International Resource movements

and Multinational Corporations

• International capital movement

• International labor movement
• Multinational Corporations
• International investment in
Vietnam
 International trade and resource movement (1)

•International trade • Resource movement

• If labor moves among two
Vietnam US countries, VN decreases 1S, 1
Steel (kg/man-hour) 1 4 man-hour moves from VN to
US that produces in US 1S and
Cloth (m/man-hour) 2 3 9/4C.
If decreased 1S, VN increases 2C. • The scale of the world
US increases 1S that decreases VN US World
3/4C. Steel (kg/man-hour) -1 +1 0
The scale of the world Cloth (m/man-hour) 0 9/4 +9/4
VN US World • The labor movement increases
Steel (kg/man-hour) -1 +1 0 the scale of the world output
Cloth (m/man-hour) 2 -3/4 + 5/4 than international trade
Each more 1S produced in US increases
5/4 C of the world output
 International investment (2)

• Two types of foreign investments: portfolio and direct

investment.
• Portfolio investment (financial investment) are the
across movement of purely financial assets, such as
bonds and stocks denominated in a national currency.
• * Main characteristics:
+ Investors get fixed payouts at regular intervals
+ Investors purchase equity or claim on net worth of firm
+ Takes place by financial institutions: banks and
investment funds
+ Diversify the risks
 International investment (3) (cont.)
• Direct investment are the real investments in factories,
capital goods, land, and inventories.
• * Main characteristics:
+ Investors retain control over use of the invested capital
+ Takes the form of a firm starting a subsidiary or taking
control of another firm.
+ Increase the assets for economy
+ It is the principal channel of international private
capital flows, technological transfer and management
acquisition.
 Motives for International Portfolio
Investment (4) (cont.)

• To earn higher returns abroad

• To take the risk diversification (obtain at a
smaller risk)
** Suppose stocks A and B have a rate of return of 30%
on average, but there is a fifty-fifty chance that the
yield will be either 20% or 40% on stock A and 10% or
50% on stock B. Stock B is riskier than stock A. Since
both stocks have the same yield on the average,
investors should purchase stock A to minimize the
risks.
 Motives for Direct Foreign Investment (5) (cont.)

• To earn higher returns abroad (higher growth rate,

more favorable tax treatment, greater availability of
infrastructures)
• To take the risk diversification (obtain at a smaller risk)
** Horizontal integration relates to the production
** Vertical integration relates to the sales and
distribution networks
* Avoid tariffs and other restrictions, share the profits
*Avoid the future competition
* Accessing to natural resources, cheap labor or large
markets
 Welfare effects of International Capital Flows (6)

Nation 1 Nation 2
F J
M
E H
R
N T
G
C
MPK1
MPK2
O B A O’
Total capital stock of N1 and N2 combined
Of the total capital stock of OO’, N1 holds OA and its total output is OFGA,
while N2 holds O’A and its total output is O’JMA. The flow of capital from N1
to N2 equilizes the return on capital in two nations at BE. This increases world
output by EGM, of which EGR accrues to N1 and ERM to N2. Of the increase
in total domestic product of ABEM in N2, ABER goes to foreign investors
leaving ERM as the net gain in domestic income in N2.
Other effects on the investing and host countries (7)

• Redistribution of domestic income from labor to

capital while investing country as a whole gains from
investing abroad, from capital to labor while the host
country gain from receiving foreign investment.
• Affecting the balance of payments of the investing
and host country
• Affecting the terms of trade by influencing the output
and the volume of trade of both relating parties.
• Affecting the technological lead and economic policy
 Multinational Corporations (8)

