UNIT – TOPIC

1. International trade: tariffs and quota, export duty, corporate tax, government subsidy,
2. Foreign direct investment: FDI
3. FPI: đầu tư gián tiếp nước ngoài (Foreign portfolio investment)
4. Foreign exchange trading: ngoại hối
a. foreign currency,
b. hard currency (?): đồng tiền mạnh,
c. strengthening currency, weakening currency
d. devaluation: phá giá tiền tệ, bán phá giá: dumping, anti-dumping duty, (fixed,
floating) exchange rate, government involvement, engagement, intervention,
managed float, convertible currency (US dollars),
5. Payment in international trade: Pay in cash, cash on delivery (safe for both sides),
Cash against invoice: Trả tiền khi có hóa đơn (favorable for the buyer), cash on order
(trả tiền khi đặt hàng), advance payment (favorable for seller) , pre-payment (đặt cọc,
tạm ứng, trả trước) , cash in advance, deposit ~ down payment, method of payment,
mode of payment, open account (thanh toán ghi sổ)  complete trust between sellers
and buyers, collection (nhờ thu), document (chứng từ), letter of credit (thư tín dụng),
issue: phát hành , buyer’s bank: phát hành thư tín dụng, importer has the responsibility
to open the letter of credit that the exporter’s bank issues, notify: thông báo ~ advise,
letter of credit (beneficial for both sides), draft (hối phiếu), sign in the draft, draft a
contract: soạn thảo, the seller draws a draft on the buyer, the buyer has to ask to open a
letter of credit to pay to the seller.
6. Marketing: 4P (Price, Promotion, Product, Place), coverage: độ bao phủ, price support
(trợ giá), marketing strategies (price skimming and penetration)
7. Logistics and supply chain management: inbound, outbound, reverse, sourcing,
procurement (thu mua), order processing, raw material transporting, …
8. Marine insurance: Certificate of insurance, insurance policy (hợp đồng) (?), insurance
premium ( phí bảo hiểm), indemnify, indemnity, claim, marine cargo insurance (bảo
hiểm hàng hóa đường biển), cargo (hàng chuyên chở), carrier (người chuyên chở),
carriage (cước phí vận tải) = freight, prepaid freight: cước phí trả trước, shipper/
consignors pay the prepaid freight >< freight forward,
9. Taxation
10. Mergers and acquisitions: to optimize profitability (?), take advantage of economy of
scale (lợi ích kinh tế do quy mô lớn)
11. Arbitration (not included in exams)
 UNIT 1: PART1: INTERNATIONAL TRADE

 New words about learning objectives

Mercantilism: chủ nghĩa trọng thương

Factor proportions: phân bổ nhân tố sản xuất

3 Factors of production: Labor, capital, land,…

Product life cycle: 4 stages: introduction, growth, maturity, decline

Competitive advantage: lợi thế cạnh tranh của quốc gia

First-goer/ first-mover advantage: lợi thế đi đầu

 Vocabulary

International trade: the purchase, sale, or exchange of goods and services across national
borders.

Benefits of international trade: (related to essays)

- Provide a country’s people with a greater choice of goods and services

- An important engine for job creation in many countries
 7 Theories of International trade explain why trade occurs and how trade can
benefit both parties to an exchange
- MERCANTILISM (chủ nghĩa trọng thương): trade theory saying that nations should
accumulate financial wealth (favorable financial balance), usually in the form of gold, by
encouraging exports and discouraging imports.

(nations-states in Europe followed this economic philosophy from about 1500 to the late
1700)

+ Countries implemented mercantilism by doing three things:

Increase their wealth by maintaining a trade surplus (export value > import) and avoiding
trade deficit (vice versa) at all costs.

National govt Actively intervene in international trade to maintain a trade surplus

Acquire less-developed territories (colonies) around the world  in order that the colonies
serve as mines of raw materials and markets for the colonizers.

+ Mercantilism assumes that a nation increases its wealth only at the expense of other
nations – a zero-sum games. (chỉ benefit 1 bên)
- ABSOLUTE ADVANTAGE THEORY

+ Absolute advantage: the ability of a nation to produce a good more efficiently than any
other nation.

+ Absolute Advantage: A person or a nation can produce more of something than another
person or nation using the same amount of resources.

International trade: not be banned or restricted by tariffs or quotas

International trade: allowed to flow according to market forces

Concentration: The country would focus on producing the goods with which they have the
absolute advantage and buy other goods from other countries.

 In this theory, International trade is a positive sum game (it benefits both parties)
- COMPARATIVE ADVANTAGE THEORY

+ A nation holds a comparative advantage in the production of a good when it is unable to

produce a good more efficiently than other nations, but can produce it more efficiently than it
can any other good.

+ Comparative Advantage: a person or a nation can produce something most efficiently

given all the products it could potentially produce

+ As a result, trade is still beneficial even if one country is less efficient in the production of
two goods, so long as it is less inefficient in the production of one of the goods.

