China, Vietnam are vital but different FDI destinations

Some foreign-funded enterprises have relocated their factories from China to Vietnam or built new factories in Vietnam, giving rise to speculation that the Southeast Asian country is fast becoming a new hot spot for investment.

Initially, it was the trade war the United States launched against China that prompted foreign investment to relocate to Vietnam.

China's shrinking advantage in labor cost is another major reason for foreign investment to relocate to Vietnam. China's labor cost has been rising due to rapid growth and increasing wages, making many labor-intensive foreign-invested enterprises relocate to countries with lower labor cost and other demographic advantages. These countries, including Vietnam, have implemented preferential policies in terms of taxation, land use and employment to attract foreign investment. Also, Vietnam has signed several regional and international free trade agreements in a bid to provide favorable conditions for foreign investment.

The shifting of foreign investment to Vietnam can also be attributed to market demand. China's consumer market demand has become more refined as the Chinese people seek quality products and services. The fact that some foreign low-end manufacturing companies could not adapt to China's rapidly developing market prompted them to shift to countries like Vietnam.

Yet Vietnam is far from replacing China as the first choice for foreign investment mainly because China still offers a much better investment atmosphere than Vietnam.

First of all, China has a larger consumer market than Vietnam thanks to its relatively abundant manpower, 1.4 billion population and 9.6 million square kilometers of land area. Vietnam, in contrast, has a population of just over 100 million and land area of about 331,000 sq km. Neither its market size nor market potential can be compared with China's.

What's more, China has a more comprehensive and balanced industrial chain than Vietnam, — along with a high-end and diversified industrial structure. Besides, Vietnam's manufacturing industry is mainly reliant on low-end and labor-intensive enterprises that are adept at processing textiles, clothing, footwear and electronic products but not at high-end manufacturing.

And although Vietnam is nurturing some emerging industries such as information technology, bioengineering and automobile manufacturing, they are smaller in scale and less developed than their Chinese counterparts.

China is capable of conducting independent research and producing raw materials, whole machinery as well as parts and accessories, while Vietnam's manufacturing supply chain is highly dependent on foreign countries. Vietnam's manufacturing industry is mainly export-oriented, and the country still needs to import key components from countries such as China which occupy the upstream supply chains. This means Vietnam's manufacturing orders and production would suffer a serious blow if there is a problem with upstream supply chains.

Although China no longer enjoys the advantage of low labor cost, it is more technologically advanced and has a more efficient talent pool than Vietnam. Plus, China allocates huge amounts every year for scientific and technological innovation, making it a global leader in fields such as high-speed railways, 5G and new energy.

Moreover, a large number of high-quality Chinese talents and scientific research institutions are still facilitating the industrial upgrading of China, while Vietnam's investment in technological research and high-level professionals and talent pool are still incomparable to China — and it still relies on technology transfer from foreign investment.

China not only has a comprehensive transportation network, but also 4G and 5G communication networks that cover most parts of the country. And its developed and complete infrastructure provides efficient and fast logistics services and stable energy supply for both domestic and foreign enterprises, while Vietnam's infrastructure is relatively backward and faces a shortage of electricity during the peak summer months.

If the incoming US administration intensifies the trade conflicts with China, Vietnam, whose production chain is heavily dependent on China, is likely to suffer as well, because the US may impose more tariffs on Vietnamese goods too, with Vietnamese electronics exports being the first to be affected.

Despite foreign investment flowing into Vietnam, the country will continue to catch up with China in terms of industrial chain integrity, innovation capability, and infrastructure construction. In other words, Vietnam may not be able to replace China as the preferred investment destination for foreign investors in the short term. However, for China, Vietnam's rapid development will serve to complement each other in manufacturing and service cooperation. Good neighbors can develop together for mutual benefit.

The views don't necessarily represent those of China Daily.

The author is an associate researcher at the National Institute of International Strategy, Chinese Academy of Social Sciences.