By: Jo Qiao
Why multinational corporations choose Vietnam instead of India?
The raising tariffs caused by the escalation of the US-China trade war and continuously increasing Chinese labor costs make exports from China more expensive for US importers. In reaction to this situation, numerous western companies and investors are relocating their manufacturing factories from China to Southeast Asian countries and generating a huge sum of Foreign Direct Investment – or FDI – and numerous development opportunities.
However, the performance of Southeast Asian countries is not very balanced amongst each-other. According to a finding by a Japanese financial group, Nomura, of the companies that relocated out of China, 3 out of 56 companies have relocated to India, while 26 went to Vietnam between April 2018 and August 2019. Despite the small population of only 100 million, Vietnam stood out from other Southeast Asian economies during the trade war. The Financial Times reported in their analysis of data from the United States International Trade Commission, imports from Vietnam to the U.S. surged nearly 40 percent in the first four months of 2019. Surprisingly, India has not capitalized on their position to take advantage of the current global economic situation, even with cheap labor costs and a huge population. The main reasons that cause this distinction between these two developing countries is dependent on the difference in their labor quality and trade policies.
Vietnam is now in a period of golden population structure – 45% are under 30 years of age. Each year, more than one million people are added to the workforce. With the strong power of its labor union and extremely progressive national labor laws, Vietnam has a strong workforce with competitive wages and a high female participation rate. Seeking to satisfy the need of tech companies, Vietnam now focuses on increasing the productivity, skills, and quality of labor to remain competitive. These high-quality labors will bring growth to the middle class, which is very attractive to Western corporations because it boosts not only production efficiency, but also consumption.
India, despite its huge population and low wages, is not competitive in its labor force. India’s population is amongst the unhealthiest in south Asia, and the quality of its education leaves a lot to be desired. India is still suffering from a low labor participation rate. Worse, within the Indian employment population, the vast majority is still stuck in informal sectors, which equates to low total factor productivity and quality. In recent years, some companies are choosing to go from manufacturing in India to just assembling in India because they cannot obtain parts in the quantity and consistency they demand.
What’s more, when seeking long-term, advanced socio-economic development, Vietnam is highly valuing “high quality” FDI inflows. Vietnam is now focusing on on FDI projects that use advanced technologies and projects with competitive products that could be part of the global production network and value chain.
To fulfill its goal, the government is committed to creating a fair and attractive business environment for foreign investors, and constantly improving its legal framework and building advanced infrastructure related to business and investment. Furthermore, Vietnam is a member of the World Trade Organization and a part of multiple frameworks for international economic integration, including free trade agreements with partners both within and outside the region. Viewing the success of FDI enterprises , Vietnam is now actively promoting the negotiation of a new generation of free trade agreements. These factors all contribute in some way to explain why so many choose to invest in Vietnam, and should draw in more foreign investors.
When seeking long-term development, India should learn from Vietnam. It needs to further liberalize trade, spend more on infrastructure construction, reform land, and labor laws and offer tax breaks for foreign investors. The good news is, India is aware of this and making moves in the right direction. The recent cut in the corporate tax rate will help put India in a new period of growth.
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