ESSAYS/PROBLEM SOLVING
1) Explain the trends of FDI inflow in Vietnam in the forms of Joint-venture and 100%
foreign owned enterprise in 1988-2022.
FDI in Vietnam mainly takes the forms of 100% foreign owned enterprise, joint-venture,
Business cooperation contract (BCC), Build-Operation-Transfer (BOT), out of which
100% foreign owned enterprise and Joint-venture account for over 90% of total FDI since
1988. Latelym M&A emerges as a new and potential form of FDI in Vietnam.
The establishment of a company with 100% foreign capital in Vietnam is increasingly
sought after by organizations and individuals abroad promoted by outstanding
advantages. It is an enterprise operated by foreign investors, so the management method
will also be different from Vietnamese enterprises. According to statistics, most of these
foreign enterprises often bring higher economic efficiency. In addition, foreign
enterprises are also better invested in terms of technology, human resources and capital.
When investing in Vietnam, investors mainly choose to invest through 100% Enterprises.
foreign capital - currently accounts for 80% of Vietnam's total FDI projects and
just under 75% of total capital. Other notable investment possibilities include
Joint Ventures and Business Cooperation [Link], the nature of
these investments has proven to be less popular with investors investment because it
requires increased cooperation with Vietnamese partners. This is being said as mentioned
before, certain industries may require foreign investors invest with the participation of
Vietnamese partners.
By 1996, about 70% of FDI is in Joint-venture, because its takes time to get a license,
investment enviroenment is still new to foreign investors.
Since 1996, over 70% FDI is in tthe form of 100% foreign owned enterprise, because
further open, tranparent investment environment to foreign investors.
2) Suppose the inward FDI creates both direct and indirect positive impacts on the host
economy. Which is more important to the host country? Explain?.
Direct impact means what FDI enterprises directly influence on the host country such as
directly recruiting workers, contributing to GDP, transfer technology in the FDI sector.
The indirect means what FDI presence brings about to the domestic sector. Supposed
both direct and indirect impacts are positive, the domestic sector’s observed impacts
make this sector stronger and likewise strengthen the economy sustainably even when
FDI is driven out.
If the domestic sector does not capture positive impacts from FDI sector, the stronger the
FDI sector, the riskier the economy may face when FDI is withdrawn from the economy.
Therefore, the indirect positive impact is more important to the host country.
3) Figure below denotes MacDougall-Kempt model, it is supposed that there are two
nations (I, II) in the world, that possessing OO’ capital of which Nation I owns OA
capital, Nation II owns O’A capital, (OA>O’A); Nation I confronts FF’ curve being the
curve of value of marginal product of capital (VMPK1), and Nation II does with JJ’ curve
(VMPK2); VMPK2 is higher than VMPK1.
Please identify:
a. GDP of each Nation before and after the movement of AB capital from Nation 1 to
nation 2. Change of each Nation’s GDP after the movement of AB capital from Nation I
to Nation II.(Please clearly identify by which area GDP increase or decrease) (10 points)
b. Volume of loss / gain of Nation II’s owners of capital/ owners of other production
factor after the movement of AB capital from Nation I to Nation II. Capital owner losses
THMR; Owner of other production factors gains HMET
Figure . MacDougall-Kemp Model
a.
- GDP of each Nation before and after the movement of AB capital from
Nation 1 to nation 2:
+ Before: GDP N1: OFGA
GDP N2: O’JMA
+ After: GDP N1: OFERA
GDP N2: O’JERA
- Change of each Nation’s GDP after the movement of AB capital from
Nation I to Nation II
+ N1: increase by ERG
+ N2: increase by ERM
b. Volume of loss / gain of Nation II’s owners of capital/ owners of other production
factor after the movement of AB capital from Nation I to Nation II
- N1: ONRA - Capital owner gains CNRG;
FNE - Owner of other production factors losses CNEG
- N2: O’TRA - Capital owner losses THMR;
TJE - Owner of other production factors gains HMET
4) FDI may cause crowding-in effect to the host country. Explain and give examples to
Illuatrate.
