ENTREPRENEURIAL CAMBODIA Cambodia Policy Note © 2018 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved 1 2 3 4 18 17 16 15 This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 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Examples of components can include, but are not limited to, tables, figures, or images. All queries on rights and licenses should be addressed to the Publishing and Knowledge Division, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. Cover design: Florencia Micheltorena, Buenos Aires, Argentina. Interior photo: Market Stall. Photo: Chhor Sokunthea, The World Bank. ENTREPRENEURIAL CAMBODIA Cambodia Policy Note July 2018 Cambodia Policy Note | 4 Foreword Thanks to rapid and sustained growth, Cambodia has become one of the world’s leaders in poverty reduction and shared prosperity. Cambodia’s success so far has ridden on openness to trade and investment, preferential trade treatment, and an abundance of low-skilled, low-cost labor. This facilitated the establishment of an export-oriented and foreign-owned garment sector, which—together with tourism, agriculture, and construction—has been driving growth over the past two decades. Several factors suggest that Cambodia will not be able to rely on its current drivers of growth going forward. With the country becoming more prosperous, it is receiving less generous donor financing, and preferential trade treatment is expected to phase out eventually. At the same time, rising wages are making it increasingly difficult for Cambodia to keep exporting unprocessed rice and low-end garments. Meanwhile, around the globe, automation is displacing jobs, and digital technologies are transforming certain sectors. Coinciding with the possibility of diminished economic prospects are the rising expectations of Cambodian citizens, fueled by the rapid spread of information through mobile phones, the internet, and social media. In light of these factors, Cambodia’s current drivers of growth need to be diversified. While the country’s economic outlook remains positive, Cambodia could begin to explore new drivers of growth that will create jobs and boost prosperity over the next 20 years. The country’s next economic transformation will rest on its ability to empower domestic entrepreneurs and citizens with capabilities and tools for the modern economy of tomorrow. Drawing from the knowledge gaps identified in the Cambodia Systematic Country Diagnostic, the Cambodia Policy Notes analyze four relatively under-analyzed policy areas: Entrepreneurship and Innovation, Digital Economy, Microfinance and Household Welfare, and Social Assistance. These topics are interrelated and will be crucial for catalyzing or complementing reforms in traditional sectors. For example, digital platforms are expected to play a key role in enabling local entrepreneurs to participate in global value chains more effectively. Financial technology (fintech) can provide expanded access to finance for both enterprises and individuals as well as facilitate the growth of e-commerce. Social assistance could help mitigate shocks for households and contribute to building a stronger human capital base to take advantage of new opportunities and safeguard the impressive economic gains of the last two decades. Ellen Goldstein Country Director for Cambodia, Lao PDR, and Myanmar World Bank Group Entrepreneurial | 5 Acknowledgements This policy note has been prepared by a World Bank Group team led by Michael Ehst, with contributions from Sambath Sak, Miguel Eduardo Sánchez Martín and Lan Van Nguyen. It benefits from guidance provided by Ellen A. Goldstein, Inguna Dobraja, Deepak Mishra, Jennifer Isern, Ganesh Rasagam, Shabih Ali Mohib, Mark Austin, and Lars Sondergaard. Minna Hahn Tong and Maria Dumpert helped editing the note. The team is grateful to Cambodian Government Institutions for the support provided during the preparation of this Policy Note, especially to H.E. Ken Chanmeta, (Secretary of State, MPTC), H.E. Dr. Phan Phalla (Under Secretary of State, MEF), H.E. Teung Siny (Under Secretary of State, MIH), H.E. Laim Kimleng (Director General, SME and Handicrafts, MIH), H.E. Penn Sovicheat (Director General, Domestic Trade General Directorate; MoC), and Mr. Suon Vichea (Director, Trade Training and Research Institute, MoC). Further contributions were provided by private sector representatives, including Mr. Samnang Chou (Founder, BioLAB), Ms. Sandra D’Amico, (Vice President, CAMFEBA), Mr. Charles Esterhoy (Chief Operations Officer, Kerry World Bridge Logistics Limited), Mr. Samboeun Hean (Director of Cyber University and Multimedia Center, Institute of Technology of Cambodia), Ms. Kate Heuisler (Chief of Party, DAI), Mr. Pisey Khin, (Nuppun Institute for Economic Research), Mr. Chansamrach Lem (Managing Director, CIC), Mr. Savin Moa (Emerging Markets Investments), Madame Keo Mom (President, CWEA), Mr. Vansann Nou, (Communication Manager, InSTEDD iLab Southeast Asia), Mr. Kouch Pheng (President, G Gear Co. Ltd.), Ms. Nary Phon (Executive Vice President & Group Chief Operations Officer, ACLEDA), Mr. Matt van Roosmalen (Manager, EMC), Ms. Panchak Sam (Assistant Manager, Angkor HUB), Mr. Piseth Sok (CEO & Co-Founder, G Gear Co. Ltd.), Ms. Phalyka Sok ( InSTEDD iLab Southeast Asia ), Mr. Heng Sok (Zaman School), Mr. Pheap So (Executive Director, YEAC SR), Mr. Justin Stewart (Ithink Asia), Ms. Bopta Touch (Assistant Manager, Lub D Cambodia Siem Reap) and Mr. Hiroshi Uematsu (CEO, Phnom Penh Economic Zone). Special thanks to the private sector representatives participating in the brainstorming session on startups: Mr. Ham But (Project Manager, Nomi), Mr. Chantra Be (Co-Founder and Managing Partner, Startup Weekend & Emerald Hub), Mr. Rocardo Balmori (Market Manager, Camoticket ), Ms. Lnagda Chea (Founder& Managing Director, BookmeBus), Ms. Chan Davy (Director, Davitra), Ms. Olivia Hough (Managing Director, Impact Hub), Mr. Meng Hun (Tek Hub), Mr. Hav Kongngy (Founding Director, My Dream Home ), Ms. Mélanie Mossard (Community Director, Impact Hub), Mrs. Mom Mona (3Sisters Cambodia), Mr. Stephen Paterson (Co-Founder & Coordinator of the Mekong Business Challenge), Ms. Chankiriroth Sim (CEO, Banji.), Mr. Rithy Thul (Founder, Small World), and Mr. Ear Uy (Co-Founder and CEO, Osja Studio). The team is also grateful to Mr. Peng Seng for his support during team missions and stakeholder consultations. Cambodia Policy Note | 6 Entrepreneurial Key Messages • Cambodia’s FDI-led growth strategy faces challenges as trade preferences are reduced and labor cost advantages erode. Continued strong economic growth is expected to rely increasingly on the emergence of domestic enterprises that have the capabilities to grow into medium- and large-sized enterprises and compete in regional and global markets. • A well-functioning entrepreneurship ecosystem is necessary to support the emergence of high-potential, growth-oriented enterprises (startups) and to assist existing enterprises in growing, innovating, improving productivity, and taking advantage of the global value chains in Cambodia. • Deficiencies in Cambodia’s current entrepreneurship ecosystem include a nascent government structure to support entrepreneurship, high aversion to risk among entrepreneurs, lack of adequate financing and business services for startups, scarce technical and managerial human capital, and few links between domestic firms and promising markets. • Cambodia can address these weaknesses with policy actions built around four objectives: (i) Promote a culture of entrepreneurship and build government capacity to implement entrepreneurship policy; (ii) Strengthen SME linkages to national and regional markets; (iii) Improve access to finance and business services through entrepreneurship support programs, developed through public-private partnerships; and (iv) Attract and nurture technical and managerial talent for startups. • Cambodia can draw inspiration from countries that have been successful in creating globally competitive domestic enterprises such as Singapore and China, and it can learn from entrepreneurship support programs established by regional peers such as Vietnam and Malaysia. Entrepreneurial | 7 Introduction Entrepreneurship is multi-faceted, with a range of identify deficiencies that are holding back the factors influencing the success of growth-oriented success of domestic enterprises. The note assesses enterprises. A well-functioning entrepreneurship Cambodia’s performance across the six pillars of the ecosystem includes six pillars: skilled human capital, well- entrepreneurship ecosystem. Given the important role functioning markets, an encouraging policy environment, that innovation plays in entrepreneurial outcomes, availability of financing, an entrepreneurship-friendly this note also includes a brief analysis of Cambodia’s culture, and supportive entrepreneurship organizations national innovation system. and networks. The ecosystem effectively brings these 1 resources at all stages of enterprise development— The note provides recommendations for how the from ideation through startup, expansion, growth, and Cambodian government can use policy to create a maturity. more robust system of support for these domestic enterprises and the entrepreneurs who establish This policy note responds to a request from and manage them. Entrepreneurship policy aims the government to assess the current state of to improve the operating environment and