Adding value to the Cambodian economy every 374.41 seconds
Originally published in TradeVistas.
Foreign direct investment (FDI) is usually measured by the size of the capital investment and number of people employed by the investment. In the aggregate, global flows of FDI reached an estimated $1.52 trillion in 2016. The majority of that activity – some $831 billion – occurred as a result of cross-border mergers and acquisitions (M&A) when a company from one country combines with a company from another country (merger) or purchases another company to become the new owner (acquisition). The other prevalent form of FDI is greenfield investments when a company enters a foreign country to build its operations from the ground up.
While billions of dollars move around the world looking for productive investments, successful companies know their most important asset is their employees and the communities where they invest. Done right, companies can create significant value beyond the corporate bottom line with their FDI.
Macro Investment, Micro Execution
The success of a multi-million dollar investment can hinge on fractions of a second. This was evident on a recent visit to a shoe-manufacturing factory near Phnom Penh, Cambodia. The factory is owned and operated by a Taiwanese company that manufactures soccer cleats and sports performance shoes.
Walking through the factory doors, the smell of rubber and sound of humming machines immediately fill the senses. But it’s the numerous white boards hanging above each station of the production line that catches my eye. These boards track— down to a tenth of a second— how long it takes to finish each critical step of creating a shoe. One board in particular stands out, with the number 374.41 circled on top. This is how many seconds it takes to assemble a shoe— from cutting the fabric to placing the finished pair in a box ready to ship.
As the different components wend their way up and down the ten production lines, factory workers in color-coded uniforms and cotton face masks make their contribution to each shoe. One woman focuses intently, using a rudimentary stamping machine to punch precise holes into each shoe for the shoelaces. At each stage of the process, the success of this FDI is literally in the hands of the workers.
Investing in the Community
Developing countries like Cambodia rely heavily on investments from foreign companies, especially from neighboring countries in Asia. According to the Council for Development of Cambodia (CDC), nearly 90 percent of capital invested in Cambodia in the past five years came from countries in Asia. In 2016, China, Japan and Thailand were the country’s largest investors.
Cambodia recorded just $1.7 billion in total FDI investment in 2015, but those investments represented a whopping 9.4 percent of the country’s total GDP. In comparison, the United States recorded nearly $380 billion in total FDI inflows during the same year, but FDI only contributed 2.1 percent of total U.S. GDP.
Cambodia tends to attract substantial FDI in the footwear and garments industry due to its supply of low-cost labor and supportive foreign investment laws. Although it lags behind developed countries and its more established Southeast Asian neighbors such as Vietnam and Indonesia, the stock of FDI in Cambodia has steadily increased to over $16.5 billion dollars as of 2016. And as FDI increases, unemployment in Cambodia has decreased.
These types of investments make an impact on local communities and workers. The Taiwanese shoe company, for example, hires 95 percent of its workforce from the local area surrounding the factory and a majority of them are women. The company has initiated a number of programs to support the community, including offering four-year local university scholarships to qualified children of their employees. It was also the first factory in the area to provide its employees with free lunch every day.
Perks like these don’t just benefit the employees, they provide return to the company as well. The university scholarship program is part of a long-term growth strategy to produce more engineers, lawyers and logistics managers for the company, three priority skill sets it says it desperately needs. The free lunch program helps ensure workers get the nourishment they need and reduces the turnover rate.
Not every company is as focused on engaging and giving back to the community where they locate their investments, but many are.
Value Created Every 374.41 Seconds
As the Cambodian shoe factory hums on, boxes begin piling up at the end of the production lines. As each second ticks by, shoes are cut, assembled, checked and boxed for shipment. With every completed pair of soccer cleats, the physical value of foreign direct investment materializes.
Somewhere across the world, a new investment is announced. Although it is the multi-million dollar price tag that makes the news headlines, the true value is what can be created in just 374.41 seconds.
Author: Lauren Kyger – Research Associate at the Hinrich Foundation.