chapter 3 fdi
TRANSCRIPT
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CHAPTER 3: ECONOMIC ASPECTS OF FOREIGN DIRECT INVESTMENT
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Official Flows FOREIGN AID
Private Flows
FDI FPI Private loans
ODA OA OOFs
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PRIVATE FLOWS
Foreign direct investment (FDI)
Foreign portfolio investment (FPI)
(International) private loans (IPL)
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3.1. FDI definition
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Foreign direct investment reflects the objective of obtaining a lasting interest by a resident entity in one economy (direct investor) in an entity resident in an economy other than that of the investor direct investment enterprise)
IMF &
OECD
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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 that own () direct investment enterprises in economies other than those in which the direct investors reside.
Direct investment enterprise : in which a direct investor owns 10 percent or more of the ordinary shares or voting power
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HOME COUNTRY
HOST COUNTRY DIRECT
INVESTOR
DIRECT INVESTMENT ENTERPRISE
FOREIGN DIRECT INVESTMENT
Lasting interest: - long-term relationship - Significant degree of
management ( >= 10%)
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FDI Definition (cont.)
Vu Chi Loc (1997):
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.
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FDI Characteristics
A voice in management
Threshold-equity ownership
- OECD (IMF)
- UNCTAD
- Vietnam
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FDI Characteristics (cont.)
Return of investors
Technology transfer
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Types of FDIodes
Linkages:
Horizontal FDI:: share the same product lines.
E.g: Lenovo & IBMs PC Division
P&G & Gillette (2005, $57b)
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Types of FDI (linkages)
Vertical FDI:: in one value chain.
-Forward integration: downstream integration.
E.g: Walt Disney & ABC Television (1996)
-Backward integration: upstream integration.
E.g: Apple & Intel (2006)
Supplier Producer Distributor
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Types of FDI (linkages)
Conglomerate FDI:: no common business areas. E.g: Phillip Morris & General Foods
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Types of FDI (cont.)
Perspectives of host country:
+ Import-substituting FDI
+ Export-increasing FDI
+ Government-initiated FDI
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Modes of FDI entry
Greenfield vs. M&A
Greenfield (UNCTAD): undertaken to set up a new production venture in a host country
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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.
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TNC MNC
???
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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.
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TNC Inclusion
- Parent enterprise
- Foreign affiliate + Subsidiary
+ Associate
+ Branch
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TNC Inclusion (cont.)
Parent enterprise controls assets of other entities
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TNC Inclusion (cont.)
Foreign affiliate
. incorporated or unincorporated
. ownership of 10%
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TNC Inclusion (cont.)
Foreign affiliate
Subsidiary
Incorporated
Parent entity: . 50% voting power . Appoint or remove a majority of the members of the administrative,
management or supervisory body
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TNC Inclusion (cont.)
Foreign affiliate
Associate
Incorporated
Parent entity:
10% X < 50% voting power
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TNC Inclusion (cont.)
Foreign affiliate
Branch
Unincorporated
Parent entity: wholly or joinly own
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TNC Measurement
- Performance: Investment expenditures, sales, assets, employment, output, exports
- No. of TNC: parent and foreign affiliates
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Measurement of FDI
FDI flows vs. FDI stocks
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FDI Components
Equity capital
Reinvested earnings
Other capital (Intra-company loans)
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Conclusion FDI is:...
Lasting interest direct investment relationship
Control-effective voice in the management
The threshold equity ownership
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FDI differs from other forms of international investment
FDI is made inside investing firm
Transfer not only capital but also other assets and resources across borders
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FDI effects
Positive effects vs. Negative effects
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Possible positive effects
Provide capital
Finance their investments projects better and often cheaper
Create new jobs
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Possible positive effects
Bring new technologies
Provide better access to foreign markets
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Possible positive effects
Help to change the economic structure of the target country
Crowding in effect
Improve the business environment
Foreign corporations usually have a positive effects on the trade balance
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Possible positive effects
Improve the environmental
conditions
Increase the level of wages
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Possible negative effects
Monopoly threat
Crowding out effect
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Possible negative effects
May cut working positions
May lead to increased imports
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Possible negative effects
Repatriation of the profits can be
stressful on the balance of payments
The high growth of wages in FDI
firms can influence a similar growth
in the domestic corporations
which are not able to cover
this growth with the growth of
productivity
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Possible negative effects
Transfer pricing
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Possible negative effects
Possible environmental damage
Incentive tourism
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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
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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 equal to or below a certain threshold to gain profit but not control those security issuers.
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FPI Characteristics
- No voice in management Sornarajah (2004)
UNCTAD
- Return of investors
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FPI Characteristics (cont.)
- Less stable
- No technology transfer
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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.
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IPL Characteristics
- Relation between investors and recipients
- Usage right of invested money
- Return of investor
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FDI vs. FPI?
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FDI vs. FPI (foreign portfolio investment)
FDI (investing in production) Motive: profit from production
Control of foreign affiliate
Contribution: a package of assets (capital, technology, etc.)
Time horizon: long
Stability: relatively stable
Investors: TNCs, producers of goods and services
Statistical definition: more than 10% of equity stake in a foreign company
FPI (buying shares of a company) Dividend or a capital gain
No control
Only capital
Sometimes very short
Volatile, sensitive to financial turmoil
Financial institutions, institutional investors, etc.
Equal or less than 10% of equity stake
FPI can be useful. It simply performs different functions