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INTERNATIONAL INVESTMENT INTERNATIONAL FINANCIAL FLOWS (CONT.) Slides by Cao Thi Hong Vinh – FTU INTERNATIONAL FLOW OF FINANCIAL RESOURCES Official Flows FOREIGN AID ODA Grants OA Concessional loans Private Flows OOFs Non-Concessional Loans FDI fpi Porftolio Equity Flows Private loans Bond Debt Flows Commercial Loans Bond Debt Flows X 05/27/19 PRIVATE FLOWS  Foreign direct investment (FDI)  Foreign portfolio investment (FPI)  (International) private loans (IPL) FDI - Definition OECD Benchmark Definition of FDI: 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’’) FDI – Definition (cont.) Lasting interest: - The existence of a long-term relationship - A significant degree of influence on the management of the enterprise Via ownership of ≥ 10% voting power of incorporated enterprise, or equivalent of an unincorporated enterprise FDI – Definition (cont.) Incorporated vs Unincorporated enterprises OECD definition: http://stats.oecd.org/glossary/detail.asp?ID=2800 - An unincorporated enterprise is a producer unit which is not incorporated as a legal entity separate from the owner (household, government or foreign resident); - the fixed and other assets used in unincorporated enterprises not belong to the enterprises but to their owners, the enterprises as such cannot engage in transactions with other economic units nor can they enter into contractual relationships with other units nor incur liabilities on their own behalf; - their owners are personally liable, without limit, for any debts or obligations incurred in the course of production FDI – Definition (cont.) Incorporated vs Unincorporated enterprises OECD definition: http://stats.oecd.org/glossary/detail.asp?ID=455 An incorporated enterprise (or a corporation) is a legal entity, created for the purpose of producing goods or services for the market, that may be a source of profit or other financial gain to its owner(s); it is collectively owned by shareholders who have the authority to appoint directors responsible for its general management FDI – Definition (cont.) Incorporated vs Unincorporated enterprises - Formation cost - Formality level - Liability - Taxation - Ease of raising capital 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 FDI – Characteristics A voice in management Threshold-equity ownership - OECD (IMF) - UNCTAD - Vietnam FDI – Components Equity capital Reinvested earnings Other capital Types of FDI Moosa, I.A (2002), Foreign Direct Investment: Theory, Evidence and Practice Perspectives of investor: + Horizontal FDI: to produce the same or similar kinds of products abroad (in host country) as in home country 13 Types of FDI (cont.) Perspectives of investor (cont.): + Vertical FDI: Exploit raw materials (Backward vertical FDI) or Be nearer to the consumers through the acquisition of distribution outlets (Forward vertical FDI) + Conglomerate FDI: Manufacture products not manufactured by the parent company at home 14 Types of FDI (cont.) Perspectives of host country: + Import-substituting FDI + Export-increasing FDI + Government-initiated FDI 15 Modes of FDI entry Greenfield vs M&A Greenfield: (UNCTAD) undertaken to set up a new production venture in a host country 16 Modes of FDI entry (cont.) M & A: (UNCTAD) Investing firm merge with or acquire an existing firm  transfer of assets from domestic to foreigner investors 17 Modes of FDI entry (cont.) M & A: (UNCTAD) - - Acquisition: transfer of assets and operations from a local to a foreign company Merger: Assets and operations of two firms are combined to set up a new legal entity 18 Modes of FDI entry (cont.) M & A: (UNCTAD) - Advantages: + speed of attaining desired goals (market, production capacity, profit) + strategic assets, + others (market, gains via synergies, risk reduction…) 19 Modes of FDI entry (cont.) M & A (cont.): - Concerns: + economic (no productive capacity, lay-offs and closing, dominance ), + social (culture, identity, sovereignty ) 20 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 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 FPI – Characteristics - No voice in management Sornarajah (2004) UNCTAD - Return of investors FPI – Characteristics (cont.) - Less stable - No technology transfer 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 IPL – Characteristics - Relation between investors and recipients - Usage right of invested money - Return of investor ... Incorporated vs Unincorporated enterprises OECD definition: http://stats.oecd.org/glossary/detail.asp?ID= 455 An incorporated enterprise (or a corporation) is a legal entity, created for the purpose of producing... FDI fpi Porftolio Equity Flows Private loans Bond Debt Flows Commercial Loans Bond Debt Flows X 05/ 27/19 PRIVATE FLOWS  Foreign direct investment (FDI)  Foreign portfolio investment (FPI)  (International)... of host country: + Import-substituting FDI + Export-increasing FDI + Government-initiated FDI 15 Modes of FDI entry Greenfield vs M&A Greenfield: (UNCTAD) undertaken to set up a new production