Chapter 3.

The economic
aspects of Foreign Direct
Investment
 3.1. FDI definition

 IMF, OECD, UNCTAD:

Foreign direct investment (FDI) is defined as an investment involving

a long-term relationship and reflecting a lasting interest and
control by a resident entity in one economy (foreign direct
investor or parent enterprise) in an enterprise resident in an
economy other than that of the foreign direct investor

2
 3.1. FDI definition (cont.)

 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.

a long-term relationship
 The lasting interest:
control

 Direct investment enterprise: in which a direct investor owns

10 percent or more of the ordinary
3 shares or voting power
 Incorporated enterprise Unincorporated enterprise
(Corporation)

- Not incorporated as a legal entity

separate from the owner;
- The assets used in unincorporated
enterprises do not belong to the
enterprises but to their owners,
CAN’T ---- engage in
- A legal entity
transactions with other economic
- Produce goods or services for the
units ,
market, that may be a source of
---- enter into contractual
profit to its owner(s)
relationships with other units
- Owned by shareholders.
---- incur liabilities on
their own behalf
- Their owners are personally liable,
without limit, for any debts or
obligations incurred in the course
of production.
4
 3.1. FDI definition (cont.)

Two sources of influence/control:

1. Ownership
an equity capital stake

2. Agreements
between firms
 3.1. FDI definition (cont.)

Control through agreements: non-equity forms

of FDI:
The following agreements give control that is strong
enough to be considered non-equity FDI:
 Franchising agreements - popular in fast food
(McDonalds), car rentals (Avis, Hertz) and retail trade
 Management contracts - popular in the hotel industry
 Partnership agreements - popular in business
consultancy and legal services
 FDI – Definition (cont.)

Vu Chi Loc (2012):

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)
- Vietnam
 FDI is made inside the investing firm
 FDI – Characteristics (cont.)

Return of investors

Technology transfer
Transfer pricing

 The pricing by TNCs of intra-firm

transactions across national boundaries.
 This allows TNCs to shift profits between
countries to lower their tax burden or
escape other restrictions on repatriating
profits.
Tax haven
Tax haven

 No tax, or very low rates of taxation;

 Strict bank secrecy provisions;

 A lack of transparency in the operation of its tax system, and

 A lack of effective exchange of information with other

countries.
14
16
Panama Papers

19
Types of FDI

 By linkages

 By perspective of host country

 By modes of entry
Types of FDIodes

Linkages:
• Horizontal FDI:: in the same industry,
same production stage.
E.g: Lenovo & IBM’s PC Division
P&G & Gillette (2005, $57b)
 Types of FDI (linkages)

• Vertical FDI:: in one value chain, different stages

of production.
Supplier Producer Distributor

-Forward integration: downstream integration.

E.g: Walt Disney & ABC Television (1996)
-Backward integration: upstream integration.
E.g: Apple & Intel (2006)
Types of FDI (linkages)

•Conglomerate FDI:: no common

business areas.
E.g: Phillip Morris & General Foods
 Types of FDI (cont.)

Perspectives of host country:

+ Import-substituting FDI

+ Export-increasing FDI

+ Government-initiated FDI

24
 Types of FDI (cont.)

Modes of FDI entry

Greenfield vs. M&A

Greenfield (UNCTAD): set up a new

production venture in a host country
25
 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.

26
 Measurement of FDI

 FDI flow

 FDI stock

1/14/2014 27 Slides by phan thi van

FDI – Components

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

 When Toyota Thailand borrows money from

(1) the Thai capital market
(2) from a bank in London
Conclusion
FDI is:...
TNC MNC
???

32
 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.

33
 TNC – Inclusion

- Parent enterprise
- Foreign affiliate
+ Subsidiary
+ Associate
+ Branch

34
 TNC – Inclusion (cont.)

Parent enterprise controls assets of

other entities

35
 TNC – Inclusion (cont.)

Foreign affiliate
Subsidiary
Incorporated
Parent entity:
. ≥ 50% voting power or shares
. Appoint or remove a majority of the members
of the administrative, management or
supervisory body
37
 TNC – Inclusion (cont.)

Foreign affiliate
Associate
Incorporated
Parent entity:
10%≤ X < 50% voting power

38
 TNC – Inclusion (cont.)

Foreign affiliate
Branch
Unincorporated

39
FEATURES OF A TNC
 The affiliates in more than one country linked
through ownership or agreements permitting
control
 Decision-making system permitting coherent
policies and a common strategy
 Affiliates share knowledge, resources and
responsibilities
World FDI trend

 Decrease in 01-03, 07-09, 11-13, 16-19, 20-21.

 M&A dominates FDI

 Uneven distribution
 World FDI inflows
(Unit: USD mil.)