 In this theory, International trade is a positive sum game (it benefits both parties)
- FACTOR PROPORTIONS THEORY

+ Factor proportion states that countries produce and export goods that require resources
(factors: Land, labor, capital equipment) that are abundant and import goods that require
resources in short supply.

+ A country will specialize in products that require labor if its cost is low relative to the cost
of land and capital

+ A country will specialize in products that require land and capital equipment if their cost is
low relative to the cost of labor.

+ The Leontief Paradox: The apparent paradox between predictions of the theory and actual
trade flows.

- INTERNATIONAL PRODUCT LIFE CYCLE

+ The international product life cycle theory says that a company will begin exporting its
product and later undertake foreign investment as the product moves through its life cycle

+ New product stage: the company keeps production volume low and based in the home
country

+ Maturing product stage: the company introduces production facilities in the countries
with the highest demand

+ Standardized product stage: competition forces an aggressive search for low-cost

production bases in developing nations to supply a world-wide market.

- NEW TRADE THEORY

+ The New Trade Theory argues that as a company increases the extent to which it specializes
in the production of a particular good, output rises because of gains in efficiency.

+ Realize economies of scale  Pushing unit costs of production lower.

+ Gain a first-mover advantage – the economic and strategic advantage gained by being the
first company to enter an industry

+ By working together, government and home-based companies can target potential new
industries in which to become first movers. It also argues that the government may play a role
in assisting its home companies

- NATIONAL COMPETITIVE ADVANTAGE

+ National competitive advantage theory states that a nation’s competitiveness in an industry

(and therefore trade flows) depends on the capacity of the industry to innovate and upgrade

+ The Porter diamond identifies four elements that form the basis of national competitiveness:

Factor conditions: including the skill levels of different segments of the work-force and the
quality of technological infrastructure

Demand conditions: such as a sophisticated domestic market

Related and supported industries: that spring up and form clusters of related economic
activities

Firm strategy, structure, and rivalry conditions: that are present in an industry

1. Autarky: tự cung tự cấp

2. Counter trade: bán đối lưu
 3. Barter: hàng đổi hàng
- Autarky: the (impossible) situation in which a country is completely self-sufficient and
has no foreign trade
- Deficit: negative balance of trade or payments
- Surplus: positive balance of trade or payments
- Quotas: quantitative limits on the import of particular products or commodities
- Dumping: selling goods abroad (at or below) cost price
- Invisible imports and exports: trade in services (banking, insurance, tourism and so on)
- Balance of trade (visible goods): the difference between what a country receives and pays
for its exports and imports of visible goods
- Balance of payments: the difference between a country’s total earnings from all exports
and its total expenditure on all imports
- Visible trade: trade in goods.
- Tariffs: taxes charged on imports
- Barter or counter trade: direct exchanges of goods without the use of money
- Protectionism: imposing tax to restrain imports

Exporting and importing are the two aspects of foreign trade: a country spends money on
goods it imports and gains money through its exports.
 UNIT 1 – PART 2: BUSINESS – GOVERNMENT TRADE RELATION

Why do Governments intervene in Trade?

Free Trade: the pattern of imports and exports that would result in the absence of trade
barriers

National governments have long intervened in the trade of goods and services for reasons that
are political, economic, or cultural.

 Political Motives

The main political motives behind government intervention in trade include:

+ Protecting jobs

+ Preserving national security

+ Responding to other nations’ unfair trade practices

+ Gaining influence over other nations

 Economic Motives

The most common economic reasons given for nations’ attempts to influence international
trade are:

+ To Protect Infant Industries: According to the enfant industry argument, a country’s

emerging industries need protection from international competition during their development
phase until they become sufficiently competitive internationally. Although conceptually
appealing, this argument can cause domestic companies to become noncompetitive, and
inflate prices.

+ To Pursue Strategic Trade Policy: Believers in strategic trade policy argue that
government intervention can help companies take advantage of economies of scale and be
first movers in their industries. But government assistance to domestic companies can result
in inefficiency, higher costs, and even trade wars between nations.

 Cultural motives

+ Perhaps the most common cultural motive for trade intervention is protection of national
identity.

Unwanted cultural influence can cause a government to block imports that it believes are
harmful.
METHODS OF PROMOTING TRADE

The most common instruments that governments use to promote trade are:

- Subsidies:

+ A subsidy is financial assistance to domestic producers in the form of cash payments, low-
interest loans, tax breaks, product price supports, or some other form.

+ It is intended to assist domestic companies in fending off international competitors.

+ Critics charge that subsidies amount to corporate welfare and are detrimental in the long
term

Default: bảo lãnh khoản vay

Loan guarantee: với tiền (bảo lãnh), với sản phẩm (bảo hành)

- Export financing:

+ Governments often promote exports by helping companies finance their export activities.

