Chapter 6: Foreign trade investment

MSc. Pham Ha Trang

1
 Content
1. Overview of Foreign direct investment (FDI)
1.1. FDI vs FPI
1.2. FDI trends in Vietnam
1.3. Types of FDI
1.4. Impacts of FDI
2. FDI theories
3. Government interventions on FDI
1. Overview of Foreign direct investment (FDI)
1.1. FDI vs FPI

International portfolio investment - FPI Foreign direct investment

(Đầu tư gián tiếp nước ngoài ) (Đầu tư trực tiếp nước ngoài)
1. Overview of Foreign direct investment (FDI)
1.1. FDI vs FPI

Foreign portfolio investment Foreign direct investment

It is a form of investing abroad by owning Is an investment activity in which foreign

foreign stocks/bonds with the aim of economic organizations and individuals, by
generating capital profit and minimizing themselves or together with economic
investment risks, but the investor does not organizations of the host country, invest capital
directly manage and operate the activities in a certain subject, directly manage and
using that investment capital operate to gain profits in business

not enough bonds to control the firm >10 percent

 1. Overview of Foreign direct investment (FDI)
1.1. FDI vs FPI

nha dau tu Thu duoc directly operate nhan bonds

 inflow fdi: resources from outside into our country (our country is the host country)
=> attract
outdflow: host country bring resouces to another country

1. Overview of Foreign direct investment (FDI) => invest in others

The home country is where

1.1. FDI vs FPI there a lot of investors
nc chu nha

Home
country nc so tai
control subsidiaries foreign country where the organization
Host will receive the resources from home
Parent firm
country country

FDI terms
bring resources to the host country
von dc su dung Implemented Foreign
capital investor

von dang ki

amount of invest that Registered receive the resources/investment from the investor
investor will be used in the investing Investee
host country
capital
1. Overview of Foreign direct investment (FDI)
1.2. FDI trends in Vietnam Ohno Vietnam at stage 1 => inflow more than outflow

Inflow FDI in Vietnam (1990-2022)

(mil USD)

Source: UN Trade and Development

1. Overview of Foreign direct investment (FDI)
1.2. FDI trends in Vietnam
Outflow FDI in Vietnam(1990-2022)
(mil USD)
AD of acquision: purchase of existing foreign firm GREENFIELD
• Immediate access/control over Create new operation in foreign country
tangible/intangible resources, AD: • Location selection
management, employees and • Own organisational culture and
customers practices – build how they want
• Business already has own personnel – • Gradual acclimatisation (start
labour and management slowly)
• May already have good brand name • Can gain local government-related
and customer base – immediate benefits e.g. subsidies, tax breaks
market share • New jobs created in local market
• Less time consuming DIS:
• Less risky • Time – lengthy process
DISAD: • More risky
• Price • Differences in corporate culture
• Potential host government restrictions • Faces competition before start up
• Lots of research and pre-work

Nguồn: UN Trade and Development

 1. Overview of Foreign direct investment (FDI)
1.3. Types of FDI

Vertical FDI Horizontal FDI

Invest in industries and products that are closely Make investments in the same industry and foreign
related to the products the company is producing products
domestically
Purpose: providing input and consuming products Purpose: to provide similar products/services
of domestic enterprises
detail
Phụ tùng ô tô biên hoà giá rẻ - cạnh tranh
Reduce costs, Improve efficiencies
by decreasing transportation
expenses, Reducing turnaround time
 1. Overview of Foreign direct investment (FDI)
collab
50-50 ownership
1.3. Types of FDI other percent
A in home country
B in host country
neu k thong nhat dc => ban lai => M&A
in some case can change in FDI

mergers and acquisition

dau tu nau lien doanh
mua lai va sap nhap
Joint venture
BOT: build operate transfer
BTO: build. transfer to the receiver
Contracts
green: home country bring M&A/Brownfield
money and reource to build investment (BCC, BOT, BTO,
new comapny BT)
brown: home country doesnt
have enough resource =>
buy facility of other company
and merge

dau tu moi cty so huu toan bo

Greenfield
investment FDI Wholly owned
subsidiary
opposite joint venture
1. Overview of Foreign direct investment (FDI)
1.4. Impacts of FDI
FOR HOME COUNTRY

