It was 1997 when Taro Tanzaki first arrived in Cambodia. His first trip from Tokyo to Phnom Penh allowed the Japanese university student to witness the vast difference between Cambodia and his home country.
In addition to the small, ancient airport in Phnom Penh, Tanzaki recalls that the city had no tall buildings and even the main roads were dusty and without traffic lights. He had arrived in the country to volunteer at the Japanese Embassy at a time when trade and business ties between the two countries were marginal.
"I remember that the relationship between Cambodia and Japan at that time was only in the sector of development cooperation, not economic cooperation," he said, adding that hundreds of millions of dollars from were flowing into the country but all for development projects.
Japanese businessmen overlooked the investment opportunities, he added. "At the time, it was difficult to find Japanese companies in Cambodia."
Tanzaki left Cambodia in 1999 after finishing his two-year volunteer assignment, and it would be 13 years before he returned. When he did come back in 2012, it was to a vastly bigger and busier airport for a start. The holder of a bachelor's degree and two master's degrees from abroad, he got down to work to support the expansion of Japanese businesses in Cambodia. He is now a project formulation adviser for the Japan International Cooperation Agency (Jica), working at the Japan Desk in the offices of the Council for Development of Cambodia (CDC).
Tanzaki's story reflects the positive change in economic cooperation between Cambodia and Japan. While Japanese investment in Cambodia was minimal in the past, more companies from Japan are setting up shop in the Kingdom. Bilateral trade is starting to flourish.
According to CDC figures, Japanese investment in Cambodia from 1994 to 2014 totalled US$732 million, most of which came after 2010. From 1994 to 2010 the total was just $236.5 million. In the first six months of this year, Japanese investors applied for licences for seven projects worth $45 million.
While many of the projects involve garment manufacturing, one investor — Sunrise Healthcare Service Co — is building the first Japanese hospital in Cambodia. The $35-million facility is scheduled to open in 2016.
A handful of other major Japanese companies have also established themselves in Cambodia. Aeon Mall — the country's largest shopping mall with a $205-million investment — was officially opened in Phnom Penh in July last year. Minebea, Sumitomo and Ajinomoto have already set up plants in special economic zones.
The Phnom Penh Special Economic Zone, Cambodia's largest industrial park, is now home to 77 firms employing more than 16,000 workers. Forty of the companies are Japanese.
Cambodian exports to Japan have been increasing by 30% annually for the last five years and were worth $776 million last year, according to figures from the Japan External Trade Organization (Jetro). Total bilateral trade was worth $1.03 billion, so Cambodia is running a huge surplus.
Suzuki Hiroshi, chief economist with the Business Research Institute of Cambodia, said that Cambodia's relative economic stability, cheap labour, duty-free exports and, most importantly, special economic zones have been the most important factors in burnishing the country's image as a good place to do business.
"The major source of Japanese foreign direct investment (FDI) is for labour-intensive parts manufacturing businesses whose products are exported to neighbouring countries and Japan," he said. "This helps very much with the effort of Cambodia to diversify its export items (beyond garments) and export destinations."
A woman works at one of the 40 Japanese-owned factories in the Phnom Penh Special Economic Zone.
Mey Kallyan, a senior adviser to the Supreme National Economic Council (SNEC), said Cambodia would benefit from more Japanese investment to help it move from a labour-intensive economy to one centred on manufacturing. He added that Japan could play a key role in diversifying Cambodia's economy.
"If we look at the development stages in Asia including China, Korea, Taiwan, Singapore, Malaysia and Thailand, even if the development outcome is largely from the effort of individuals, behind that we also see the contribution of Japanese investment," he told Asia Focus. "I see that wherever Japanese go, they always invest in the manufacturing sector in a country. Thus, the industrial sector starts to develop."
However, some challenges remain. As Cambodia prepares for Asean economic integration, it still needs to overcome skills shortages, inadequate infrastructure and spotty electricity supply.
"The quality of education would be one of the important focus areas," Sais Jun Arii, vice-chairman of the 200-member Japanese Business Association of Cambodia (JBAC). "It is necessary to improve the education sector."
Still, Arii said that Cambodia's location between Thailand and Vietnam was making it highly attractive to more Japanese firms to set up shop and export to other countries.
Japan has been working with the Cambodian government to strengthen its education system. Some aid money is also being allocated to skills training in science, technology and engineering.
For Taro Tanzaki, who has seen many stages of development in Cambodia, Japan will remain one of the country's most important donors and investors. With the rising cost of labour and political instability in countries traditionally targeted by the Japanese for investment, Cambodia is still a good place for Japanese businesses.
"I think the garment sector and labour-intensive industries will keep coming," he said. "Plus, the number of big investment projects such as in the automotive and electronics industries will just keep rising."