Foreign Direct Investment

FDI – Definition (cont.)

Vu Chi Loc (2012):

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.
 FDI definition

Foreign direct investment (FDI) is made by foreign companies in

order to establish wholly owed companies in another country
and to manage them or to purchase shares of companies in
another country for the purchase of managing such companies. It
also includes foreign collaboration, which means setting up of
an enterprise, jointly by the foreign and native entrepreneur

3
 FDI definition

 IMF, OECD, UNCTAD:

Foreign direct investment (FDI) is defined as an investment involving

a long-term relationship and reflecting a lasting interest and
control by a resident entity in one economy (foreign direct
investor or parent enterprise) in an enterprise that is resident in
another economy (the direct investment enterprise)

4
 FDI definition (cont.)

 Direct investors/ Parent enterprise : individuals;

incorporated or unincorporated private or public
enterprises; associated groups of individuals or
enterprises; governments or government agencies; or
estates, trusts, or other organizations.
a long-term relationship
 The lasting interest:
control

 Direct investment enterprise/ Affilate: in which a direct

investor owns 10 percent or more of the ordinary shares or
voting power 5
Types of FDI

 By linkages

 By perspective of host country

 By modes of entry
Types of FDIodes

Linkages:
• Horizontal FDI:: in the same industry,
same production stage.
E.g: Lenovo & IBM’s PC Division
P&G & Gillette (2005, $57b)
 Types of FDI (linkages)

• Vertical FDI:: in one value chain, different stages

of production.
Supplier Producer Distributor

-Forward integration: downstream integration.

E.g: Walt Disney & ABC Television (1996)
-Backward integration: upstream integration.
E.g: Apple & Intel (2006)
Types of FDI (linkages)

•Conglomerate FDI:: no common

business areas.
E.g: Phillip Morris & General Foods
 Types of FDI (cont.)

Perspectives of host country:

+ Import-substituting FDI

+ Export-increasing FDI

+ Government-initiated FDI

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 Types of FDI (cont.)

Modes of FDI entry

Greenfield vs. M&A

Greenfield (UNCTAD): 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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Objectives of FDI

Foreign direct investment is not consider only as a stock of

capital but as something that provides modern technology,
managerial expertise, employment opportunities and a new
market for product

-
 Why is FDI needed?
 To increase the level of investment by supplementing the domestic investment

 To develop basic industries

 To develop infrastructure

 To remove the shortage of foreign exchange

 To improve managerial and entrepreneurial ability

 To exploit natural resources

 To setup risky and capital intensive projects

 To improve technology

 To increase employment opportunities

Impact of FDI

15
Benefits of FDI in host nation

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Host country benefits
 Availability of capital: Many nations suffers from lack of capital. Since
saving do not increase in the same ratio as the income does, the gap is
filled by foreign capital

 Availability of modern technology: the use of modern technology

could become possible with foreign capital and aid. Modern
technology enhances the productivity of economy

 Exploitation of natural resources: Due to lack of capital resources

have not been properly exploited. Foreign capital will help to make
proper exploitation of natural resources.

 Availability of risk capital: FDI serves as venture capital and thus

makes up this deficiency. As a result of foreign capital, development
has taken place in basic industries and risky ventures like iron and steel,
coal, oil exploration etc.
Host country benefits

 Generating employment and strengthening

skills
Creating jobs
Impact on quality of employment
• Wages
• Job security
• Other conditions of work

Enhancing skills

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36,500 workers with average
wage 6mVND/per month
Host country benefits
 Reduction in inflation: Foreign capital has also made imports
of essential goods possible on a large scale. It increase total
availability of goods and reduces the rate of inflation.
 Promotes competition and economic growth:

FDI in the form of Greenfield investment increases the level of

competition in a market, driving down prices and improving the
welfare of consumers.
Increased competition can lead to increased productivity
growth, product and process innovation, and greater economic
growth
Challenges of FDI in host nation

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Challenges of FDI in host nation

 Bad effects on Domestic industries: domestic industries

cannot face open competition with these foreign companies
who have technological superiority, managerial expertise,
huge financial base, well reputed global brands.

 Increase in foreign dependence: the machines, raw material,

technical know how etc which are imported from abroad
increase the dependence on foreign company.
Challenges of FDI in host nation

 Uncertainty: it leads to shortage of capital in domestic

economy, fall in stock prices, and also leads to decline in
external value of domestic currency.