develop Cambodia’s entrepreneurship ecosystem and to the capabilities of existing and new entrepreneurs to Box 1: Basic Definitions of Terms in This Policy Note Entrepreneurship is the act of starting and growing an enterprise.a Growth-Oriented or Opportunity-Driven Enterprises are motivated by an opportunity to increase in size and profitability, as opposed to necessity-driven enterprises that aim only to provide the enterprise owner with a viable source of income. Entrepreneurship Ecosystem is a comprehensive system of people, organizations, and institutions that supports the creation and growth of enterprises. Entrepreneurship Policy aims to (i) improve the environment for new enterprise creation and growth and (ii) improve the capabilities of enterprises to grow and compete. Innovation is an improvement of an enterprise’s product, process, marketing method, or organizational method.b a  An expanded definition of entrepreneurship, used by the Global Entrepreneurship Monitor (GEM), is “any attempt at new business or new venture creation, such as self-employment, a new business organisation, or the expansion of an existing business, by an individual, a team of individuals, or an established business” (Reynolds, P. et al, 1999). b  The full definition of innovation includes “the implementation of a new or significantly improved product (that is, a physical good or service), process, a new marketing method, or a new organizational method in business practices, workplace organization, or external relations” (OECD, 2005). 1  This framework reflects the Babson College concept of an entrepreneurship ecosystem (Isenberg, 2014; Global Entrepreneurship Research Association, 2018). Cambodia Policy Note | 8 grow and compete.2 Given Cambodia’s struggle with labor and favorable foreign investment incentives. the “missing middle” of enterprises, this note focuses This has resulted in the growth of important sectors— particularly on policies to encourage the types of particularly garments, footwear, and tourism—focused dynamic small- and medium-enterprises (SMEs) that on exporting to international markets. However, this grow quickly and can have a potentially transformational engine of growth will face challenges in the medium effect on the economy. To provide some useful lessons 3 term as trade preferences expire and Cambodia’s labor on improving support for entrepreneurship, the note cost advantages dissipate.4 also includes international examples from countries, such as Singapore and Malaysia, that started with a Cambodia could address these challenges by similar profile of FDI-led development and, over time, developing its own domestic enterprises that create have successfully put in place the conditions necessary growth and employment and open new areas of to nurture and grow a dynamic domestic private sector. economic activity. However, to date, Cambodian owned enterprises have not demonstrated an adequate capability to grow beyond micro- and small-sized into competitive medium- and large-sized enterprises. As Context and Main a result, Cambodia’s distribution of enterprises has a “missing middle,” with medium-sized enterprises making Challenges up only 1.3 percent of the roughly 500,000 enterprises covered by the 2011 Economic Census. Micro- and Cambodia can no longer depend on foreign small-sized enterprises (employing between 1-20 staff) investment as its sole engine of growth. Cambodia’s accounted for 97.7 percent of the enterprises, while strong economic growth, at an average of 7.6 large enterprises accounted for 1 percent.5 This type of percent from 1994-2015, has relied heavily on foreign enterprise size distribution, common in low- and middle- investment, attracted by its comparatively low-cost income countries, is illustrated in Figure 1. Figure 1. Stylized distribution of enterprise size in high-income vs. low-income countries High-Income Countries Low-Income Countries Number of firms Number of firms The Missing Middle Micro SMEs Large Micro SMEs Large Source: Harvard Entrepreneurial Finance Lab. 2  Analysis of entrepreneurship in this note is restricted to policies that support enterprises and entrepreneurs to build the capabilities necessary to start and grow their businesses. Analysis of the overall business environment can be found in the Doing Business Report, Enterprise Survey, and Cambodia Investment Climate Assessment 2014. This note also does not focus on micro-enterprises, which generally do not grow and create significant numbers of jobs. 3  The “missing middle” refers to SMEs that are greatly underrepresented in many developing countries. Cambodia, has a high number of domestic micro-enterprises and a strong presence of large, exporting enterprises, but it has a relatively small share of SMEs compared to successful middle- and high-income economies. 4  World Bank, 2017. 5  Cambodia National Institute of Statistics, 2014. Entrepreneurial | 9 Figure 2. Domestic enterprises have lower Figure 3. Cambodia has an extremely low productivity at medium and large sizes than rate of enterprise entry foreign enterprises Average productivity, by firm size (# workers) Enterprise Entry Density Across Income Groups 60.000 5 4.2 Sales per worker (USD) 50.000 4 Entry density 40.000 3 2.4 30.000 2 20.000 0.8 10.000 1 0.3 0.23 0 0 Small Medium Large High Upper Lower Low Cambodia (5-19) (20-99) (100+) Income Middle Middle Income Income Income Domestic Foreign Note: Entry Density is calculated as the number of newly registered limited-liability firms in the corresponding year as a percentage of the country’s working age population (ages 15-65), normalized by 1,000. Source: World Bank Cambodia Enterprise Survey 2016. Source: World Bank Entrepreneurship Snapshots, 2010. Moreover, looking at medium- and large-sized out as the top business environment constraint in the enterprises, a large productivity gap between 2016 World Bank Enterprise Survey of Cambodia. This domestic and foreign-owned enterprises can be poses a challenge to the enterprises that choose to seen. Results of the World Bank’s 2016 Cambodia become formal, often a necessity to attract the type of Enterprise Survey show that while domestic small financing necessary to grow and compete beyond local enterprises are more productive than foreign small markets. enterprises, this reverses dramatically for medium- and large-sized enterprises (Figure 2). This productivity gap These factors help explain why Cambodia has a reflects certain challenges in Cambodia’s economy. For low rate of enterprise entry. As shown in Figure 3, example, few linkages have been established between Cambodia has an annual business entry density domestic enterprises and large enterprises operating in rate of just 0.23, meaning that Cambodia has a very Cambodia’s special economic zones (SEZs), whether low rate of formalized new enterprise formation. This in garments or other sectors.6 Therefore, few spillovers is less than one-third of the average for lower middle- have occurred from foreign-owned enterprises to income countries. While new enterprise formation does domestic enterprises in the form of management or not directly correlate with increases in the number of technological capabilities that can help the latter to growth-oriented enterprises,7 increasing the entry rate increase productivity and compete in these sectors. can make an important contribution. Recent economic literature emphasizes the disproportionate contribution Many Cambodian enterprises also choose to remain of young enterprises to the number of high-growth in the informal sector, whether to avoid taxes and enterprises in an economy.8 regulations or simply as the “path of least resistance” in a system that does not offer strong incentives to In sum, the Cambodian economy is running on only formalize. Competition from the informal sector came one of its two legs: Cambodia has relied heavily 6  World Bank, 2017. 7  Henrekson and Sanandaji, 2014; The Economist, 2014. 8  Startups and young businesses, not SMEs, are the biggest job creators in the US (Haltiwanger and Miranda, 2013). Cambodia Policy Note | 10 on attracting foreign investments while failing to that some factors may limit the creation and growth develop its own domestic enterprises. For Cambodia of enterprises. Based on the Babson Entrepreneurship to build a modern, diversified economy that can support Ecosystem framework9, these pillars are policy and continued strong growth well into the future, supporting leadership, entrepreneurial culture, support structure domestic enterprises must become as high a priority as and organizations, markets, availability of financing, and attracting foreign investment. Going forward, a healthy human capital and skills (see Figure 4). Each of these entrepreneurship ecosystem needs to be developed to six pillars of Cambodia’s entrepreneurship ecosystem grow Cambodia’s base of competitive, locally owned is discussed in greater detail below. The findings and enterprises. analysis are based on quantitative indicators for each dimension and complemented by interviews and focus Cambodia’s Entrepreneurship group meetings conducted by the authors in December Ecosystem 2017. Cambodia’s entrepreneurship ecosystem is less Policy and Leadership developed than regional and global competitors. For instance, the 2018 Global Entrepreneurship Index What this pillar measures: Government plays an (GEI) ranks Cambodia 113 out of the 137 countries. This