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INTERNATIONAL INVESTMENT ECONOMIC & LEGAL ASPECTS OF FOREIGN DIRECT INVESTMENT ECONOMIC ASPECTS TNC AND INTERNATIONAL PRODUCTION Slides by Cao Thi Hong Vinh – FTU 1 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 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 Types of FDI (cont.) Perspectives of host country: + Import-substituting FDI + Export-increasing FDI + Government-initiated FDI Modes of FDI entry Greenfield vs M&A Greenfield: (UNCTAD) undertaken to set up a new production venture in a host country Modes of FDI entry (cont.) M & A: - UNCTAD: transfer of assets from domestic to foreigner investors - Advantages: speed, strategic assets, others (market, gains via synergies, risk reduction…) Modes of FDI entry (cont.) M & A (cont.): - Concerns: economic (no productive capacity, layoffs and closing, dominance ), social (culture, identity, sovereignty ) TNC MNC MNE ??? TNC - Definition Dunning (1993): A TNC is an enterprise that engages in FDI and owns or controls value-adding activities in more than country TNC – Definition (cont.) OECD Guidelines for Multinational Enterprises: “These usually comprise companies or other entities whose ownership is private, State of mixed, established in different countries and so linked that one or more of them may be able to exercise a significant influence over the activities of others, in particular, to share knowledge and resources with others” 10 TNC – Inclusion - Parent enterprise Foreign affiliate + Subsidiary + Associate + Branch 11 TNC – Inclusion (cont.) Parent enterprise controls assets of other entities 12 TNC – Inclusion (cont.) Foreign affiliate incorporated or unincorporated lasting interest in the management for investor (ownership of ≥10%) 13 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 14 TNC – Inclusion (cont.) Foreign affiliate Associate Incorporated Parent entity: 10%≤ X ≤ 50% voting power 15 TNC – Inclusion (cont.) Foreign affiliate Branch Unincorporated Parent entity: wholly or joinly own 16 TNC – Measurement - Performance: Investment expenditures, sales, assets, employment, output, exports… - No of TNC: parent and foreign affiliate 17 TNC – Measurement (cont.) - Concentration ratios vs Transnational index + Concentration ratios: within groups + Transnationality index: FDI inflows/gross fixed capital information FDI inward stock/GDP Value added of foreign affiliates/GDP Employment of foreign affiliates/total employment UNCTAD database 18 Int production - Definition UNCTAD Perspective of world economy: All of the production that takes place in parent firms (or home-country units), as well as in foreign affiliates (or host country units) constitutes international production 19 Int production – Definition (c.) Perspective of home and host countries: The production by a domestic firm in a foreign location, and the production of a foreign firm in the domestic country that is foreign to them constitutes international production 20 Int production – Measurement Flows and Stock of FDI Global sales, gross product, total assets, exports, employment… of foreign affiliates 21 Int production – Long-term trends and current patterns UNCTAD: - M&A increasingly drive FDI - The sectoral composition of FDI - Changing geography of FDI 22 Int production – Long-term trends & current patterns (c.) M&A increasingly drive FDI 23 Int production – Long-term trends & current patterns (c.) The sectoral composition of FDI - Services - Extractive industries 24 Int production – Long-term trends & current patterns (c.) Changing geography of FDI - Home country: less concentration (outward) - Host country: more balanced distribution - Host country: the shift towards Asia 25 ... wholly or joinly own 16 TNC – Measurement - Performance: Investment expenditures, sales, assets, employment, output, exports… - No of TNC: parent and foreign affiliate 17 TNC – Measurement (cont.)... added of foreign affiliates/GDP Employment of foreign affiliates/total employment UNCTAD database 18 Int production - Definition UNCTAD Perspective of world economy: All of the production that takes