the sun setting on China's once unrivalled attractions as a
manufacturing base? Its a controversial question and most readers would
argue the opposite — that China continues to act as a magnet for
manufacturing FDI and, most controversially, jobs once done in the west.

But a recent report from IBM Global Services on investment by multinationals suggests that the magnet's pull is weakening.

report looks at both the locations and types of investment favoured by
multinationals. Perhaps its most surprising finding is that Europe
regained the top postion in 2005, attracting 39% of all FDI projects in

Runner-up was Asia-Pacific which attracted 31% of all
projects globally in 2005, a fall of three percentage points from the
previous year. China remains Asia's number one destination for
manufacturing, attracting almost half of all the region's manufacturing
FDI projects in 2005. But the number of projects in China dropped by a
third from 840 in 2004 to 560.

Globally, the number of
manufacturing projects dropped only 20% so China seems to be suffering
hardest in the secular shift from manufacturing to services. According
to the survey, business services are now the most popular area for FDI.
Investment in R&D, another key area for FDI, remained fairly stable
worldwide, although the number of R&D investment projects in China
dropped from 143 to 126.

In contrast with China's cooling
attractions for FDI, Vietnam continued its strong performance,
particularly in manufacturing, attracting 9% of the inward investment
into Asia-Pacific.

The rise of Vietnam as a manufacturing base
is recent but the country seems intent on learning lessons from China
by transforming itself into a modern, export-oriented market economy.

Its going to be a long journey — Vietnam had a trade deficit
of over $4.5bn in 2005 — but at least one seasoned China watcher
thinks that Vietnam is moving in the right direction. After a recent
visit to Vietnam, Dan Harris of the excellent ChinaLawBlog, writes:

however, is indisputably a rising centre for manufacturing and
agriculture and it is in these two areas that I see it growing fast
over the next few years. Low end manufacturing costs are rising in
China and I can see more of that business moving to Vietnam.

EngagingVietnam anyone?

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