influential role in entrepreneurship by providing clear is behind the lower middle-income average as well as signals of its support for entrepreneurship and then Cambodia’s ASEAN peers. defining, funding, and executing a clear entrepreneurship policy and set of entrepreneurship support programs. A comparative analysis across ecosystem pillars indicates that Cambodia’s current ecosystem does Finding 1: Cambodia lacks a clear and coordinated not provide adequate support for entrepreneurs and strategy for entrepreneurship development Figure 4. Cambodia has an underdeveloped Cambodia’s policies affecting entrepreneurship are entrepreneurship ecosystem spread across various documents, resulting in a fragmented agenda and lack of clarity for entrepreneurs Entrepreneruship index benchmarking and SMEs on the government’s plans and programs. Policy and Leadership Several policy documents influence entrepreneurship, 10 but many have limitations or duplications. The 1994 80 Human Capital 60 Entrepreneurial Law on Investment and its 2003 amendment offer and Skills Culture corporate income tax holidays and exemptions for 40 20 the import of inputs and equipment, but there are no 0 specific incentives for entrepreneurship and innovation. Moreover, the minimum capital investment thresholds Support Availability of Financing Organizations may prevent SMEs from benefiting from these incentives. and Network The Industrial Development Policy (2015), led by the Ministry of Industry and Handicrafts (MIH), focuses on Market moving toward higher-skilled industry by addressing key Cambodia Asia-Pacific constraints and linking with regional and global value chains, but it has not been fully implemented. The draft Source: Global Entrepreneurship Index, Global Entrepreneurship Monitor, Global Competitiveness Index, Global Innovation Index. SME Policy Framework (2015) is aimed at improving the 9  The comparative analysis for this study maps 18 national-level quantitative indicators against the domains of the Babson Ecosystem Framework (http://entrepreneurial-revolution.com/). Entrepreneurial | 11 Figure 5. Opportunity perception for entrepreneurship in Cambodia is low Policy and Leadership - Selected Indicators Ease of Starting a Business Asia-Pacific Bangladesh Philippines Quality of Thailand Institutions Malaysia Vietnam Cambodia Opportunity Perception 0 50 100 Source: Global Entrepreneurship Index, Global Competitiveness Index, Global Innovation Index. environment for SMEs to grow, facilitating support and Enterprises in Cambodia continue to face many technical assistance to improve skills and technology, constraints. Based on the World Bank’s 2016 and improving access to business support services and Cambodia Enterprise Survey results, the biggest financing. The Startup Policy, which is under development obstacles for enterprises are informality (cited by 28 at the Ministry of Posts and Telecommunications percent of firms), political instability (16 percent), (MPTC), is viewed as an important policy document, inadequately educated workforce (12 percent), and but this policy and the MPTC’s authority is limited to the access to finance (8 percent). Registering a business ICT sector, whereas entrepreneurship activity spans the remains time-consuming and costly. Cambodia ranks entirety of the economy. This fragmentation and delays 135 out of 190 countries in the World Bank’s Doing in policy implementation were mentioned repeatedly Business rankings. during interactions with the private sector. These challenges reflect the weak overall quality of institutions, A poor business environment has the overall effect of as indicated in Figure 5. hampering the creation and growth of enterprises. For example, interviewed enterprises cited a lack of In terms of institutional arrangements, the Cambodian understanding about procedures for obtaining a patent government’s support for entrepreneurship is dispersed tax certificate and different types of payments as across several ministries. Entrepreneurs noted the lack challenges for SMEs. Doing Business 2018 indicates of a point of contact with whom the entrepreneurial that there are 40 tax payments per year for a private community could interact. Various ministries were company in Cambodia compared to only 21.8 for the cited as being involved, including MIH, MPTC, and the East Asia and Pacific region, so the confusion among Ministry of Economy and Finance (MEF), but none was SMEs is understandable. Although new regulations viewed as the lead institution. Due to this fragmentation, lay out the patent tax procedures, SMEs have limited the entrepreneurs expressed uncertainty over the awareness of them, and the lengthy time involved government’s commitment to entrepreneurship. pushes SMEs to pay facilitators to process patent tax certificates. Constraints in the business environment are Finding 2: Cambodia’s overall poor business discussed in more detail in a forthcoming Investment environment limits entrepreneurial opportunity Climate Assessment. Cambodia Policy Note | 12 Such challenges are reflected in the very low Opportunity younger generation.12 This is boosted by a growing Perception score (Figure 5). It is troubling that despite young population and access to mobile phone and Cambodia’s growing economy, its entrepreneurs do not internet services and is supported by the growing see opportunity to grow successful enterprises. presence of incubators, accelerators, tech hubs, innovative universities’ initiatives, and entrepreneurship Entrepreneurial Culture programs funded by development partners. Focus groups emphasized that the digital sector, particularly What this pillar measures: Society’s positive mobile app development, is the most active part of or negative views toward entrepreneurship and the entrepreneurship and innovation ecosystem in acceptance of risk affect the level of opportunity-driven Cambodia. entrepreneurial activity. Support Structure and Organizations Finding 3: Low cultural support for entrepreneurship results in low levels of opportunity-driven startup What this pillar measures: Support structure includes activity the organizations and infrastructure that nurture entrepreneurs and build the capabilities of enterprises, Cambodia’s scores on entrepreneurial culture are low, as well as the quality of interactions and depth of including risk acceptance 10 and cultural support for networks among these organizations. entrepreneurship. This suggests that entrepreneurship is not yet viewed widely as a viable career within Cambodia, Finding 4: Local incubators, accelerators, and and those who choose to become entrepreneurs are tech hubs are focused on digital startups, with isolated from supportive entrepreneurship networks. As minimal support for other sectors or later stages of a result, despite Cambodia’s fast growth, the percentage enterprise development of opportunity-driven startups (as opposed to necessity- driven startups) is low compared to the Asia-Pacific Support organizations play an important role in average, as indicated in Figure 6. Among the reasons promoting entrepreneurship and innovation. They cited by focus groups for the low level of cultural include business incubators, accelerators, co-working support for entrepreneurship are the legacy of SMEs as spaces, venture and angel investors, mentors, and other family-run businesses that are not structured for outside related programs and initiatives implemented by the investment, challenges with “copycat” businesses that government, universities, and development partners. compete without regard to formalization requirements, These support organizations help entrepreneurs and and the economic structure of traditional sectors that startups refine their business models and go to market provides large, incumbent enterprises with dominant with a prototype or full-fledged product. market power thereby lowering opportunity for startups. Furthermore, connections between entrepreneurship While the support organizations that are emerging in support organizations and traditional SMEs are weak, Cambodia provide important services, significant gaps meaning outside influence and support for growing remain. As illustrated in the entrepreneurship ecosystem these enterprises is low. 11 mapping (Annex 1), numerous organizations are emerging in Cambodia’s market, including Impact Hub, Nevertheless, entrepreneurs and startups are Small Works, SHE Investment, Emerald Hub, TRYBE, increasingly emerging in Cambodia, mostly among the NOMI Network, TEK Hub, and USAID-Development 10  Risk acceptance reflects whether legal and social penalties for business failure. For instance, bankruptcy law that has harsh penalties for owners of insolvent businesses is likely to lower the risk acceptance for entrepreneurs and diminish entrepreneurial activity and investment. 11  Dutch Good Growth Fund, 2018. 