Insights and Analysis
Cambodia’s Small Businesses Serve as Backbone of Sustainable Economy
May 15, 2013
Cambodian Prime Minister Hun Sen announced in late March that the nation was on target to move from the status of a low-income to a lower-middle-income nation by the end of 2013, ranking it the 15th country that obtained high economic growth in the world in the last 10 years.
An owner of a small sundries shop in Kampong Chhnang in Central Cambodia. Small businesses like this one serve as the backbone of the country’s sustainable economy. Photo/Karl Grobl
However, the global economic crisis has had an adverse impact on the Cambodian economy since the end of 2008. In 2009, Cambodia’s growth hit the lowest level (2%) experienced in the last 15 years. The real GDP growth has started to pick up since 2010 and 2011, with 3.0 percent and 7.0 percent, respectively. According to the Ministry of Industry, Mine, and Energy, the industrial sector, which includes the agricultural, tourism, garment, and mineral industries, shared 30 percent of the GDP, up 6 percent from the past 18 years.
Historically, however, Cambodia has relied on the role of small- and medium-sized enterprises (SMEs) as the backbone of a sustainable economy. Generally in Cambodia when we talk about SME economic activities, we are in fact talking about micro-small and medium-sized enterprises (MSMEs), as out of the more than 500,000 economic establishments or enterprises counted in the 2011 Cambodia Economic Census, some 493,000 of them employ only one to 10 employees.
Prime Minister Hun Sen said in June 2010 when he announced the Rectangular Strategy Phase II, Cambodia’s main socio-economic policy agenda for the Fourth Legislature of the National Assembly (2008-2013), that SMEs are one of the angles of the strategy which government is committed to promoting.
Growth in the number of MSMEs could help expand the economy, create more jobs, facilitate Foreign Direct Investment, and enlarge the tax collection base. The 2011 census shows that more than 500,000 economic establishments were engaged in economic activities, employing more than 1.6 million laborers or approximately 20 percent of the total Cambodian labor force.
The best way to boost MSMEs is to encourage private sector development and support their expansion. Micro enterprises, mainly in the provinces, have the potential to grow to become small- medium-sized enterprise. However, this growth may not be realized if there are too many constraints.
For almost 10 years, The Asia Foundation has been working with MSMEs in Cambodia to help create a more productive, enabling environment at the provincial level; advocating for an improved business environment; improving the ability of Cambodia’s provincial MSMEs to compete in regional and world markets; and increasing the understanding of the benefits of MSME development in the local economy. Through different program activities such as subnational dialogues between public and private actors, surveys, and researches on impediments to growth, we found that constraints include lack of access to information, unclear and burdensome regulations, poor relationships with public authorities, lack of technological capacity in production, and most importantly, limited access to financing for business expansion. Despite these challenges, there have been a large number of new enterprises that opened their doors for business recently. Findings show that from 2009 to 2011, 34 percent of all total establishments had just started their business in those two years.
According to the National Institute of Statistics (NIS), around 72 percent of Cambodian enterprises are family-run businesses with one to three employees (2009). Out of 505,134 enterprises, only 3.5 percent were registered at the Ministry of Commerce in 2011. This means that the majority of enterprises are in the informal sector, effectively preventing them from accessing finance because banks and monetary financial institutions require SMEs to have legal status to be eligible to apply for a loan. As a result, SMEs rely on personal savings and informal sources for starting up or expanding their businesses. The primary reason for SMEs maintaining their informal status is the perception that standard accounting practices are complicated and unnecessary. Additionally, some SMEs prefer to keep informal financial records because it allows them to conceal their real profits and revenues from tax authorities.
Although there are policies in place, implementation still has a long way to go. Cambodia’s government should play an active role in connecting SMEs to the export sector by providing incentives to export firms to find local partners; benchmarking certain standards or priority areas for export growth; providing market, management and technical consultancy; and enhancing awareness of local SMEs to suppliers through tour organizing, workshops, or seminars. To reach its lower-middle income status and beyond, Cambodia’s small businesses must be given a fair environment to reach their full potential and grow.
The Asia Foundation’s work with SMEs in Cambodia is supported by the U.S. Agency for International Development, Australian Agency for International Development, New Zealand Aid Programme, and the Danish International Development Agency.
Khut Inserey is The Asia Foundation’s senior program officer in Cambodia. He can be reached at [email protected]. The views and opinions expressed here are those of the individual author and not those of The Asia Foundation.
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It does not suffice to always call upon government side to provide facilitations. The private sector itself, those MSME need to seriously be educated to upgrade their management method (start with proper book keeping and good comprehension of corporate rules and markets peculiarities outside) to move forward improved contribution to the local economy.