+ Governments can offer export financing - loans to exporters that they would not otherwise
receive or loans at below-market interest rates.

+ Another option is to guarantee that the government will pay a company’s loan if the
company should default on repayment – called a loan guarantee.

- Foreign trade zones: khu ngoại thương

+ Most countries promote trade with other nations by creating what is called a foreign trade
zone (FTZ) – a designated geographic region in which merchandise is allowed to pass through
with lower customs duties (taxes) and/or fewer customs procedures.

- Special government agencies

+ Most nations have special government agencies responsible for promoting exports.

+ These agencies organize trips abroad for trade officials and businesspeople and open offices
abroad to promote home country exports./ meet the potential business partners
 PART 3: METHODS OF RESTRICTING TRADE

The methods governments can employ to restrict unwanted trade include:

- Tariffs:
- Quotas:
- Embargoes:
- Local content requirements: hàm lượng sản xuất nội địa (Phần trăm được sản xuất trong
nước)
- Administrative delays: hành chính nhiêu khê phiền nhiễu (?), quan lieu
- Currency controls: kiểm soát chuyển đổi đồng tiền
 TARIFFS
- A tariff is a government tax levied on a product as it enters or leaves a country (Levy tax
against sb)
- 3 types of tariff:

+ An export tariff is one that is levied by the government of a country that is exporting a
product.

+ A tariff levied by the government of a country that a product is passing through on its way
to its final destination is called a transit tariff.

+ An import tariff is one that is levied by the government of a country that is importing a
product.

- Three categories of import tariff are ad valorem tariffs, specific tariffs and compound
tariffs:

+ Ad valorem tariff: Tariff levied as a percentage of the stated price of an imported product.

+ Specific tariff: Tariff levied as a specific fee for each unit (measured by number, weight,
etc.) of an imported product

+ Compound tariff: Tariff levied on an imported product and calculated partly as a percentage
of its stated price and partly as a specific fee for each unit.

- Governments levy tariffs for 2 main reasons:

+ To protect domestic producers: Import tariffs raise the effective cost of an imported good,
domestically produced goods can appear more attractive to buyers.
+ To generate revenue: tariffs are a source of government revenue, especially among
relatively less-developed nations.

 QUOTAS (hạn ngạch)

- A restriction on the amount (measured in units or weight) of a good that can enter or leave
a country during a certain period of time is called a quota.
- Governments may impose import quotas to protect domestic producers or export quotas to
maintain adequate supplies in the home market or increase prices of a product on world
markets.
- A unique version of export quota is called voluntary export restraint (VER) – a quota that
a nation imposes on its own exports, usually at the request of an importing nation. (tự
nguyện hạn ngạch xuất khẩu)
- A hybrid form of trade restriction is called a tariff-quota – a lower tariff rate for a certain
quantity of imports and a higher rate for quantities that exceed the quota. (trong hạn
ngạch thì thuế thấp, còn nếu vượt hạn ngạch sẽ bị đánh thuế cao)
 EMBARGOES

A complete ban on trade (imports and exports) in one or more products with a particular
country is called an embargo.

Ex: US’s embargo on Cuba

 LOCAL CONTENT REQUIREMENTS

Laws stipulating that a specified amount of a good or service be supplied by producers in the
domestic market (local producers) are called local content requirements.

These requirements can state that a certain portion of the end product consists of domestically
produced goods or that a certain portion of the final cost of a product has domestic sources.

Aim: pressure the foreign producers to utilize the local resources, maybe labor, materials in
their production.

Solution to avoid this: Using FDI

 ADMINISTRATIVE DELAYS

Governments can also discourage imports by causing administrative delays - regulatory

controls or bureaucratic rules designed to impair (impede, stop) the rapid flow of imports into
a country (non-tariff barrier). (range of government actions, forced air carriers, require
product inspection that might damage the product, purposefully understaffing of export
offices)

 CURRENCY CONTROL

Restrictions on the convertibility of a currency into other currencies are called currency
controls.

A country’s government can discourage imports by restricting who is allowed to convert the
nation’s currency into the internationally acceptable currency.

Stipulating exchange rate (tỉ giá hối đoái bất lợi cho người nhập khẩu)  raising the price of
imported goods to an impractical level.

What are the differences between FDI and

 PART 4: GLOBAL TRADING SYSTEM

 GATT: The General Agreements on Tariffs and Trade (Hiệp định thương mại chung
về thuế quan và mậu dịch)

Treaty ~ Agreement

The General Agreements on Tariffs and Trade (GATT) was a treaty designed to promote free
trade by reducing both tariff and nontariff barriers to international trade

 WTO: World Trade Organization

The World Trade Organization was created - an international organization to regulate trade
between nations.

The three main goals of the WTO are:

To help the free flow of trade

To help negotiate further opening of markets

To settle trade disputes between its members.