12  Source: Focus group meetings. Entrepreneurial | 13 Figure 6. Cultural support for entrepreneurship and risk acceptance are low in Cambodia Policy and Leadership - Selected Indicators Level of Opportunity-Drive Asia-Pacific Startups Bangladesh Philippines Risk Thailand Acceptance Malaysia Vietnam Cambodia Cultural Support for Entrepreneurship 0 20 40 60 80 100 Source: Global Entrepreneurship Index. Figure 7. Cambodia fares well in cluster development, but lags behind in networking Support Structure and Organizations - Selected Indicators State of Cluster Development Asia-Pacific Bangladesh Philippines Thailand Networking Malaysia Vietnam Cambodia University/ Industry Collaboration 0 20 40 60 80 100 Source: Global Entrepreneurship Index, Global Innovation Index. Innovation. They provide services such as training, In addition, most of the emerging support organizations mentoring, and financing. However, given the growing focus on the digital sector. This is not surprising, as the needs and limited resources available, the support costs and barriers to entry are lower in the digital sector services provided do not always meet demand. For for both the entrepreneurs and support organizations. example, as highlighted during focus group discussions, However, it leaves entrepreneurs and enterprises in committed and dedicated mentors are difficult to find, other sectors without adequate support. and there is a lack of financing opportunities after enterprises move past proof-of-concept stage. The Finding 5: Universities have played a limited role in incubators and accelerators are largely focused on the supporting entrepreneurship ideation and startup phases, with very few capable of providing support to the enterprise expansion and Cambodia’s universities have been playing only a minor growth phases. role in supporting entrepreneurship. According to the Cambodia Policy Note | 14 study Startup Ecosystem in Cambodia,13 only 4 out pipeline of highly skilled entrepreneurs and investors of 118 higher education institutions are engaged in with a deep interest in Cambodia’s development. entrepreneurship support. Some initiatives have taken place: the Cambodian Institute of Technology (ITC) Markets runs an Innovation Challenge for engineering students with business ideas, several universities have signed What this pillar measures: Growth-oriented MOUs with the Young Entrepreneurs Association of enterprises need access to markets to grow. These may Cambodia (YEAC), the National Institution of Post be domestic, regional, or international as needed to Telecommunication and Information Communication support the scale and goals of each enterprise. Technology (NIPTICT) hosted a Startup Policy Hack, and the University of Management runs the Mekong Finding 7: Domestic enterprises are not developing Challenge. However, these and other universities are still the capabilities needed to work with large, exporting mostly disconnected from the wider entrepreneurship enterprises in SEZs or to compete in regional and ecosystem. international markets Finding 6: Limited access to entrepreneurship The relatively small size of Cambodia’s domestic networks prevents Cambodian entrepreneurs market means that Cambodian enterprises, even if they from obtaining high-quality mentorship and other initially sell into the domestic market, eventually need resources needed to grow their enterprises to compete successfully in regional and international markets to grow to significant scale. Cambodia’s ASEAN Cambodia is fortunate to sit within a dynamic region membership provides an important entry point for that includes China, Singapore, and other economic domestic enterprises seeking to internationalize in this leaders with strong entrepreneurship ecosystems but way. The presence of foreign companies in Cambodia’s has not fully tapped into them yet. The MPTC, YEAC, SEZs is reflected in the Market Sophistication indicator and local tech hubs have been establishing initial links to in Figure 8 and also offers a market opportunity for the entrepreneurial networks in the region. For instance, domestic enterprises as well as the potential for transfer YEAC is active in ASEAN’s networks for students, of technology and expertise to the domestic enterprises. and MPTC is active with the Startup Nations Summit. Exploiting these opportunities should be a top priority However, Cambodia’s connections to regional and for entrepreneurship policy. international entrepreneurship networks can be made much stronger. Examples of additional international Unfortunately, few domestic enterprises seem to networks that Cambodia can connect with include the be taking advantage of these market opportunities. Global Entrepreneurship Network (government and civil Figure 8 shows the very low level of internationalization society organizations), the Global Accelerator Network of Cambodian firms. As noted earlier, few linkages (accelerators), IncubatEnergy (clean tech startups), currently exist between domestic enterprises and and the Aspen Network of Development Entrepreneurs foreign-owned enterprises in the SEZs.14 Items like (entrepreneurship support organizations in emerging zippers are being imported to go into Cambodian- markets). These networks provide a range of resources, made garments rather than being sourced from local including access to professional and committed mentors, suppliers. The top reason given by foreign enterprises angel and institutional investment, links to incubation in the SEZs for the lack of domestic suppliers is the and acceleration expertise, and support for policy inability of domestic enterprises to meet quality and makers. In addition, diaspora networks can provide a volume standards. 13  Mekong Business Initiative, 2017. 14  World Bank, 2017. Entrepreneurial | 15 Figure 8. Despite access to the ASEAN market, enterprise internationalization is low Markets - Selected Indicators Market Size Asia-Pacific Bangladesh Market Philippines Sophistication Thailand Malaysia Competition Vietnam Cambodia Internationalization 0 20 40 60 80 100 Source: Global Entrepreneurship Index, Global Innovation Index. The structure of competition in the Cambodian economy only a laptop and a mobile phone—allow Cambodians to reveals some possible reasons for the low capabilities compete in this sector. Similarly, the animation industry, of domestic enterprises. The Competition indicator in which has a small foothold in Cambodia, offers a potential Figure 8 measures the level of the product or market niche market opportunity as described in Box 2. uniqueness of startups, combined with the market power of existing enterprises and business groups as The integration of digital technologies into traditional well as with the effectiveness of competitive regulation. industries lowers entry costs in many of those industries. In Cambodia’s case, domestic enterprises are not This allows the creation of new connections between showing uniqueness in product offerings, meaning they businesses and improved logistics, thus enlarging the are not being forced to innovate. This might be attributed opportunity set of local entrepreneurs for joining regional to an industry structure that protects a few successful GVCs. Domestic enterprises may also be plugged into enterprises instead of encouraging intense competition regional consumer markets through digital platforms. that fosters more, and more innovative, enterprises. For example, Alibaba in China has offered a platform that allows small and medium manufacturers to compete in Finding 8: Niche markets with low barriers to entry the supply chains of regional markets. These concepts can offer Cambodia new high-value markets are expanded on in the digital economy policy note in this series. Cambodian enterprises could find success in some knowledge-intensive niche industries that do not rely Access to Finance on vast pre-existing capabilities to develop a presence. Much of Cambodia’s emerging growth-oriented What this pillar measures: Access to appropriate entrepreneurship activity is clustered in the digital sector, financing for starting or growing an enterprise is critical, particularly around the development of mobile apps for particularly for entrepreneurs, startups, and early-stage the domestic market. Examples such as BookMeBus enterprises. Enterprises need access to both working are supported by local tech hubs and incubators.15 The capital (under one-year term) for managing operations low barriers to entry in the digital sector—a mobile app and longer-term investment capital to support the enterprise can be started by skilled coders who possess growth of their enterprises. 