• MNCs are firms that own control or manage the

production facilities in different countries.
• They play a very important role in the international
investment for the development of the world economy
• Reasons for existence of MNCs:
• * Competitive advantage of global network of
production and distribution by horizontal and vertical
integration
• * Gain the economies of scale
• * Research and Development (R&D)
• * Transfer pricing
 Problems created by MNCs (9)
• For the home country
• * Unemployment
• * Undermine technological superiority
• * Transfer pricing
• * Make difficult for implementing the monetary policies and controlling the
economy.
• For the host country
• * Dominate the economies
• * Low prices paid to host nations
• * Use of highly capital-intensive production techniques inappropriate for
labor-abundant developing nation
• * Lack of training of local labor, overexploitation of natural resources
• Creating highly dualistic “enclave” economies
 Electic paradigm (10)
(Dinning)

• Ownership advantage
• Location advantage
• Internalization advantage
 The policy toward FDI attraction in VN (11)
• VN encourages foreign investors to invest in VN on the basis of respect for the
independence and sovereignty of VN, observance of law, equality and mutual
benefit.
• VN protects the ownership of invested capital and other legal rights of foreign
investors, provides favorable conditions and formulates simple and prompt
procedures for foreign investors investing in VN.
• Foreign investors may invest in VN in sectors and regions.
• * The sectors encouraged are: production of exports; animal husbandry,
farming and processing of agricultural produce, forestry, and aquaculture;
utilization of high technology and modern techniques; labor intensive activities;
construction of infrastructure facilities and important industrial production
establishments.
• * The regions encourages are: regions with difficult socio-economic conditions
and regions with specially socio-economic conditions.
• VN will not license any project which may have adverse effects on national
defense, national security, cultural and historical heritage, fine custom and
tradition, or the ecological environment.
 Policy toward FDI attraction in VN (12)

• The forms of investment in Vietnam:

• * Business co-operation on the basis of a business co-operation
contract;
• * Joint venture enterprise;
• * Enterprise with 100% foreign owned capital
• * BOT, BT, BTO, EPZ, IZ…
• The foreign investors may make contribution to the legal capital:
foreign currency or VN currency originating from investment in VN;
equipment, machinery, plants, value of industrial property rights,
technical know-how, technical services…
• VN party may make contribution to the legal capital in VN currency
or foreign currency; the value of the right to use land; resources,
equipment, machinery, plant and other construction works, the value
of industrial property rights, technical know-how, technological
process and technical services.
 Policy toward FDI attraction in VN (13)

• The investors have the right to convert the forms of

investment, split, demerge, merge and consolidate
enterprises.
• The investors shall open bank accounts in both VN
currency and foreign currency at VN banks or joint
venture banks or foreign bank branches established in
VN.
• The enterprises with foreign owned capital shall be
permitted to open an overseas account under approval
of the State Bank of VN.
 Policy toward FDI attraction in VN (14)

• The income tax is at a regular rate of 28%

on the profits earned; where investment is
encouraged the rate of corporate income
tax is 20% on the profits; where the
investment satisfies many investment
promotion criteria, the rate is 15%; where
the investment is specially encouraged, the
rate is 10%.
 Policy toward FDI attraction in VN (15)

• The foreign investors have the right to

enjoy the exemption (to 8 years) or
reduction of corporate income tax (to
50%).
• When transferring profits abroad, the
foreign investors shall pay an amount
of tax equal to 3%, 5% or 7% of the
profits transferred abroad. (now pay
nothing)
 Policy toward FDI attraction in VN (16)

• Any dispute between foreign investors and VN

enterprises must firstly be resolved by
negotiation and conciliation.
• When the parties fail to settle the dispute by
way of conciliation, the dispute shall be referred
to a VN arbitration body or a VN court in
accordance with the Law of Vietnam
• The parties related to dispute may agree in the
contract to appoint another arbitration body to
resolve the dispute. (see website of MPI and
Law of Investment in 2005)
 International labor movement (17)

• Motives for international labor migration:

• * Desire to escape political and religious oppression in
Europe
• * Prospect of earning higher real wages and income
abroad.
• * Get more educational and job opportunities for their
children
• *** Welfare effects of International labor migration
• * Other welfare effects of international labor migration.
• (see Figure 7.3 of P.Krugman)