China FDI falls. Are cheaper rivals to blame?

While China as been a go-to destination for all sorts of work, including back office service centers, Foreign Direct Investment (FDI) has fallen relative to last year.  No firm conclusions can be drawn from this one statistic alone, but it does raise the question of investment choices as companies evaluate where to make future investments..  

It's no secret that China's coastal cities aren't the bargin they once were.  However, they're still proven locations within China to set up shop, and there are up-and-coming locations in China's interior such as Chengdu, in the Sichuan province in Southwest China.  The challenge for China is that it's lower cost neighbors have been watching China's success and working to emulate them.  That means more choices for Western companies to invest.

A recent article from the South China Morning Post has the details.  Here's an excerpt:

China’s foreign direct investment inflows fell at their fastest rate in more than three years in January, highlighting the challenges it faces competing for funds with cheaper rivals in a sluggish global growth environment.

China Commerce Ministry data on Wednesday showed the world’s second-biggest economy drew in US$9.3 billion (HK$72.12 billion) of foreign direct investment (FDI) in January, down 7.3 per cent on a year ago.

The fall was the steepest in year-to-date inflows since a 9.9 per cent drop in November 2009, and it was the worst January performance in four years.

January FDI was down from December’s US$11.7 billion, with inflows from key Asian economies and the United States down in the latest period, reflecting what analysts say are foreign perceptions of a decline in China’s near-term growth prospects.

Zhang Zhiwei, chief China economist at Nomura in Hong Kong, said the continuing fall in FDI – the longest consecutive run since the global financial crisis – was indicative of the rising competitive challenges facing the world’s biggest manufacturer of exports.

“We expect more multinational companies will increase investment in cheaper countries, such as Vietnam and Indonesia,” Zhang told said.

If nothing else, this story illustrates that companies increasingly have choices when it comes to Asian operations.  A country like Vietnam doesn't necessarily have the infrastructure or trained labor pool that China has, but it isn't for lack of trying.  These countries are making investments in these very areas and may soon be credible alternatives to China for locating operations, including back-office staff for finance and accounting.