raw materials• Access to low-cost labour• Access to skilled labour• Relative cost and productivity ofresources/assets• Other input costs (e.g.
transportation, communication,energy)Source: AJC.

• Access to strategic assets• Created assets (e.g. technology,
intellectual property)• Strategic infrastructure• Presence of credible local
entrepreneurs and business
partners• Access to local capital6

N O N-E Q U I T Y M O D E S O F T R A D E I N A S E A N – A U G U S T 2 019
P R O M O T I N G N E W F O R M S O F T R A D E B E T W E E N J A PA N A N D A S E A N

2. CHARACTERISTICS AND SCOPE
The characteristics and scope of the different modalities vary; hence it is important to discuss eachseparately so that efforts to promote them are cognizant of the unique elements associated witheach. As most NEM modalities have already emerged in Cambodia (table 3), a systematic discussion
is provided below.

2.1 Scale and scope of NEMs
According to the National Bank of Cambodia, in 2017 the country’s total external trade in goods andin services reached some $11 billion and $5 billion, respectively. Although the goods trade balance
has faced deficits in the recent past, the service trade balance has registered a growing surplus. In
particular, the contribution of the tourism industry has been impressive in recent years.1
Since it is clearer to explain NEMs through a comparison with TNC operations, table 4 presents thedifferent forms of NEMs that have emerged in Cambodia from the perspective of TNCs’ motivations
for engaging in them. For example, contract farming is motivated by a search for resource-based
agricultural output (Dolan and Humphrey, 2000), whereas contract manufacturing and outsourcing(or subcontracting) are motivated by the desire to improve efficiency by reducing costs and risks
where local characteristics offer NEM firms the opportunity to enter into such captive activities.
For example, the restriction of land ownership to citizens ensures that access to such activities isundertaken through land leases and concession agreements with Cambodian owners; in a numberof cases the farming is also outsourced to NEM firms.
Licensing and franchising are motivated by the desire to penetrate markets. Whereas subcontracting
is similar to FDI in that it consists of transferring resources, technologies and expertise to contractors
in the form of “packages”, licensing and management contracts involve few direct transfers. This
paper looks at the characteristics that constitute the different modalities in operation in Cambodia,
in particular subcontracting, contract farming and franchising.
Subcontracting has expanded into labour-intensive industries, such as apparel, footwear and toy
industries. From simple cut, make and pack (CMP) operations, subcontractors that are connected toclothing value chains have evolved to become intermediaries handling a large section of the stages
involved in those value chains – e.g. manufacturing and logistics throughout Africa, Asia and Latin
America (Rasiah, 2007, 2012; UNCTAD, 2011).
Garments is the major industry in which NEM operations have accelerated in Cambodia. However,investments have also grown in manufacturing of machinery, bicycles and electronics, withconsequent expansion through NEMs.

1

According to the World Travel and Tourism Council report, the direct contribution of travel and tourism to GDP
amounted to $3,135 million – 14 per cent of GDP in 2017. The industry generated 2,663,500 jobs that year, which
accounted for 30 per cent of employment in the country. In the tourism industry, the hotels and restaurants segment
can best contribute to NEM operations, through contract management and franchising.

Source: AJC.

Lodgis Hospitality

Pestech• Tourism and hospitality• Electricity

Agreement under which operational control of an asset in a hostcountry is vested in a TNC contractor that manages the asset inreturn for a fee.

Includes concessions, lease agreements, build-operate-transfer
arrangements, etc., in the context of public-private partnerships.

Other(e.g. build-operate-transfer
and the like)

Kumon, KooBits• Education

Management contracts

Coffee Beans & Tea Leaf
Café Amazon
Domino’s Pizza• Restaurant

Contractual relationship in which a TNC (franchisor) permits a hostcountry firm (franchisee) to run a specified business modeled on asystem developed by the franchisor in exchange for a fee.

Franchising

Maxim’s Caterers• Restaurant• Logistics

Mollyfantagy
NPE Logistics• Family amusement

Contractual relationship in which a TNC (licensor) grants to a hostcountry firm (licensee) the right to use an intellectual property (e.g.
copyrights, trademarks, patents, industrial design rights, trade
secrets) in exchange for a payment (royalties). Includes brand,
product and process licensing, as well as cross-licensing and intrafirm licensing.

LicensingGreenLeader• Agriculture

Agreement between a TNC buyer and host-country farmers or
miners (including governments) that establishes conditions for the
production and marketing of farm or mining products

MinebeaMitsumi• Mechanical equipment

Contract farming/
contract mining

Golden Apparel
Universal Jeans• Garments

Company examples
Izumi Electronics

Agreement whereby a TNC contracts out to a host-country firm one
or more aspects of product design, processing or manufacturing.
Includes contract manufacturing and design, as well as outsourcing
in the case of services or business processes.

Subcontracting

Typical industries• Electronics

Description (in the international context)

Modality

Table 3. Description of selected non-equity modalities, Cambodia

PA P E R 2 C A M B O D I A
7

Primary

Rice

Aromatic riceLong-grain white rice
Parboiled rice

Cambodia RiceFederation

Marubeni (AKR)

23,659 tonnes$331 million(local NEM production)

SectorIndustry

Product orservices

No. of companies(NEM-related
estimation)

Major companies(local partner ormain franchisee)

Estimated
export volume(estimatedexport by NEM)

10,210,000 tonnes$21 million(dried cassava, local
NEM production)

Green Leader
Charoen Pokphand
Foods

Several local
associations forcassava production

Dried chips
Dried starch
Wet starch

Cassava
Road bikes
Cyclo-cross bikes
Touring bikes
Adventure road bikes
Mountain bikes
City bikes

BicycleSmall retail groceries
Snack foods
Confectionery
Soft drinks
TobaccoConvenience store

Tertiary$7.3 billion($5.6 billion)

Uniqlo(Golden Apparel)
GAP(Cambo Handsome)$415 million(over $125 million)
Ref.
GIANT (OEM 30%)

Atalantic Cycle
Asama
Strong Man
Smart Tech
World Tech Cycle

Operating since
February 2018
(franchise fee, licence
fee and other fees arerevenue of franchiser)

Circle-K(TH Group)

Garment Manufacturers No specific associations 18 Circle-K stores
Association
Various franchiserestaurants(Over 600 members, 570
of them export-oriented
garment factories, mostof them NEM firms)

Garments
Footwear

Garment

Secondary

Table 4. NEM operations by major sectors, selected industries, 2017$3.4 billion for travel
and tourism(Management contract
fee is 10% or more of
profit)Raffles (Lodges)
The Okura Prestage(TEHO Development,
open 2020)
Hyatt (Chip Mong
Group, open 2020)

781 hotels
2,255 guesthouses

Lodging
Welcome
Comfort
Quality
Trust
Safety services

Hotel

…/

8

N O N-E Q U I T Y M O D E S O F T R A D E I N A S E A N – A U G U S T 2 019
P R O M O T I N G N E W F O R M S O F T R A D E B E T W E E N J A PA N A N D A S E A N

Contract farming
Growing
OEM brand
Concession

3 million

15% increase from 2015($287 million)

China: 22%
France: 16%
Germany: 12%

Further improvementof rice production andcommercialization is
expected.

Modality in NEM

Number of jobs

Average export
growthMarket or tradescale

Product or service
scope

Source: AJC.

Primary

SectorGovernmental initiative
to produce morecassava is expected
to enable farmers toexport more cassava todifferent destinations.

Thailand: 60%
China: 39%

260% growth from 2012($7.8 million)

Over 90,000 families

Viet Nam: 19%
China: 17%
Thailand: 8%
Lao People’s Democratic
Republic: 7%
Republic of Korea: 7%
United States: 5%
Japan: 4%
More International
hotel chains have roomto enter local resort
markets.

More international
convenience chains
have opportunities toenter the market.
Major Taiwanese bicycle
manufacturers operate
in SEZs.
More manufacturing
production can occur at
SEZs.

The EU and the UnitedStates have stabledemand.
Some Japanesecompanies have interestin transferring theirfactories from China to
Cambodia.

Expected to grow by
6.2% per year from 2017
to 2027 (to $6.8 billion)

Market competition
has just started inurban areas between
international capitalconvenience stores andlocal stores.

Approximately 7%
annual economic
growth

140% growth from 2012($296 million)

Over 2.2 million(hotels and restaurants)

LicensingManagement contract

Germany: 38%
United Kingdom: 23%
Belgium: 11%
United States: 6%
Canada: 3%

Operating since
February 2018

Over 15,000

Franchising
Licensing

Tertiary

EU: 38%
United States: 33%
Japan: 6%140% growth from 2012($4.5 billion)

Over 600,000

Subcontracting

Secondary

Table 4. NEM operations by major sectors, selected industries, 2017 (Concluded)

PA P E R 2 C A M B O D I A
9N O N-E Q U I T Y M O D E S O F T R A D E I N A S E A N – A U G U S T 2 019
P R O M O T I N G N E W F O R M S O F T R A D E B E T W E E N J A PA N A N D A S E A N

10

A wide range of NEM exporters have emerged in Cambodia. In agriculture, for example rice and rubber
are produced and exported through contract farming methods undertaken using NEMs. Other major
exports that use contract farming as the NEM activity include palm oil and cassava wine.

Contract farming
Agribusiness TNCs use NEMs in more than 110 developing countries and for a diverse range of
agricultural products (UNCTAD, 2011). Contract farming is a tool for efficient procurement ofagricultural products because it enables TNCs to secure the quantity and quality of products theyrequire. In addition, farmers can secure stable sales and income levels. TNCs demand high quality
from contract farmers, and in return, farmers acquire new information and technology throughthese contracts.
Contract farming is widespread in Cambodia. It has grown strongly owing to the fertile soil, thestringent laws prohibiting foreigners from owning some land and the lower costs of production in
the country. In 2018, agriculture accounted for 25 per cent of Cambodia’s total GDP, and 64 per centof the population relied on it for their livelihoods.2 Rice, rubber and cassava are major agricultural
export products of the country, and they play a vital role in generating employment, income, GDP
growth and foreign currency earnings.
Contract farming generates a large number of jobs for small-scale farms, producing a reasonable
impact on the reduction of poverty. Although the total number of contract farms is hard to identify,
data from individual projects show that several tens of thousands of workers are employed at farms
that use this NEM.

Subcontracting
The degree to which subcontracting accounts for overall production varies by industry type. In thetoy, sporting goods, electronics and automotive industries worldwide, subcontracting generates 50
per cent or more of value added (UNCTAD, 2011). Subcontracting also accounted for slightly lessthan 50 per cent of value added in pharmaceutical products in 2010.
In Cambodia, the garment industry has played a major role in driving exports since TNC subsidiaries
began operations in the country in the 1990s. Textiles and clothing together accounted for 60 per
cent of total exports of goods from Cambodia in 2016, thanks to the GSP offered by the United States
and the EU for the least developed countries (LDCs), which allows vulnerable developing countries
such as Cambodia to pay no duties on exports within specified quota limits (Rasiah, 2009a).
In services, Cambodia is no exception to the global trend of rapid growth in subcontracted IT services.
Various support services from ASEAN neighbours have already brought greater IT connectivity to thecountry. IT is expected to be a major sector for the growth of NEMs, which will not only stimulate
its economic contribution to the national economy but also its complementary support of otherindustries and sectors. The industry is developing in Cambodia, but local firms must realize that theindustry is more mature in neighbouring ASEAN members.

FranchisingFranchising is well known as a business mode for marketing and distributing products or services.
Through franchise management, franchisers are able not only to rapidly and efficiently expand
operations, but also to procure capital. The formula is being applied to the retail industry in many2

FAO Stat, accessed in January 2019.