 A key component of the WTO is the principle of nondiscrimination called normal trade
relations that require WTO members to treat all members equally.

When a company exports a product at a price either lower than the price it normally charges
in its domestic market or lower than the cost of production, it is said to be dumping.

The normal way a country retaliates is to charge an anti-dumping duty – an additional tariff
placed on an imported product that a nation believes is being dumped on its markets.

Nations can retaliate against products that receive an unfair subsidy by charging a
countervailing duty – an additional tariff placed on an imported product that a nation
believes is receiving an unfair subsidy.

I. Practice
1. If a country can produce something more cheaply than anywhere else in the world, it
has an absolute advantage
2. A country exporting more than it imports has a trade surplus
3. Autarky is the impossible situation in which a country is completely self-sufficient and
has no foreign trade
4. Countries that export a lot of oil or manufactured goods tend to have a positive
balance of trade
Why would government impede free trade:

- There are three kinds of reasons

- Political motives/ reasons: 4: protect jobs, preserve national security, responds to unfair
trade practices, gain influence over other nations
- Economic motives: 2: protecting infant industries AND pursue strategic trade policies
- Cultural motives: Protecting nation identity

What are the methods used by the government to restrict trade?

6 – listing the characteristics of different types (REVIEW THE CHARACTERISTICS OF

DIFFERENT TYPES ACCORDING TO YOUR UNDERSTANDING)

Tariff:

Quota:

Embargo:

Local content requirements:

Administrative delays:

Currency controls:

Explain the difference ways of promoting international trade?

Subsidy

Export financing

Free trade zone

Special government agencies:

What brings the absolute advantage or comparative advantage to a country?

Abundant natural resources  clarify – soil and climate – example of Vietnam and raw
materials

Cheap – low-cost labor

Technology

Technical expertise

What are the reasons for imposing tariffs

Protect domestic producers/ infant industries

Generate revenue for the Government

Protect jobs

Protect against dumping

Make imported goods more expensive than home-produced substitutes

Reduce balance of payments deficits

What is the difference between the balance of trade and balance of payment?

BOT: includes imports and exports of visible goods

BOP: considers all business transactions with other countries including exports and imports of
goods and services and money earned from and paid for services and investments

Essays: Must include examples

Stimulate economic growth

Job creation

Yellow highlighted: deleted

 ESSAYS

What are the pros and cons of free trade?

What are the advantages of international trade?

 UNIT 2: FDI

Liquidate: thanh khoản

1. FOREIGN DIRECT INVESTMENT (FDI) AND PORTFOLIO INVESTMENT

1.1. Foreign direct investment (FDI): Purchase of physical assets or a significant amount of
the ownership (stock) of a company in another country to gain a measure of management
control.
1.2. Portfolio investment (PI): Investment that does not involve obtaining a degree of
control in a company
 The main difference: MANAGEMENT CONTROL
1.3. Difference between Portfolio Investment and FDI

1.4. Reasons for growth of FDI

1.4.1. Globalization
 The forces causing the globalization of industries are encouraging growth in FDI.
 Lower trade barriers encouraged FDI in those markets that promised adequate sales
volumes.
 Companies could produce in the most efficient and productive locations in the world, and
simply export to their markets worldwide.
 Increasing globalization is also causing a growing number of international companies
from emerging markets to undertake FDI.
1.4.2. Mergers and Acquisitions
 The number of mergers and acquisitions (M&A) and their exploding values also underlie
the growth in FDI flows.
 A great deal of M&A activity in domestic markets is causing companies to venture abroad
for new M&A targets.
 Many cross-border M&A deals are driven by many companies to
- Get a foothold in a new geographic market
- Increase a firm’s global competitiveness
- Fill in companies’ product lines in a global industry
- Reduce costs in such areas as R&D, production, or distribution
1.4.3. Role of Entrepreneurs and Small Businesses
 Entrepreneurs and small businesses also contribute to the expansion of FDI flows.
 Unhindered by many of the constraints of a large company, entrepreneurs investing in
other markets often demonstrate an inspiring can-do spirit and ingenuity.

Internalization: Nội bộ hóa

Eclectic: chiết trung

2. EXPLANATIONS FOR FDI: THEORIES

4 theories

2.1. International Product Lifecycle

A company will begin by exporting its product and later undertake FDI as a product moves
through its lifecycle.

 New product stage: A good is produced in the home country because of uncertain
domestic demand and to keep production close to the research department that developed
the product.
 Maturing product stage: The company directly invests in production facilities in those
countries where demand is great enough to warrant its own production facilities.
 Standardized product stage: increased competition creates pressure to reduce production
costs. The company builds production facilities in low-cost developing nations to serve its
markets around the world.
2.2. Market Imperfections

When an imperfection in the market makes a transaction less efficient than it could be, a
company will undertake FDI to internalize the transaction and thereby remove the
imperfection.

