8/19/21

INTERNATIONAL INVESTMENT

Instructor: Pham Thi Mai Khanh (M.A., LL.M., Ph.D.)

Slides by Pham Thi Mai Khanh-FTU 1

COURSE STRUCTURE

I. AN OVERVIEW OF INTERNATIONAL
INVESTMENT
II. FOREIGN DIRECT INVESTMENT

8/19/21 Slides by Pham Thi Mai Khanh-FTU 2

1
 8/19/21

Part II:

FOREIGN DIRECT INVESTMENT

8/19/21 Slides by Pham Thi Mai Khanh-FTU 3

STRUCTURE

I.  Economic Aspects of Foreign Direct

Investment

II.  Policy Aspects of Foreign Direct Investment

in Developing Countries

8/19/21 Slides by Pham Thi Mai Khanh-FTU 4

2
 8/19/21

I. ECONOMIC ASPECTS OF FDI

Theme I.1: FDI and TNCs: concepts,
definitions and measurements
Theme I.1b: Basic Theories of FDI
Theme I.2: International Production:
Long-term trends and current patterns
Theme I.3: Determinants of FDI
Theme I.4: FDI and Development

8/19/21 Slides by Pham Thi Mai Khanh-FTU 5

II. POLICY ASPECTS OF FDI

Theme II.1: Key national FDI policies in

host developing countries

Theme II.2: International rules on FDI

8/19/21 Slides by Pham Thi Mai Khanh-FTU 6

3
 8/19/21

Theme I.1. FDI and TNCs: concepts,

definitions and measurements

•  Main concepts

•  Modes of FDI entry

•  Measurements of FDI and TNC activity

•  Financial crisis and FDI

I.1. Main concepts

•  Foreign Direct Investment

Detailed Benchmark Definition of FDI: 3rd Edition
(BD3) (Paris, OECD, 1996)
Balance of Payments Manual: 5th Edition (BPM5)
(Washington, D.C., IMF, 1993)

•  Transnational Corporations

4
 8/19/21

FDI
•  Direct investment is the category of international
investment that reflects the objective of a resident
entity in one economy obtaining a lasting
interest in an enterprise resident in another
economy.
(The resident entity is the direct investor and the
enterprise is the direct investment enterprise.)

FDI

•  The lasting interest implies

•  the existence of a long-term relationship

between the direct investor and the enterprise and

•  a significant degree of influence by the

investor on the management of the enterprise.

5
 8/19/21

MNC/TNC and FDI

•  Firms become •  FDI presents and
multinational internal
(transnational) when organizational
they undertake FDI expansion by
multinational/
transnational corps.

Definition and Types of FDI

•  Foreign Direct Investment – when a

firm invests directly in production or
other facilities, over which it has effective
control, in a foreign country.
•  Liability of foreignness – the costs of
doing business abroad resulting in a
competitive disadvantage.

Chapter 3: Foreign Direct Investment Theory and Application

6
 8/19/21

Definition and Types of FDI

•  Foreign subsidiaries – overseas units

or entities.
•  Host country – the country in which a
foreign subsidiary operates.
•  Flow of FDI – the amount of FDI
undertaken over a given time.
•  Stock of FDI – total accumulated value
of foreign-owned assets.
•  Outflows/Inflows of FDI – the flow of
FDI out of or into a country.
Chapter 3: Foreign Direct Investment Theory and Application

Components of FDI:

v  equity capital,

v  the reinvestment of earnings and

v  long- and short-term intra-company loans

(between parent and affiliate enterprises).

Slides by Pham Thi Mai Khanh-FTU 14

7
 8/19/21

What cause the discrepancy in the FDI

reports???

