• Vietnam’s Foreign Direct Investment

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    Notably, the rioters did not single out Chinese companies, but also vandalized companies owned by Hong Kong and Taiwan, which have little stake in the ongoing maritime disputes in the South China Sea. If the violence continues, countries could suspend or even forego their investment, which Hanoi desperately needs. In fact, roughly 20 percent of Vietnam’s foreign investment comes from China, Hong Kong and Taiwan.

    Subsequent violence could also imperil Vietnam’s investor confidence. Social stability has been a tenet of the business environment for the past few decades, and so Hanoi knows it must maintain that stability to maintain investor confidence. But it also must drum up just enough nationalist sentiment so that it has the mandate to take a stronger stance against China, particularly in regard to its territorial claims in the South China Sea. Hence, Hanoi’s dilemma.

    The China dilemma
    Despite all the anti-China sentiment and the overwhelming desire to defend its maritime territory, there is very little Vietnam can do to back up its claims. But even if it could, Hanoi is acutely aware that it needs a stable relationship with China, one of its most important benefactors.

    The situation in Vietnam typifies China’s economic strategy throughout Southeast Asia: Beijing accelerates trade and investment cooperation to foster economic dependencies throughout the region. As a result, China has been Vietnam’s largest trade partner since 2004. Hanoi imports textiles, raw materials and processed goods in bulk — materials crucial for Vietnam as it compensates for its inadequate industrial chain and its export-oriented economy.

    Though China currently does not invest significant amounts of money in Vietnam—it accounts for only 3-4 percent of Vietnam’s total foreign investment—its importance as an investor has risen quickly over the past few years. A much improved economic performance and newly relocated manufacturers have made Vietnam a preferred destination for foreign investment, which constitutes nearly 60 percent of the country’s total export revenue and 40 percent of its industrial output. Simply put, Vietnam knows it needs to protect the investment it receives, and it would be loath to sacrifice it for the ongoing protests.

    Over the years, Hanoi has tried to wean itself off its economic dependence on China, a strategy that has come alongside a plan to diversify its foreign policy and seek out other benefactors. To that end, Vietnam has expedited its economic and defense relationships with Russia, Japan and India, even as it has tried to capitalize on Washington’s “Asia Pivot.” But as Hanoi courts outside powers, it knows it must anticipate possible reprisals from China, as the past thousand years of history have shown.

    Republishing by The Manila Times of this analysis is with the express permission of STRATFOR.

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