15  For instance, BookMeBus was part of a SmallWorld-managed bootcamp and acceleration program. Cambodia Policy Note | 16 Box 2: Finding a Niche: Animation In the digital age, some new, high-value industries offer opportunities for developing countries that can find a niche. One such niche for Cambodia may be digital animation. ithinkasia, for instance, is an animation studio based in Phnom Penh, Cambodia, that provides outsourcing services for animated feature films and television series, co-produces internationally distributed animated feature films, and creates original animated content. The studio has been operating for seven years and runs a free “train into employment” program in animation. ithinkasia uses its training program to identify and develop talented Cambodians who can meet the standards of international customers, including film and television production companies in Europe, Asia, and the United States. This allows the studio to compete on cost while matching the quality of competitors in locations such as Singapore, Hong Kong, and San Francisco. ithinkasia plans to scale up its training program into the provinces of Cambodia and has a strategic focus on gender equality and youth. This has important impacts such as moving youth that may be at risk from cross-border migration into employment in a digital economy or providing a way for youth to find employment that is not vulnerable to the impacts of climate change, as is traditionally the case in rural, agricultural areas. Success in such niche industries can have important effects on related industries. In Cambodia, for example, mobile gaming companies such as Sabaya can benefit from the increased supply of skilled local animators. Digital animation artists at ithinkasia, Phnom Penh. Photo Credit: Justin Stewart, Founder, ithinkasia. a  See http://geeksincambodia.com/sabay-osja-launches-ey-sey-storytime/ Entrepreneurial | 17 Finding 9: Banks are not meeting the financing Cambodia has few sources of risk capital for early-stage needs of growth-oriented enterprises enterprises.16 Equity and debt funds, private (angel) investors, and government are key sources of financing Beyond the startup phase, Cambodian enterprises for high-growth enterprises at an early stage that lack do not have access to financing that would help them collateral. However, few funds or private angel groups expand. Startup enterprises can often access seed are actively investing in Cambodia, particularly targeting funds through family, relatives, and friends or from the early stage of investment (typically USD 50,000- microfinance institutions, although these amounts are 500,000 deal size).17 The Smart Axiota Fund was cited usually very small (typically around a few thousand US as one of the only investment funds making investments dollars). They then need larger investment to expand in this early stage space, while Mekong Angels is one their businesses, which is typically addressed by of the only angel groups. As illustrated in Figure 9, the commercial banks for a large percentage of enterprises lack of risk capital for early-stage financing is particularly in any country. Government programs, such as the acute in Cambodia compared to other countries. Given U.S. Small Business Loan program or government- the limited pipeline of high-growth entrepreneurs and backed credit lines or risk sharing facilities, can be the weak entrepreneurship ecosystem in Cambodia, used to extend credit to such enterprises. However, potential investors interviewed still view domestic a well-functioning financial system with sophisticated enterprises and startups as risky and are investing credit analysis is necessary for these programs to work cautiously. effectively. Cambodian banks have restrictions on types of collateral, for instance, that make such programs less Some innovative financing initiatives have emerged, but effective in the Cambodian context. This conservative they are not enough to fill the gap. One such initiative approach of banks was repeatedly cited in interviews as is the Cambodian Investors’ Club featured in Box 3. a challenge to Cambodia’s entrepreneurial enterprises. Fintech solutions such as crowdfunding also hold potential as new sources of financing for startups but Finding 10: Risk capital is inadequate, particularly the regulations are nascent and the financing to date for early-stage enterprises has been limited. Overall, the demand for such early- Figure 9. Credit and risk capital are difficult to access for Cambodian SMEs Availability of Financing - Selected Indicators Financial Asia-Pacific Market Development Bangladesh Philippines Thailand Malaysia Vietnam Risk Capital Cambodia Availability 0 20 40 60 80 100 Source: Global Entrepreneurship Index, Global Competitiveness Index. 16  Risk capital, in either debt or equity form, does not require collateral to secure the investment in the enterprise. This is valuable for small and growing enterprises that often do not have physical or other collateral (e.g. receivables) to offer at early stages. 17  See, for example, Dutch Good Growth Fund, 2018. Cambodia Policy Note | 18 Box 3: Filling a Finance Gap: The Cambodian Investors’ Club The Cambodian Investors Club (CIC) is an example of an organization that has taken an innovative approach to address a clear financing need in Cambodia’s market. 1. Why CIC was established. CIC was established to provide an investment platform and financing opportunities for SMEs, entrepreneurs, and investors through flexible and easy access to finance. The entrepreneurs and investors who are members of the CIC contribute capital and identify investment deals through the CIC platform. Building on the success of the CIC, the Cambodian Investors Corporation PLC was established in 2015 to facilitate formal financing for SMEs in Cambodia. In addition, the CIC team is planning to apply for a license from the Securities and Exchange Commission of Cambodia to mobilize crowd funding and provide financing for SMEs. 2. How they operate and what services they offer to their members. CIC is operated as a Business Association registered at the Ministry of Interior (MoI). It started in 2013 with 13 members and expanded to over 250 members by the end of 2017. CIC operates both as an investment platform for SME financing and as a services provider. It provides community lending and equity investment and offers consulting services to its members such as business partnership matching services and business development support services. CIC is managed by a group Management Team and governed by a Board of Directors. 3. Some of their results to date. CIC has facilitated USD 2.5 million of financing for over 250 SMEs through the CIC investment platform. The CIC has provided consultancy services to numerous SMEs across the country and has three portfolio investments: Mega Fund, NILEDA Co., Ltd, and Joy Premium Drinking Water. The closeness of the CIC members to the enterprises receiving CIC loans and investment allow it to provide highly effective and targeted consulting services. stage financing outstrips the supply, and the few existing Finding 11: Finding talent is a key challenge for organizations cannot address the diverse financing entrepreneurial enterprises needs of early-stage enterprises. Formal and informal education and skills remain a Human Capital / Skills challenge for enterprises in Cambodia. Recent analysis indicates that most of Cambodia’s workforce of 10 million What this pillar measures: Entrepreneurship requires is low-skilled.18 Many young people who have obtained highly talented people to start and build new enterprises, formal education lack practical knowledge and applied as well as skilled managers and workers to fill important training and are not well-equipped with the appropriate roles as enterprises grow. In particular, growth-oriented knowledge and skills to fully and actively participate in enterprises need employees with technical and the market. This has resulted in the limited availability of managerial skills necessary to manage the business and skilled workers to support growing enterprises. Evidence the technical production process. from a firm survey shows that businesses’ top selection criteria include related work experience and literacy in 18  The Dutch Good Growth Fund, 2018. Entrepreneurial | 19 Figure 10. The skills challenge is very significant in Cambodia Human Capital and Skills - Selected Indicators Tertiary Education Asia-Pacific Bangladesh Philippines Human Thailand Capital Malaysia Vietnam Cambodia Startups Skills 0 20 40 60 80 100 Source: Global Entrepreneurship Index, Global Competitiveness Index. both Khmer and English, criteria that are challenging to Chinese industrial zones, less famous than its SEZs, fulfill. 19 Enterprises therefore invest valuable time and have been key to development of its domestic SMEs.20 energy to train people for their businesses particularly in India’s “Startup India” program, launched in 2016, foreign language, communication, and technical skills. provides three years of a tax-free environment for newly formed startups, including an entire package Advanced human capital is particularly important for of regulatory simplification and incubation activities driving innovation in growth-oriented enterprises. In specifically tailored for startups. sophisticated enterprises, skilled managers work with highly-qualified engineers and scientists to produce Two countries in the region, Singapore and Vietnam, new and improved products and processes that drive have programs that may offer useful lessons for profitability and productivity. These enterprises should Cambodia. Some of the key initiatives are highlighted be supported by a well-functioning public-private below. innovation system. Cambodia’s innovation system is weak in some key areas that hold back innovation Singapore outcomes, as discussed in Box 4. While Singapore is at a more advanced phase of International Experience development than Cambodia, it still offers two key lessons for consideration. One lesson is the need to Many countries offer examples of how progress can provide differentiated support that is appropriate for be made in the long-term and challenging endeavor various types of enterprises and at various stages of of developing a high-performing entrepreneurship growth, rather than simply focusing on the size of the ecosystem. For example, China, famous for attracting enterprise. Another lesson is the importance of giving FDI to build its manufacturing base, has more recently government agencies that support entrepreneurship the been putting “indigenous” entrepreneurship and necessary independence to design, implement, monitor, innovation at the center of its development strategies. and adjust programs. 19  EMC and USAID, 2016. 