 02 market imperfections:
- Trade barriers such as tariffs cause companies to undertake FDI
- Specialized knowledge: When a company’s specialized knowledge is embodied in its
employees, the only alternative to exploit a market opportunity in another nation may be
to undertake FDI.
2.3. Eclectic Theory

Firms undertake FDI when the features of a particular location combine with ownership and
internalization advantages to make a location appealing for investment.

 A location advantage is the advantage of locating a particular economic activity in a

specific location because of the characteristics (natural or acquired) of that location such
as natural resources, or productive workforce (Middle East – oil)
 An ownership advantage is an advantage that the company has due to its ownership of
some special asset, such as brand recognition, technical knowledge, or management
ability.
 An internalizing advantage is the advantage that arises from internalizing a business
activity rather than leaving it to relatively inefficient market.
2.4. Market Power

A firm tries to establish a dominant market presence in an industry by undertaking FDI.

 The benefit of market power is greater profit because the firm is far better able to dictate
the cost of its inputs and/or the price of its output.
 One way a company achieves market power is through vertical integration (quản lý từ raw
materials supply đến finished product)– the extension of company activities into stages of
production that provide a firm’s inputs (backward integration - input) or absorb its output
(forward integration).
3. MANAGEMENT ISSUES IN THE FDI DECISION
3.1. Control
 When many companies invest abroad greatly concerned with controlling the activities
occurring in the local market.
 But a greater ownership percentage does not guarantee greater control.
 Also, local governments might require a company to hire local managers or require that all
goods produced in a local facility be exported so they do not compete with products of
native firms.
3.2. Purchase or build decision
 Another matter of concern is whether to purchase an existing business or build an
international subsidiary from the ground up ( called a greenfield investment.
 An acquisition generally provides the investor with an existing plant and equipment as
well as personnel.
 Factors that reduce the appeal of purchasing existing facilities include obsolete equipment,
poor relations with workers, and an unsuitable location.
 Adequate facilities are sometimes simply unavailable and a company must go ahead with
a greenfield investment
3.3. The production costs
 The cost of production in a market is also important. Labor regulations can increase the
hourly cost of production several times.
 One approach companies use to contain production costs is rationalized production - a
system of production in which each of a product's components are produced in the
location in which the cost of producing that component is lowest.
 All the components are then brought together at one central location for assembly into the
final product.
3.4. Customer knowledge
 A local market presence might help companies gain valuable knowledge about the
behavior of buyers that it could not obtain from the home market.
 Company might want to produce in a nation that has a quality image in a certain product.
3.5. Following clients
 Firms commonly engage in FDI when doing so puts them close to firms for which they act
as supplier - called following clients.
 The practice tends to result in clusters whereby companies that supply one another's inputs
congregate in a certain geographic region.
3.6. Following rivals
 Companies engage in FDl simply because a rival does
 They do not want to be shut out of a potentially lucrative market - called following rivals
4. GOVERNMENT INTERVENTION IN FDI
 Both host and home of foreign interfere in the free countries free flow of FDI for a variety
of reasons - many of them related to their balance of payments position.
 A country's balance of payments is a national accounting system that records all payments
to entities in other countries and all receipts coming into the nation.
 International transactions that result in payments (outflows) to entities in other nations are
reductions in the balance of payments accounts.
 International transactions that result in receipts (inflows) from other nations are additions
to the balance of payments accounts.
 The current account is a national account that records transactions involving the import
and export of goods and services, income receipts on assets abroad, and income payments
on foreign assets inside the country. (tài khoản vãng lai)
 A current account surplus (trade surplus) occurs when a country exports more goods,
services vices, and income than it imports.
 A current account deficit (trade deficit) occurs when a country imports more goods,
services, and income than it exports.
 The capital account is a national account that records transactions that involve the
purchase or sale of assets. (tài khoản vốn)
4.1. Reasons for host country intervention in FDI
 To protect their balance of payment
- Allowing FDI to come in gives a nation a balance-of-payment boost.
- Countries also improve their balance-of-payments position from the exports of local
production operations created by FDI.
- When direct investors send profits made locally back to the parent company in the home
country, the balance of payments decreases
 Obtain Resources and Benefits
- Access to Technology: Local investment in technology also tends to crease the
productivity and competitiveness of the nation.
- Management skills: By encouraging FDI, nations can also bring in people with
management skills who can train locals and thus improve the competitiveness of local
companies.
- Employment: Many local jobs are also created as a result of incoming FDI
4.2. Reasons for home country intervention
 Investing in other nations sends resources out of the home country – lowering the balance
of payments.
 Profits on assets abroad that are returned home increase a home country’s balance of
payments.
 Outgoing FDI may ultimately damage a nation’s balance of payments by taking the place
of its exports.
 Jobs resulting from outgoing investment may replace jobs at home that were based on
exports to the host country
5. GOVERNMENT POLICY INSTRUMENT AND FDI
5.1. Host countries: Restriction
 Ownership restriction
Governments can impose ownership restrictions that prohibit nondomestic companies from
investing in businesses in cultural industries and those vital to national security.