- Crowding-in may takes place when the presence of a FDI firm calls in other
foreign or domestic firms in the same area.
- Crowding in foreign firms is direct impact while crowding-in domestic firms is
indirect impacts.
- Inflow of FDI leads to increase of host country’s total capital formation including
foreign and domestic savings.
Crowding in of domestic investment as a result of receiving FDI generally occurs
when foreign investment generates spillovers to the domestic economy. Such spillovers
occur because foreign investments lower the costs of adopting new technologies, which
in turn enhances the rate of growth. FDI may also generate demand for specialized inputs,
thus increasing the marginal productivity of investments in those inputs.
- Crowding-in in indigenous financial and goods markets
+ Direct effects : Attract other foreign fimrs to the host country
+ Indirect effects:
- Establish industrial clusters,
- Improve indigenous competitiveness
- Siphone off advanced technology/R&D to home country
5) Figure below illustrates the model of Firm’s Decision , Horizontal axis denotes market
size and Vertical axis denotes price /cost in a host country, Please explain
a. What do C, ACd, ACf curves and M1M1 denote?
b. Supposed the host market size is larger than OA and smaller than OC, which mode of
entry will foreign firm choose? Do you think foreign company like this mode of doing
business? Explain.
[Link] the host country increase import tax, the market price M1M1 (comprising
import tax) shifts to M2M2, Which mode of entry will the foreign company choose if the
host country’s market size is OC? Explain.
a. C is transaction cost curve faced by the foreign firm in the host country;
ACd is average cost curve faced by domestic firms in the host country;
ACf is the average cost curve faced by foreign firm (ACf= ACd+C) when
investing in the host country;
M1M1 is market price (including import tax) accepted by consumers in the host
country.
b. The host market size is larger than OA and smaller than OC, the company will
lease the monopoly advantage
Assume that MS stands for Market Size. Based on theoretical
models of the firm’sdecision, if: OA < MS ≤ OC licensing will be
chosen as a foreign entry mode;Because OA < MS ≤ OC Foreign
companies invest in profitable, local companiescan also
produce. the foreign company will lease the technology to the
local company and choosethe licensing [Link] first, market
accpeted price is M1M1. That the host country increases import
tax shifts the market price curve upward to M2M2, intersecting
ACD and ACF at A2 and C2 respectively.
c.
OC2 ≤ MS: foreign direct investment (FDI) will be chosen
as a foreign entrymode. Because when a foreign company
sees a higher market demand than OC,ACF < M1M1 use
production technology to supply the market
Foreignenterprises will use FDI as a technique of entrance.
6) It is argued that FDI brings about positive and negative impacts on the host country’s
environment protection? Give evidence and explain
NEGATIVE IMPACTS
Environmental PollutionAs investors search the world for the best potential profits, they
are frequently drawn toareas rich in natural resources but lacking in robust
environmental legislation to regulate theirdiscoveries. Foreign investors may
engage in economic activities that are detrimental to thecommunities in which
they [Link] example, Timber corporations may remove forests to make place for
building. Given theimportance of vegetative cover for the hydrological cycle, such
operations have a detrimental impact onthe ecosystem. FDI also encourages western-style
consumerism by increasing automobile ownershipand paper consumption. This has a
detrimental impact on the natural world, the earth's climatic stability,and food
[Link] is both an opportunity for technology transfer, but sometimes it
turns FDI-receivingcountries into technology dumps where outdated technologies
are consumed that no longer meetnational standards. Many serious environmental
pollution cases of FDI projects that has caused bad consequencesfor the ecosystem and
reduced sustainability of economic growth. For example, the Project Formosa inHa Tinh
causes marine environmental incidents in 2016; Vedan Vietnam was found causing
"death" ofThiVai river; Vietnam Miwon was sanctioned for over discharging wastewater
allowable technicalregulations; Vietnam Mei Sheng Textiles Co., Ltd. was sealed its
dying house for illegal constructionand discharge emissions polluting the environment or
Lee & Man Paper Factory is found to pollute theenvironment.