20  Palmade, et al., 2010. Cambodia Policy Note | 20 Box 4: Cambodia’s National Innovation System Innovation is an important aspect of the success of many entrepreneurial enterprises and has a collective effect on the economy, including raising productivity and providing new and improved products for consumers and businesses to purchase. Growth-oriented enterprises often rely on innovation to improve their competitiveness.a Cambodia therefore has an interest in ensuring that an effective national innovation system (NIS) is in place. A strong NIS includes coordinated interactions between key actors, including: (i) universities and research institutions that produce knowledge, (ii) government programs that fund pre-commercial research and development (R&D) and innovation, (iii) private investors that fund commercially-oriented innovation, and (iv) private enterprises that undertake commercially-driven innovation. The relative weakness of Cambodia’s NIS is reflected in Cambodia’s rankings in the Global Innovation Index (GII). It is ranked 101 out of 127 countries and is last among the included ASEAN countries. Particularly low scores include expenditure on education, tertiary enrollment, and knowledge-intensive employment. Notably, Cambodia scores well relative to ASEAN competitors on FDI net inflows, suggesting that FDI is one current avenue that can lead to technology absorption and innovation in Cambodia. Figure 11 illustrates how Cambodia compares to other countries on some innovation drivers measured in the World Economic Forum’s Global Competitiveness Report. Improvements in intellectual property protection, quality of scientific research institutions, and university-industry collaboration in R&D could lead to improvements in innovation, including patenting, as well as productivity. Figure 11. Cambodia lags behind in R&D spending and availability of scientists Perception of Cambodia’s comparative performance on innovation drivers Availability of scientists and engineers Intellectual property protection Quality of scientific research institutions University-industry collaboration in R&D Company spending on R&D 2.0 2.5 3.0 3.5 4.0 4.5 Vietnam Philippines Cambodia Bangladesh Source: WEF, Executive Opinion Survey 2016 (scale 1 - 7 best). a  Innovation is often, but not always, an important aspect of entrepreneurial success. Many high-growth enterprises utilize well-known technologies and business processes and grow by having superior efficiency or marketing. Likewise, not all innovations lead to successful commercialization. Nevertheless, as economies grow, more enterprises are built around innovation (WEF, 2017). Entrepreneurial | 21 Box 4 (cont.) While overall national innovation capabilities are important to long-term economic development, shorter-term goals should revolve around building innovation capacity in areas of the economy critical to development. This suggests a national strategy to build innovation capacity with specific steps: • First, the government should consider which economic sectors should be the focus of Cambodia’s innovation efforts. Since innovation capacity building requires extensive effort, in-depth consideration is needed. Based on this, the government should begin to develop advanced human capital, fund R&D, and finance enterprise-led innovation efforts in high-priority sectors that offer Cambodia a comparative advantage, such as garments, ICT, tourism, and agribusiness.b • Second, innovation is often most successful when geographical clusters bring together key innovation actors. Cambodia should, for instance, consider placing manufacturing-related innovation activities within the SEZs that house most of the FDI-led manufacturing enterprises. • Third, Cambodia should develop innovation capacity that is relevant for its stage of development. In most sectors, Cambodian enterprises need to primarily absorb and adapt existing technologies, building on key clusters of activity, rather than produce any innovation at the technological frontier. b  International examples offer lessons on such innovation support. New Zealand developed world-class innovation capacity in agriculture, and the United States has long supported its manufacturing industry through technology extension, university programs, and funding research on new technologies. SPRING Singapore, which stands for the Standards, ecosystem. Institutes of higher learning support training Productivity and Innovation Board, illustrates both and mentorship, incubators and accelerators support lessons. SPRING is Singapore’s main agency for ideation and new business development, and business enterprise development, and it aims to enhance the angels and equity investors support the financing needs competitiveness of enterprises to develop a strong base of expanding enterprises. of dynamic and innovative Singaporean enterprises. 21 SPRING’s programs are illustrated in Figure 12. Notably, although SPRING is government-owned, it is an autonomous agency with independence to implement Recognizing that technical and financing needs vary at its programs. This allows SPRING to test out and adjust different stages of enterprise growth, SPRING provides its programs over time. It is also able to be responsive to differentiated support to entrepreneurs depending on demand in designing its programs. This demonstrates whether they are at the ideation stage, early stage, or the value of having an agency empowered to lead the growth stage. This support is largely channeled through entrepreneurship agenda and develop and monitor the diverse set of actors in Singapore’s entrepreneurial programs. 21  SPRING merged with International Enterprise Singapore on April 1, 2018 to form Enterprise Singapore. Cambodia Policy Note | 22 Figure 12. SPRING Singapore Offers Diverse Support for Enterprises Nurturing Startups Institutes of Global Through Enterprises Higher Learning Generating Ideas Mentorship Early-stage & Network Funding Go to Market Commercialising Ideas Incubators & Equity Accelarators Investment Business Angel Investors Source: SPRING Singapore Website. Vietnam Finally, authorities have communicated that Vietnam wants to support startups with clear and consistent messages, and it offers visas for startup founders. In an effort to entice foreign and domestic entrepreneurs, Vietnam22 has taken several policy actions: • The Law to Support SMEs: This law was passed in 2017 to improve the ease of doing business for Policy Options SMEs and to strengthen the capacity and efficiency of the agencies and organizations that support Given the weaknesses described above, an SMEs. The Agency for Enterprise Development was intentional and systematic approach to supporting given a clear mandate for implementing the law. entrepreneurship is needed if Cambodia wishes • Support for entrepreneurship support organizations, to see an increase in entrepreneurial activity and including incubators, accelerators, and mentorship measurable improvements in the performance networks: This support includes establishing of its domestic enterprises. Specifically, this incubators at Vietnamese universities. note recommends policy actions to support four • Funding for startup and early-stage enterprises: objectives (see Table 2 below): (i) Promote a culture Vietnam has introduced specific investment of entrepreneurship and build government capacity incentives for investment funds targeting startup and to implement entrepreneurship policy; (ii) address early-stage enterprises. The government has also the “missing middle” by linking SMEs to national and provided a clear legal framework and tax incentives regional markets; (iii) address enterprise challenges with for early-stage investors, including angel investors access to finance and services through public-private and venture capital enterprises. entrepreneurship support programs; and (iv) attract • Education and skills for key sectors: The government technical and managerial talent needed by growth- has embarked on several training initiatives to oriented enterprises. produce a skilled IT workforce. 