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CHAPTER 3: ECONOMIC

ASPECTS OF FOREIGN
DIRECT INVESTMENT
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Official Flows
FOREIGN AID











Private Flows
FDI FPI Private
loans
ODA OA OOF
s

PRIVATE FLOWS
Foreign direct investment (FDI)
Foreign portfolio investment
(FPI)
(International) private loans
(IPL)
3.1. FDI definition

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Foreign direct investment
reflects the objective of
obtaining a lasting interest
by a resident entity in one
economy (direct investor)
in an entity resident in an
economy other than that of
the investor
direct investment
enterprise)
IMF
&
OECD
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Direct investors : individuals; incorporated or unincorporated private
or public enterprises; associated groups of individuals or enterprises;
governments or government agencies; or estates, trusts, or other
organizations that own () direct investment enterprises in
economies other than those in which the direct investors reside.


Direct investment enterprise : in which a direct investor owns
10 percent or more of the ordinary shares or voting power
HOME COUNTRY




HOST COUNTRY



DIRECT
INVESTOR
DIRECT
INVESTMENT
ENTERPRISE
FOREIGN DIRECT
INVESTMENT
Lasting interest:
- long-term relationship
- Significant degree of
management
( >= 10%)
FDI Definition (cont.)
Vu Chi Loc (1997):
Foreign direct investment is the category of
international investment that an investor in
one country invest the whole or a substantial
part of a project's capital amount in another
country to control or join in controlling
activities of that project.
FDI Characteristics
A voice in management
Threshold-equity ownership
- OECD (IMF)
- UNCTAD
- Vietnam
FDI Characteristics (cont.)
Return of investors

Technology transfer
Types of FDIodes
Linkages:
Horizontal FDI:: share the same product
lines.
E.g: Lenovo & IBMs PC Division
P&G & Gillette (2005, $57b)
Types of FDI (linkages)
Vertical FDI:: in one value chain.

-Forward integration: downstream integration.
E.g: Walt Disney & ABC Television (1996)
-Backward integration: upstream integration.
E.g: Apple & Intel (2006)


Supplier Producer Distributor
Types of FDI (linkages)
Conglomerate FDI:: no common
business areas.
E.g: Phillip Morris & General Foods
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Types of FDI (cont.)
Perspectives of host country:
+ Import-substituting FDI

+ Export-increasing FDI

+ Government-initiated FDI
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Modes of FDI entry
Greenfield vs. M&A

Greenfield (UNCTAD): undertaken to
set up a new production venture in a
host country
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Modes of FDI entry (cont.)
M & A:
- UNCTAD: transfer of assets from
domestic to foreigner investors by
merge with or acquire an existing
local firm in the host country.

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TNC MNC
???
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TNC - Definition
Dunning (1993):
A TNC is an enterprise that engages in
FDI and owns or controls value-adding
activities in more than 1 country.
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TNC Inclusion
- Parent enterprise
- Foreign affiliate
+ Subsidiary
+ Associate
+ Branch
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TNC Inclusion (cont.)

Parent enterprise controls assets of
other entities
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TNC Inclusion (cont.)

Foreign affiliate
. incorporated or unincorporated
. ownership of 10%
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TNC Inclusion (cont.)
Foreign affiliate
Subsidiary
Incorporated
Parent entity:
. 50% voting power
. Appoint or remove a majority of the members of the administrative,
management or supervisory body
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TNC Inclusion (cont.)
Foreign affiliate
Associate
Incorporated
Parent entity:
10% X < 50% voting power

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TNC Inclusion (cont.)
Foreign affiliate
Branch
Unincorporated
Parent entity: wholly or joinly own

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TNC Measurement
- Performance: Investment expenditures, sales,
assets, employment, output, exports

- No. of TNC: parent and foreign affiliates

Measurement of FDI
FDI flows vs. FDI stocks



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FDI Components
Equity capital
Reinvested earnings
Other capital (Intra-company loans)

Conclusion
FDI is:...
Lasting interest direct investment relationship
Control-effective voice in the management
The threshold equity ownership
FDI differs from other forms of
international investment
FDI is made inside investing firm
Transfer not only capital but also other assets and resources
across borders
FDI effects
Positive effects vs. Negative effects
Possible positive effects
Provide capital



Finance their investments projects better and often
cheaper

Create new jobs
Possible positive effects
Bring new technologies



Provide better access to foreign markets
Possible positive effects

Help to change the economic structure of the target country
Crowding in effect



Improve the business environment
Foreign corporations usually have a positive effects on the
trade balance

Possible positive effects
Improve the environmental
conditions


Increase the level of wages
Possible negative effects
Monopoly threat

Crowding out effect
Possible negative effects
May cut working positions




May lead to increased imports
Possible negative effects
Repatriation of the profits can be
stressful on the balance of payments

The high growth of wages in FDI
firms can influence a similar growth
in the domestic corporations
which are not able to cover
this growth with the growth of
productivity
Possible negative effects
Transfer pricing




Possible negative effects
Possible environmental damage

Incentive tourism


FPI Definitions
IMF, Balance of Payment:
Portfolio investment is the category of
international investment that covers
investment in equity and debt
securities, excluding any such
instruments that are classified as direct
investment or reserve assets
FPI Definitions (cont.)
Vu Chi Loc (1997), Foreign Investment:
Foreign portfolio investment is the category
of international investment that an investor in
one country buy securities of enterprises in
another country equal to or below a certain
threshold to gain profit but not control those
security issuers.
FPI Characteristics
- No voice in management
Sornarajah (2004)
UNCTAD

- Return of investors

FPI Characteristics (cont.)
- Less stable


- No technology transfer

IPL Definitions
Vu Chi Loc (1997), Foreign Investment:
International Private Loan is the category of
international indirect investment that
investors lend their money and gain profits
via interest.
IPL Characteristics
- Relation between investors and recipients

- Usage right of invested money

- Return of investor
FDI vs. FPI?

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FDI vs. FPI (foreign portfolio
investment)
FDI (investing in production)
Motive: profit from production
Control of foreign affiliate
Contribution: a package of
assets (capital, technology,
etc.)
Time horizon: long
Stability: relatively stable

Investors: TNCs, producers of
goods and services
Statistical definition: more
than 10% of equity stake in a
foreign company


FPI (buying shares of a company)
Dividend or a capital gain
No control
Only capital

Sometimes very short
Volatile, sensitive to financial turmoil

Financial institutions, institutional
investors, etc.
Equal or less than 10% of equity stake
FPI can be useful. It simply performs
different functions