BENEFITS COSTS

- Expanding markets and increasing revenue - Asset and technology outflow

- Reducing production costs - Loss of domestic jobs
- Exploiting and fully utilizing the advantages - Economic and political risks
of the host country (often with a lower level of - High and complex management costs
development) - Risk of dependence on the host country
- Overcoming the problem of aging products
- Optimizing taxes
- Increasing foreign exchange reserves
1. Overview of Foreign direct investment (FDI)
1.4. Impacts of FDI
FOR HOST COUNTRY

BENEFITS COSTS

- Transfer of resources from abroad - Increasing the gap between regions in the
- Resolve labor productivity difficulties country (urban-rural, rich-poor)
- Improve efficiency in using domestic resources - Risk of dependence on FDI capital
- Employment opportunities (labor effects) - Impact on the environment
- Add to national budget revenue (BOP effects) - Risk of depleting resources by foreign
- Help local enterprises access world markets investors
- Promote economic restructuring - Domestic enterprises must compete with
FDI enterprises...
- Develop human resources...
2. Theories of FDI

International product
life cycle Market power
(Lý thuyết về vòng đời (Lý thuyết về quyền
quốc tế của sản lực thị trường)
phẩm)

Market imperfection
Electic theory
(Lý thuyết thị trường
(Lý thuyết chiết trung)
không hoàn hảo)
2. Theories of FDI
2.1. International product life cycle

• Explain why manufacturers shift their business activities from exporting

products to FDI
• Content: in the early stages, products are produced in the home country even
though the cost of production abroad may be lower. As products become
standardized during the growth period, manufacturers are encouraged to invest
abroad to take advantage of costs and prevent the market from falling into the
hands of local manufacturers
• Disadvantages: why choose FDI over other modes of market entry?
2. Theories of FDI
2.2. Market power

Is the ability of a firm to adjust the price of its products or services without facing significant
competition from other firms. Firms with market power can raise prices without significantly reducing
revenue
 Firms engage in foreign direct investment to increase their control over markets and gain a
competitive advantage

Companies undertake FDI for the following reasons:

• Raw material supply is increasingly scarce, local companies are not capable of exploration
and exploitation → Vertical FDI
• Thanks to vertical FDI, oligopolies (các công ty độc quyền nhóm) create barriers that prevent
other firms from accessing resources
• Vertical FDI creates cost advantages through technical innovation by coordinating production
and transferring products between different stages of the production process
2. Theories of FDI
2.3. Market imperfection

Content: When there are imperfect factors in the market that make business
activities less effective, companies will carry out FDI to stimulate business
activities and overcome those imperfect factors

Imperfect factors of the market:

Special know-
Trade barriers
how/knowledge
2. Theories of FDI
2.4. Electic theory (OLI framework) neu co 3 ad => se dau tu fdi thanh cong

Ownership advantage

Do you have any tangible/intangible assets that other

competitors do not own?

Location advantage
Characteristics of the host country that make it an attractive
place for investment (market size, resource availability,
labor costs, infrastructure quality, and favorable regulatory
environments)

Internationalization advantage
A firm's ability to control and manage its foreign operations
internally rather than relying on external entities like
licensing or franchising
3. Government interventions on FDI
fair for the investors VS the domestic firms

Reasons Tools
For Host country: For Host country:
• Balance of payments: cash inflow, • Investment restrictions: restrictions on
increased exports, decreased imports ownership, content of activities
• Resource mobilization: technology, • Investment incentives: financial
management know-how, labor incentives, infrastructure
For Home country:
For Home country: • Investment restrictions: corporate
income tax policy, penalties/bans
• Outflow of production resources
abroad • Incentives: hedging, lending, tax
incentives
• Increase competitiveness
• Take advantage of outdated
technology