Unit 4: Foreign Direct Investment
Vocabulary:
1. Platform: sân ga
2. economic geography: địa lý kinh tế
3. exchange rate: tỷ giá trao đổi
4. Cash grants: ưu đãi về tiền mặt
5. Tax credits: ưu đãi về thuế
6. Accelerated depreciation: ưu đãi về giá trị gia tăng
Definition: (P63)
The basic questions of FDI (6W+H)
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.
The most popular types because:
- When thị trường tiêu thụ trong nước trở nên bão hòa -> mang công nghệ sang nước khác
sản xuất để tìm new consuming market
- The foreign direct investors want to utilize the resources of foreign nations to reduce the
production cost: nguyên liệu rẻ, nhân công rẻ
- There is a gap in technology among nations -> transfer that old technology to other
countries
● 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.
OLI Theory
O = Ownership advantages
who is an FD Investor?
• Some firms have a firm-specific capital known as knowledge capital: 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
Where to invest?
- Producing close to the final consumers or downstream customers
- Saving transport costs
- Obtaining cheap inputs (cheap raw materials, cheap labor,...)
- Jumping trade barriers (tariffs and quarantine)
- Provide services (for most services, production and delivery have to be contemporaneous)
- Contempanous services: sản xuất ở đâu dùng ngay ở đó
I – internalization advantages
- Why doesn't a firm just sign a contract with a subcontractor (external agent) in a foreign
country?
(vòng đời công nghệ =50 năm ~ HD outsource thường chỉ có 2-3 năm)
- 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's reputation
The objective of seeking FDI
The policy of FDI was developed by Jere Behman to clarify the different objectives of IDI:
• Resunce seeking FDI
• Market seeking FDI
- Efficiency-seeking FDI
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 ( PESTEL)
• „hysteresis effect“
● FDI theory is based on exchange rates
• Analyzes the relationship between FDI flows and exchange rate changes
• FDI as a tool for exchange rate risk reduction
● FDI theory is based on economic geography
• Explores the factors influencing the creation of international production clusters
• Innovation as a determinant of FDI – „Greta Garbo effect“
● 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 institutional 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 do 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”.
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.
-> legal entity:
Wholly foreign owned enterprise (cty 100% von nnuocngoai)
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: hợp đồng hợp tác kinh doanh
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.
Acquisition:
(1)Merger of consolidation
A merger refers to the absorption of one firm by another. The acquiring firm retains its name
and identity, and it acquires all of the assets and liabilities of the acquired firm.
After a merger, the acquired firm ceases to exist as a separate business entity.
(2)Acquisition of Stock
A second way to acquire another form is to purchase the firm’s voting stock in exchange for
cash, shares of stock, or other securities
3 types of acquisition (cần nhớ)
A Casiraton Schene Frandal analysis has typically classified acquisitions into three types:
• 1. Horizontal acquisition: Here, both the acquirer and acquired are in the same industry.
Exton's acquisition of Mobil in 1998 is an example of a horizontal merger in the oil industry.
• 2. Vertical acquisition: A vertical acquisition involves firms at different steps of the
production process. The acquisition by an airline company of a travel agency would be a vertical/
acquisition.
• 3. Conglomerate acquisition: The acquiring firm and the acquired firm are not related to each
other. The acquisition of a food product Sim, by a computer firm would be considered a
conglomerate acquisition.