PA P E R 2 C A M B O D I A

11parts of Southeast Asia, including high street retail and goods stores, restaurants, hotels, businessservices, education and a variety of other business types.
Imported fast food brands, such as KFC, Dairy Queen and Burger King, have attracted Cambodian
NEM firms as partners. With the growth in consumer purchasing power in the country, these
TNCs have started to penetrate the local market by opening franchise shops. Starbucks and otherinternational and regional restaurants, including Japanese restaurants, are further examples .
In franchise agreements, normally franchisers provide franchisees with various types of support
related to business operations, which includes initial and ongoing support, training, management
guidance, marketing, and administration and human resource management advice. Franchisees
pay royalties to franchisors to enjoy these services.

Licensing
Licensing is the process of transferring the rights to use firms’ products and services to companies
that then produce or sell them. Licensing also includes agreements allowing licensees to use thetechnology of the licensor. In exchange for a payment (royalty), the licensor allows the licensee
to use an intellectual property (e.g. copyright, trademark, patent, industrial design right, trade
secret) in order to gain access to know-how or establish a presence in the markets covered by thelicensee. The international expansion of pharmaceuticals, consumer goods and electronics firms
has often been through licensing contracts. Samsung Semiconductor, which now leads the memorystorage industry, used this route successfully to catch up and leapfrog market leaders (Edquist andJacobssen, 1987).
In Cambodia, the carbonated soft drink Pepsi Cola is manufactured by Cambreu under a licensing
agreement. In services, Nippon Express, a logistics company, entered into a franchise agreementwith NEP Logistics to conduct land transportation.3 Aeon Fantasy, which creates, manages andpromotes indoor theme parks with entertainment and amusement facilities, made a franchisingagreement to open its indoor theme parks in Phnom Penh.
The analysis of NEMs is complex because “the web of directly owned, partially owned, contract-based
and arm’s-length forms of international operation of TNCs is tangled, and some of the distinctions
between the different modes are blurred” (UNCTAD, 2011). Thus, the analysis in this report is limited
to a number of industries in which NEMs are especially important.
Trade volume by NEMs in Cambodian exports is difficult to estimate. Nonetheless, for textiles
and clothing, which account for 60 per cent of exports from Cambodia, officials from the Garment
Manufacturers Association of Cambodia (GMAC) estimated that the share of NEM firms would
be about 80 per cent of the total volume of exports. Their estimation was guided by the following
observations:• Of the more than 600 garment factories that are members of GMAC, 570 are export-oriented.
• None of the global retail apparel companies, such as Zara, GAP, H&M and Uniqlo, have garment
factories in Cambodia. They have only what they call partner factories or contract factories.
Therefore, according to the conservative estimate by the GMAC, 80 per cent of the total volume of
Cambodian textile exports – $5.8 billion in value – would be NEM trade. In addition, although thesector currently employs about 600,000 workers, more than 2 million people in Cambodia are partlyor wholly dependent on garment factory salaries from a spouse, parent or child for their living, whichshows that NEM trade in the industry has a significant impact on the Cambodian economy.

3

Nippon Express Press release, July 28, 2011.

N O N-E Q U I T Y M O D E S O F T R A D E I N A S E A N – A U G U S T 2 019
P R O M O T I N G N E W F O R M S O F T R A D E B E T W E E N J A PA N A N D A S E A N

12

2.2 NEM case studies
Several foreign firms and TNCs do business with local partners using NEM arrangements in various
industries. Their involvement in NEM operations and their contribution to the Cambodian economy
vary by modality and industry. To understand better NEM operations in Cambodia, fieldwork
was undertaken on firms in the garment and agribusiness industries using questionnaires andinterviews. Of the targeted 50 firms, 21 firms (10 in garments and 11 in agribusiness) replied to thequestionnaire survey and answered the interview questions.4
The fieldwork shows that all 10 garment companies export and none have domestic sales, whereas
all 11 agribusiness companies have domestic sales and 5 also engage in export activities (table 5).
In addition, most of the garment companies are foreign owned. As far as destinations are concerned,
most garment exports go to North America and Europe, whereas agribusiness exports are dispersed
among East Asia, North America and Europe, and ASEAN member states.
Most of the 11 agribusiness companies are domestic, with nearly half of their sales in domestic
markets. They employ on average approximately 100 workers. The mean number of workers at thegarment firms was large, at 2,370. Whereas all garment firms reported training employees, only
three agribusiness firms reported the same. One garment firm and two agribusiness firms had
research and development (R&D) operations but focused on supporting incremental innovations.

Table 5. Profiles of firms studied in Cambodia
Economic sector

Garment

AgribusinessRespondents (%)

10 (40%)11 (44%)Foreign owned

81Year of establishment (Ave.)

2006

2006

Number of employees (Ave.)

2,370

100

Export-oriented (Ave.)

100%

55%

North America and Europe (72%)
East Asia (20%)
ASEAN (5%)

East Asia (26%)
North America and Europe (13%)
ASEAN (11%)

Undertake contract R&D

1

2

Number of companies that receive training

10

3

Major export destinations (Ave.)

Source: AJC.

(1) Contract farming: Cassava
Cassava is the second most important crop in Cambodia after rice, contributing 1.5 per cent of totalexports from the country in 2016, at a value of $268 million. Cambodian agricultural producers havefor many years focused on neighbouring markets. Cassava producers are no exception. The main
export destination is Thailand, which receives 95 per cent of exports, followed by China at 5 per cent.
The exported cassava is used as biomass fuel and processed as poultry and livestock feed meal.

4

The field studies were conducted throughout February 2016 using a national consultant, targeting 25 large firms
each from the garment and the agribusiness industries.

PA P E R 2 C A M B O D I A

13Whereas global production of cassava is dominated5 by African countries, such as Nigeria(ranked first in 2016, at 59 million tons) and the Congo (second, at 31 million tons), global exports
are dominated by the Southeast Asian countries of Thailand (42 per cent of the total), Viet Nam(10 per cent) and Cambodia (9.7 per cent).6 Cambodia has a strong potential to be a larger supplierof cassava for the global market owing to its fertile soils and ideal climate conditions. Hence, theCambodian government has taken on a big role to develop the industry.
The government recently launched its new strategy, which aims to position Cambodia as a reliablecassava supplier for cassava-based products to the global market. In order to reach this goal, thegovernment has focused on achieving three main strategic objectives:7
1. To transform cassava production from subsistence level to commercial level, to enhance farmers’
income, stabilize prices and strengthen the sustainability of land use
2. To attract investment to produce cassava, including processing it, and to shift farming to highvalue added cassava-based products to supply diverse markets.
3. To enhance the trade competitiveness of Cambodian cassava by expanding its sale in markets byimproving trade facilitation and reducing trade-related costs.
Upgrading existing processors and attracting new investments to build advanced and sustainablefactories, addressing cassava production issues and improving business-enabling environments
could raise the competitiveness of cassava exports from Cambodia.
The Cambodian government’s strategy is to promote a contract farming scheme,8 which is consideredan efficient mechanism to help smallholder farmers to derive benefits by growing cassava while
giving some control to companies (buyers) without allowing them to own the land. This very muchfits into Cambodia’s aim of expanding exports into high value added products. Table 6 presents astakeholder analysis of cassava value chains in Cambodia.
Eaton and Shepherd (2001) categorized five contract farming models (including for cassava), as
follows:-C entralized: An agribusiness company buys produce from a large number of smallholders (smallscale farmers), exerting tight control over quality and quantity.
-N ucleus estate: An agribusiness company combines contract farming with direct involvement inplantation production.
-M ultipartite: Farmers sign contracts in a joint venture between an agribusiness company and alocal entity.
- I nformal: More informal verbal purchase agreements are signed on a seasonal basis, with inputs
that are provided by the company often being restricted to seed and fertilizer.
- Intermediary: An agribusiness company has contracts with intermediaries who then sign contracts
with a large number of farmers.
This report examines case studies for two companies, Green Leader Holding Group Ltd and Charoen
Pokphand Foods Plc (CPF) (boxes 2 and 3). Green Leader is characterized by the centralized model.
The company directly signs agreements with smallholder farmers that stipulate the quantity

5
6
7
8

FAOSTAT, accessed in January 2019.
UN COMTRADE, accessed in January 2019.
National Strategy for Cassava 2018–2022.
Cambodian government has established a legal framework to support the contract farming scheme: the subdegree on contract farming 2011.

14

N O N-E Q U I T Y M O D E S O F T R A D E I N A S E A N – A U G U S T 2 019
P R O M O T I N G N E W F O R M S O F T R A D E B E T W E E N J A PA N A N D A S E A N

and quality of cassava to be produced and purchased. In return, the company provides inputs
and technology support to the farmers. CPF uses features of both the centralized model and theintermediary model (box 3).

Table 6. Stakeholder analysis of the cassava value chain, Cambodia
Stakeholder

Activity

Main challenge

Input suppliers

Produce inputs
such as fertilizer
and pesticides- No proper industry in Cambodia, high dependence on high-cost
imported products or illegal low-quality imported products- Lack of knowledge in farmers about pests and diseases, andlack of experience by the majority of input suppliers in cassava
production

Farmers

Produce cassava- Insufficient financial capacity of farmers to cover production costs(land rent – although 99% of farmers grow cassava on their own
land, land preparation, labour costs, high interest of credit)- Lack of support for farmers on technical issues, price and market
information, knowledge of production

Traders

Buy cassava directlyfrom farmers, thensell to buyer- Some production areas inaccessible without a vehicle

Transporter

Provide service totraders in areasthat traders cannot
access- Some inadequate transport infrastructure, including facilities forstoring cassava. Scarce cold-storage facilities.

Process cassava- Dependence on imported foreign technology and second-handmachines that need frequent maintenance and repair- Lack of domestic experts to train local staff- High cost of electricity and transportation- Unstable price of cassava, requiring a lot of capital for storing
fruits while waiting for a price increase-Lack of compliance of final products with international standards

Processors

Source: AJC based on SNV (2015).

PA P E R 2 C A M B O D I A

15Box 2. Contract farming: Green Leader Holding Group, Ltd
Green Leader Holding Group, based in Hong Kong (China), is an investment company that engages
in coal mining, agricultural cultivation, energy derivatives and systems integration businesses
in China and Cambodia. At the beginning of 2018, Green Leader signed a memorandum of
understanding with the Cambodian Ministry of Agriculture, Forestry and Fishery (MAFF) to invest
in cassava plantations and build 20 processing plants in the country.
Partnering with the United Nations Development Programme and the Cambodian Ministry ofCommerce, Green Leader agreed to establish a smallholder contract farming scheme, as shownin box figure 2-1. The company’s aim is to raise production from 10–15 tonnes of fresh cassava perhectare to about 25 tonnes per hectare once the new technology and farming methods are fully
implemented. Farmers have embraced this arrangement to raise their incomes while obtaining
more knowledge of production and markets.

Box figure 2.1. Contract farming scheme, Green Leader

Final Buyer(International)

Processor/Exporter

Trader/Transporter(National level)- Provide expertise and equipment- Hire labors, train farmers- Provide land preparation andhigh quality fertilizer
These costs will be deduced fromcompany’s payment to farmers.

