Foreign direct investment flows continued to see strong growth across the 10-member ASEAN bloc in 2014, with most countries in the Lower Mekong region reporting higher levels of inflows given their rising infrastructure needs and manufacturing activities, according to a new report jointly produced by ASEAN Secretariat and UNCTAD.

The ASEAN Investment Report 2015 found that while FDI flows to ASEAN were up 16 per cent to $136 billion in 2014, Cambodia, Laos, Myanmar and Vietnam (CLMV) – grouped together because of their lower, relative economic development to other ASEAN members – saw a 3 per cent dip in foreign direct investment (FDI). The report attributed this decline to a sharp drop in Myanmar’s investment inflows.

Total FDI inflows to the CLMV region were $12.78 billion in 2014, with Cambodia recording a solid $1.7 billion in FDI, up from $1.2 billion a year earlier, the report said. It projected that with its low labour costs, rapid economic growth and an improving investment environment this progress would continue in 2015.

The Kingdom saw a 35 per cent increase in FDI dominated by inflows from China, followed by those of other ASEAN members. Japanese investment, while more than doubling from 2013 levels, was still only the seventh largest, the report said.

“Japanese investments remain dwarfed by the Chinese, even though there has been some increase in the past two years,” said independent economist Srey Chanthy.

He added that in light of the upcoming ASEAN Economic Community, ASEAN members will continue to be crucial investors in Cambodia, though other avenues could be explored for attracting capital.

“They may come from India and South Korea. They can come from the United States and the European Union,” Chanthy said.

However, in the case of the US and EU, he said that investments will come in only in a competitive business environment, with improved labour relations and a stable political climate.

Chanthy said additional investment was also needed in critical sectors like agriculture, education and health services, which were not only important for the well-being of Cambodians, but also for “long-term, sustainable and inclusive economic development”.

According to the report, Japanese manufacturers such as NHK Spring, Toyota and Denso increased their investments in Cambodia in 2014, with Chinese companies investing heavily in infrastructure and manufacturing activities, and some manufacturers relocating due to increasing production-cost pressures in China.

Given China’s heavy investment in the country, a diversification to other countries, such as Japan, could provide Cambodia with a more “well-balanced and diversified exposure”, said Thomas Hugger, CEO of investment firm Asia Frontier Capital.

“If ‘something’ happens to a country that is a major investor, other countries’ investments might not fill the gap,” he said. “Look, for example, at those countries or sectors where Russia is a huge investor.”

However, he said, it can sometimes be difficult to read such figures and pinpoint exactly where investments are coming from, given that many countries funnel their inflows through countries like Singapore, which has favourable tax treaties.

“That means the end investor could be based in a country like Germany or the US, but since the investment is done through an offshore entity incorporated in Singapore it appears in the statistics as ‘Singapore’,” he added.