Is China's Manufacturing Relocation Helping Southeast Asia Industrialize?

Is China's Manufacturing Relocation Helping Southeast Asia Industrialize? Over the past several years, Chinese manufacturers have increasingly shifted operations to Southeast Asia. Rising labor costs in China, along with geopolitical tensions such as the US-China trade war and the global trend toward supply chain diversification, have driven this strategic move. Dubbed the "China Plus One" strategy, this relocation echoes Japan’s industrial shift to Southeast Asia in the 1980s and 1990s. While it brings promise, the question remains: will this wave of investment lead to long-term development or simply reinforce the region's middle-income trap? China’s economic engagement in the region can be explored through the World Bank’s "three I’s" framework: investment, infusion, and innovation. In terms of investment, Chinese greenfield foreign direct investment (FDI) in manufacturing across ASEAN nations doubled from an annual average of US$6.1 billion (2016–2019) to US$12.9 billion (2020–2023). This investment has outpaced inflows from the US, Japan, and South Korea. In 2023 alone, China accounted for one-third of all manufacturing investments in Southeast Asia. Vietnam, Thailand, Indonesia, Malaysia, and Cambodia are among the top global recipients of this capital. In countries like Cambodia and Vietnam, the scale of Chinese investment has been remarkable when compared to their initial manufacturing capabilities. Cambodia, for example, received US$2 billion in Chinese manufacturing FDI from 2016 to 2023—significant relative to its 2016 manufacturing value added of US$3.2 billion and merchandise exports of US$8.5 billion. However, not all investments yield the same developmental returns. Capital-intensive projects, such as mineral refining in Indonesia, mainly serve to export processed materials back to China, limiting local value creation. Other export-driven investments are better positioned to benefit from Southeast Asia’s location between Chinese suppliers and US consumers. A third of Chinese FDI in Vietnam, for instance, has gone into electronics like semiconductors and communication equipment. This helped Vietnam raise its global electronics market share from 2.68% in 2016 to 4.48% in 2022. By leveraging cheap Chinese inputs and strong US demand, Vietnam is seeing tangible productivity gains. Similarly, foreign investments in electric vehicles (EVs) across Thailand, Malaysia, Vietnam, and Indonesia are aimed at upgrading local capabilities and reducing import dependency. Infusion, or the integration of foreign technologies into local economies, is the next phase. Chinese and other FDI have helped expand the manufacturing sectors of countries like Cambodia and Vietnam. Between 2016 and 2023, these countries have seen rising shares of manufacturing in GDP and employment. However, this growth has not always translated into a shift toward higher-value manufacturing. Much of the work remains concentrated in low-end production like garment-making or assembly of electronics, rather than in the production of complex components. This limitation is evident in countries’ Economic Complexity Index (ECI), a measure of an economy’s capability to produce sophisticated goods. While Vietnam, the Philippines, and even Myanmar have shown improvements in ECI since 2016, other nations like Indonesia, Malaysia, and Thailand have stagnated. This suggests that large investment inflows alone have not significantly boosted knowledge intensity in many Southeast Asian economies. The final piece—innovation—is the most critical and difficult to achieve. Innovation involves a country’s ability to develop and commercialize new technologies. Although patent filings and R&D initiatives are growing across the region, much of the actual research remains concentrated in more developed hubs like Singapore. Investments in AI infrastructure and national digital strategies show promise, but obstacles such as rising labor costs, talent shortages, and limited tech transfer from foreign firms persist. To turn these investments into long-term gains, Southeast Asian countries must go beyond just receiving FDI. They must create policies that promote technology and knowledge transfer, strengthen domestic institutions, and upskill their workforce. Encouraging deeper links between foreign investors and local supply chains, empowering domestic SMEs, and fostering joint ventures can help build genuine production and innovation capabilities. The global landscape is shifting fast, and a prolonged US-China trade war could slow China’s investment into the region. But with the right structural reforms and strategic focus, Southeast Asia has a real opportunity to position itself as a global manufacturing hub—not just as an assembler of foreign technologies, but as a source of innovation and growth in its own right.

Is China's Manufacturing Relocation Helping Southeast Asia Industrialize?

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Is China's Manufacturing Relocation Helping Southeast Asia Industrialize?

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