 Performance demands

Governments can also create performance demands that influence how international
companies operate in the host nation.

Performance demands can take the form of stipulations regarding the portion of the product's
content originating locally, the portion of output that must be exported, or requirements that
certain technologies be transferred to local businesses.

5.2. Host countries: Promotion

 Financial incentives
- Host governments can also grant companies tax incentives such as lower tax rates or offer
to waive taxes on local profits for a period of time.
- A country may also offer low-interest loans to investors.
- The downside of incentives such as these is that it can allow multinationals to create
bidding wars between locations that are vying for the investment.
 Infrastructure improvements
- Because of the problems associated with financial incentives, some governments prefer to
lure investment by making local infrastructure improvements - better seaports suitable for
containerized shipping, improved roads, and increased telecommunications systems.
5.3. Home countries: Restriction
 Differential tax rates

Impose differential tax rates that charge income from earnings abroad at a higher rate than
domestic earnings

 Outright sanctions

Impose outright sanctions that prohibit domestic firms from making investments in certain
nations

5.4. Home countries: Promotion

 Offer insurance

Offer insurance to cover the risks of investments abroad.

 Grant loans
Grant loans to firms wishing to increase their investments abroad. A home-country
government may also guarantee the loans that a company takes from financial institutions.

 Offer tax breaks

Offer tax breaks on profits earned abroad or negotiate special tax treaties.

 Apply political pressure

Apply political pressure on other nations to get them to relax their restrictions on inbound
investments

A cash grant is called an investment incentive, whose purpose is to promote FDI/ attract
FDI/ lure FDI
Most companies give foreign companies tax INCENTIVES/ BREAKS to attract new
investment
What kind of RETURN can I expect on my investment?

What are the differences between FDI and FPI?

(Slide 2&3)

What are some financial considerations in making a foreign direct investment?

Return on investment

Cost of production

Investment incentives

Exchange rate

Tax rates

Interest rate

Cash flow

Sources of working capital

What are the important management issues in the FDI decision?

- Control – purchase or build decision – production cost – customer knowledge – following

clients – following rivals (brief, underlining and bold words in slides)

For what reason do host countries intervene in FDI?

Protect balance of payments –

For what reason do home countries intervene in FDI?

Protect BOP

To obtain resources and benefits

What are the methods used by host countries to restrict and promote FDI?

Sending resources out of …

Damaging BOP

Jobs are lost at home

What are the methods used by host countries to restrict and promote FDI?

Restrict – owners restriction + performance demand

Promote - financial incentives + infrastructure improvement

What are the methods used by home countries to restrict and promote FDI?

Restrict: Differential tax rates – outright sanction

Promote: offer insurance + grant loans + tax breaks + political pressure

 WHAT ARE THE ADVANTAGES AND DISADVANTAGES OF FDI IN

VIETNAM?

Pros:

Job creation

Obtain high technology, new and advanced business practices, global management styles,
new economic concepts

Capital inflow

Tax revenue

BOP boost

Cons:

Decrease BOP when direct investors return profits made locally back to their home country.

Environment – ecosystem

Local resources (unreasonable policies from the government) are vulnerable to

overexploitation by foreign firms
 UNIT 3: FOREIGN EXCHANGE TRADING

1. FOREIGN EXCHANGE MARKET

1.1. Definition
- The foreign exchange market (also known as forex, FX, or the currencies market) is an
over-the-counter (OTC) global marketplace that determines the exchange rate for
currencies around the world.
- Participants in these markets can buy, sell, exchange, and speculate on the relative
exchange rates of various currency pairs.
- Foreign exchange Market: Market in which currencies are bought and sold and in which
currency prices are determined.
- Foreign exchange market: Mechanism through which foreign currencies are traded. It is
not an actual market place but a system of telephone or telex communications between
banks, customers and middlemen (foreign exchange brokers, acting for a client vis-à-vis
the bank
1.2. Functions
1.2.1. Conversion
- Companies use the foreign exchange market to convert one currency into another.
- Companies also must convert to local currencies when they undertake FDI. In addition,
when a firm's international subsidiary earns a profit and the company wishes to return
some of it to the home country, it must first convert the local money into the home
currency.
1.2.2. Hedging
- The practice of insuring against potential losses that result from adverse changes in
exchange rates is called “currency hedging”.
- Two purposes

To lessen the risk associated with international transfers of funds

To protect themselves in credit transactions in which there is a time lag between billing and
receipt of payment.

1.2.3. Currency Arbitrage

Currency Arbitrage: is the instantaneous purchase and sale of a currency in different markets
for profit.

1.2.4. Currency Speculation

Currency speculation is the purchase or sale of a currency with the expectation that its value
will change and generate a profit.