Sales /
ExportFarmer/Producer

N O N-E Q U I T Y M O D E S O F T R A D E I N A S E A N – A U G U S T 2 019
P R O M O T I N G N E W F O R M S O F T R A D E B E T W E E N J A PA N A N D A S E A N

16

Box 3. Contract farming: Charoen Pokphand Foods Plc
Charoen Pokphand Group is Thailand’s largest private company and one of the world’s largest
conglomerates. Its main businesses are in telecommunications and media, agro-food, retail anddistribution, e-commerce and digital business, property development, automotive and industrials,
pharmaceuticals, finance and investments.
Charoen Pokphand Foods (CPF) is a member company of the group that engages in the agro-foodindustry. CPF’s core businesses include livestock, animal feed, meat and food production, andaquaculture. Charoen Pokphand Cambodia Co., Ltd., with registered capital of $67 million, is oneof CPF’s investments. Its main activities include the animal feed production and sale, livestock
farming and a food processing plant (box table 3-1). The company has been working closely with
farmers in a contract farming scheme since 1995, growing cassava and corn in seven provinces –Battambong, Kampong Cham, Pursat, Ratanakiri, Kandal, Mondulkiri and Pailin.
CPF has two types of contractual agreements drawn from guidelines defined by UNIDROIT, theindependent intergovernmental organization on universal law:
- CPF works directly with farmers to have them grow what it wants. A written contract is made with
farmers on prices, quality and terms.
- CPF works with middlemen who collect produce from farmers and are responsible for the qualityof the product. CPF signs a written agreement with the middlemen, but the middlemen use
informal (verbal) agreements with farmers.
The contract farming scheme represents a win-win strategy. Under this scheme, on the one hand,
farmers will obtain technical support, a guaranteed income, and knowledge about the production
and market. On the other hand, the scheme provides a solution for investors to reduce equity
investment, and hence expose with less risk (box table 3-2).

Box Table 3.2 Benefits of contract farming by Charoen Pokphand Cambodia, 2017
For farmers- Guaranteed prices, market and income- Capacity-building (117 trainings in 2017, technical support)- Access to finance

For CPF- High-quality crops without acquiring land
- Political accessibility- Reliable supply of products and shared risk

Source: CPF Sustainability Report 2017.

PA P E R 2 C A M B O D I A

17(2) Subcontracting: Garments
The clothing industry has played a significant role in the export-oriented industrialization in East Asia’s
early phase of rapid economic growth (Rasiah, 2012). Three of the Asian Tigers or Asian Dragons,i.e., Hong Kong (China), Taiwan Province of China and the Republic of Korea, benefited from massive
garment exports from the 1960s until the early 1980s. They were followed in this success by ASEAN
members Indonesia, Malaysia, Thailand, and the Philippines. The latter countries took advantage ofthe relocation of firms from the Asian Tigers and Japan to expand their garment exports. Two major
developments since the turn of the millennium have transformed trade in garments. First, by 2010
China had extended its grip on global garment exports to about 40 per cent, thereby reducing thespace available for other countries (WTO, 2015). Second, developed countries such as those of the
EU offered LDCs such as Cambodia preferential access to major markets following the scrapping of
the Multi Fibre Arrangement in 2004 (Rasiah, 2012).
The Cambodian textile industry has relied extensively on the GSP to access major markets. In
2017 the United Nations had designated 47 countries, including Cambodia, as LDCs.9 The LDCs of
Bangladesh, the Lao People’s Democratic Republic and Myanmar met the criteria for graduationfrom the status in March 2018, according to UNCTAD. Some of these countries are expected to lose
their GSP privileges in 2024 if they meet the graduation criteria again in 2021. Cambodia, which met
one of the three criteria in 2018, may lose its GSP privileges in 2027. Therefore, it is important that
the Cambodian government develop infrastructure and related policy instruments for the medium
and long terms to handle the transition to open tariffs without any significant problems.
Since the opening of Cambodia for FDI inflows in 1994, the garment industry in the country has
contributed enormously to boosting national income and reducing poverty by creating employment
opportunities. In 2013 the industry accounted for 13 per cent of Cambodian GDP. In 2010, it accounted
for 50 per cent of manufacturing employment. However, less than 10 per cent of local factories benefit
from the industry’s growth. In general, the industry has four types of business models: original
brand manufacturer (OBM), original design manufacturer (ODM), original equipment manufacturer(OEM), and cut make trim (CMT).10 Their involvement in the production cycle is shown in figure 1.
Since OBMs control garment value chains, CMT suppliers start with little bargaining power comparedto their buyers. The GMAC (which was established in 1999) listed 605 garment factories – most ofwhich have NEM contracts – as members in 2018. (Two NEM firms in the garment industry are
examined in box 4 and box 5.) Among the objectives of the GMAC is to obtain a better businessenvironment by lobbying the Cambodian government to develop infrastructure, offer security and set
up legislation to support their businesses.

910

As of 20 November 2018 (UNCTAD).
OBM refers to a company that typically sells its own branded products, which are made by a second company.
The company is responsible for design (possibly by another company), raw material sourcing (possibly by anothercompany), CMT (possibly by another company), marketing and distribution.
ODM refers to a company that designs and manufactures a product that is then rebranded by another company
for sale.
OEM refers to a company that sources the inputs for products and produces products that may be remarketed byanother manufacturer.
CMT requires the basic knowledge of design patterns and the ability to produce the products ordered by OEMsor ODMs with the inputs and materials they provide. Most contract manufacturers in Cambodia provide CMT andassembly services. Only a few factories operate as ODMs and only at a very small scale.

N O N-E Q U I T Y M O D E S O F T R A D E I N A S E A N – A U G U S T 2 019
P R O M O T I N G N E W F O R M S O F T R A D E B E T W E E N J A PA N A N D A S E A N

18

Figure 1. Business model in textile and apparel industry

Brand

Raw material
sourcing

DesignMarketing/Distribution

CMT

Cut Make Trim
Original Equipment Manufacturer (OEM)
Original Design Manufacturer (ODM)
Original Brand Manufacturer (OBM)

Source: Textile and Apparel Industry Report, FPT Securities (2014).

Box 4. Fashion giant H&M and H&M (Cambodia) International Manufacturing Ltd
Hennes & Mauritz AB (H&M) is a multinational retail clothing company based in Sweden. As of
2017, H&M had 4,739 stores and 43 online markets in 62 countries. H&M’s supply chains are
summarized in box table 4-1.

Box Table 4.1. H&M’s supply chain
Designing,
Planning and Buying- Over 100 in-house
designers- 400 more people
work in otheraspects of productdevelopment

Production

Distribution- 20 production offices around the world placeorders, ensure product delivery times, andmanage relationships with suppliers. They arealso responsible for ensuring that the company
respects labour laws in supplier countries.

- Transportation
outsourced, mainly
by ship and rail

- 900 suppliers, mainly in Europe and Asia

- Operates 13 distribution
centres (DCs) andcall-off centres- In-house grading system to evaluate supplierson their performance (see box table 4-2)
Source: H&M Supply Chain Strategy.

M&V (Cambodia) International Manufacturing Ltd is a leading knitwear company founded in1980 (under the names Chong Cheong (Macau) Knitting Factory Ltd, Chong Cheong (Zhongshan)
Knitting Factory Ltd and M&V International Manufacturing (Viet Nam) Ltd.). In 1994, the company
moved from Viet Nam to Cambodia. Its main activities include designing and producing for some ofglobally renowned brands, such as H&M, Next, Marks & Spencer, Mango, Muji and Niko. Notably,
it is a gold-rated supplier to H&M (box table 4-2).

…/

PA P E R 2 C A M B O D I A

19Box 4. Fashion giant H&M and H&M (Cambodia) International Manufacturing Ltd (Concluded)

Box Table 4.2. H&M’s supply grading system
Platinumand Gold

Top suppliers and preferred suppliers with long-term strategic partnerships, accountfor 60% of H&M products. As best performers in all areas, including sustainability, thesepartners have opportunities for training, workshops or even joint investments with H&M.

Silver

H&M provides training and supports them with long-term partnerships.

OthersSuppliers and factories that have worked with H&M for less than one year or have filled
only a test order; H&M works rarely with this category.

Source: H&M Sustainability Report 2017.

Box Table 4.3. Contract stipulations between H&M and M&V (Cambodia) andwith other strategic partners, and pertinent regulations of theCambodian Labour Law
Contract Between H&M and
M&V

Other partners

Cambodian Labour Law

Wages

Workers paid by piece rate
at an average of $ 6.87/day,$181/month (mid-2015) for 208
hours. However, when there
are fewer orders(as of November 2015),$143.50/month

Other strategic partners:$148-$158/month(mid-2015), if fewer
orders, then lower wages-$
 140/month (minimum wage for a
garment worker) for 208 hours-$
 80/month (minimum wage forpiece-rate employees), working
regular hours (48 hours perweek). If pay based on piece rates
would be less, the employer muststill pay $80 per month

Duration ofcontract

Legal contracts

As of December 2015,
31 of 72 H&M suppliers
continued to use illegal
contracts (CENTRAL,
2016)

Two types of contract:- Undetermined duration-F ixed duration: up to two years;
after two years, automaticallyconvert to undetermined duration

Workinghours- No overtime due todecreasing orders- Partial suspension of
overtime since June 2015,
full suspension from
December 2015 to April 2016

Other strategic partners:
an average 10 hours ofoverwork per week-O vertime is defined as more than
8 hours/day-O vertime should be limited to 12hours/week, or 2 hours/day-O vertime work should bevoluntary

Annual leave

18 days/year

18 days/year

18 days/year

Maternity
leave

90 days at 50% of pay

90 days at 50% of pay

90 days at 50% of pay

Sick leave

Available with a doctor’scertificate, which is inaccordance with the law

Some strategic partners
do not provide the sickleave in accordance withthe law, for example: only
2 days of sick leave areallowed, or attendancebonus is reduced due tosick leave

An employer must give an
employee sick leave for up to 6
months if an employee:- is absent from work because ofillness; and-h as a certificate from a qualified
doctor-A n employer may dismiss anemployee if the employee ison sick leave for more than 6months.

Freedom of
association

Several unions, two of which
are considered as independent
unionsIn other strategic
suppliers, no independent
unions- T he right to strike and the right tonon-violent demonstration- T he right to form unions of theirchoiceSource: Summarized from Preston, J., and Leffler, C. (2016) and Asia Floor Wage Alliance (2016).
Note: Other partners include only Platinum and Gold partners.

20

N O N-E Q U I T Y M O D E S O F T R A D E I N A S E A N – A U G U S T 2 019
P R O M O T I N G N E W F O R M S O F T R A D E B E T W E E N J A PA N A N D A S E A N

Box 5. New Wide (Cambodia) Garment Co., Ltd
New Wide (Cambodia) Garment Co., Ltd. is an international textile and garment supplier located in
Cambodia. This firm belongs to the garments conglomerate New Wide Group, which was establishedin 1975 in Taiwan Province of China. New Wide Group core businesses are manufacturing, fabricresearch and garment production. It now has offices and factories in four continents, including
North America and Africa. In 2001, it started textile, knitting and dyeing factories in China as afundamental step towards globalization. By 2017, it had expanded garment operations to China,
Lesotho, Kenya and Viet Nam, as well as Cambodia, with low operating costs (including wages)
as the main attraction of those countries. New Wide established its Cambodia operations in 2006.
The company’s main product is fashion knitwear. In 2013, it employed 1,299 workers on 22
production lines, with 32 workers per line, producing 500,000 garments each month. Its mainclients are United States apparel makers, such as Charming Shoppers, Wal-Mart, LF USA, Dick’s,
Mother’s Work, Belk, Trimark, FCR, Tchibo, and PI.
New Wide Group has enjoyed massive scale-based advantages from integrating the entire
textile and garments value chain. Internalized but productive collaboration based on a blend ofcompetition and cooperation has ensured that subsidiaries downstream have managed to accessstable and reasonable prices and quality of supply.11 The company’s subsidiary in China supplies
raw materials to the Cambodian subsidiary.
New Wide (Cambodia) has introduced labour-friendly policies that seek not to discriminate,including equal opportunity and compensation for pregnant workers, unrestricted access to toilets
during work hours for workers, eliminated restrictions on access to the health clinic for ill andinjured employees, and unionization and freedom of association.

