Slides by Cao Thi Hong Vinh – FTU 1

INTERNATIONAL FINANCIAL

FLOWS (CONT.)

INTERNATIONAL INVESTMENT

05/04/2012 2

Official Flows

FOREIGN AID

Private Flows

FDI fpi Private

loans

Porftolio

Equity

Flows

Bond

Debt

Flows

Commercial

Loans

Bond Debt Flows X 2

ODA OA OOFs

Non-Concessional

Loans Grants Concessional

loans

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

13

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

14

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

15

Types of FDI (cont.)

Perspectives of host country:

+ Import-substituting FDI

+ Export-increasing FDI

+ Government-initiated FDI

16

Modes of FDI entry

Greenfield vs. M&A

Greenfield: (UNCTAD)

undertaken to set up a new production

venture in a host country

17

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

18

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.

19

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…)

20

Modes of FDI entry (cont.)

M & A (cont.):

- Concerns:

+ economic (no productive capacity,

lay-offs and closing, dominance..),

+ social..(culture, identity,

sovereignty..)

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