The shift in value might be expected to occur suddenly or over a longer period. The foreign
exchange trader may bet that a currency's price will go either up or down in the future.

1.3. Foreign exchange rates

- The exchange rates (also known as the foreign-exchange rate, forex rate or FX rate)
between two currencies specifies how much one currency is worth in terms of the other. It
is the value of a foreign nation’s currency in terms of the home nation’s currency.
- Financial Institutions convert one currency into another at a specific exchange rate – the
rate at which one currency is exchanged for another.
- Exchange rates depend on the size of the transaction, the trader conducting it, general
economic conditions and sometimes government mandate
1.4. Quoting Currencies
- There are two components to every quoted exchange rate: the quoted currency and the
base currency.
- In a quoted exchange rate, the quoted currency is the currency with which another
currency is to be purchased.
- In a quoted exchange rate, the base currency is the currency that is to be purchased with
another currency
- If an exchange rate quotes the number of Japanese yen needed to buy one U.S. dollar
(¥/$), the yen is the quoted currency and the dollar the base currency
- When you designate any exchange rate, the quoted currency is always the numerator and
the base currency the denominator.
1.5. Factors affecting the exchange rates
- Economic factors: inflation, trade balances, government policies.
- Political factors: political unrest or instability in the country and any kind of political
conflict.
- Psychological factors: psychology of the participants involved in foreign exchange.
1.6. Types of Exchange Rate System
- A fixed exchange rate, sometimes called pegged exchange rate: a currency's value is
matched to the value of another single currency or to a basket of other currencies, or to
another measure of value, such as gold. It is determined by the government of the country
or central bank and is not dependent on market forces. System in which the exchange rate
for converting one currency into another is fixed by international agreement.
- A floating exchange rate: Currencies have no specific par value; value is normally
determined by supply and demand. Central bank or the Government are not required to
intervene, but they often do to avoid wild fluctuations. Exchange-rate system in which
currencies float freely against one another, without governments intervening in currency
markets.
- Managed floating exchange rate: the Government or central banks intervene or participate
in the purchase or selling of the foreign currencies, but do not determine the exchange
rate. Exchange-rate system in which currencies float against one another, with
governments intervening to stabilize their currencies at particular target exchange rates.
1.7. Types of Foreign Exchange Market
 Spot Market
- The Spot market is the immediate exchange of currencies at the prevailing rate of
exchange on the spot.
- Spot transaction: Currency bought or sold today with delivery two business days later.
The buyer and seller of different currencies settle their payments within the two days of
the deal.
- Spot/ Current exchange rates: the exchange rates that require delivery of the traded
currency within two business days
- The spot market assists companies in performing any one of three functions:
+ Converting income generated from sales in another country into their home-country
currency

+ Converting funds into the currency of an international supplier

+ Converting funds into the currency of a country in which they wish to inves

 Forward Market
- Forward Market refers to the market in which the sale and purchase of foreign currency
are settled on a specific future date at a rate agreed upon today.
- Forward Transaction: To buy or sell a currency in the future, with payment and delivery at
that future date.
- Forward exchange rate: The rate at which two parties agree to exchange currencies on a
specified future date. ✓Forward market is often used for hedging.
- Forward contract: Contract requiring the exchange of an agreed-upon amount of a
currency on an agreed-upon date at a specific exchange rate.
- If its forward rate is higher than its spot rate, the currency is trading at a premium.
- If its forward rate is lower than its spot rate, the currency is trading at a discount.
 Futures Market
- Futures market is similar to forward market, in which there is an agreed price at an agreed
date.
- Currency futures contract: requires exchange of a specific amount of currency on a
specific date at a specific exchange rate, with all conditions fixed and not adjustable.
- Forex Futures are subject to rules and regulation and are transacted on established
Exchanges.

