Governments in Asia and the Pacific are reforming regulations to reduce business costs and attract investment. Cambodia is showing that evidence-based tools and digital platforms can create fairer and more effective rules.
Governments across Asia and the Pacific are challenged with designing business-friendly regulations that encourage innovation and promote investment. Achieving this requires a regulatory approach that minimizes compliance burdens while safeguarding public interest. The need for smart regulation is more pressing than ever, with developing countries seeking a competitive edge as escalating trade barriers disrupt global value chains.
Take Cambodia, for example. It is an export-oriented economy now faced with unpredictable demand from its top export market. The government has a bold economic vision to become a high-income country by accelerating private sector-led economic diversification into digital services, agro-processing, and complex manufacturing, as well as advancing human development and strengthening resilience.
But in the short term, maintaining economic growth and poverty reduction will depend on defending its global market share of basic manufacturing exports, especially clothing and electrical equipment. These are product markets with razor-thin margins and fierce regional and global competition.
According to a recent case study, half of the total cost to produce and prepare a Cambodian t-shirt for export consists of raw material costs, 40% is evenly split between labor and infrastructure costs, and the remaining 10% is attributed to compliance costs. Compliance costs include expenses incurred to meet the standards of international buyers and local regulators.
As countries converge in their access to productive inputs, competitiveness increasingly depends on the cost of doing business. About 10% of the cost of a t-shirt may not sound like much, but with tight margins, regulatory considerations can make a pivotal difference in production decisions. Indeed, analyses of historical data and investor surveys alike show that regulatory quality is a determining factor for foreign direct investment flows to developing countries.
Recognizing the need for streamlined business regulations, Cambodia has passed landmark legislation in the past five years, including the 2019 E-Commerce Law and 2021 Law on Competition. It plans to continue making progress in business-friendly policies, especially with respect to digitalization. But these laws have yet to translate into private sector dynamism.
Business-friendly regulation can be designed by focusing on clarity, efficiency, and inclusiveness.
While the economy has grown steadily at 5.4% annually (excluding COVID-afflicted 2020), domestic private sector growth is held back by regulatory uncertainty, burdensome processes, and low enforcement at all stages of the business lifecycle. Based on international benchmarking exercises, Cambodia has much room for improvement on indicators of regulatory framework and regulatory burden. According to the World Bank’s World Governance Indicators, Cambodia ranks 8th out of 10 among ASEAN countries in regulatory quality score.
Business-friendly regulation can be designed by focusing on clarity, efficiency, and inclusiveness. This involves setting clear regulatory objectives aligned with economic goals and consulting stakeholders early, especially small businesses.
Evidence-based tools like regulatory impact assessments (RIA) can, when applied appropriately, help ensure that rules are fair, effective, and proportionate to the issues they aim to address, including considerations of gender equity. They can also help ensure that new regulations do not have unintended negative consequences. In the Republic of Korea, recent cutting-edge fintech regulation used a regulatory sandbox approach to strike a balance between fostering innovation and protecting consumers. The approach was informed by core RIA principles – consulting stakeholders, consideration of alternative approaches, and cost-benefit analysis.
The experience of countries like the Republic of Korea, where regulatory impact assessments have been mandatory for over two decades, underscores that such tools are only effective when embedded in a broader system of political commitment, institutional capacity, and transparency.
If treated as a box-ticking exercise or bypassed for urgent policy decisions, its potential is diminished, and it may even be counterproductive. For the process to be transformative, it must be ingrained in regulatory culture and supported by regular training, clear procedures, and adequate resources.
Business-friendly regulations can also be achieved by creating a policy environment that supports private sector development, while safeguarding public interests like health, safety, the environment, and fair competition. Governments can streamline procedures, reduce red tape, and leverage digital platforms to significantly lower compliance costs. Ensuring transparency, legal certainty, and fair enforcement builds trust and encourages formal business activity. Finally, regular review and coordination across agencies help keep regulations relevant in support of private sector growth.
As developing countries seek to build more inclusive and resilient economies in the wake of global shocks, embedding the assessment of laws into policymaking can help achieve growth that is both sustainable and equitable, while enhancing investor confidence and unlocking the full potential of the private sector.
Investments in regulatory quality are just as critical as building infrastructure for unlocking sustainable growth, diversifying economic composition, expanding export markets, and attracting diverse investments.