Foreign direct investment (FDI) (TIẾNG ANH KINH tế SLIDE)

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

the firms` finished products

services for which production and

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

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