Shortages of workers and consequently rising wages in eastern China have driven significantly
the relocation of garment manufacturing to the CLMV countries (Cambodia, the Lao People’s
Democratic Republic, Myanmar and Viet Nam). Despite inputs supplied from China, total production
costs in Cambodia are lower than those in China. In addition, the Cambodian textile and apparelindustry has expanded its exports by complying with labour conditions imposed by the International
Labour Organization (ILO).12 Consequently, M&V (Cambodia) International Manufacturing Ltd, New
Wide (Cambodia), Garment Co., Ltd and other foreign textile and apparel companies in the country
have also generally complied with these conditions.

(3) Management contracts and franchises in hotels
The hotel industry links up with many other industries that function as major conduits of employment
and economic development. Examples include online booking services, restaurant services, foodand beverage services, linen services and furniture and decoration industries, as well as transport
services.13 Cambodia’s historic and scenic landscapes have made tourism a major industry in the
country, and the government has identified the tourism industry as one of its priority sectors fordevelopment. The provinces and municipalities of Siem Reap, Kampot, Sihanoukville, and Phnom
Penh in particular have become major conurbations for tourists from all over the world. The greatest

11
12

13

See Piore and Sabel (1984) to comprehend the positive synergies associated with such relationships.
In order to maintain the preferential duties in the United States, the Cambodian government need to have a labour
law, allow the organization of labour unions, and accept audits by the ILO.
According to to the World Travel and Tourism Council (2017), in 2016 travel and tourism generated 988,000 jobs
directly and the industry’s total contribution to employment (including broader effects from investment, the supply
chain and induced income impacts) reached 2,252,500 jobs.

PA P E R 2 C A M B O D I A

21numbers of branded hotels are generally concentrated in Phnom Penh and Siem Reap, where theycater to commercial demand and government needs. Yet there presence of international hotels in
the leisure destinations remains limited, as demand continues to outstrip supply.
One of the most critical factors affecting TNCs’ decision to choose the NEM option in Cambodia
is local regulations, which de facto favour NEMs over FDI. Hotel management and operations areconstrained by land ownership restrictions, and hence, foreign investors have to engage in suchbusinesses through management contracts, franchises or long-term leases of land.
With the rapid growth of international tourism in recent years, the number of hotels in Cambodia hassoared. Between 2018 and 2020, some 2,000 rooms are scheduled for completion, of which 38 percent are in luxury and upscale hotels.14 According to Rosario (2007), the hotel industry has two entry
modes: FDI and NEMs, i.e. management contracts or franchising.
In the global hotel industry, it is well acknowledged that instead of investing in real estate, highdegrees of control and lucrative revenues can be derived by establishing contractual agreementswith local businesses (Quer, Claver and Andreu, 2007). Conceptually, the internalization theory
suggests that contractual agreements allow firms to be more flexible in modifying their decisions in
response to unforeseen changes in conditions in the host countries. For example, high transaction
costs might arise due to cultural differences in host countries (Anderson and Gatignon, 1986).
All of the above explains why firms may prefer to commit fewer resources abroad. This is evident in
Cambodia, as many new hotels are scheduled to open under NEMs. Table 7 shows some examples
of international hotel brands expected to open facilities in Cambodia.

Table 7. Examples of international hotels scheduled to open in Cambodia, 2019–2020
Year

Hotel nameOperator

Owner

Business model

2021

Fairfield by Marriott
Phnom Penh

Marriott International

Royal Field Development
Co LtdManagement contract

2020

Hyatt Regency Phnom
Penh

Hyatt Hotels Corporation

Chip Mong GroupManagement contract

2019

Shangri-La Phnom
Penh

Shangri-La International
Hotel Management Ltd

Oxley Gem (Cambodia),
Ltd

Management contract

2019

Ibis Phnom Penh

Accor Hotels Group

Accor

FDI

N/A

NovotelAccor Hotels GroupManagement contract

Source: AJC.

This section examines three hotels that are scheduled to open in Phnom Penh through NEMs: theHyatt Regency (box 6), the Fairfield by Marriott (box 7) and the Shangri-La (box 8). The specifics of land
regulations and the prominence of these hotel brands have made foreign-domestic arrangements
an important mode of operation.

14

Knight Frank, Cambodia Real Estate Highlights, 1st half 2018.

N O N-E Q U I T Y M O D E S O F T R A D E I N A S E A N – A U G U S T 2 019
P R O M O T I N G N E W F O R M S O F T R A D E B E T W E E N J A PA N A N D A S E A N

22Box 6. Hyatt Regency Phnom Penh
Hyatt Hotel Corporation is a world-class multinational hotel group headquartered in Chicago,
Illinois (United States), managing hundreds of hotels worldwide, owning and managing over
140,000 rooms. It has developed different brands to meet the needs of different types of travellers,
Hyatt Regency, its luxury brand hotels, are mid- to large-scale premium hotels (box table 6-1).

Box Table 6.1. Features of Hyatt Hotel brands
Style

Name

Typical range (rooms)

Flagship brandPark Hyatt

125–250

Luxury brandGrand Hyatt, Hyatt Regency, Hyatt

350–700, 200–2,000, 150–300

Design and boutique hotel

Andaz, Hyatt Centric, Unbound Collection

125–250, 100–250, 125–250

Basic service brandHyatt Place, Hyatt House

120–200, 120–200

All-inclusive resorts

Hyatt Zilarsta, Hyatt Ziva, Miraval

200–600, 200–600, 100–400

Source: Hyatt Hotel Corporation.

In 2016, a management agreement was signed between Hyatt Hotel Corporation and Chip Mong
Group for the first Hyatt Regency hotel in Phnom Penh. The 250-room hotel, which is expected
to open in 2020, will be located in one of the most popular areas of the city, close to the National
Museum and the Royal Palace. Founded in 1982, the Chip Mong Group is a leading conglomerate
in Cambodia, which is involved in many fields and products, such as beer, drinking water and otherbeverages; construction materials, ready-mixed concrete, roof tiles and pipes, cement, cans,consumer products, property development, hospitality and hotels, feed, retail and banking (boxtable 6-2).

Box Table 6.2. Chip Mong Group’s Portfolio
Subsidiaries

SectorPartnership

Hyatt Regency Phnom Penh

Hospitality

Hyatt Hotel Corporation

Khmer Brewery Limited

Drink

N/A

Chip Mong Land

Real estate development

N/A

Chip Mong Industries

Manufacturing

Siam City Concrete Co., Ltd.. (Thailand)

Chip Mong Trading

Distribution

N/A

Chip Mong Feed

Agriculture

N/A

Chip Mong Insee Cement

Manufacturing

Siam City Cement Co.

CROWN Khmer Beverage Cans

Packaging

CROWN Holdings Inc..

Chip Mong Ritta

Construction

Ritta Company Ltd. (Thailand)

Chip Mong Retail

Retailing

N/A

Chip Mong Commercial Bank

Financial

N/ARoyal Field Development

Hospitality

Marriot International (United States)

Source: Chip Mong Group.

In general, three models characterize Hyatt Hotel Corporation’s arrangements across the globe(box table 6-3): (1) franchise model, (2) management model, and (3) ownership and lease model.
The Hyatt Regency Phnom Penh will be operated under a combination of the franchise andmanagement models (box figure 6-1).
…/

PA P E R 2 C A M B O D I A

23Box 6. Hyatt Regency Phnom Penh

Box Table 6.3. Hyatt Hotel Corporation’s business models
FranchiseManagement

Ownership and leased

Revenue

Initial franchise fee + Ongoing
franchise fee + Other service fee

Base fee + Incentive fee

Room rent + F&B sales +Revenue from other services

Properties

248 hotels and 5 all-inclusive
properties

264 hotels and 10
residential properties

35 hotels, 1 residential
property and 8 leased hotels

Source: Matthews (2015).

Based on publicly available information retrieved from Hyatt’s website, the Hyatt Regency Phnom
Penh will be the first Hyatt Regency brand hotel in Cambodia run by Hyatt Hotel Corporation undera mix of the franchise and management models (box figure 6-1).

Box figure 6.1. Hyatt Corporation and Chip Mong Group Agreement

Hyatt Hotel Corporation

Operator,
Franchisor

Sales /
ExportChip Mong Group Ltd

Owner ofproperty,
Franchisee

Hyatt Regency Phnom Penh

Source: AJC.

The details of management agreements signed between Hyatt Hotel Corporation and Chip Mong
Group have not been disclosed. Box table 6-4 summarizes the expected fee system, services, term
and renewal details of the agreement.
…/

N O N-E Q U I T Y M O D E S O F T R A D E I N A S E A N – A U G U S T 2 019
P R O M O T I N G N E W F O R M S O F T R A D E B E T W E E N J A PA N A N D A S E A N

24

Box 6. Hyatt Regency Phnom Penh (Concluded)

Box Table 6.4. Expected fee system, responsibilities, terms and renewal
Fees charged by
Hyatt Hotel Group

Services provided by
Hyatt Hotel GroupFee for Hyatt (Hyatt Regency is
considered a full-service hotel):Franchise fee:
- Application fee: $100,000 or$300 per guest room
- Franchise fee: 6% of grossroom revenues, 3% of grossfood and beverage revenues.
- Other service fees

- Use of the Hyatt Regency
brand name- Maintenance and repair ofhotel- Hiring, training, andsupervising of hotel managers
and employees- Annual budget preparation- Local sales and marketing
efforts- Financial analysis- Food and beverage services

Management fee:- Base fee: an agreement on
percentage of gross revenues
from hotel operations- Incentive fee: calculated
as a percentage of a hotel
profitability measure

All above costs to be approved
and reimbursed by owners.

Fee for running the HyattRegency Phnom Penh:- Operating costs- Capital expenditures

Terms and renewability
Franchise agreement:
The term of Hyatt franchise
agreements is typically
20 years, with one 10-year
renewal option exercisableby the franchisee, assuming
the franchisee has compliedwith franchise agreement
requirements and standards.
Management agreement:
If no renewal options are
exercised by either party,
for Asia and Pacific region,
the average term is 14 years;
if the agreement includes theexercise of extension
options that are in Hyatt’s sole
discretion, the average term is
16 years.

Source: Based on a similar management agreement disclosed in Hyatt Hotel Corporation’s 2016 annual report.

Box 7. Fairfield by Marriott Phnom Penh
Marriott International is a United States-based global lodging company that has 6,500 properties in
127 countries and territories with over 1.2 million rooms (as of September 2017); it is headquarteredin Washington, D.C. Marriott International operates 30 brands internationally (box table 7-1).
Fairfield is an economy chain of hotels targeted at competing with economy hotels globally.
Marriott International generally operates this hotel chain under one of two business models (seebox table 7-2): (1) franchising, licensing, and joint-venture programs, and (2) company-operated
programs through management agreements, and lease agreements.

Box Table 7.1. Chain categories and names of Marriott International brands
LuxurySt. Regis Hotels & Resorts, The Ritz-Carlton, JW Marriott, Edition, The
Luxury Collection, W Hotels, BVLGARI Hotels & Resorts

Upper Upscale

Autograph Collection Hotels, Le Meriden, Tribute Portfolio, Westin Hotels& Resorts, Renaissance Hotels, Gaylord Hotels, Marriott, Delta Hotels,
Sheraton, Marriott Executive Hotels

UpscaleCourtyard, Four Points by Sheraton, Springhill Suites by Marriott,
Residence Inn by Marriott, AC Hotels, Aloft Hotels, Element by Westin

Upper midscale

Moxy Hotels, Protea Hotels, Fairfield, Towneplace Suites

Source: Marriott International Annual Report 2017.

