Foreign direct investment (FDI) (TIẾNG ANH KINH tế SLIDE)

Definition Foreign Direct Investment: The establishment of a plant or distribution network abroad Investors can acquire part or all of the equity of an existing foreign corporation either to control or share control over sales, production, and research and development The basic questions of FDI (6W+H) Who? (is the investor) What? (kind of FDI) Why? (are we investing) Where? (is the FDI going) When? (do we invest) How? (the mode of entry) Types of FDI Horizontal FDI arises when a firm duplicates its home country-based activities at the same value chain stage in a host country through FDI Platform FDI Foreign direct investment from a source country into a destination country for the purpose of exporting to a third country Vertical FDI takes place when a firm through FDI moves upstream or downstream in different value chains i.e., when firms perform value-adding activities stage by stage in a vertical fashion in a host country O = Ownership advantages Some firms have a firm specific capital known as knowledge capital: Human capital (managers), patents, technologies, brand, reputation… This capital can be replicated in different countries without losing its value, and easily transferred within the firm without high transaction costs L – Localization advantages Producing close to final consumers or downstream customers Saving transport costs Obtaining cheap inputs Jumping trade barriers Provide services (for most services production and delivery have to be contemporaneous) I – internalization advantages Why don't a firm just sign a contract with a subcontractor (external agent) in a foreign country? Because contracting out is risky: it implies transferring the specific capital outside the firm and revealing the proprietary information (e.g how to use the technology or the patent) Problem: If the agent interrupts the contract it can use the technology to compete with the mother company In the case of brands/reputation: if the agent damages the brand reputation OLI approach - conclusions The eclectic, or OLI paradigm, suggests that the greater the O and I advantages possessed by firms and the more the L advantages of creating, acquiring (or augmenting) and exploiting these advantages from a location outside its home country, the more FDI will be undertaken Where firms possess substantial O and I advantages but the L advantages favor the home country, then domestic investment will be preferred to FDI and foreign markets will be supplies by exports types of FDI derived from OLI theory The typology of FDI was developed by Jere Behrman to explain the different objectives of FDI: Resource seeking FDI Market seeking FDI Efficiency seeking (global sourcing FDI) Strategic asset/capabilities seeking FDI Resource seeking FDI To seek and secure natural resources e.g minerals, raw materials, or lower labor costs for the investing company For example, a German company opening a plant in Slovakia to produce and re-export to Germany 10 Market seeking FDI To identify and exploit new markets for the firms` finished products Unique possibility for some type of services for which production and distribution have to be contemporaneous (telecom, water supply, energy supply) Automotive TNCs have invested heavily in China 11 Efficiency seeking FDI To restructure its existing investments so as to achieve an efficient allocation of international economic activity of the firms International specialization whereby firms seek to benefit from differences in product and factor prices and to diversify risk Global sourcing – resource saving and improved efficiency by rationalizing the structure of their global activities Undertaken primarily by network based MNCs with global sourcing operations 12 Strategic asset/capabilities seeking FDI MNCs pursue strategic operations through the purchase of existing firms and/or assets in order to protect O specific advantages in order to sustain or advance its global competitive position  Acquisition of key established local firms  Acquisition of local capabilities including R&D, knowledge and human capital  Acquisition of market knowledge  Pre empting market entrance by competitors  Pre empting the acquisition by local firms by competitors 13 FDI theories on macro level Capital market theory One of the oldest theories of FDI (60s) FDI is determined by interest rates Dynamic macroeconomic FDI theory FDI are a long term function of TNC strategies The timing of the investment depends on the changes in the macroeconomic environment „hysteresis effect“ FDI theories on macro level FDI theory based on exchange rates Analyses the relationship of FDI flows and exchange rate changes FDI as a tool of exchange rate risk reduction FDI theory based on economic geography Explores the factors influencing the creation of international production clusters Innovation as a determinant of FDI – „Greta Garbo effect“ FDI theories on macro level Gravity approach to FDI The closer two countries are (geographically, economically, culturally ) the higher will be the FDI flows between these countries FDI theories based on istitutional analysis Explores the importance of the institutional framework on the FDI flows Political stability – key factor Foreign Portfolio Investment: The purchase of shares and long-term debt obligations from a foreign entity Portfolio investors not aim to take control of a corporation They can liquidate their investment at market value any time Strategic Approach: Foreign direct investment decisions based on business strategies Investors seek access to raw materials, markets, product efficiency, and “know-how” Cash Flow: The total amount of cash that remains in a company after it has paid taxes and other cash expenses Investment Incentives: benefits such as cash grants, tax credits, accelerated depreciation, and low interest-bearing loans, which are sponsored by national or local authorities to attract foreign investment Exclusive Distributor: An independent sales agent who is given the sols right, under contract, to sell a foreign manufacturer’s products Multiple Distributor: A sales agent who represents more than on e manufacturer Royalty Payments: the payments made by a foreign manufacturer to a company that has licensed the manufacturer to product its products Joint Venture: A subsidiary formed by two or more corporations   Joint venture enterprise A joint venture enterprise (JVE) is an enterprise established in Vietnam on the basis of a joint venture contract signed by two or more parties for the purpose of conducting investment and business in Vietnam A joint venture contract may be entered into between: (i) a Vietnamese party and a foreign party; (ii) a Vietnamese party and a wholly foreign owned enterprise; (iii) a JVE and a foreign party; (iv) a JVE and a wholly foreign owned enterprise; or (v) two JVEs Wholly foreign owned enterprise A wholly foreign owned enterprise (WFOE) is an enterprise owned and established by one or more foreign investors under which the investors will manage the enterprise and assume full responsibility for its debts and liabilities An existing WFOE in Vietnam may cooperate with another WFOE and/or with foreign investors to establish a WFOE A WFOE may be established as a joint-stock company, a limited liability company or a partnership Business cooperation contract A business cooperation contract is a form of FDI established via a contractual arrangement between two or more parties without creating a legal entity The contract should stipulate the responsibilities and distribution of profits and liabilities between the parties Foreign company branch vs representative office A foreign company branch established under Vietnamese laws is regarded as the dependent unit of a foreign investor It is permitted to engage in commercial activities which include investment On the other hand, a representative office, also a dependent unit of a foreign investor, may be established by a foreign investor, but only for conducting market surveys and commercial promotion activities permitted under Vietnamese laws  ...Definition ? ?Foreign Direct Investment: The establishment of a plant or distribution network abroad Investors can acquire part or all of the equity of an existing foreign corporation either... aim to take control of a corporation They can liquidate their investment at market value any time Strategic Approach: Foreign direct investment decisions based on business strategies Investors... owned enterprise; (iii) a JVE and a foreign party; (iv) a JVE and a wholly foreign owned enterprise; or (v) two JVEs Wholly foreign owned enterprise A wholly foreign owned enterprise (WFOE) is