Unfinished Business – Closing Cambodia’s Productivity Gap

few years ago, a small Cambodian garment manufacturer experienced impressive growth and set out to expand its business even further. The owner had a clear vision—invest in new machinery, hire more workers, and secure contracts with international buyers. But turning that vision into reality proved difficult. Regulatory and tax procedures, along with limited access to affordable finance, slowed expansion efforts. After investment took place, workers lacked the necessary skills to operate new equipment efficiently, and training took time. Production remained slow, defect rates were high, and output per worker stayed low. With limited productivity gains, keeping wages low was the only way to stay competitive. This story is not unique. It reflects a broader challenge. Cambodia’s economy is growing, but to sustain that growth and raise living standards, productivity must take center stage. 

Historically, productivity has not been a growth driver in Cambodia. In fact, at the macro level, productivity declined with total factor productivity shaving off an annual average of 2% of Cambodia’s GDP growth over the past decade, as we pointed out in a blogpost from 2023. To better understand the roots of this weak productivity, we recently analysed novel firm-level data. This blog highlights some of the key findings and suggests priority reform areas to support higher firm-level productivity in Cambodia. 

Let’s start with some basic facts—what does the data tell us about the productivity of registered (formal) Cambodian firms? The numbers suggest huge potential to increase productivity. Labor productivity—measured as output per worker—lags significantly behind Cambodia’s peers. According to Enterprise Surveys data, Cambodian firms are, on average, 41% less productive than those in comparable economies. The gap spans industries, with manufacturing trailing by 28% and services by 43%. (Figure 1).  

Figure 1. Labor productivity among Cambodian firms compared to other countries, by sector 

Source: Enterprise Surveys for Bangladesh (2022), Cambodia (2023), the Philippines (2023), and Vietnam (2023), World Bank.  

Note: Enterprise Surveys only cover private registered firms in the manufacturing and services sectors. They exclude informal firms and state-owned enterprises as well as the agricultural and government sectors.  
1. Comparator group includes Bangladesh, the Philippines, and Vietnam. 

But not all firms are created equal. Geography matters. Perhaps not surprisingly, firms in Phnom Penh are 73% more productive than those in remote, mountainous regions. Size matters, too. Small and large firms tend to be more productive, while mid-sized firms struggle. These businesses face unique barriers that make scaling up harder (Figure 2).  

Figure 2. Variation in labor productivity among Cambodian firms based on their characteristics

Figure 2. Variation in labor productivity among Cambodian firms based on their characteristics 

Source: Enterprise Survey for Cambodia (2023), World Bank.  

Note: 1. The Plains includes southern provinces that surround the capital such as Kandal and Prey Veng. Tonle Sap includes provinces such as Siem Reap and Battambang. The Mountains includes northern and northeastern highland provinces such as Kracheh and Preah Vihear.   

And the productivity divide doesn’t stop there. Within every sector, there’s a wide gap between the best-performing firms and the rest. Cambodia’s most productive companies—the top 10%—are, on average, 13 times more productive than those at the bottom (Figure 3, Panel A). In services, this gap widens to 18 times. These high-performing “frontier firms” tend to be based near the capital, embrace advanced management practices, and leverage technology. 

Figure 3. Variation in labor productivity among Cambodian firms based on their performance and compared to other countries 
Panel A 

Panel B 

Panel C 

Source: Enterprise Surveys for Bangladesh (2022), Cambodia (2016 and 2023), the Philippines (2023), and Vietnam (2023), World Bank.  

Note 1: Comparator group includes Bangladesh, the Philippines, and Vietnam. 

Yet, despite their national success, Cambodia’s frontier firms still lag behind their regional peers. In other countries, the best firms are much further ahead of the laggards, driving national innovation and raising overall productivity. In Cambodia, that gap is narrower, limiting their ability to drive innovation and productivity gains (Figure 3, Panel B). Even more concerning, Cambodia’s frontier firms operate far below the regional productivity frontier—let alone the global one. The numbers are stark: the average productivity of Cambodia’s top firms (around $25,000 per worker) is roughly the same as the median firm in Vietnam and a staggering 83% below the average of peer frontier firms (Figure 3, Panel C). 