…/

PA P E R 2 C A M B O D I A

25

Box 7. Fairfield by Marriott Phnom Penh
In 2017, Marriott International and Royal Field Development Co. Ltd. signed a management
contract to open the first Fairfield branded hotel in Phnom Penh in 2021. Royal Field Development
is a subsidiary of the Chip Mong Group (box figure 7-1). The hotel has been earmarked to belocated in the administrative centre of Phnom Penh, just 20 minutes from the airport. Facilities will
include a restaurant and a fitness centre.

Box Table 7.2. Marriott International’s business models
Franchising, licensing, or joint
ventureManagement agreement, or lease agreement(together, operating agreement)

Definition

Property owner or other operator
can use Marriott’s brand names andsystems

Management agreement: property owner uses
Marriott’s manager to operate the property
Lease agreement: Marriott leases the hotel fromthe property owner

Features

4,432 franchised and licensed
properties (as of 2017), the majority“select service”

1,959 company-operated hotels (as of 2017), themajority full-service

Source: Marriott International Annual Report 2017.

Box figure 7.1. Fairfield Marriott Phnom Penh

Marriott International

Chip Mong Group Ltd

Operator,
Franchisor

Owner ofproperty,
Franchisee

Fairfield by Marriott Phnom Penh
Sales /
ExportSource: Marriott International Annual Report 2017.

According to the director of new business development of Chip Mong Group, a budget of $100
million will be allocated for the construction and operation of the Fairfield Marriott Phnom Penh.
Using the limited data available, an analysis may be made of a possible fee system for the various
services provided by Marriott and the terms and renewability of the agreement (box table 7-3).
…/

N O N-E Q U I T Y M O D E S O F T R A D E I N A S E A N – A U G U S T 2 019
P R O M O T I N G N E W F O R M S O F T R A D E B E T W E E N J A PA N A N D A S E A N

26

Box 7. Fairfield by Marriott Phnom Penh (Concluded)

Box Table 7.3. Possible fee system, services provided, term and renewal for Fairfield
by Marriott Phnom Penh
Fees charged by MarriottInternational

Services provided by MarriottInternational

Fee charged by MarriottInternational (Fairfield by
Marriott is a select-service hotel)- Hiring- Training- Supervising- Centralized reservation
service- National adverting- Marketing- Promotional services- Various accounting and dataprocessing services

Franchise agreement:
The length of the initialfranchise term is 20 years.
The agreement is notrenewable.

All costs to be approved andreimbursed by owners.

Many agreements permit
owners to terminate theagreement if Marriott does
not meet certain performance
metrics or defined financial
return level.

Franchise fee:
- Application fee and continuing
royalty fees: range from 4% to
6% of room revenues for all
brands.
- Fees for use of centralized
reservation system: $4.24
per guestroom reserved
Management Fee:- Base fee: a certain percentage
of hotel revenues- Incentive fee: based on hotel
profits

Terms and renewability

Management agreement:
Initial periods of 20 to 30 years,
with options for Marriott torenew for up to 50 or more
additional years.

Source: Marriott International Annual Report 2017.

Box 8. Shangri-La Hotel Phnom Penh
Shangri-La International Hotel Management Ltd is a hospitality company owned by Robert Kuok
that is based in Hong Kong, China. Founded in 1971, the company owns and manages about 100
hotels and resorts under various brands (box table 8-1). In 2017, Shangri-La Hotel Management
had 20 hotels owned by third parties through strategic partnerships, which do not require capitalcommitments at the host sites. Another seven hotels are under development in Nanning, Qiantan,
Suzhou (China); Kota Kinabalu (Malaysia); Bali (Indonesia); Jeddah (Saudi Arabia); Phnom Penh
(Cambodia); Melbourne (Australia); and Manana (Bahrain).
The first Shangri-La hotel in Cambodia is expected to open in Phnom Penh in 2019, under amanagement agreement between Shangri-La International Hotel Management and Oxley Gem(Cambodia) Co. Ltd., announced in October 2014. It will be located along the Mekong River facing
Diamond Island. The hotel is expected to have 300 rooms.

Box Table 8.1. List of Shangri-La International Hotel’s brands
Shangri-La Hotels

Five-star luxury properties in premier cities

Shangri-La Resorts

Resorts offering travellers and families relaxing and engaging vacations in exotic
destinations

Traders Hotels

Located in the business hubs in Asia and Middle East, offering services forbusiness travellers

Kerry Hotels

New brand, five-star designed hotels

Hotel Jen

Middle-range hotels in Asia

Source: Shangri-La International Hotel.

…/

PA P E R 2 C A M B O D I A

27

Box 8. Shangri-La Hotel Phnom Penh
Unlike the Fairfield Marriott, the Shangri-La Phnom Penh will be a five-star luxury hotel. ShangriLa organizes its hotel business in three main segments: hotel ownership, property rentals, andhotel management services. Box figure 8-1 presents the strategic partnership between ShangriLa Hotel Management and Oxley Gem (Cambodia).

Box figure 8.1. Management Agreement between Shangri-La Hotel Management
and Oxley Gem (Cambodia)

Shangri-La Hotel

Oxley Gem (Cambodia)

Operator,
Franchisor

Sales /
ExportOwner ofproperty,
Franchisee

Shangri-La in Phnom Penh

Source: Shangri-La International Hotel.

The local partner, Oxley Gem, was founded in July 2013. Its main activities include retail, hotel,
residential and commercial in Phnom Penh. Oxley Holdings Ltd., a Singapore lifestyle property,
owns 75 per cent of Oxley Gem and 25 per cent is owned by Worldbridge Land (Cambodia) Co.,
Ltd., a leading property company in the country. Oxley Gem is the developer of the “Peak”, amixed-use development project occupying approximately 12,609 square meters in the heart ofPhnom Penh. It comprises two residential towers, one commercial tower with offices, and the
new Shangri-la hotel.

N O N-E Q U I T Y M O D E S O F T R A D E I N A S E A N – A U G U S T 2 019
P R O M O T I N G N E W F O R M S O F T R A D E B E T W E E N J A PA N A N D A S E A N

28

3. OPPORTUNITIES AND CHALLENGES
This section analyses the opportunities and challenges Cambodia faces in promoting and capitalizing
on economic synergies from the establishment and expansion of NEMs (figure 2). The development of
NEMs with TNC linkages will offer local industries a number of opportunities. Although the potential
is huge, the realization of economic benefits from these agreements is not without challenges.

Figure 2. Opportunities for NEMs in Cambodia

Local companies/
Local employees

Agreements between
TNCs and local firms

TNCs

Opportunities

Challenges
Contract Farming
Cassava cultivation

Competition among

Non-equity modalities in Cambodia

Job creationneighbouring countries

Subcontracting
Garment industry
Job creation
Management know-how transfer

Need localization

Management contracts and Franchising
Hotel industry
Substantial investment
Management know-how transfer

is required from locals
Training by TNC

Source: AJC.
Note: Major NEM industries only.

The issues faced by local firms relate to contractual agreements, industry characteristics and
TNC strategies, among other matters. Both opportunities and challenges can be found for each.

PA P E R 2 C A M B O D I A

29The issues can be grouped in four categories: continuity (footlooseness), NEM characteristics,
capacity-building, and local firms’ initiatives and local embeddedness (table 8).
In their quest to take advantage of the opportunities, local NEM firms will also face challenges if theyseek to strategically adopt TNCs’ know-how and technological skills for their use (table 8). They may
also build their capacity to deal with these challenges and even expand their businesses by using
TNCs’ GVC networks. In addition, local NEM firms can use their supply chain experience with TNCs
to eventually export directly to foreign markets.

Table 8. Opportunities and challenges facing local firms engaged in NEMs
Opportunities

Typical industries
concerned

Challenges

Continuity (footlooseness) issues
Easier to find TNC partners both in andoutside the country through, for example,
matching events (since TNCs do notdirectly invest into the business).

Garments &FootwearEasier for TNCs to terminate thecontract, and long-term relationship is
not guaranteed, if quality of services orgoods do not meet TNC’s standards andif local firms in other countries are morecompetitive (e.g. competitors in the IT-BPO/
BPM industry in India or Viet Nam).

Tourism

Demand and markets are outside thecountry (e.g. customers of hotel industry,and subcontracting products).
Demand from TNCs may change dependingon the interest and taste of their clients(e.g. changes in trends in tourism
destinations, trends in furniture and homedecor).

Agriculture

Not easy for local firm to build further
capacity, apart from that gained throughreceiving orders from customers, as under
NEMs they receive only relevant knowhow at most (thus, upgrading value chain
activities through local firms’ efforts alone
is not easy).

Local firms can adopt foreign design andmanagement approaches and thus do
not need to think about local values andlocalization strategies (that is, it is quicker
for local firms to make a profit by using
TNCs’ business models).

Tourism

Local firms may lose their initiative, design
ability and traditional values, apart fromdesigning for limited products (e.g. local
firms may follow TNCs business models
of hotel industry as they do not need to
implement localization strategy).

Local firms and franchisees should
consider localization model carefully, so ittakes a longer time for local firms to makeprofits. Therefore, they seek to initiative
for their operations or activities leading toembeddedness.

ConvenienceStore

In the short term, franchisees or local firms
may face difficulties in adapting TNCs’
original strategies to local tastes and needto learn through experience until they
become part of the community (e.g. in theretail industry, franchisees need to localize
the TNCs’ strategy to meet local customers’
demands that TNCs are not aware of).

NEM characteristics issues
Easier to enter new market or new areaeven where demand is not present in the
country. Skills, talents or resources thatare available in the country but are notrequired there can be usefully utilized
outside the country.

Capacity-building issues
Easier for local employees to work inbusiness activities because of low skills.

Initiatives and local embeddedness issues

Source: AJC.

30

N O N-E Q U I T Y M O D E S O F T R A D E I N A S E A N – A U G U S T 2 019
P R O M O T I N G N E W F O R M S O F T R A D E B E T W E E N J A PA N A N D A S E A N

3.1 Ownership
NEM operations provide the host country and local firms with both opportunities and challenges.
Even if foreign ownership is not directly achieved through equity, TNCs can still exert quasiownership control over local firms through contracts by means of providing important inputs, accessto markets, required technology and income sources. If TNCs can find local firms that offer the sameor better services than their own affiliates, they are likely to establish contracts with local firms andenter NEM arrangements.
In Cambodia, there are potential opportunities for local firms to have contractual agreements with
TNCs in a wide range of industries including cassava, clothing and hotels. Garments have been
the chief export of Cambodia for over a decade now, the country’s history and culture make hotels
attractive for tourism, and the climate and soil is ideal for cassava. Capabilities are already evolving
in these three industries. Whereas the government is targeting the cassava and hotel industries tobecome world-leading industries in the future, the garment industry already shows considerable
promise for upgrading. Although local firms have already emerged to generate NEM synergies fromthe expansion in these industries, there is a need to coordinate better the attempt to boost local
ownership rates in all three.
Although directly or jointly owned operations offer nationals room to expand into GVCs, the ability
to remain connected in value chains requires constant upgrading, so as to offer TNCs sufficiently
competitive options. TNCs typically make decisions on whether to produce their raw materials
and intermediate components in-house or to purchase them from suppliers on the basis of a wide
range of factors. One key factor is the existence or the potential emergence of competent suppliers
within Cambodia. TNCs are likely to contract out supplies to local firms if they benefit economicallyfrom such outsourcing, relative to producing them in-house or importing them from abroad.
Such contractual arrangements can benefit host countries through the expansion of linkages into
countries. Thus, there are potential opportunities for local firms in the garment, electronics, rice,
tobacco and hotel industries, as well as others that tend to be the focus of contractual agreementswith TNCs.
However, these opportunities can only be taken advantage of effectively if local firms acquire anddevelop the requisite capabilities to participate in such contractual relationships. These capabilities
include management, inventory and quality control systems and production technology. There will
also be a pressing need to sustain rapid technological upgrading among national NEM firms forthem to remain connected to GVCs, as well as to move to higher value added activities, which will
become inevitable once unemployment falls and production costs rise. This is how Foxconn from
Taiwan Province of China managed to transform its linkage with Apple from being an OEM to taking
control of the design and R&D of the components it supplies (Sturgeon, 2002). Flextronics andCelestica are other examples. Also, if local NEM firms do not remain competitive – for example, in
supplying materials to garment and electronics firms, and in hotel franchises – TNCs will switch
suppliers or terminate their branding agreements. In the hotel industry, established brand holders
have terminated contractual agreements with host-country owners when their standards werecompromised. Examples include the termination of contracts by Park Hotel and Holiday Inn in
Malaysia. Hence, the franchise modality is often vulnerable to the vicissitudes of volatile demand
fluctuations. In industries such as garments, TNCs often engage a few suppliers simultaneously sothat orders filled by competent and successful firms can compensate for orders terminated fromunsuccessful firms (Rasiah, 2009a, 2009b).