 Harmful for domestic producers: because of increase in

dependence of foreign industries, their profits decline

 Imbalance development: as foreign capital has been invested

in high profit industries, thus basic industry could not develop
properly
Benefits of FDI in home nation

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Benefits of FDI in Home country
 Inflow of foreign exchange: When subsidiary unit is well
established, the parent company gets huge amount in form of
repatriation of profit, royalty, technical fees, interest on capital etc.
This repatriation on results in inflow of foreign exchange in parent
nation

 Increase in export of capital goods and intermediate goods: The

host nation has to import matching capital goods and intermediate
goods from the parent nations of MNCs. It leads to increase in
export of capital goods and intermediate goods from parent nation

 Reverse knowledge transfer: when an MNC set up its subsidiary in

host nation, its expatriates interact with managers, technocrats of
host nation and learn new working style from them.
Challenges of FDI in home nation

26
Challenges of FDI in home nation

 Negative effects on balance of payment

 Initial capital outflow from home nation to host nation

adversely affects the balance of payment in home nation

 If FDI by home nation has replaced the export mode, it

adversely effects the exports of home nation

 If MNC has setup its production base in the host nation

because of its cheaper labor cost and low input cost
Challenges of FDI in home nation

 Negative effects on employment generation

If FDI is replaced the trade mode, then the goods which were
earlier manufactured in home nation are now manufactured in
host nation. So investment mode promotes unemployment in
home nation
World FDI inflows 1970-2022
(Unit: USD mil.)

(Source: World Investment 29

Report 2023, UNCTAD)
World FDI inflows
 FDI inflows by regions
(Unit: USD mil.)

31 2015), UNCTAD.
(World Investment Report
 FDI inflows by regions 2017-2022
(Unit: USD mil.)

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%
2017 2018 2019 2020 2021 2022

Developed countries Developing countries

32 2023), UNCTAD.
(World Investment Report
 World FDI inflows by sectors

2022 Primary
11%

Manufac
Services turing
59% 30%

33
Nguồn: Báo cáo đầu tư thế giới (World Investment Report 2023), UNCTAD.
 FDI in Vietnam

Millions of $

Source: UNCTAD handbook statistics

FDI inflows 2006-2022 (Unit: USD bil.)
70.00

60.00

50.00

40.00

30.00

20.00

10.00

0.00
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Tổng vốn đăng ký Vốn thực hiện

FDI inflows in VN by sectors(accumulated until 20/12/2022):

Investment
Number of
No. Sector capital
projects
(million
USD)
1 Manufacture and processing 15.947 260.117,55

2 Real-estate business 1.072 66.267,55

Manufacture, distribution of electricity,
3 gas, water, air conditioner 185 38.317,63

4 Hotel and Restaurant 928 12.679,18

5 Construction 1.785 10.899,62

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FDI inflows in VN by home countries (accumulated
until 20/12/2022)
Investment capital (millions
No. Countries No of projects
USD)

1 Korea 9.534 80.969,64

2 Singapore 3.097 70.846,16

3 Japan 4.978 68.897,17

4 Taiwan 2.905 36.433,74

5 Hongkong 2.164 29.492,77

6 China 3.567 23.348,82

7 BVI 888 22.382,22

8 The Netherlands 410 13.713,70

9 Thailand 677 13.098,25

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10 Malaysia 702 13.060,40

FDI inflows in VN by locations (accumulated until
20/12/2022)
Number
Investment capital
No. Locations of
(Million USD)
projects

1 TP. Hồ Chí Minh 11.272 55.828,96

2 Bình Dương 4.074 39.633,40

3 Hà Nội 7.019 38.743,15

4 Đồng Nai 1.818 34.992,05

5 Bà Rịa - Vũng Tàu 533 33.304,09

6 Hải Phòng 982 25.274,13

7 Bắc Ninh 1.819 23.170,76

8 Thanh Hóa 174 14.798,91

9 Long An 1.293 12.912,83

10 Hà Tĩnh 80 12.014,24
FDI effects on Vietnam

 FDI contributes to economic growth:

Contribution of FDI sector in GDP: 2% (1992)  18.97% (2011)

FDI in total social capital: ~ 25%

 FDI contributes to export:

Before 2001: 45.2%  2012: 64%

 FDI contributes to budget revenue:

1994-2000: $1.8bil  2001-2010: $14.2bil

FDI decision making

Process issues in FDI decision

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FDI decision making

Japanese manufacturers in Europe: FDI decision and location

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Some of main FDI component decisions

 FDI or/and operation modes

 Ownership level

 Acquisition vs. greenfield

 FDI package content

 Location (country/region/city)

 Scale and depth of operations (such as assembly or full scale

manufacturing

 Financing
Ownership level