Attracting FDI: Opportunities and Challenges as Chinese Manufacturing Firms rush to Vietnam

Chinese investment in Vietnam has increased by almost 70% in 2023, with a focus on supporting industries for global manufacturing. This influx of investment is pressuring the domestic manufacturing sector. Chinese FDI is flowing into northern provinces, with major projects being established. China now leads in new FDI projects in Vietnam, surpassing countries like South Korea and Japan. This trend is due to the U.S.-China trade tensions, causing corporations to shift production away from China. Vietnam is seen as an attractive alternative for these companies. However, there are concerns about competition for domestic enterprises, the risk of counterfeiting, environmental pollution, and dependency on Chinese FDI. Selective FDI attraction and tighter screening processes are recommended to address these risks. Additional legal provisions are also needed to balance FDI attraction with economic and national security concerns. Chinese investment continues to pour into Vietnam after investment from this country surged nearly 70 percent in 2023. Of note, this investment flow is seeing significant growth in supporting industries to supply global manufacturing conglomerates in Vietnam. Alongside the positive figures regarding FDI attraction, this shifting tide is exerting significant pressure on the domestic manufacturing sector in the long run. The influx of Chinese FDI has been bustling into northern provinces since the beginning of the year. On April 4th, Jelex Inco Group and the new energy vehicle brand Omoda and Jeku, under Cherry Group, signed a joint venture contract to build a factory in Thai Binh with a capital of over $800 million, with a capacity of 200,000 vehicles per year. Meanwhile, the electric scooter manufacturer Yadea is urgently constructing its second factory in Bac Giang province with a capacity of 2 million motorcycles per year, four times that of the first factory which began operations in 2019 in this locality. It is anticipated that 30 percent of the output from the new factory will be exported to the Philippines, Thailand, Malaysia, and Laos. In Bac Ninh province, out of 105 FDI projects licensed in the first quarter of 2024, over half, 60 projects, are from investors from this populous country. Looking at the national overview, statistics from the Ministry of Planning and Investment show that China has surpassed countries with significant investments such as South Korea, Japan, and Singapore to lead the number of new FDI projects in Vietnam. Specifically, China accounts for 27.8 percent of the 644 newly licensed projects in the first quarter of 2024. Rushing into Vietnam alongside international giants, according to experts, the U.S.-China trade tensions have led to an increasing number of large corporations shifting their production away from China. Consequently, Chinese small and medium-sized enterprises, SMEs, within the supply chains of these corporations are also relocating. On the other hand, many foreign investors with manufacturing plants in China, due to caution regarding supply chains, have sought alternative sources outside the territory of this country. In this wave, Vietnam is being viewed as an attractive destination in the Southeast Asian region. As a result, a series of Chinese companies are swiftly bringing investment projects for manufacturing plants following the footsteps of international giants to Vietnam. These new projects are primarily to serve the big names that have previously established a presence. In addition to international enterprises, companies at both ends of Chinese industrial supply chains are also enticing each other to Vietnam to establish production links, creating a closed-loop supply chain in production and business. With its strategically important location bordering China, a large supplier of goods and materials, and being a large market, Vietnam has the conditions for investors to reduce transportation costs and establish stable supply chains in China. Therefore, Vietnam is evaluated as the top choice in the ASEAN region in this trend. Major challenges for domestic manufacturing. In addition to the positive impacts of attracting FDI, the massive shift of Chinese enterprises also becomes a major concern for Vietnam. Competitive pressure, domestic enterprises, especially those in supporting industries, may face significant competitive pressure from Chinese enterprises due to their advantages in technology, finance, and experience. Risk of exploitation. Vietnam may become a staging ground for Chinese enterprises to counterfeit the origin of goods, thereby affecting the reputation of Vietnamese goods in the international market. Environmental risks. Some Chinese investment projects may cause environmental pollution if not managed tightly. Dependency risk, over-reliance on FDI from China may make Vietnam vulnerable to economic fluctuations in the Chinese economy. Forecasting an increasing influx of Chinese capital, analysts recommend the need for selective FDI attraction, where the responsibility of project appraisal units should be enhanced, screening and monitoring processes tightened. Projects with outdated technology, excessive labor exploitation, and environmental pollution should be absolutely prevented. According to experts, efforts to attract investment should involve additional legal provisions to address gaps and balance between attracting FDI and avoiding economic and national security risks.