Slides by Pham Thi Mai Khanh-FTU 15

FDI understanding – recapped + measurement

https://www.youtube.com/watch?v=xP3nDn_fzGQ

The 2nd Practical Exercise on Page 18, UNCTAD, Virtual

Institute Teaching Material on Economic and Legal
Aspects of Foreign Direct Investment, New York
and Geneva, 2010

Slides by Pham Thi Mai Khanh-FTU 16

8
 8/19/21

Types of FDI (1)

n  Primary FDI – in natural resource exploitation,

forestry or agriculture,…
n  Manufacturing FDI requires the establishment
of production facilities.
n  Service FDI requires building service facilities or
an investment foothold via capital contributions
or building office facilities.

Chapter 3: Foreign Direct

Investment Theory and Application

Types of FDI (2)

n  Horizontal FDI – the MNE enters a foreign

country to produce the same products product at
home.
n  Conglomerate FDI – the MNE produces
products not manufactured at home.
n  Vertical FDI – the MNE produces intermediate
goods either forward or backward in the supply
stream.

9
 8/19/21

Forms of FDI

FDI takes two main forms:

¨ Green-field investment: establishing a
wholly new operation in a foreign country
¨ Acquiring or merging with an existing
firm in the foreign country (M&A)

Entry Mode

n  The manner in which a firm chooses to enter a

foreign market through FDI.
¨  International franchising
¨  Branches
¨  Contractual alliances
¨  Equity joint ventures
¨  Wholly foreign-owned subsidiaries
n  Investment approaches:
¨  Greenfieldinvestment (building a new facility)
¨  Cross-border mergers
¨  Cross-border acquisitions
¨  Sharing existing facilities (brown-field)

10
 8/19/21

Practical Exercise:

The 1st Practical Exercise on Page 18, UNCTAD (2010)

21
Slides by Pham Thi Mai Khanh-FTU

Practical Exercise:

•  A TNC specialized in textile manufacturing

wants to invest in your country. It seeks to
increase its production capacity through
opening a plant there and it intends to export
a part of the products produced in this plant
to developed country markets with the rest to
be sold on the host country market.

22
Slides by Pham Thi Mai Khanh-FTU

11
 8/19/21

Practical Exercise:
•  Find possible arguments in favour (group 1) and
possible arguments against (group 2) the choice of a
greenfield investment instead of M&A from the point
of view of the TNC.
•  Find the same from the point of view of a host
country (group 3 for greenfield versus group 4 for
M&A).
•  In the end, discuss your arguments as follows: group
1 with group 4 and group 2 with group 3. The
purpose is for each group to convince the other that
investment according to its preferred entry mode is
the preferable option. Slides by Pham Thi Mai Khanh-FTU23

Theme I.1b

Theories of Foreign Direct Investment

12
 8/19/21

There is not one but a number of

competing theories with varying
degrees of power to explain FDI

25

Theme I.1b. Theories of FDI

•  Theories assuming perfect markets

•  Theories assuming perfect markets

•  Other theories

•  Theories based on other variables

Note: possible overlap

13
 8/19/21

Five "W's" and an "H"

n  Who - who is the investor?
n  What - what type of investment?
n  Why - why go abroad?
n  Where - where is the investment made?
n  When - When does the firm choose to go abroad?
n  How - How does the firm go abroad? What mode of
entry into the foreign market does it choose?

27

1. Who - who is the investor?

(a new firm or an established MNE? an insider or an
outsider?)

2. What - What kind of investment?

(Greenfield v. brownfield? M&A?
first time investment or sequential investment?).

28

14
 8/19/21

3. Why - why go abroad?

(Firm X wants to earn more profits either by raising its
revenues or reducing its costs.)

4. Where - where is the investment made?

(Choice of host country location - affected by
economic, social/cultural and political factors)

29

5. When - when is the investment made?

(Timing of entry decision - affected by age of product,
multinationality of firm.)