PA P E R 2 C A M B O D I A

31

3.2 Control
Even though foreign firms do not directly own NEM firms, more often than not they control them.
Control takes the form of buyer firms being able to dominate pricing decisions, assessment of qualityand determination of lead times. In CMT operations in the garment industry, Cambodian NEM firms
are completely reliant on buyers with respect to lead times, specifications and materials sourced(Rasiah, 2009a; 2009b). Similarly, in the hotel industry, franchise holders determine the terms andconditions under which NEM firms must operate.
The positive side of these conditions includes the pressure imposed by TNCs on NEM firms to
upgrade; that said, NEM firms always remain exposed to contract termination if TNCs are notsatisfied with their supply or if more capable suppliers emerge. Such circumstances often arise
when TNCs upgrade and thereby require that their suppliers also upgrade their operations.
Examples of NEM firms that have met such upgrading requirements include Flextronics, Celesticaand Foxconn, which have all developed R&D capabilities to undertake design and R&D involving
components, both completely knocked down and completely built-up units for their buyers (Rasiah,
1994; Sturgeon, 2002). Such circumstances can also emerge if the TNCs find other suppliers inother countries to be more efficient or if those other countries provide better access to markets.
Nevertheless, NEM firms that catch the wave of competition to upgrade provoked by major export
markets enjoy the opportunity to move up the value chain, and even – as in the Republic of Korea
and Taiwan Province of China – to leapfrog incumbents (Hirshman, 1970; Amsden, 1989; Kim, 1997;
Amsden and Chu, 2003). Samsung Semiconductor, which started operations in 1975, and Taiwan
Semiconductor Manufacturing Company, which started operations in 1987, now lead the memory
and logic chip value chains respectively (Rasiah, Yap and Yap, 2015). In Cambodia, the science,technology and innovation (STI) infrastructure will require massive transformation to bring aboutsuch developments (see Rasiah, 2018).
If buyer TNCs’ subsidiaries are located in Cambodia to procure inputs from NEM firms, the control
those TNCs exercise can be stronger than otherwise. In LDCs, such TNCs often make efforts to train
the workforce of host-country NEM suppliers or sometimes invest in skills development centres todevelop the host country’s human resources or implement rooting strategies for its own expansion(Rasiah, 1995). The host government often plays a central leveraging role to initiate and coordinate
such developments, as seen in Singapore15 and Malaysia.16 The garment and electronics industries
in Cambodia can benefit from adopting such a framework. TNCs often adopt such a function tostrengthen their value chain globally.

15
16

Singapore’s Economic Development Board successfully played such a role (Rasiah and Yap, 2016).
The Penang Skills Development Center, established in 1989, is financed together with TNCs (Rasiah, 1995).
Hirschman (1970) actually emphasized this point when discussing the role of host-country governments instimulating backward linkages.

32

N O N-E Q U I T Y M O D E S O F T R A D E I N A S E A N – A U G U S T 2 019
P R O M O T I N G N E W F O R M S O F T R A D E B E T W E E N J A PA N A N D A S E A N

3.3 NEM modalities and industries
Particular modalities are often linked to specific industries. For example, in Cambodia both contract
farming and subcontracting characterize cassava cultivation, whereas subcontracting dominates
garment manufacturing, and management contracts and franchising dominate the hotel industry.
There are TNC-owned subsidiaries in Cambodia that have entered contractual agreementswith customer firms outside the country in industries such as cassava production and garment
manufacturing. In such cases, these subsidiaries create offshore outsourcing with TNC vendors,
which has created opportunities for local employees to be integrated in subsidiaries’ businessactivities; however, it does not guarantee capacity building for local firms, which requires internal
efforts. Local NEM firms that have contractual agreements with TNCs’ subsidiaries in the cassava
and garment value chains encounter offshore outsourcing opportunities (figure 1). Through thismodality, local firms have potential opportunities to receive orders from customer TNCs locatedoutside the country.
Other modalities characterize the hotel and retail industries. Most brand holders in the hotel industry
use management contracts and franchising. Examples include the Hyatt Regency Phnom Penh andFairfield Phnom Penh (with Chong Ming Group as the local partner), and Shangri-La (with Oxley
Gem as its local partner). The prohibition of foreign ownership of land is the main leveraging pointthat has allowed the participation of local partners. Such management contracts and franchisingmodalities should be promoted further as foreign brand holders have demonstrated a strong global
marketing ability to attract tourists worldwide to Cambodia as a country and to the country’s hotels.
However, because brand holders impose stringent conditions to protect their brands, national owners
must keep their operating standards high in order to remain attractive to the brand holders. Indeed,throughout ASEAN, management contracts and franchise agreements are the typical modalities
engaged in by TNCs in the hotel industry, though there are also hotels that are owned jointly withforeign capital and managed directly by foreign hoteliers in countries such as Malaysia and thePhilippines. The generation of tourism synergies from the promotion of NEMs in the hotel industry
also requires that the government improves infrastructure (including IT support) and security
throughout the country.

3.4 Localization strategies
Governments have often launched localization strategies when foreign TNCs engage in manufacturing
for domestic markets. This is how Indonesia, Malaysia and Thailand initially promoted local suppliersin the automobile industry (Rasiah, 2010). However, such opportunities have largely fizzled out since
the onset of deregulation in the region (following the launch of the ASEAN Free Trade Area in 1992
and later the ASEAN Economic Community in 2015) and around the world (by the World Trade
Organization in 1995). Nevertheless, governments still enjoy the space to promote linkages withnational NEM firms without infringing the Trade-Related Investment Measures (TRIMs) instrumentof the WTO, which prohibits differential trade treatment on the basis of ownership (Rasiah, 2005).
Also, as was done in Singapore, Indonesia and Vietnam in the past, the Cambodian government canuse leveraging strategies based on its bargaining strength to impose conditions for TNCs to train
national workers and to source from capable NEM firms. This is an effective tool when the TNCs
enjoy incentives or benefits from sales in the domestic market. The cassava, garment and hotelindustries can be targeted for the development of NEMs as suppliers; they can also export once they
develop sufficient capabilities.

PA P E R 2 C A M B O D I A

33

TNCs’ efforts to outsource a part or the whole of any goods or services, or even part of their GVC
stages, to a host country increase when the TNCs look for nearby suppliers so as to attain zero
inventory levels. This is the case when TNCs seek to reduce transport costs and to coordinate
effectively the implementation of just-in-time inventory control systems, as well as to enhance theapplication of kaizen (continuous improvement) activities. This is why foreign TNCs have developed
nearby suppliers in the electronics and automobile industries, though unless local capabilities arebuilt up, foreign suppliers often fill the void (Rasiah, 1994). In the garment and electronics industries
Cambodian NEM firms can improve the quality of their silk fibre, electronics parts (e.g. plastic
injection moulding) and textile manufacturing activity, both to supply TNCs in the country and toexport. National NEM firms should undertake initiatives independently to integrate their operations
and activities with TNCs’ overall production networks and GVCs.
The challenges include the need to develop human capital and the need for local firms to undergo
massive technological upgrading to meet international standards. Local firms need to have aminimum level of management skills, including autonomous acquisition initiatives, technologicalskills and capacity, depending on the industry, as TNCs’ support cannot be taken for granted. In
addition, TNCs’ decisions about selecting local partners and terminating contracts with them areoften unpredictable, since such contracts are typically not guaranteed over the long term and canbe ended anytime. Two characteristics of NEMs are that demand for particular products or services
can come from subsidiaries located in different places and that such demand is not predictable. In
the absence of control over demand, local firms remain vulnerable to market fluctuations, despite
their acquisition and development of NEM capabilities.
In industries with franchising agreements, operations or activities are characterized by two main types
of identity. On the one hand, in the hotel industry TNCs’ operations and activities are standardized at
the international level but at the same time tailored to synergize with local hospitality. The merging of
global and local features has been referred to as glocalization. Hence, firms’ operations or activities
do not need to be spearheaded through a deliberate localization strategy. Local management caneventually build the capacity to run local hotels, which can seek to expand regionally once theexpertise brought by international hotel chains standards has been transferred and modified toinclude the unique features of local hospitality.
TNCs may terminate agreements with local firms when more efficient suppliers capture theirbusiness. Efforts to discourage such behavior require the successful implementation of a profoundlocalization strategy by the government, one that is cognizant of the strategies of both TNCs andlocal firms – even in NEM operations. Local firms should also take initiatives independent of TNCs
to integrate their operations and activities into TNCs’ overall production networks and GVCs. The
government will need to distribute information in Khmer underscoring what is allowed under
existing contractual practices and laws, as well as what is required by international trading practices
and activities that the government is promoting.

3.5 Basic and science, technology and innovation infrastructure
The infrastructure in Cambodia has advanced considerably since the civil war ended, and trade
shipment, road transport and the movement of people have all improved to facilitate tourism
and trade. These developments offer great potential to stimulate additional tourism, as well as
manufacturing and agriculture, mining and services. However, transportation bottlenecks that haveemerged in Phnom Penh and the hinterland connectivity still need considerable development. In
addition to improving the basic infrastructure, the government will also need to develop science,

34

N O N-E Q U I T Y M O D E S O F T R A D E I N A S E A N – A U G U S T 2 019
P R O M O T I N G N E W F O R M S O F T R A D E B E T W E E N J A PA N A N D A S E A N

technology and innovation (STI) infrastructure if it hopes to stimulate upgrading in NEMs (seeRasiah, 2018).
There are no science parks or incubators in Cambodia to support the scaling of innovations, especiallyin cassava farming. Similarly, training centres in the country lack coordination and the appraisal
capacity to support farm and firm upgrading. Such support will be critical if the government is torealize its ambition to make Cambodia a world-leading producer of cassava.