(Source: World Investment 42

Report 2020, UNCTAD)
 FDI inflows by regions
(Unit: USD mil.)

43 2015), UNCTAD.
(World Investment Report
 World FDI inflows by sectors

44
Nguồn: Báo cáo đầu tư thế giới (World Investment Report 2013), UNCTAD.
 FDI in Vietnam

Millions of $

Source: UNCTAD handbook statistics

FDI inflows in VN by sectors(accumulated until 20/3/2018):
Number of projects: 23,071
Investment capital : 300,740.457 (USD mil.)
Investment
Number of capital
No. Sector
projects (million
USD)

1 Manufacture and processing 11,903 178,574.069

2 Real-estate business 599 52,581.950

Manufacture, distribution of electricity,
3 gas, water, air conditioner 108 12,908.389

4 Hotel and Restaurant 562 11,538.986

5 Construction 1,409 10,927.246

Wholesale retail and mantenance
6 services 2,357 5,599.662

7 Mining industry 1,506 4,781.952

Information and communication
8 Warehouse and transportation 626 4,322.636

9 Warehouse and transportation 106 3,641.094

46
10 Agriculture forestry and fishery 522 3,600.715
FDI inflows in VN by home countries (accumulated
until 20/3/2018)

Investment capital (millions

No. Countries No of projects
USD)

1Korea 5,932 54,011.530

2Japan 3,355 42,490.319

3Singapore 1,838 39,263.677

4Taiwan 2,526 32,353.112

5BritishVirginIslands 695 20,649.930

23,071 300,740.457
TOTAL

47
FDI inflows in VN by locations (accumulated until
20/3/2018)
Number
Investment capital
No. Locations of
(Million USD)
projects

1 TP. Hồ Chí Minh 6,899 45,661.325

2 Bình Dương 3,105 28,241.722

3 Bà Rịa - Vũng Tàu 348 27,232.097

4 Hà Nội 4,056 26,079.340

5 Đồng Nai 1,388 26,067.375

6 Bắc Ninh 967 15,189.327

7 Hải Phòng 564 14,522.835

8 Hà Tĩnh 64 11,593.054

9 Thanh Hóa 90 10,647.239

10 Hải Dương 397 7,552.490

 CASE : TOYOTA’S INVESTMENT IN
THAILAND

In 2005, Toyota Motor Thailand (TMT), 100% owned by Toyota

Japan, was granted by the Board of Investment (BOI) of Thailand
approval for two new investment projects with the following
profile:

TOTAL INVESTMENT VALUE $1.2 Billion

- 100 000 Pickups
Annual production
- 224 550 SUVs and auto parts
Employment 3 700 jobs
$2.2 Billion of components and
Sourcing
parts sourced locally
Exports 60% of autos and auto parts
Source: BOI, Thailand Investment Review, July 2005, vol.17, no.6
FDI effects

Positive effects vs. Negative effects

 Increasing financial
resources and
investment

Enhancing
technological
capability

Boosting export
FDI and
competitiveness and
development trade

Generating
employment and
strengthening skills

Effects in other areas

51
Impact on financial resources for
development

52
Impact on financial resources for
development
The largest source of foreign savings

Advantages over other sources of foreign finance

 More stable
 Divestment is more difficult

Disadvantages:
 Balance-of-payment impacts: Repatriated profits
 Transfer pricing

53
Impact on investment

FDI impacts on host-country investment

volume.
 Directly
 Through the investment expenditures in
foreign affiliates
Indirectly
 Crowding in domestic investment
 Crowding out domestic investment

54
Enhancing technological capability

Technology
transfer

Technology
diffusion

Technology
generation

56
Technology diffusion

Four
channels
Competition with local firms

Vertical and horizontal

linkages
Labor mobility

Proximity

57
Boosting export competitiveness
and trade

 Exploiting static comparative advantage

 Creating dynamic comparative advantage

 Providing access to international markets

 Increasing local firms’ links to international markets

58
Generating employment and
strengthening skills

Creating jobs

Impact on quality of employment

• Wages
• Job security
• Other conditions of work

Enhancing skills

59
 - 36,500 workers with average
wage 6mVND/per month

 - 70,000 employers – 60
suppliers
Protecting the environment

61
FDI effects on Vietnam

 FDI contributes to economic growth:

Contribution of FDI sector in GDP: 2% (1992)  18.97% (2011)

FDI in total social capital: ~ 25%

 FDI contributes to export:

Before 2001: 45.2%  2012: 64%

 FDI contributes to budget revenue:

1994-2000: $1.8bil  2001-2010: $14.2bil

 FDI effects on Vietnam

 FDI promotes economic restructuring towards industrialization

– modernization:

58.4% FDI in industry sector

 FDI creates jobs, improves the quality of human resources and

change in labor structure:

2 million direct jobs and about 3-4 million indirect jobs

FDI effects on Vietnam

 FDI is an important technology transfer channel,

contributing to improve technological level of the economy:

63% tech transfer contracts from FDI

 FDI has impact on improving competitiveness in country,

business and product levels

 FDI has contributed significantly to the international

integration
 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 below a certain threshold to
gain profit but not control those security
issuers.
 FPI – Characteristics

- No control
- Return of investors the safety of their
capital, the likelihood of appreciation in
value and the return generated.
- 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.
 FDI vs. FPI?