6. How - how does the firm go abroad? What mode of

entry?
(choices include exports, licensing, franchising, FDI)

30

15
 8/19/21

Theories assuming perfect markets

•  Different rate of return theory/hypothesis

•  Portfolio Diversification theory/hypothesis

•  The market size theory/hypothesis

Theories assuming imperfect markets

•  The Oligopolistic Reaction Theory

•  Industrial Organization theory/hypothesis

•  Internalization theory/hypothesis

•  Location theory/hypothesis

•  The Product Life Cycle theory/hypothesis

•  The Eclectic theory

16
 8/19/21

The Different Rates of

Return Hypothesis

CAPITAL MOVEMENT THEORY

Q: Why?
In the context of perfect competition/markets,
FDI is a form of international capital
8/19/21 movement 33

Basic view
n  Capitalflows from countries with low rates
of return to countries with high rates of
return move in a process that lead
eventually to the equality of ex ante real
rates of return.
(K. Kojima)

34

17
 8/19/21

Assumptions
n  Firms behave in such a way to equate the
marginal return on and the marginal cost of
capital.

n  Risk neutrality: domestic and foreign direct

investment to be perfect substitutes.

35

Origin of the capital movement

theories

n  Based on the international trade model

developed by Heckcher-Ohlin-Samuelson
(HOS), Richard S. Eckaus has abolished the
assumption of production factor immobility to
explain the motivation for foreign investment.

36

18
 8/19/21

Mac Dougall Kempt Model (1960)

n Additional Assumptions:
- Diminishing marginal rates of return (output).

-  The marginal rates of return in developed

countries (with abundance of capital) is lower
than the marginal rates of return in developing
countries (lack of capital)

37

Model construction
n  2x2 model.

n  Provides explanation for and prediction of FDI from a

developed country to a developing country based on
production factor comparative advantage principle.

38

19
 8/19/21

N1 N2

S2
P2
S0
I
P0
P
1
P1 S1

x2 x1

Q1 Q0 Qi Q2

Slides by Pham Thi Mai Khanh- 39

FTU

Portfolio Diversification Theory

Main view:

FDI is undertaken to
reduce or minimize the
risk via diversification.

40

20
Slides by Pham Thi Mai Khanh – Foreign Trade University
 8/19/21

Market Size Hypothesis

n  Main view:
The volume of FDI in a host country depends on its
market size (measured by the sales of an MNCs in
that country or by the country’s GDP).
§  Problems:
-  Explainable only in the case of import-substitute FDI
-  Forgoes other FDI determinants
-  Lack of causality explaination

41

Theories assuming imperfect markets

•  The Oligopolistic Reaction Theory

•  Industrial Organization theory/hypothesis

•  Internalization theory/hypothesis

•  Location theory/hypothesis

•  The Product Life Cycle theory/hypothesis

•  The Eclectic theory

21
 8/19/21

The Oligopolistic Reaction Theory

(Follow-the-Leader Theory)
Knickerbocker (1973)
n  Main view:
—  In oligopolistic markets the companies follow
the actions of the market leader
—  Mutual threats – game theory
A move towards foreign production by one oligopolistic firm
induces others to follow (to maintain their market share).

43

Industrial Organization theory/hypothesis

Q. What’s the basic problem of making FDI?
Liability of Foreignness
Main view:
FDI is made by firms in oligopolistic industries possessing
technical and other advantages over indigenous (local) firms.

Internationalization Theory
Firm’s proprietary asset
Firm-specific advantage
compete against local firms
make FDI

22
 8/19/21

Industrial Organization theory/hypothesis

Monopolistic Advantage Theory (Hymer 1960, 1976)

Foreign firms must possess countervailing advantage over

local firm and the market for the sale of this advantage must
be imperfect

45

Internalization Theory
Peter Buckley & Mark Casson
Q. Given the costs of foreignness, why does the MNF
choose internalization over market transactions?
Basic views
To obtain a higher ROI, a firm will transfer its superior knowledge to a
foreign subsidiary rather than sell it in the open market.
A Internalization of proprietary assets can best realize
their full value;
B The MNC is the result of internalizing markets across
national borders.