4. POLICY IMPLICATIONS
Increasing trade and openness to investment within ASEAN offers enormous opportunities for
Cambodia in both directions, inward and outward. The Comprehensive and Progressive Agreement
for the Trans-Pacific Partnership has already forged ahead, and the Regional Comprehensive
Economic Partnership is under negotiation for earlier-than-planned conclusion. These megaagreements not only deregulate trade further but also increase the attractiveness of ASEAN. ASEAN
is among the most open and integrated regions in the world, seeing rapid expansion of trade as well
as FDI inflows and outflows.
Within the overall policy framework of NEMs discussed above, the Cambodian government should
consider evaluating the state of NEMs and NEM-related operations in the country as the foundation
for their promotion. For an evaluation methodology, AJC proposes the checklist in table 8, which isbased on the corporate code of conduct of the Tokyo Chamber of Commerce and Industry. It provides
direction for the Cambodian government to check whether NEM agreements and operations comply
with and are in sync with international standards, taking into account all stakeholders — NEM firms’
foreign clients, local NEM-based firms, local NEM subcontracting firms, and local workers.
Typically, firms that are connected to buyer firms owned fully or jointly by foreign TNCs are reliant
on export markets, and thus, have been the most vulnerable to external shocks such as thoseexperienced by Malaysia, the Philippines, Singapore and Thailand during the global financial crisisof 2007–2008. The adverse impact of reliance on TNCs has also been felt in terms of the repatriationof profits by TNCs to their home countries. Local NEM firms can help reduce the repatriation of
profits by capturing some segments of TNCs’ value chains. The development of resilient local NEM
firms, especially in contract cassava farming, subcontract garment manufacturing, and hotels using
management contracts and franchising, will help build the reservoir of domestic capital that can bemobilized for internationalization.
In addition, fostering NEM firms can create more opportunities to link the country with neighbouring
countries (e.g. Thailand, China, the Lao People’s Democratic Republic, Viet Nam and Malaysia)
through becoming part of value chains. Focusing the country’s business objectives on growth areasof the ASEAN region, rather than countries outside the region, is an important and reasonablegrowth strategy. Hence, government policy should consider the promotion of NEMs as one of thecritical economic growth strategies. There are at least eight strategies that the government, TNCs
and local NEM firms can consider and coordinate to facilitate rapid economic growth and structuralchange in Cambodia:
1. Enhancing the capability of local firms
2. Improving investment regulations
3. Promoting and upgrading skills and expertise
4. Enhancing basic infrastructure
5. Building STI infrastructurePA P E R 2 C A M B O D I A

35

6. Promoting connectivity and coordination
7. Promoting integration into global markets
8. Mainstreaming sustainable development

4.1 Enhancing the capability of local firms
Local firms’ capabilities in both technological and management skills should be enhanced so thatthey can meet TNCs’ current and potential demand, as well as help spearhead the transformationof the economy from a concentration on low value added activities to a concentration on highvalue added activities. Once they develop the essential capabilities, they can upgrade them toenjoy higher value addition in their operations, which will then open access to potential customers
through TNC networks, as well as domestic firms, and for them to create their own businessnetworks in the long run.

Firm level
At the firm level, the government needs to support the implementation of continuous internal
training for employees in local firms. They can appropriate synergies from foreign training bodies,such as the German Technical Cooperation Agency and the Japan International Cooperation Agency,
which have deepened their support operations in Cambodia since the late 1990s (Rasiah, 2009a,
2009b). However, local firms must also train their employees for higher-skilled jobs. Direct orindirect financial support for training will help local firms focus on internal training tailored to theirown needs to meet demand from their client TNCs.17 The government should consider imposing
on firms a levy of a certain percentage of corporate income and offering an equivalent government
complement, for example, 1 per cent each, to be used for internal training. The cassava, garment
and hotel industries would benefit enormously from such an initiative. In light of the transition to
Industry 4.0 across the world, training should also address the potential for the use of digitalization,such as digitally controlled smart robots.
Industrial associations should promote a learning centre where local firms can learn about NEM
operations and activities. They need to be collectively aware of changes in demand rather thanfocusing solely on current operations. The government can support these firms as a facilitator,
connecting firms in an industry with the essential organizations and ministries. Programs at thecentre should cover all aspects of NEMs in forming, executing and evaluating contracts, as well as
NEM operations.
Create an enabling environment for local firms to facilitate their globalization and localization(glocalization) strategies. Local firms need to become familiar with TNCs’ changing strategies and tolearn customers’ strategies. Using its bargaining position as the authorization body, the government
can support different types of NEMs by using leveraging strategies to induce TNCs to stimulate
the upgrading of local firms. Incentives and preferential access to domestic institutions can be theleveraging instruments.

Industry level
The government should establish and strengthen the environment for competition and cooperation
between local firms and foreign TNCs through which local firms in many industries other than

17

This was the case of the Malaysian electrical and electronics industry in the 1990s (see Rasiah, 1995).

36

N O N-E Q U I T Y M O D E S O F T R A D E I N A S E A N – A U G U S T 2 019
P R O M O T I N G N E W F O R M S O F T R A D E B E T W E E N J A PA N A N D A S E A N

garments can become partners of foreign firms. Local firms need to strengthen their operations
and activities, which requires continuous improvements in their capabilities to be able to sustain
competitiveness. Competing with local and foreign firms in Cambodia gives local firms the potential to
become competitive enough to participate as TNCs’ partners or vendors. Therefore, the government
should create a positive environment for firms to compete with others while cooperating with one
another so that NEM industries as a whole can become more and more competitive over time.
The government should promote local firms to upgrade into higher value added segments of GVCs
to stimulate structural change in the country. Shifts in demand by TNCs and changes in TNCs’
strategies in Cambodia derive mostly from TNCs’ efforts to reduce costs. The government canpromote local firm capabilities explicitly through supporting innovation and technical upgrading.
Only then can those firms sustain NEM partnerships with foreign TNCs over the long term.
The government should establish an intellectual property rights body in the country to encourage
local firms in acquiring technologies required to perform as high value added NEM operators.
Competition to become a TNC’s NEM partner is high. Some competitors may offer higher-quality
services at lower prices. Particularly if the services offered by local firms are standardized and are
not required to localize, competition will be much more severe. Innovations flourish only whereintellectual property rights are protected (Schumpeter, 1934). The country is still underdevelopedin this respect, classified as stage 1 (the lowest in terms of development) in the World Economic
Forum’s Global Competitiveness Index 2016–2017. It will also be pertinent for the government to
identify and promote geographical indications in labeling so that agricultural products such as
cassava can be traded at premium prices.
Shield local employees from unreasonably exploitative conditions. Doing so would also help improve
productivity. Local employees need protection through some kind of labour policy for the industry if
working environments or conditions are not healthy. As a signatory to the ILO’s covenants, Cambodia
has in place the general legal environment to shield the labour force from exploitation. However,there is a critical need to ensure that these covenants are enforced to prevent the occurrence of
breaches, such as those reported by the GMAC.

4.2 Improving investment regulations
NEMs are used by fully nationally owned firms and by joint ventures with national and foreign equity.
Thus, refinement of regulations to attract foreign and domestic investment is necessary to stimulate
NEM activities in Cambodia. An active and vibrant environment where NEM firms function alongsideforeign firms and joint ventures will be important to foster rapid economic growth and structuralchange in the country.
A 2014 report by the Economic Research Institute for ASEAN and East Asia (ERIA) noted that
regulations on the approval of licenses for small and medium-sized firms in Cambodia are extremely
cumbersome and often involve a long and tedious process, thus causing delays. The government
should rationalize approvals for these firms to be consistent with its practice for large firms, forwhich approvals have been expedited. In addition, since large foreign firms are primarily found onlyin the resource-based and garment industries, it would be useful to attract similar foreign and jointventure firms to other activities so that they can play an active role in other critical sectors, such as
IT and transport. The same NEM arrangements can be found in contract farming of cassava and in
franchised hotels and hotels run through management contracts.

PA P E R 2 C A M B O D I A

37

4.3 Promoting and upgrading skills and expertise
Economic development in any LDC requires, inter alia, massive upgrading of skills and expertise.
Cambodia is no different. Unfortunately, skilled and semi-skilled labour shortages have hampered
the activities of garment firms in Cambodia (Rasiah, Gopala and Sanjivee, 2013; Rasiah, Gopala andRatnavelu, 2015). NEM firms and foreign and joint-venture firms can certainly pursue upgrading
strategies if the requisite skills and expertise are in place. The following recommendations can go along way toward making this possible.
The government should build more schools to make primary education (for children ages 7 to12) compulsory. Although this is the age group typically targeted for universal education, as
recommended by the World Bank, making secondary schooling mandatory will be useful to ensurea strong supply of basic labour that is literate enough to perform semi-skilled jobs. This labour
force can be further trained to undertake skilled tasks through learning by doing, in-house training
and exposure to training in technical and vocational institutes. Foreign organizations that offer
official development assistance – e.g. the Japan International Cooperation Agency and the German
Technical Cooperation Agency – can complement national institutes to strengthen these training
activities.
Cambodia has seen a significant emigration of skilled and professional personnel, especially toThailand (Rasiah, Vignes and Sanjivee, 2013). Not only are the languages of Cambodia and Thailand
close, but western and northern Cambodia borders Thailand and has a long history of Indo-Chinese
linkages. Efforts must be made to bring back skilled personnel through attractive brain gain andbrain circulation policies such as those employed in China, the Republic of Korea and Taiwan Provinceof China. Although the Cambodian diaspora could be offered permanent resident and citizenshipstatus, the government might also consider easing and simplifying work permits for foreign experts
as a way to strengthen the management of firms in the country.

4.4 Enhancing basic infrastructure
The growth of NEM-based exports, employment and revenue can be solidified if the government
develops the basic infrastructure where NEM firms operate. Ease of registration; access to finance,skilled personnel and water and power; and provision of security are important to lower the cost of
doing business and to operate efficiently (ERIA, 2014). Local administrative agencies must help solve
the problems that these firms face. For example, the lead time facing garment firms in Cambodia islonger than that facing firms in Bangladesh, China, Malaysia, the Philippines and Viet Nam (Rasiah,
Gopala and Sanjivee, 2013).
With good infrastructure, hotels can benefit from an increase in tourist visits to scenic locations, andthe cassava, garment and other industries can enjoy low-cost and quick access to essential services.
Access to the internet also connects potential customers to hotels and the tourist attractions thatsurround their locations. The focus on basic infrastructure should not be confined to just road,railway, sea and air transport, but should also include improvements in water and power supply,
schools, telecommunication and health centres.

38

N O N-E Q U I T Y M O D E S O F T R A D E I N A S E A N – A U G U S T 2 019
P R O M O T I N G N E W F O R M S O F T R A D E B E T W E E N J A PA N A N D A S E A N

4.5 Building science, technology and innovation infrastructure
Whereas efficient basic infrastructure is critical to boost the efficiency of firms, the developmentof STI infrastructure is important to stimulate firms’ participation in innovative activities, including
information and communication technology (ICT) and biotechnology.18 Cambodia should start bydeveloping the infrastructure for the latter two activities, offering complementary support for a wide
range of industries. Not only clothing and agricultural products, but also outsourcing industries aswell as a wide range of other industries could benefit strongly from this infrastructure.
In addition, a bioscience park could be developed to support the incubation and enhancement ofinnovation capabilities in domestic agriculture. The focus should be on rice, cassava, coffee andother important crops for which Cambodia has the potential of raising value added and becoming aworld-leading exporter. Selected national universities should also participate in supporting R&D andin training researchers and entrepreneurs to raise value added in farming.
Training centres may focus on raising the skills of workers for the garment industry. Training in
cutting-edge skills, such as those proliferating from digitalization and smart machines should
become the basis of training modules. Phnom Penh should be the main centre of these training
institutes, with subsidiary outlets in Sihanoukville and major cities in other regions.

4.6 Promoting connectivity and coordination
Support for NEM firms from the government and industrial associations is not sufficient to stimulatetechnological upgrading. There must also be strong connectivity and coordination between basic and
STI infrastructure, and the NEM firms. Whereas the emphasis on basic infrastructure will help firms
establish more efficient business practices, shorten lead times and lower costs, the developmentof STI infrastructure – science parks, industry-university linkages and standards organizations –along with good-quality, technically skilled university graduates will help stimulate the generation of
innovation synergies in firms. This is critical if firms are to upgrade technologically so as to sustain
their competitiveness, and if they are to participate in high value added activities (Rasiah, 2007).
The government and industrial associations need to work together to solve collective action problems
in basic and STI infrastructure. The strengthening of connectivity and coordination between firms andthe organizations will also stimulate institutional upgrading to accelerate economic development
and structural change in Cambodia.