22  Nguyen and Mort, 2016. Entrepreneurial | 23 Promote a culture of hubs, incubators, accelerators, and entrepreneurship entrepreneurship and build networks for the implementation of entrepreneurship government capacity to implement support programs. Universities should be leveraged as entrepreneurship policy key actors in the ecosystem, as they have programs in traditional sectors such as agriculture which gives them the ability to work in areas that private sector incubators Given its reputation as a landing spot for foreign and accelerators may be reluctant to focus on due to investors, Cambodia needs to make a strong unfamiliarity or costs. statement that it is ready to support its domestic entrepreneurs, for example through a national In the longer term, the EPC could be upgraded branding campaign. Much like Startup India, Startup to an entrepreneurship and innovation agency America, Thailand 4.0, and Israel The Startup Nation, a empowered by the government to design, manage, national branding campaign sends an important signal monitor, and adjust the government’s ongoing to both domestic and foreign entrepreneurs that the support for entrepreneurs. Such an agency should government is strongly supportive of entrepreneurship. have the technical expertise to undertake increasingly “Startup Cambodia” or a similar branded campaign sophisticated policy development and programming. could include a package of incentives such as tax This agency could draw inspiration from many similar relief or simplified registration targeting growth- international agencies. For example, Israel successfully oriented enterprises. Importantly, such a campaign managed a range of entrepreneurship and innovation in Cambodia should reach out to women and other programs out of its Office of the Chief Scientist, an underrepresented groups to motivate a broad base independent body under the Ministry of Economy.23 of potential entrepreneurs. This branding campaign Enterprise Singapore provides a comprehensive set of could be launched alongside the establishment of the support to Singapore’s growth enterprises throughout Entrepreneurship Promotion Center (EPC) that is already their lifecycle. envisioned by the government of Cambodia. A branding campaign needs to be backed by Strengthen SME linkages to national additional signaling actions. Such actions could and regional markets include renewed engagement with the private sector Cambodia should build its entrepreneurship that builds on the existing Government-Private Sector ecosystem around the market opportunities Forum. A regular survey of Cambodia’s entrepreneurs available to it. This means first and foremost supporting should also be initiated to ensure that the views of the enterprises that can integrate into regional and global entrepreneurial community are heard and incorporated value chains with an existing presence in Cambodia, into government policies. Finally, over time, government including garment and footwear manufacturers as well programs should be harmonized to ensure clarity for as newer entries such as bicycles and automobile parts. the private sector and avoid duplication with other These existing industries offer a ready market and global government programs. knowledge and expertise that can be absorbed by local enterprises. Greater support is needed for the actors in Cambodia’s entrepreneurship ecosystem to As an immediate step, Cambodia could establish enable them to be effective as catalyzers. In the a supplier development program that builds links short term, the government could provide matching between domestic suppliers and global enterprises grants to develop the capabilities of Cambodia’s tech in the most obvious market: large exporters in 23  See http://www.matimop.org.il/About.html Cambodia Policy Note | 24 Box 5: Designing the Proposed Entrepreneurship Promotion Center Authorities could consider designing and establishing an Entrepreneurship Promotion Center (EPC) to provide financial and non-financial support to Cambodian enterprises. For now, the financial support is expected to be provided through the SME Bank, while the EPC would provide non-financial support through its own programs. The EPC is aligned with this policy note’s recommendation to establish an entrepreneurship fund that could eventually develop into a full enterprise development agency. Good practice from international experience suggests that the EPC should: • Have autonomy to protect it from political influence over technical decisions; • Have a public-private Board that provides strategic oversight and manages the appointment of key staff; • Be established as a learning organization that can design, pilot, and adjust programs over time based on structured monitoring and evaluation; and • Run a range of programs targeting the diverse needs of enterprises across the enterprise lifecycle. Some examples of entrepreneurship and innovation funds in other countries that can provide lessons for Cambodia are provided in Table 1. Table 1. Examples of entrepreneurship and innovation funds Country Fund Name Objective Mechanism Management EU European Angels High-Growth Equity to Business Angels and other Public-Private Fund Startups non-institutional investors for the financing of innovative companies in the form of co-investments Finland SME Initiative SME Growth Credit Guarantees / Risk Sharing With Private Finland Commercial Banks Ireland Innovation University- Vouchers (EUR 5000 for firms to Public Vouchers Industry Links collaborate with universities or public research centers) Malaysia Graduate Startups Low interest loans with 4 year grace Public-Private Entrepreneur Fund by Young period up to RM500,000 (SME Bank) Graduates Malaysia Business Expansion Equity in companies that have Public Expansion Fund of Domestic RM5million revenue and have been in Firms operation for 3 or more years South Africa National Research Basic and Research grants to university or public Public Foundation Applied research institute teams Research Entrepreneurial | 25 Box 5 (cont.) Table 1 (cont.) Country Fund Name Objective Mechanism Management The Innovation Fund for Private Sector Seed Capital, Fund of Funds, Private Netherlands SMEs Innovation Innovation Loans ( EUR 150 million to target 10 to 15 growth stage investments over 5 years) The Microcredit SME Growth €100 million in loans accessed Private Netherlands Guarantee Fund through microfinance organization Qredits. This provides scope for 1,200 SMEs to borrow up to €250,000 and for 5,300 SMEs to access microcredit of up to €50,000. United States Small Business Private Sector Grants ($100K grant Phase 1, Up to Public Innovation Innovation $1m grant Phase 2) – Government Research (SBIR) Managed Cambodia’s SEZs. This program should provide (MNCs), domestic enterprises, and other innovation management training to the domestic enterprises as system actors into physical and virtual proximity to jointly well as services to improve the potential for linkages, undertake R&D and applied innovation activities. The including surveys of the foreign enterprises to assess government could act as a catalyst for such innovation their needs and programs so the necessary technology, centers by providing some equipment and facilities, skills, and expertise can be brought in to ensure that funding some shared services for the sector, and the local enterprises can meet quality and other encouraging large foreign and domestic corporations to requirements. The focus of supplier development should participate in innovation center activities.24 be on those sectors that have an existing presence in Cambodia. Industrial zones with a mission to support Address enterprise challenges in SMEs, like those managed successfully in China, should access to finance and business also be considered. services through public-private entrepreneurship support programs The long-term objective should be to create clusters of innovative activity among a dynamic Cambodia has recently stated that it will establish a set of domestic and foreign enterprises in priority state-owned SME Bank with a USD 100 million initial sectors. The government should encourage this by capitalization,25 which could help expand access to establishing sector-specific innovation centers that finance for SMEs. Box 6 presents considerations to bring together universities, multinational corporations be taken into account in the design of this SME Bank, 24  An example is China’s Zhongguancun Park: http://www.zpark.com.cn/en/ 25  Kimsay, 2017. Cambodia Policy Note | 26 which could be used to provide a range of working and be encouraged to develop entrepreneurship programs, investment capital to domestic enterprises. and universities with existing entrepreneurship programs should broaden their support beyond students to Complementary non-financial services, including offer short form entrepreneurship training programs to entrepreneurship training, enterprise capacity entrepreneurs and private firms. building, and mentorship to growth-oriented enterprises, could be provided through the EPC. Cambodia should also tap into the significant The government might also consider whether the EPC, technical and entrepreneurial capabilities that exist discussed in Box 5, should provide financing programs in its foreign diaspora. For example, over 50,000 to meet the needs of enterprises beyond credit, such as Cambodians are said to work in technical industries startup grants or equity financing. While EPC programs in the Republic of Korea.26 The government should can be designed and funded through the government, create programs to attract this skilled diaspora as well it is critical that these programs involve private actors as foreigners from overseas to come to Cambodia and in their implementation to ensure commercial-minded establish enterprises. The value of such programs can approaches. Such a publicly funded / privately managed be seen in China’s “Sea Turtles” entrepreneurs returning approach to entrepreneurship support is representative from abroad as well as in Chinese Taipei, which built of good practice internationally and addresses its semiconductor industry by attracting Taiwanese challenges around political capture, mismatch of public engineers highly experienced in Silicon Valley to bring and private mindsets, and limitations of capacity in the their expertise and technological know-how back home. public sector. Budget Implications of the In the longer term, incentives should be created to proposed policy options attract early- and growth-stage private investment funds. Tax breaks or modest amounts of government The overall costs to the budget from these policy funding can be used to “crowd-in” significant private options can be modest when programs are designed capital through multiple privately managed risk capital with