23
 8/19/21

Location theory/hypothesis

Factor Market Imperfections

¨  International immobility of some factors of production
- Labour
- Natural resources

Note: Appropriability Theory by Magee (information)

47

5. Product life-cycle theory

Học thuyết vòng đời sản phẩm

t
Introductory stage Growth stage Mature stage
I II III

24
 8/19/21

Life cycle theory

—  Raymond Vernon – 1966

—  It can be used to analyse the relationship of product life

cycle and possible FDI flows
—  FDI can be seen mostly in the phases of maturity and
decline

Three stages of product development

production Imports
United State
Exports consumption

Exports

Other advanced
countries production
consumption
Imports

Exports
Developing
countries consumption
Imports production

Introductory stage Growth stage Mature stage

25
 8/19/21

6. Eclectic theory
For a firm to invest overseas, it must have 3 kinds of
advantages: ownership specific, location specific, and
internationalization. Sometimes referred as the OLI Model

OLI paradigm (Mô hình OLI)

Ownership advantage
Location-specific advantage
Internalization incentive

Theme I.2. International production: long-

term trends and current patterns

•  What is international production?

•  The increasing importance of international
production

•  M&As increasingly drive FDI

•  The growth of non-equity relationships
•  The sectoral composition of FDI
•  Changing geography of FDI
•  The transnationality index of countries

26
 8/19/21

FDI trends and patterns

•  Scope of FDI (FDI flows, stock,...)

•  Composition of FDI
-  By modes/forms
-  By sectors
-  By home countries/host countries
•  The importance of FDI
-  Transnationality Index
-  FDI outward/inward performance index

Transnationality Index

•  Measures the relative role of FDI in their

economic activities in terms of its
contribution to investment, employment,
value added, etc.
•  The average of four shares:
a) FDI inflows/gross fixed capital formation;
b) FDI inward stock/GDP;
c) value added of foreign affiliates/ GDP; and
d) employment in foreign affiliates/ total
employment.

27
 8/19/21

FDI inward performance index

The ratio between:

•  FDIi /FDIw : relative size of inward FDI

•  GDPi/GDPw : relative size of the economy

Theme I.3. Determinants of Foreign Direct

Investment

•  Key factors determining FDI

•  Firm-specific determinants of FDI
•  Host-country determinants of FDI

28
 8/19/21

Host country determinants

Theme I.4. FDI Impact

•  On a Home Country

•  On a Host Country
-  Developed host country
-  Developing host country

Mac Dougall-Kemp Model

58
Slides by Pham Thi Mai Khanh-FTU

29
 8/19/21

Theme I.4. FDI and development

•  Increasing financial resources and investment

•  Enhancing technological capabilities
•  Boosting export competitiveness and trade
•  Generating employment and strengthening
skills
•  Effects in other areas: environment and
competition.

Theme I.4. FDI and development

•  Increasing financial resources and investment

•  Enhancing technological capabilities
•  Boosting export competitiveness and trade
•  Generating employment and strengthening
skills
•  Effects in other areas: environment and
competition

30
 8/19/21

Development priorities of countries

•  achieving sustained income growth by increasing
investment rates,
•  strengthening technological capacities and skills,
•  improving the competitiveness of their exports in
world markets;
•  distributing the benefits of growth equitably by
creating more and better employment
opportunities; and
•  protecting and conserving the natural environment
for future generations.

New Global Context

•  knowledge-intensive production,
•  rapid technological change,
•  shrinking economic space,
•  rapid changes in competitive conditions and
evolving attitudes and policies with respect
to international trade, investment and other
flows.

31
 8/19/21

Link between FDI and development –

four perspectives
•  The reigning orthodoxy in neo-liberal economics
–  FDI is the best source of development finance, on the
grounds that it is self-liquidating
•  FDI is neither good nor bad; it all depends on how
you deal with it
•  Aid created debt crisis; FDI will create an even
greater crisis of development
•  FDI is not a development tool at all; it is a
response to systemic crisis of the developed
countries

FDI as capital inflows affect

•  the volume and characteristics of

investible financial resources

•  actual investment

64
Slides by Pham Thi Mai Khanh-FTU

32
 8/19/21

The impact on capital and investment

depends on
•  the conditions of host country
•  mode of entry,
•  the activities of foreign affiliates,
•  the way the FDI is financed, and
•  the ways in which the activities of
domestic companies are affected.