4.7 Promoting integration into global markets
NEM firms can make ASEAN more integrated. The ASEAN Economic Community offers low tariffs ofzero to 5 per cent in almost all product lines. Through this arrangement, NEM firms enjoy preferential
treatment in ASEAN markets so long as 40 per cent of their cumulative value added is recorded
within the region (rule of origin). The same is true for foreign TNCs. In addition, Cambodian NEM
firms enjoy preferential trade treatment provided by developed countries through the Everything but
Arms clause of the EU19 and preferential access to the United States market. Efforts to maximize
such preferential treatment include reducing bureaucratic red tape in customs controls involving

18
19

For a detailed account of STI infrastructure in ASEAN members, see Rasiah (2018).
As of February 2019, this special arrangement was threatened to be terminated.

PA P E R 2 C A M B O D I A

39trade and registering firms that seek to import and export. It is also important for Cambodia tooffer employment permits to foreigners who have the requisite qualifications. It may also be worth
introducing textile engineering at selected national universities to generate the professionals who
are required in order to stimulate upgrading in the country.

4.8 Mainstreaming sustainable development
The adoption of the Sustainable Development Goals by the United Nations provides opportunities
for the government to shape the conduct of NEM firms in ways that mainstream such goals. In
particular, workers’ and human rights, and the environment are key elements that require reshaping.
Environmental and labour standards have become important in bilateral trading relationships.
Cambodia has already ratified the critical international labour covenants – unionization of workers
and freedom of association, among others – which was a condition that the United States imposed inorder to enjoy preferential access to its market. Export-oriented NEM firms in the garment industry,
such as Pactics, observe labour standards imposed as conditions by TNCs and other buyers.20 Rasiah(2009a, 2009b) provides evidence that the technological capabilities of garment-exporting firms in
Cambodia is quite high. Similarly, established hotel brands require their hosts to observe suchstandards. Such monitoring by developed country buyers has increased over the years. According
to the UN’s guidance,21 human rights due diligence “should cover adverse human rights impacts
that the business enterprise may cause or contribute to through its own activities, or which may bedirectly linked to its operations, products or services by its business relationship” (p. 17).
Pressure on environmental standards has also mounted because of climate change, and Cambodia
has ratified the 2015 Paris Accord (and the subsequent time-deferred version of the Marrakech
Proclamation in 2016) under the United Nations Framework Convention for Climate Change (Rasiah
et al., 2018). Hence, the government should raise awareness, as well as work towards the formationof a major standards organization to coach and certify NEM firms.
To help NEM firms to export, expand employment, and upgrade technologically, the government
should consider implementing and strengthening the regulatory framework. This initiative should
start with a profound evaluation of the critical policy pillars shown in table 9 as the first step for theGovernment to decide whether it should establish a policy framework for NEM promotion and, if so,what, how and to what extent.

20

21

See Support the Guardian (2015), “Cambodian textile firms sewing the seeds of change”, downloaded on
10 December 2018 from https://www.theguardian.com/global-development/2015/dec/29/cambodia-textile-firmgarment-industry-workers-rights.
United Nations (2011), “Guiding Principles on Business and Human Rights: Implementing the United Nations‘Protect, Respect and Remedy’ Framework”, United Nations Human Rights Office of the High Commissioner,
New York and Geneva.

40

N O N-E Q U I T Y M O D E S O F T R A D E I N A S E A N – A U G U S T 2 019
P R O M O T I N G N E W F O R M S O F T R A D E B E T W E E N J A PA N A N D A S E A N

Table 9. Checklist for NEM agreements and operations to maximize benefits andminimize costs
Whether there is an agreement on contract performance
Whether there is an agreement on contract terms (durations)
Compliance withlaws

Whether there is an agreement on contract termination and its
process
Whether there is an agreement on contract arrangements (additional
contracts) and its process
Whether there are rules on non-discrimination

Respect for humanrightsWhether there are rules on basic human rights
Whether there are rules on harassment (whether a power balance
exists between local NEM firms and TNCs)
Whether there are guidelines on air pollution by local NEM firms

Environmental
considerations

Whether there are guidelines on water contamination by local NEM
firms
Whether there are guidelines on environmentally friendly goods orservices by local NEM firms
Whether there are employment rules (laws) on ages under the NEM
agreement
Whether there are employment rules (laws) on gender under the
NEM agreement
Whether there are guidelines on a safe and pleasant work
environment for local NEM firms
Whether there are employment rules (laws) on working environments
under the NEM agreement

Government
policy on NEMs

Whether there are employment rules (laws) on working conditions
under the NEM agreement
Work environment

Whether there are employment rules (laws) on working hours under
the NEM agreement
Whether there are employment rules (laws) on taking holidays under
the NEM agreement
Whether there are employment rules (laws) on treatment of absence
under the NEM agreement
Whether there are employment rules (laws) on maternity-related
leave under the NEM agreement
Whether there are guidelines on provision of a support system ofchildcare and nursing care
Whether there are employment rules (laws) on terminating
employment contracts under the NEM agreement
Whether there is a program that local NEM firms can take to improvetheir technology/capacity

For local firms’
development

Whether there is a program that local NEM firms’ employees canlearn from
Whether there is a program that local NEM firms can take tounderstand NEM policy
Whether there is a program that local NEM firms can take tounderstand business environment of the industry

Subcontractors andsuppliers

Whether there are guidelines for similar NEM policies for local
subcontractors and suppliers…/PA P E R 2 C A M B O D I A

41Table 9. Checklist for NEM agreements and operations to maximize benefits andminimize costs
Earning the trustof customers andconsumers
For TNCs that
the Cambodian
government
should address

Whether there are guidelines for TNCs to provide correct informationon their products or services
Whether there are guidelines for TNCs to respect free and fair trading
rules

Mutual growth withpartner companies

Whether there are guidelines for TNCs to provide relevant information
required for trading
Whether there are guidelines for TNCs to develop relationships basedon trust with local NEM firms

Coexistence withlocal communities

Whether there are guidelines for TNCs to establish and maintain agood relationship with local community where local NEM firms arelocatedSource: Adapted from “Corporate Code of Conduct, the Third Edition”, Tokyo Chamber of Commerce and Industry (2013).

42

N O N-E Q U I T Y M O D E S O F T R A D E I N A S E A N – A U G U S T 2 019
P R O M O T I N G N E W F O R M S O F T R A D E B E T W E E N J A PA N A N D A S E A N

PA P E R 2 C A M B O D I A

43

REFERENCES
Amsden, A.O. (1989), Asia’s Next Giant: South Korea and Late Industrialization, New York: Oxford
University Press.
Amsden, A.O., and Chu, W.W. (2003), Beyond Late Development: Taiwan’s Upgrading Policies,
Cambridge: MIT Press.
Dolan, C., and Humphrey, J. (2000), Governance and trade in fresh vegetables: The impact of UK
supermarkets on the African horticultural industry. Journal of Development Studies, 37 (2):
147–176.
Eaton, C., and Shepherd, A. (2001), Contract Farming: Partnerships for Growth. Food and Agriculture
Organization of the United Nations, Rome.
Edquist, C., and Jacobssen, S. (1987), The integrated circuit industries in India and South Korea in aninternational techno-economic context, Industry and Development, 21: 1–62.
ERIA (2014), ASEAN SME Policy Index 2014 – Towards Competitive and Innovative ASEAN SMEs,
Jakarta: Economic Research Institute for ASEAN and East Asia.
Hirshman, A.O. (1970), Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations, andStates, Cambridge: Harvard University Press.
Kim, L. (1997), From Imitation to Innovation, Cambridge: Harvard Business School Press.
Quer, D., Claver, E., and Rosario, A. (2007), Foreign Market Entry Mode in the Hotel Industry: The
Impact of Country- and Firm-Specific Factors. Spain: International Business Review, Elsevier.
Piore, M., and Sabel, C. (1984), The Second Industrial Divide: Possibilities for Prosperity, New York:
Basic Books.
Rasiah, R. (1994), Flexible production systems and local machine tool subcontracting: Electronics
component transnationals in Malaysia, Cambridge Journal of Economics, 18(3): 279-298.
Rasiah, R. (2005), Trade-related investment liberalization: the Malaysian experience, Global
Economic Review, 34(4): 453-471.
Rasiah, R. (2007), The systemic quad: technological capabilities and economic performance ofcomputer and component firms in Penang and Johor, Malaysia, International Journal ofTechnological Learning, Innovation and Development, 1(2): 179-203.
Rasiah, R. (2009a), Can garment exports from Cambodia, Laos and Burma be sustained?, Journal ofContemporary Asia, 39(4): 619-637.
Rasiah, R. (2009b) Garment manufacturing in Cambodia and Laos, Journal of the Asia Pacific
Economy, 14(2): 150-161.
Rasiah, R. (2010), Industrialization in the second tier NIEs, in Rasiah, R., and Schmidt, J.D. (eds.),
The New Political Economy of Southeast Asia, Cheltenham: Edward Elgar.
Rasiah, R., Gopala, K. and Sanjivee, P. (2013), Innovation in clothing firms in Cambodia, Asian Journalof Technology Innovation, 21(2): 305-306.
Rasiah, R., Zhang, M., and Kong, X. (2013), Can China’s miraculous growth continue?, Journal ofContemporary Asia, 43(2): 295-313.
Rasiah, R., and Myint, M.M. (2013), Ownership, technological capabilities and exports of garment
firms in Myanmar, Technologi​cal and Economic Developmen​t of Economy, 19(S): S22-S42.

44

N O N-E Q U I T Y M O D E S O F T R A D E I N A S E A N – A U G U S T 2 019
P R O M O T I N G N E W F O R M S O F T R A D E B E T W E E N J A PA N A N D A S E A N

Rasiah, R., and Yap, X.S. (2016), Institutional support, technological capabilities and domestic
linkages in the semiconductor industry in Singapore, Asia Pacific Business Review, 22(1):180-192.
Rasiah, R., Gopala, K. and Ratnavelu, K. (2015), Do contractors undertake more learning andinnovation than multinational subsidiaries at least developed host-sites? A study of clothing
firms in Cambodia, Asian Journal of Technology Innovation, 23(3): 351-365.
Rasiah, R., Al-Amin, A.Q., Chowdhury, A.H., Ahmed, F. and Zhang, C. (2018), Climate Change
Projections for ASEAN, Journal of the Asia Pacific Economy, 23(2): 195-212.
SNV Netherlands Development Organization (2015), Cassava Value Chain analysis: Inclusive
Business Model for Promoting Sustainable Smallholder Cassava Production (IBC).
Sturgeon, T. (2002), Modular production networks: a new American model of industrial organization,
Industrial and Corporate Change, 11(3): 451-496.
Sum, S., and Khiev, P. (2015), Contract Farming in Cambodia: Different Models, Policy and Practice.
Cambodia Development Resource Institute.
Support the Guardian (2015), Cambodian textile firms sewing the seeds of change, https://www.
theguardian.com/global-development/2015/dec/29/cambodia-textile-firm-garmentindustry-workers-rights.

PA P E R 2 C A M B O D I A

45

46

N O N-E Q U I T Y M O D E S O F T R A D E I N A S E A N – A U G U S T 2 019
P R O M O T I N G N E W F O R M S O F T R A D E B E T W E E N J A PA N A N D A S E A N

ASEAN Promotion Centre on Trade, Investment and Tourism
https://www.asean.or.jp/en