Charting a Path Forward: Strategic Approaches for Enhancing Cambodia’s Export Diversification

Over the past decade, Cambodia has made significant strides in integrating into the global trade network, gradually shifting away from traditional exports like garments and textiles. Despite challenges such as trade disruptions and increased global competition, Cambodia is at a crucial juncture where it must identify its strengths and enhance its position within the global value chains (GVCs) to ensure sustainable growth and prosperity.

Shifting Export Landscape

Cambodia’s export profile has undergone significant transformation, both in terms of products and trading partners. While textiles remain a key export, its share of total exports has decreased from 70% during 2011-2015 to 40% in the 2020-2023 period (Figure 1). This marks a positive shift toward new export products, including machinery, plastics, rubber, and agricultural goods like vegetable products. Additionally, Cambodia is diversifying its trading partners, expanding from major markets such as the US, EU, and China to also engaging with ASEAN countries (Figure 2). This shift indicates Cambodia’s potential for continued diversification and its gradual movement away from reliance on one or two sectors.

Progress and Challenges in Global Value Chains

Despite these challenges, Cambodia has clear potential to improve its global trade standing by enhancing its export diversity and expanding its product offerings. The country has already embarked on a structural transformation aimed at shifting its manufacturing sector from labor-intensive activities to more diverse and higher value-added products. To chart a successful path forward, Cambodia must focus on strategic sectoral choices. The key is to determine which sectors to prioritize based on their complexity, potential for growth, and interconnectedness with the global market. Although higher-value and advanced manufacturing sectors may offer long-term benefits, they come with their own set of challenges, such as the need to acquire new technologies and attract foreign investment. To navigate these obstacles, Cambodia will need to foster an environment conducive to technological transfer, investment, and innovation.

Choosing the Right Approach: Two Possible Strategies

A Balanced Strategy: This strategy focuses on sectors where Cambodia already has some strengths, such as food processing, garments, and machinery. By leveraging existing capabilities and gradually diversifying into higher-value products, Cambodia can minimize risk and build upon its current position in the global market.

A Big Jump Strategy: A more ambitious approach, this strategy targets advanced manufacturing sectors, such as heavy machinery or high-tech industries. While this could lead to substantial long-term gains, it involves greater risks and requires substantial investments in technology, infrastructure, and human capital development.

Given Cambodia’s current position, the balanced strategy appears more pragmatic. It builds on existing sectors where the country has established expertise, while gradually transitioning into more sophisticated and diverse products. This approach ensures a smoother and less risky shift, allowing for sustainable long-term growth.

Key Considerations and Government Role

Regardless of the strategy chosen, strong government involvement is essential for success. The government must invest in local businesses, foster talent development, and create a welcoming environment for long-term foreign investment. Furthermore, the government needs to be proactive in mitigating risks, such as over-reliance on foreign investment, environmental impacts, and the challenges posed by economic transitions. Investing in local businesses is especially crucial for Cambodia, as it helps build resilience and reduces dependency on foreign firms. Additionally, the promotion of local sourcing and partnerships with Asia sourcing agents could improve manufacturing capabilities and create more locally driven supply chains, further enhancing Cambodia’s position in global value chains.

Conclusion

Cambodia is at a pivotal point in its journey toward export diversification. The country has shown resilience and adaptability in integrating into the global trade network and shifting its export profile. However, to fully capitalize on its potential, Cambodia needs to focus on sectors that can offer sustainable growth, invest in building domestic capabilities, and adopt strategies that reflect both its current strengths and future ambitions. With careful planning and government support, Cambodia can improve its global competitiveness and increase its footprint in diverse markets, ultimately leading to a more diversified and robust economy.