The impact of FDI on

financial resources

33
 8/19/21

The inflow of foreign financial resources for

investment in host countries

•  Internal resources (FDI flows)

•  External resources (raised from international

financial markets)

Advantages of FDI as a source of finance

•  More stable
– Lower risk of “herd behaviour”, divestment
is more difficult

•  Easier to service (than private loans)

– Profits are repatriated only when a project
yields a return

34
 8/19/21

FDI vs. Domestic savings

•  Supplement

•  Substitute

Balance of Payment Impact of FDI

•  The size of net FDI inflows

•  Outflows of income and repatriated capital
•  The export and import propensities of foreign
affiliates,
•  the indirect impact of FDI on foreign factor
income outflows;
•  the indirect impact of FDI on the export and
import propensities of domestic firms; and
•  the indirect impact of FDI on import demand
by consumers in the country
•  Transfer pricing

35
 8/19/21

Transfer Pricing
•  The pricing by TNCs of intra-firm transactions
across national boundaries.

•  TNCs often have considerable freedom in pricing

such transactions, particularly when there are no
arm’s length prices to serve as a reference.

•  This allows TNCs to shift profits between countries

to lower their tax burden or escape other
restrictions on repatriating or declaring profits.

The impact of FDI on investment

36
 8/19/21

FDI impact on investment

•  Direct impact through the investment

expenditures in foreign affiliates.
= internal FDI inflows
+ capital raised locally and internationally
– component that are not used to finance
investment expenditure
•  Indirect impact on the investment by host-
country firms.
–  crowding-in (stimulating entry of) or
•  the existence or creation of backward or forward linkages with
host-country enterprises
–  crowding out (inducing exit of) Back

Enhancing Technological Capacity

37
 8/19/21

Enhancing Technological Capability

•  Technology transfer

•  Technology Generation

Technology Transfer

3 modes of technology transfer:

Technology Transfer via Sale of Capital Goods
Licensing, Sub-contracting
Strategic Alliances
Foreign Direct Investment

Slides by Pham Thi Mai Khanh- 76

FTU

38
 8/19/21

Technology Transfer and Generation

via FDI
•  Vertical Linkages
•  Horizontal Linkages
- Demonstration Effects
- Competition Effects
•  Labour shift
•  Personal contact, reverse engineering,
imitation and the formation of industrial
clusters.
•  R&D Internationalization
Slides by Pham Thi Mai Khanh- 77
FTU

Boosting export competitiveness

and trade
•  Exploiting static comparative
advantages.

•  Creating dynamic comparative

advantages.

•  Providing access to international markets.

•  Increasing local firms’ links to

international market

39
 8/19/21

Generating Employment and

Strengthening Skills
•  Employment Generation
•  Impact on Quality of Employment
– Wages
– Job Security
– Working conditions
•  Enhancing Skills

MODULE II

Policy aspects of FDI in

developing countries

40
 8/19/21

Module II: Policy aspects of FDI in

developing countries
•  Theme II.1:
Key national FDI policies in host
developing countries

•  Theme II.2:
International rules on FDI

Each type of FDI has a different set of

economic requirements
Motive of FDI Key determinants
Natural resource- Abundance and cost of natural resources
seeking FDI Physical infrastructure (ports, roads, railways, etc.)
Price movements
Market-seeking FDI Market size and purchasing power (per capita income)
Market growth
Access to regional and global markets
Tradability of product/service
Structure of markets
Efficiency-seeking, Quality and cost of human resources
export-oriented FDI Physical infrastructure (ports, roads, telecom, etc.)
Trade costs
Quality of suppliers, clusters, etc.
Regional integration agreements
Strategic asset- Presence of firm-specific assets
seeking FDI Ease of cross-border M&As
Efficiency and transparency of financial markets