FDI FPI
Motive Profit from production Dividend or a capital gain

Control Yes (Foreign affiliates) No

Contribution A package of assets (capital, Only capital
technology, etc.)
Time horizon Long Sometimes very short
Stability Relatively stable Volatile, sensitive to financial
turmoil
Investors TNCs, producers of goods Financial institutions,
and services institutional investors, etc.
Statistical definition At least 10% of equity stake Less than 10% of equity
in a foreign company stake
 FDI vs. FPI?

FDI FPI
Motive Profit from production Dividend or a capital gain

Control Yes (Foreign affiliates) No

Contribution A package of assets (capital, Only capital
technology, etc.)
Time horizon Long Sometimes very short
Stability Relatively stable Volatile, sensitive to financial
turmoil
Investors TNCs, producers of goods Financial institutions,
and services institutional investors, etc.
Statistical definition At least 10% of equity stake Less than 10% of equity
in a foreign company stake
 FDI vs. FPI?

FDI FPI
Motive Profit from production Dividend or a capital gain

Control Yes (Foreign affiliates) No

Contribution A package of assets (capital, Only capital
technology, etc.)
Time horizon Long Sometimes very short
Stability Relatively stable Volatile, sensitive to financial
turmoil
Investors TNCs, producers of goods Financial institutions,
and services institutional investors, etc.
Statistical definition At least 10% of equity stake Less than 10% of equity
in a foreign company stake
 FDI vs. FPI?

FDI FPI
Motive Profit from production Dividend or a capital gain

Control Yes (Foreign affiliates) No

Contribution A package of assets (capital, Only capital
technology, etc.)
Time horizon Long Sometimes very short
Stability Relatively stable Volatile, sensitive to financial
turmoil
Investors TNCs, producers of goods Financial institutions,
and services institutional investors, etc.
Statistical definition At least 10% of equity stake Less than 10% of equity
in a foreign company stake
 FDI vs. FPI?

FDI FPI
Motive Profit from production Dividend or a capital gain

Control Yes (Foreign affiliates) No

Contribution A package of assets (capital, Only capital
technology, etc.)
Time horizon Long Sometimes very short
Stability Relatively stable Volatile, sensitive to financial
turmoil
Investors TNCs, producers of goods Financial institutions,
and services institutional investors, etc.
Statistical definition At least 10% of equity stake Less than 10% of equity
in a foreign company stake
 FDI vs. FPI?

FDI FPI
Motive Profit from production Dividend or a capital gain

Control Yes (Foreign affiliates) No

Contribution A package of assets (capital, Only capital
technology, etc.)
Time horizon Long Sometimes very short
Stability Relatively stable Volatile, sensitive to financial
turmoil
Investors TNCs, producers of goods Financial institutions,
and services institutional investors, etc.
Statistical definition At least 10% of equity stake Less than 10% of equity
in a foreign company stake
 FDI vs. FPI?

FDI FPI
Motive Profit from production Dividend or a capital gain

Control Yes (Foreign affiliates) No

Contribution A package of assets (capital, Only capital
technology, etc.)
Time horizon Long Sometimes very short
Stability Relatively stable Volatile, sensitive to financial
turmoil
Investors TNCs, producers of goods Financial institutions,
and services institutional investors, etc.
Statistical definition At least 10% of equity stake Less than 10% of equity
in a foreign company stake
 FDI vs. FPI?

FDI FPI
Motive Profit from production Dividend or a capital gain

Control Yes (Foreign affiliates) No

Contribution A package of assets (capital, Only capital
technology, etc.)
Time horizon Long Sometimes very short
Stability Relatively stable Volatile, sensitive to financial
turmoil
Investors TNCs, producers of goods Financial institutions,
and services institutional investors, etc.
Statistical definition At least 10% of equity stake Less than 10% of equity
in a foreign company stake
 FDI vs. FPI?

FDI FPI
Motive Profit from production Dividend or a capital gain

Control Yes (Foreign affiliates) No

Contribution A package of assets (capital, Only capital
technology, etc.)
Time horizon Long Sometimes very short
Stability Relatively stable Volatile, sensitive to financial
turmoil
Investors TNCs, producers of goods Financial institutions,
and services institutional investors, etc.
Statistical definition At least 10% of equity stake Less than 10% of equity
in a foreign company stake