INTERNATIONAL INVESTMENT

INTERNATIONAL FINANCIAL FLOWS (CONT.)

Slides by Cao Thi Hong Vinh FTU

Official Flows FOREIGN AID

Private Flows

ODA

OA

OOFs

FDI

fpi

Private loans

Grants

Concessional loans

Non-Concessional Loans

Porftolio Equity Flows

Bond Debt Flows

Commercial Loans

Bond Debt Flows X 2

05/04/2012 2

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 do 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 Characteristics (cont.)

Return of investors Technology transfer

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

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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
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Types of FDI (cont.)

Perspectives of host country:

+ Import-substituting FDI
+ Export-increasing FDI

+ Government-initiated FDI

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Modes of FDI entry Greenfield vs. M&A

Greenfield: (UNCTAD)
undertaken to set up a new production venture in a host country

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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

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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.
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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)
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Modes of FDI entry (cont.)

M & A (cont.):
- Concerns: + economic (no productive capacity, lay-offs and closing, dominance..), + social..(culture, identity, sovereignty..)

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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