 Option Market
- Forex options give currency traders the right, but not the obligation, to buy or sell
currency at a certain price (`strike price’ i.e. exchange rate in this case) at a particular date
in the future (`expiry date’).
- There are two types of forex options – call and put. A call option gives you the right to
buy and a put option the right to sell forex options.
- A call option works better when you expect the value of a currency to fall. A put option
works better in a situation where the currency is expected to strengthen.
- Currency option: a right, or option, to exchange a specific amount of a currency on a
specific date at a specific rate.
- Suppose a company buys an option to purchase, in 30 days, French francs FF 5.95/$. If, at
the end of the 30 days, the exchange rate is FF 6/$, the company would not exercise its
 currency option. Why? It could get 0.05 more francs for every dollar by exchanging at the
spot rate in the currency market rather than at the stated rate of the option.
- Companies often use currency options to hedge against exchange rate risk or to obtain
foreign currency.
 Swap Market
- A foreign exchange swap (also known as an FX swap) is an agreement to simultaneously
borrow one currency and lend another at an initial date, then exchanging the amounts at
maturity.
- It is useful for risk-free lending, as the swapped amounts are used as collateral for
repayment.
- For a foreign exchange swap to work, both parties must own a currency and need the
currency that the counterparty owns. There are two “legs”.
- Leg 1 at the Initial Date: The first leg is a transaction at the prevailing spot rate. The
parties swap amounts of the same value in their respective currencies at the spot rate. The
spot rate is the exchange rate at the initial date.
- Leg 2 at Maturity: The second leg is a transaction at the predetermined forward rate at
maturity. The parties swap amounts again, so that each party receives the currency they
loaned and returns the currency they borrowed
- A currency swap is the simultaneous purchase and sale of foreign exchange for two
different dates.
(Suppose a Swedish carmaker imports parts from a subsidiary in Turkey. The Swedish
company must pay the Turkish subsidiary in Turkish lira for the parts when they are delivered
tomorrow. It also expects to receive Turkish liras for cars sold in Turkey in 90 days. Our
Swedish company exchanges krona for lira in the spot market today to pay its subsidiary. At
the same time, it agrees to a forward contract to sell Turkish lira (and buy Swedish krona) in
90 days at the quoted 90-day forward rate for lira. In this way, the Swedish company uses a
swap both to reduce its exchange-rate risk and to lock in the future exchange rate.)
1.8. Institutions of Forex
- Interbank Market: Market in which the world's largest banks exchange currencies at spot
and forward rates. (liên ngân hàng)
- Securities Exchanges: Exchange specializing in currency futures and options transactions.
(sở giao dịch chứng khoán)
- Over-the-counter Market (OTC): Exchange consisting of a global computer network of
foreign exchange traders and other market participants. (thị trường phi tập trung)
2. Currency
- Convertible currency (or hard currency): Currency that trades freely in the foreign
exchange market, with its price determined by the forces of supply and demand
2.1. Goals of Currency Restriction
- To preserve a country’s reserve of hard currencies with which to repay debts owed to
other nations
- To preserve hard currencies to pay for imports and to finance trade deficits ✓To protect a
currency from speculation
- To keep resident individuals and businesses from investing in other nations
2.2. Policies for restricting currencies
Policies used to enforce currency restrictions include:
- Government approval for currency exchange
- Imposed import licenses
- A system of multiple exchange rates
- Imposed quantity restrictions
2.3. Gold standard
- International monetary system in which nations linked the value of their paper currencies
to specific values of gold.
- As all currencies had a gold value, they also had a certain value in relation to each other.
This was the beginning of a foreign exchange system.
- Britain was the first nation to implement the Gold Standard in the early 1700s
- The Gold Standard required a nation to fix the value (price) of its currency to an ounce of
gold (e.g., $35/ oz.).
- The value of a currency expressed in terms of gold is called its par value (ngang giá)
 Advantages of Gold Standard
- Reducing Exchange-rate risk
- Imposing Strict Monetary Policies
- Correcting Trade Imbalances
 Bretton Woods System
- The Bretton Woods system of monetary management established the rules for commercial
and financial relations among the world's major industrial states in the mid 20th century.
- Bretton Woods Agreement: Agreement (1944) among nations to create a new
international monetary system based on the value of the U.S. dollar.
- The most important features of Bretton Woods System:
+ Fixed Exchange Rates
+ Built-in Flexibility

+ Funds for economic development

+ Enforcement Mechanism

2.4. Bretton Woods Agreement

- World Bank (International Bank for Reconstruction and Development, or IBRD): Agency
created by the Bretton Woods Agreement to provide funding for national economic
development efforts.
- WB funds poor nation’s economic development projects such as the development of
transportation networks, power facilities, and agricultural and educational programs.
- International Monetary Fund (IMF): Agency created by the Bretton Woods Agreement to
regulate fixed exchange rates and enforce the rules of the international monetary system.
 Main purposes of IMF
- Promoting international monetary cooperation
- Facilitating expansion and balanced growth of international trade
- Promoting exchange stability, maintaining orderly exchange arrangements, and avoiding
competitive exchange devaluation
- Making the resources of the Fund temporarily available to members
- Shortening the duration and lessening the degree of disequilibrium in the international
balance of payments of member nations
2.5. Central Bank
- A country’s chief bank, which is government owned.
- Regulates the commercial banks and holds gold and foreign currency reserves.
- Actively intervenes by buying and selling its own currency in the foreign exchange
markets so that the currency will keep a certain value.
 Functions of Central Bank
- Implementing monetary policy
- Providing the nation’s money supply
- Being the Government's banker and the bankers' bank ("lender of last resort")
- Managing the country's foreign exchange and gold reserves and the Government's stock
register
- Regulating and supervising the banking industry
- Setting the official interest rates – used to manage both inflation and the country's
exchange rate – and ensuring that this rate takes effect via a variety of policy mechanism