41
 8/19/21

Three groups of host country FDI determinants

•  To make economic attractions effective, many other conditions
are needed. One common condition (apart from the openess to
FDI) is a degree of political, economic, and social stability
determining the risk of investing in a host country
•  The two other groups of determinants are:
à Policy determinants divided into two sub-groups:
1. FDI policy proper including policy measures affecting only
or mainly foreign investors
2. Policies affecting all investors. Some of them may be
more and some less important for foreign investors
à Business facilitation, including investment promotion
(image building, investment attraction and facilitation and policy
advocacy)

I. Hành lang pháp lý về FDI Định hướng thị trường

1. Ổn định chính trị, kinh tế, xã hội
2. Quy định về thâm nhập và hoạt động
3. Tiêu chuẩn đối xử với những công ty
nước ngoài
4. Chính sách về chức năng và cơ cấu thị
trường (Đb. chính sách cạnh tranh và chính sách
về M&A)
5. Chính sách cổ phần hóa
6. Chính sách thương mại
7. Chính sách thuế
8. Các hiệp định quốc tế về FDI
II. II. Các nhân tố kinh tế
III. Các nhân tố tạo thuận lợi cho kinh doanh
1. Xúc tiến đầu tư (xây dựng hình ảnh, các
hoạt động thúc đẩy đầu tư, dịch vụ đầu tư,...)
2. Các biện pháp khuyến khích đầu tư
3. Dịch vụ hậu đầu tư
4. Các chi phí tham nhũng, hối lộ,...
5. Môi trường xã hội
Dung lượng thị trường
Tăng trưởng thị trường
Khả năng tiếp cận thị trường khu
vực và thế giới
Cơ cấu thị trường
Thị hiếu của người tiêu dùng
Định hướng nguồn nguyên
liệu/ tài sản
Nguyên vật liệu
Lao động
Công nghệ, sáng chế và các tài
sản sáng tạo khác (VD. Nhãn
hiệu)
Cơ sở hạ tầng vật chát (đường
xã, sân bay, bến cảng,...)
Định hướng hiệu quả/chi phí
Chi phí nguồn nguyên liệu/tài sản
+ năng suất lao động
Các chi phí đầu vào khác (VD:
vận tải, viễn thông, các sản phẩm
trung gian) 84

42
 8/19/21

Key general policies that affect FDI

Trade policy Tax policy

Ø import-substitution vs. Ø tax heavens

export-orientation Ø tax incentives
Ø membership of regional Ø corporate and
integration schemes personal taxes

General policies affecting FDI

Policies affecting Ø Monetary Privatization policy

economic, Ø fiscal Ø can be a powerful
political and Ø exchange rate policies determinant of FDI
social stability
inflows
NOTE: THERE ARE MANY OTHER POLICIES AFFECTING FDI IN ONE WAY OR THE OTHER,
RANGING FROM EDUCATIONAL POLICIES THROUGH LABOUR MARKET POLICIES TO
ENVIRONMENTAL AND SECTORAL (E.G., MINING) POLICIES

Policy as FDI determinant: core FDI policies

•  Rules and regulations governing the entry and establishment of foreign
investors in a host country
-- e.g., prohibition of entry, restrictions on ownership (joint venture
requirement) or liberalization of entry
•  Treatment of foreign investors concerning entry, establishment and
operations
-- non-discrimination in the treatment of foreign and domestic firms
(national treatment) and among foreign firms (most-favoured nation
treatment)
-- preferential treatment of foreign or domestic firms (e.g., incentives
only to FDI)
-- distinguish treatment before and after entry
•  Protection of foreign investors
-- expropriation and nationalization; fund transfers; and dispute
settlement are key issues in protection
-- protection against “regulatory takings” is a new issue

43
 8/19/21

Theme II.1. Key national FDI policies in

host developing countries

•  National FDI policies: main objectives and

measures
•  Evolution of FDI policies
•  Key issues in national FDI policies
•  Investment Promotion

National FDI policies

•  The main objectives:

– attracting FDI,
– ensuring that the host economy derives full
economic benefits from FDI, and
– addressing concerns about the potential
negative effects of FDI on the host
economy.

