TIẾNG ANH KINH TẾ FDI

Platform FDI Foreign direct investment from a source country into a destination country for the purpose of exporting to a third country.. OLI approach - conclusionsThe eclectic, or OL

.

Definition

Foreign Direct Investment: The establishment

of a plant or distribution network abroad

Investors can acquire part or all of the equity of

an existing foreign corporation either to control or share control over sales, production, and research and development

The basic questions of FDI (6W+H)

Who? (is the investor)

What? (kind of FDI)

Why? (are we investing)

Where? (is the FDI going)

When? (do we invest)

How? (the mode of entry)

Types of FDI

Horizontal FDI arises when a firm duplicates its

home country-based activities at the same value chain stage in a host country through FDI

Platform FDI Foreign direct investment from a

source country into a destination country for the purpose of exporting to a third country

Vertical FDI takes place when a firm through FDI

moves upstream or downstream in different value chains i.e., when firms perform value-adding

activities stage by stage in a vertical fashion in a host country

O = Ownership advantages

Some firms have a firm specific capital

known as knowledge capital: Human capital (managers), patents, technologies, brand, reputation…

This capital can be replicated in different

countries without losing its value, and easily transferred within the firm without high

transaction costs

L – Localization advantages

 Producing close to final consumers or downstream customers

 Saving transport costs

 Obtaining cheap inputs

 Jumping trade barriers

 Provide services (for most services production and delivery have to be contemporaneous)

I – internalization advantages

 Why don't a firm just sign a contract with a

subcontractor (external agent) in a foreign country?

 Because contracting out is risky: it implies

transferring the specific capital outside the firm

and revealing the proprietary information (e.g how

to use the technology or the patent)

 Problem:

 If the agent interrupts the contract it can use the technology to compete with the mother company

 In the case of brands/reputation: if the agent

damages the brand reputation

OLI approach - conclusions

The eclectic, or OLI paradigm, suggests that the greater the O and I advantages possessed by

firms and the more the L advantages of creating, acquiring (or augmenting) and exploiting these advantages from a location outside its home

country, the more FDI will be undertaken

Where firms possess substantial O and I

advantages but the L advantages favor the home country, then domestic investment will be

preferred to FDI and foreign markets will be

supplies by exports

4 types of FDI derived from OLI theory

The typology of FDI was developed by Jere

Behrman to explain the different objectives of FDI:

Resource seeking FDI

Market seeking FDI

Efficiency seeking (global sourcing FDI)

Strategic asset/capabilities seeking FDI

Resource seeking FDI

 To seek and secure natural resources

e.g minerals, raw materials, or lower

labor costs for the investing company

 For example, a German company

opening a plant in Slovakia to produce and re-export to Germany

Market seeking FDI

 To identify and exploit new markets for the firms` finished products

 Unique possibility for some type of

services for which production and

distribution have to be contemporaneous (telecom, water supply, energy supply)

 Automotive TNCs have invested heavily in China

Efficiency seeking FDI

 To restructure its existing investments so as

to achieve an efficient allocation of

international economic activity of the firms

International specialization whereby firms seek

to benefit from differences in product and factor prices and to diversify risk

Global sourcing – resource saving and improved efficiency by rationalizing the structure of their global activities Undertaken primarily by

network based MNCs with global sourcing

operations

Strategic asset/capabilities seeking FDI

MNCs pursue strategic operations through the purchase of existing firms and/or assets in order

to protect O specific advantages in order to

sustain or advance its global competitive position

 Acquisition of key established local firms

 Acquisition of local capabilities including R&D, knowledge and human capital

 Acquisition of market knowledge

 Pre empting market entrance by competitors

 Pre empting the acquisition by local firms by competitors

FDI theories on macro level

Capital market theory

One of the oldest theories of FDI (60s)

FDI is determined by interest rates

Dynamic macroeconomic FDI theory

FDI are a long term function of TNC strategies

The timing of the investment depends on the changes in the macroeconomic environment

„hysteresis effect“

FDI theories on macro level

FDI theory based on exchange rates

Analyses the relationship of FDI flows and

exchange rate changes

FDI as a tool of exchange rate risk reduction

FDI theory based on economic geography

Explores the factors influencing the creation of international production clusters

Innovation as a determinant of FDI – „Greta

Garbo effect“

FDI theories on macro level

Gravity approach to FDI

The closer two countries are (geographically, economically, culturally ) the higher will be the FDI flows between these countries

FDI theories based on istitutional analysis

Explores the importance of the institutional framework on the FDI flows

Political stability – key factor

Foreign Portfolio Investment: The purchase of

shares and long-term debt obligations from a

foreign entity Portfolio investors do not aim to

take control of a corporation They can liquidate their investment at market value any time

Strategic Approach: Foreign direct investment

decisions based on business strategies Investors seek access to raw materials, markets, product efficiency, and “know-how”

Cash Flow: The total amount of cash that

remains in a company after it has paid taxes and other cash expenses

Investment Incentives: benefits such as cash

grants, tax credits, accelerated depreciation, and low interest-bearing loans, which are sponsored

by national or local authorities to attract foreign investment

Exclusive Distributor: An independent sales

agent who is given the sols right, under contract,

to sell a foreign manufacturer’s products

Multiple Distributor: A sales agent who

represents more than on e manufacturer

Royalty Payments: the payments made by a

foreign manufacturer to a company that has

licensed the manufacturer to product its products

Joint Venture: A subsidiary formed by two or

more corporations

 

Joint venture enterprise

 A joint venture enterprise (JVE) is an enterprise

established in Vietnam on the basis of a joint venture contract signed by two or more parties for the

purpose of conducting investment and business in

Vietnam A joint venture contract may be entered

into between:

 (i) a Vietnamese party and a foreign party;

(ii) a Vietnamese party and a wholly foreign owned enterprise;

(iii) a JVE and a foreign party;

(iv) a JVE and a wholly foreign owned enterprise; or (v) two JVEs.

Wholly foreign owned enterprise

A wholly foreign owned enterprise (WFOE) is an enterprise owned and established by one or more foreign investors under which the investors will manage the enterprise and assume full

responsibility for its debts and liabilities An

existing WFOE in Vietnam may cooperate with

another WFOE and/or with foreign investors to

establish a WFOE A WFOE may be established as

a joint-stock company, a limited liability company

or a partnership

Business cooperation contract

A business cooperation contract is a form of FDI established via a contractual arrangement

between two or more parties without creating a legal entity The contract should stipulate the

responsibilities and distribution of profits and

liabilities between the parties

Foreign company branch vs

representative office

A foreign company branch established under

Vietnamese laws is regarded as the dependent

unit of a foreign investor It is permitted to engage

in commercial activities which include investment

On the other hand, a representative office, also a dependent unit of a foreign investor, may be

established by a foreign investor, but only for

conducting market surveys and commercial

promotion activities permitted under Vietnamese laws