POSITIVE IMPACTS
FDI has a positive impact on the environment through the introduction of new energy-
savingproducts, reducing dependence on traditional raw materials or energy sources, and
solutions to improveproduction efficiency. or good experience in environmental
[Link], FDI along with the reduction of environmental pollution is an
inevitable investmenttrend, and at the same time, investment recipient countries are
increasingly focusing on strengtheningenvironmental protection policies, so when a
Countries that receive clean FDI projects have theopportunity to receive
modern, environmentally friendly treatment technologies. Both economicbenefits
and environmental protection are [Link] FDI projects, there are still a
few relatively "clean" projects that not only bringeconomic efficiency but are also
environmentally friendly, implemented and operated in the direction ofenvironmental
protection of the land. country. A new feature in attracting FDI is that there are more
andmore large projects such as the tire production project of Kumho Asiana Group
(Korea) with a totalinvestment of 360 million USD, the My Phuoc Ecological Urban
Area project by SP. Setia Berhad(Malaysia) and Becamex IDC cooperated to invest with
a capital of 620 million USD, the project of afactory to manufacture sphygmomanometer
accessories of Key Plastics Vietnam Co., Ltd. to servemedical equipment manufacturers.
electronics... focus on high-tech, environmentally-friendly values.
7) FDI may cause both direct and indirect impacts on the host country’s capital
formation?
Explain.
FDI plays a crucial role in financing development, both directly, as an external source
ofcapital, and indirectly through its impact on domestic capital formation. FDI has
actually becomethe leading source of external financing: FDI in terms of
stock tripled in Least DevelopedCountries, Small Island Developing States, and
quadrupled in landlocked developing countries.
"Direct impacts refer to the direct investments made by foreign firms in the host country,
which increases the stock of physical and financial capital. This leads to the creation of
new jobs, improved infrastructure, and increased technology transfer, which can drive
economic growth and development.
FDI can have negative effects on overall capital formation in developing countries, when
the entry of foreign-owned firms pushes the less efficient domestic firms out of the
market and therefore reduces domestic production capacity.
Indirect impacts refer to the spillover effects of FDI on the host country's economy. For
example, increased competition from foreign firms can lead to increased efficiency and
productivity of domestic firms, which can improve the overall competitiveness of the
host country. FDI can also lead to the development of new industries and the expansion
of existing ones, which can further stimulate economic growth and capital formation."
8) Please explain why in certain cases, the host country worries about FDI in the form of
cross border M&A?
"In certain cases, the host country may worry about Foreign Direct Investment (FDI) in
the form of cross-border mergers and acquisitions (M&As) for several reasons:
- Loss of control : Company will face major difficulties thanks to frictions and
internal competition that may occur among the staff of the united companies.
There is conjointly risk of getting surplus employees in some departments.
Sometimes mergers and acquisitions can result in diseconomies of scale. For
example, this can happen if the owner of the new larger company lacks the control
required to run a bigger company.
- Job losses: Loss of experienced workers aside from workers in leadership
positions. This kind of loss inevitably involves loss of business understand and on
the other hand that will be worrying to exchange or will exclusively get replaced at
nice value.
When two companies doing the same activities come together and become one
company, it might mean duplication and over capability within the company,
which might lead to retrenchments.
- Cultural homogenization: refers to a segment of globalization that reduces cultural
diversity through diffusion, leading when people are subjected to different values
and ideas. Culture homogenization is a bad thing. For instance, it alienates the
culture of a country, eroding their identity over time.
- Transfer pricing:
- Dependence on foreign investors"
9) Host countries impose tax incentives to lure FDI inflow. Thus fiscal incentives may be
an effective measure to attract FDI. Give your opinion and examples to illustrate. (10
points).
- What kind of tax conccession: TAX CONCESSIONS represent perhaps the most widely
adopted measure in developing countries to promote economic development. Today
virtually all developing countries—and many developed countries, too—offer
inducements to approved enterprises in the form of reductions in or exemptions from
import duties and income taxes for given periods of time. Some countries also provide
relief from taxes on sales (including exports) and property, as well as relief from stamp
taxes and other levies.
- How effective.
- Provide examples.