44
 8/19/21

National FDI policies

•  The main measures:

– attracting FDI:
•  Reducing obstacles to entry
•  Improving standards of treatment of foreign
investors
•  Protecting foreign investors
•  Promoting FDI inflows

National FDI policies

•  The main measures:

– Benefiting from FDI:
•  Mandatory measures (performance
requirements)
•  Encouraging foreign affiliates to act in a desired
way, including offering incentives.

45
 8/19/21

National FDI policies

•  The main measures:

– Benefiting from FDI:
•  Mandatory measures (performance
requirements)
•  Encouraging foreign affiliates to act in a desired
way, including offering incentives.

National FDI policies

•  The main measures:

– Addressing concerns about the impact of FDI:
•  Restrictions on admission, establishment and
operations of foreign affiliates
•  To control or influence the operations of foreign
affiliates.

46
 8/19/21

Evolution of national FDI policy:

from hostility towards TNCs to FDI attraction
•  Up until the 1980s most countries made an extensive use of
restrictions on FDI
•  The process of decolonization fuelled nationalizations of
many foreign-owned assets. The mood of confrontation and
hostility towards FDI prevailed

•  Since the 1980s, an almost complete reversal of national FDI

policies in an increasing number of countries

•  Countries started not only attracting FDI but also competing

for better types of FDI

National FDI policy:

from hostility towards TNCs to FDI attraction
•  Providing an open and friendly regime, or an enabling
framework, for FDI has come to dominate national FDI policy
until today

•  International investment agreements (IIAs) have increasingly

complemented national FDI policies: an international
investment rule-making has emerged

47
 8/19/21

MAIN ELEMENTS OF AN ENABLING FDI FRAMEWORK

Liberalization of FDI policy

LIBERALIZATION OF OTHER INTERNATIONAL

ECONOMIC TRANSACTIONS, notably trade
Restrictions Standards of protection
FDI PROMOTION, incentives, EPZs

and treatment
REDUCING
• Entry and
establishment • Protection against • Fair and equitable

BUILDING
• Ownership and nationalization, treatment
control (e.g., joint expropriation and • Transfer of funds
ventures) regulatory takings abroad
• National treatment • Transparency,
• Operational • Investor-State stability and
restrictions (e.g., dispute settlement predictability
expatriates,
performance • Recourse to • Policy coherence
requirements) international means
for the settlement of
• Privatization with investment disputes
FDI (services,
mining)

Market supervision: competition policy, monopoly

regulation, prudential supervision of banks, etc.

INTERNATIONAL INVESTMENT AGREEMENTS HAVE COME TO PLAY AN

INCREASING ROLE IN CONTRIBUTING TO AN ENABLING FDI FRAMEWORK

Attracting FDI
•  Liberalization: reducing obstacles to FDI by removing
restrictions on admission and establishment as well as
operations of foreign affiliates
•  Improving standards of treatment of foreign investors
•  Investor protection: compensation in the event of
nationalization and expropriation, dispute settlement and
guarantees on transfer of funds
•  FDI promotion by Investment Promotion Agencies
(IPA), establishing Export Processing Zones (EPZs),
etc.
•  Competition among host countries for FDI (incentives)

48
 8/19/21

The Evolution of Investment Policy

in Vietnam
•  Law on Foreign Investment (1987,
1990, 1992, 1996, 2000)
•  Law on Promotion of Domestic
Investment (1994, 1998)
•  Law on Investment (2005, 2009,
2014, 2016, 2020)

Slides by Pham Thi Mai Khanh- 97

8/19/21 FTU

POLICIES ON INVESTMENT
Investment Law of Vietnam, 2020

•  Art. 5 (General principles)