public-private implementation models. For funds. instance, tax incentives to encourage startups can be effectively budget neutral as startups are generally not Attract and nurture technical profitable during the first years of their existence and and managerial talent needed by only contribute to national tax revenues in the medium- growth-oriented enterprises term. In a similar way, incentives to attract risk capital investment funds might have limited costs to Cambodia Both short-term and longer-term measures will be once the tax revenues of investee enterprises are needed to develop the human capital and skills that considered. Small grants to entrepreneurship support growth-oriented enterprises need to be successful. organizations, while not cost-free, can be used by Cambodia’s deficits in technical and managerial skills these organizations to attract private sector and donor will require a long-term commitment to education and contributions that provide leverage to the government training. In the meantime, shorter-term measures must funds. Similarly, innovation centers and clusters should be undertaken to address the immediate needs. be designed to attract private participants such as multi- national technology enterprises that would share costs Higher education institutions should play a key role for operations following the government’s provision of in fostering entrepreneurship and providing the land and basic infrastructure. necessary skills. Higher education institutions should 26  Focus group discussions. Entrepreneurial | 27 Box 6: Considerations and Governance Principles for Cambodia’s SME Bank The planned SME Bank would address a critical gap for SME finance in Cambodia, but some considerations should be taken into account in its design: SMEs need investment capital as well as working capital. Although many SMEs are interested in working capital, there is also a critical need for longer-term investment capital. The SME Bank should offer a range of credit instruments that target working capital and longer-term capital needs. Growth-oriented enterprises need a mix of equity and debt. Growing businesses may require equity, convertible debt, or other products specific to their size, stage of maturity, and business needs. Investment funds that complement the SME Bank may be necessary to fill in these gaps and could be incentivized through policy. Sustainability and minimizing market distortions are important. SME banking, both public and private models, is growing in developing countries and showing good returns in some cases.a There are also many examples that demonstrate difficulties with sustainability (profitability) or create market distortions that can crowd out private lending to SMEs. Positive examples of public SME banks include the Development Bank of Canada and the Banco Estado of Chile.b Corporate governance principles from international experience should be followed including:c • A mixed public and private ownership structure • Board and management composed of independent and highly qualified individuals selected through a merit- based, transparent process • A mandate to support the financial services needs of Cambodian MSMEs and for its products to be designed in a manner that (i) effectively addresses market gaps, and complements and leverages private sector funding; (ii) pricing fully reflects costs and credit risk; and (iii) ensures full financial sustainability • Wholesale-only, second-tier business model coupled with an effective risk management system to ensure maximum financial sustainability and minimize risks • Regulations and governance arrangements to provide for adequate transparency and disclosure requirements, including standards for accounting and auditing—overall, DFI standards should be comparable to those of publicly listed firms • Prudential regulation and supervision by the National Bank of Cambodia including (i) enforcement of requirements essentially similar to those applied to commercial banks (but taking into account the significantly lower risks taken by the DFI); (ii) strong technical oversight by MEF; and (iii) eligibility requirements for participating financial institutions. a  IFC, 2009. b  IFC, 2010. c  Adapted from World Bank, 2016b. Cambodia Policy Note | 28 The EPC would require staffing and funding for additional expense. Targeting of entrepreneurship programs, but a limited range of pilot programs programs to women and underrepresented groups is an could be offered in the short term as the EPC’s outreach and design challenge rather than a significant capacity is developed. The SME Bank would require investment. Finally, a program to attract the diaspora as a significant initial investment of capital, but should aim entrepreneurs could be initiated with minimal funding to be self-sustaining financially after establishment. support, though over time it may be attractive to provide Good governance principles listed in Box 6 should be funding support to returnee entrepreneurs considering followed for the SME Bank to avoid the costly situation the positive impact these entrepreneurs can have on some countries encounter with their underperforming the economy with the right financial and non-financial development banks. Entrepreneurship training support. programs can be integrated into universities with little Table 2. Policy Options to Support Entrepreneurship in Cambodia Objectives Short-term options (1-2 years) Medium- and long-term options (3+ years) i. Promote a culture of • Establish a “Startup Cambodia” branding • Harmonize government programs entrepreneurship and campaign that includes a package of on entrepreneurship to reduce build government entrepreneur-friendly tax incentives, duplication and confusion in the capacity to implement regulatory streamlining market entrepreneurship policy • Consider providing small grants to • Consider upgrading the incubators, tech hubs, universities, and Entrepreneurship Promotion networks to run entrepreneurship support Center to an autonomous agency programs to develop, implement, and • Utilize the Government-Private Sector monitor entrepreneurship and Forum to further incorporate the views of innovation programs entrepreneurs into policy ii. Strengthen SME linkages • Create a supplier development program • Establish sector-focused to national and regional to build the capabilities of domestic SMEs innovation centers that markets interested in linking with large exporters in encourage clustering and SEZs collaboration among MNCs, the local private sector, universities, and public research institutions iii. Address enterprise • Utilize the SME Bank and • Provide incentives for private challenges in access to Entrepreneurship Promotion Center to investment funds to target finance and business provide appropriate financing and advisory Cambodia with equity and debt services through public- services to domestic enterprises across investments, particularly for early- private entrepreneurship growth stages stage enterprises support programs iv. Attract and nurture • Initiate and set targets for entrepreneurship • Create a “Returnee” program technical and managerial training programs at universities for overseas Cambodians and talent needed by growth- a “Startup Visa” program for oriented enterprises foreigners, with incentives to attract skilled entrepreneurs to come to Cambodia and establish enterprises • Reach women and other groups currently underrepresented in entrepreneurship with targeted programs and outreach efforts Entrepreneurial | 29 References Proceedings of the National Academy of Sciences of the United States of America (PNAS), January 2014. Cambodia National Institute of Statistics, Ministry of International Finance Corporation. The SME Banking Planning, and JICA. Economic Census of Cambodia. Guide. Washington, DC: IFC, 2009. Phnom Penh: 2011. International Finance Corporation. Scaling-Up SME Cambodia National Institute of Statistics and Statistics Access to Financial Services in the Developing World. Sweden. 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Categories of players (non-exhaustive) International Support Organizations Education / Research Cambodia Institute of Technology Organizations & Donors Incubators / Accelerators Networks National University of Cambodia Young Entrepreneurs Zaman University Impact Hub Emerald Hub Association of Cambodia ADB Australian Aid NIPTICT Cambodia Women TRYBE SmallWorld Entrepreneurs JICA The World Bank University Group of Management Cambodia-Japan BarCamp Smart Start Cooperation Center USAID-Development innovation Junior Chamber Inti Corporates Tek Hub Startup Bootcamp The Asia SMART Amret U.S. Embassy Foundation Foreign cellcard Investors Incubators / Media / Government Finance Recognition Accelerators Support Structure and Organizations Young Entrepreneur NOMI International Cambodia Coco Angel Emerging Award Fashion Training Investor Club Investor Markets Investments MPTC MOIH GEEKS in Cambodia InSTEDD (iLab) Smart Axiata Digital Innovation Fund ACLEDA MEF MOC Cambodia ICT Award Mekong Business Initiative Agribusiness SEA Ventures Laksmi Prime Booster SabayNews Annex 1: Entrepreneurship Ecosystem Mapping – Mekong Strategic Partners SHE Investment Phnom Penh Post Entrepreneurial | 31 Cambodia Country Office Exchange Square Building Floor 10th IBRD and 11th IFC Streets 51-61 and streets 102-106 Sangkat Wat Phnom, Khan Daun Penh Phnom Penh, Cambodia www.worldbank.org/cambodia