This means Cambodia’s productivity challenge isn’t just about lifting the bottom—it’s about pushing the top further. If Cambodia is to compete at the next level, it must empower its frontier firms to break new ground—and pull the rest of the economy forward.  

So what can be done? 

First, Cambodia must accelerate the shift toward higher-value-added sectors, value chains, and activities. The reality is that not all firms—and not all sectors—are equally productive. In fact, Cambodia’s services firms are almost twice as productive as its manufacturing firms, with “other services” leading the way and “other manufacturing” lagging behind. And despite its historical export success, Cambodia’s garment sector remains one of the least productive, stuck in low-value final assembly (Figure 4). To break through this ceiling, Cambodia must reignite and accelerate structural transformation. That means shifting firms and workers toward higher-value activities—both within sectors and across the economy. It means enabling businesses to move from low-productivity to high-productivity industries and facilitating the transition from rural to urban areas where opportunities are greater. To get there we need to accelerate reforms that make it easier and faster for new firms to enter the market, for successful ones to grow and for underperforming ones to exit.

Figure 4: Average labor productivity by sector in Cambodia

Mean value-added per employee by sector and sub-sector (2023, USD), N=500

Source: Enterprise Survey for Cambodia (2023), World Bank. 

Second, for Cambodia to unlock its full economic potential, its firms must modernize, digitalize, and look beyond domestic borders. Take training. Firms that offer formal training programs see a 29% productivity boost—yet only 10% of firms provide such training. Similarly, technology matters too. Firms that have a website and use electronic payments tend to be more efficient and competitive. Professional management also helps. Firms led by an independent professional manager —not the owner—are 20% more productive. But in Cambodia, 95% of firms are still managed by their owners (Figure 5).  Market orientation is another key driver. Exporting manufacturers are 29% more productive than those focused solely on the domestic market. Yet, too few firms are seizing global opportunities. To enable Cambodian firms to reach regional and global markets, better transport and logistics infrastructure is essential.  

Figure 5. Variation in labor productivity among Cambodian firms by practice (mean value-added per employee, US$) 

Source: Enterprise Survey for Cambodia (2023), World Bank.   Note: * Manufacturing firms only. 

Finally, a more dynamic private sector starts with a business environment that works for businesses. Ask any business leader in Cambodia what’s holding them back, and the answers are strikingly consistent: competition with informal firms, taxes, informal payments, courts, and transport. These challenges dominate firm surveys, with 78% of businesses citing informal competitors as a major obstacle, followed by 68% pointing to tax rates and 57% raising concerns about informal payments and courts (Figure 6). 

While Cambodia’s business environment has improved over time, it remains tougher than in many peer economies. Compared to firms in Vietnam, the Philippines, or Bangladesh, Cambodian businesses report greater difficulties across nearly every aspect of the business climate (Figure 6).  

Building on previous efforts, there are many things that could be done. By digitizing business registration and adopting risk-based licensing, firm registration could be made faster, easier, and more beneficial—especially for small businesses. This would encourage more informal businesses to transition into the formal economy, unlocking greater growth potential. A transparent, predictable tax system is just as critical. Compliance should be simpler, and informal payments must be curbed including through digital solutions that reduce face-to-face interactions. Finally, at the core of a functioning business environment is the rule of law. Courts must be fair, fast, and transparent. Establishing specialized commercial courts, increasing transparency, and digitizing case management could make dispute resolution more efficient and reliable.

 Figure 6. Ranking of obstacles to doing business in Cambodia over time and compared to other countries  

Source: Enterprise Surveys for Bangladesh (2022), Cambodia (2016 and 2023), the Philippines (2023), and Vietnam (2023), World Bank.  

Note 1: Comparator group includes Bangladesh, the Philippines, and Vietnam. 

Economies thrive when businesses thrive. As the Growth Commission report stated many years ago: “GDP growth may be measured in the macroeconomic treetops, but the real action happens in the microeconomic undergrowth—where new limbs sprout, and deadwood is cleared away.” Cambodia has the potential to close its productivity gap, but to do so, it must create an environment where businesses can sprout to do so—because when they do, the entire economy rises with them.