–  Recognize investors’ freedom to conduct business in
Vietnam, unless prohibited by law
–  Recognize investors’ right to access to financial, land
and other resources
–  Retain the right to suspend or terminate investment
activities which can jeopardize the national defense
and security.
–  Recognize and protect investors’ assets and interests
–  Provide “equal treatment”, encourage and facilitate
investors’ activities
–  Commit to enforce investment treaties

49
 8/19/21

Key issues in national FDI policies

•  National Treatment
•  Nationalization, expropriation and other
regulatory takings
•  Dispute settlement
•  Performance Requirements
•  Incentives
•  Measures to influence technology
transfer
•  Competition Policy

Key issues in national FDI policies

•  National Treatment

– Pre-establishment

– Post-establishment

50
 8/19/21

Key issues in national FDI policies

•  Nationalization, expropriation and other

regulatory takings (property takings)
– Basic principles
•  it must be for a public purpose,
•  be non-discriminatory and
•  give rise to the payment of compensation.
– Types:
•  Direct takings: involve the transfer of the physical
possession of an asset as well as the legal title.
•  Indirect takings: do not involve the transfer of property
rights (creeping expropriation, regulatory takings).

51
 8/19/21

“Plain tobacco packaging” case

•  Philips Morris Asia v Australia

Key issues in national FDI policies

•  Dispute Settlement (investor-state)

– The possible choice between national
procedure and international procedure.

– Post-establishment

52
 8/19/21

DISPUTE RESOLUTION
•  Popular options for Investor – State Dispute
Resolutions in Investment Treaties:
–  Domestic Court
–  ICSID – if both Host State and Home State are ICSID
Members
–  ICSID Additional Facility – if only one State is ICSID
Members
–  Arbitrations under UNCITRAL rules
–  Pre-agreed ad-hoc arbitration
•  Possibility of Vietnam joining ICSID?

Key issues in national FDI policies

•  Performance Requirements (mandatory

requirements)
– Definition: stipulations imposed on foreign affiliates to
act in ways considered beneficial for the host economy.
– Most common requirements: local content, export
performance, domestic equity, joint ventures, technology
transfer and employment of nationals.
– Purposes: induce TNCs to do more to promote local
development
– Characteristics: mandatory, creating inefficiency,
deterring FDI (possible)

53
 8/19/21

Key issues in national FDI policies

•  Performance Requirements (mandatory
requirements)
– TRIMs (WTO): prohibits certain performance
requirements considered trade distorting
•  local content requirements,
•  trade-balancing requirements,
•  restrictions on foreign exchange inflows and
•  export controls.

The Agreement prohibits not only mandatory TRIMs

but also those linked to an advantage. It applies
equally to measures imposed on domestic and foreign
enterprises.

– Reasons:
•  WTO rules oblige members to abandon some
Keymeasures
issues (TRIMs)
in national FDI policies
•  more competitive environment for FDI (the shift from
“sticks to carrots”: mandatory->more market-friendly
•  Incentives
tools)
– Purpose:
•  some development objectives that countries sought to
•  promote
attractingthrough performance
new FDI, preventing requirements
relocation may now
have been realized
elsewhere, or
•  making foreign affiliates in a country operate in
certain ways or undertake activities regarded as
desirable.
– Three main types:
•  financial incentives,
•  fiscal incentives and
•  other incentives

54
 8/19/21

Key issues in national FDI policies

•  Measures to influence technology transfer
–  Direct controls: to influence the types, costs and
conditions of technology transfer.
Concerns:
•  The information and administrative requirements of technology
regulation
•  The absorption and upgrading of imported technology
–  Stipulating greater local ownership, or requiring
transfers.
–  Providing behavioural incentives
–  Strengthening intellectual property rights
NOTE: objectives-policies-measures-conditions
relationship (p.112)

Technology Transfer

55
 8/19/21

Key issues in national FDI policies

•  Competition Policy
– Main objective: to preserve and ensure the efficient
allocation of resources in an economy

– Measures to regulate:
•  restrictive business practices
•  the abuse of dominant positions
•  M&A

Investment Promotion

•  Definition:
–  a wide range of initiatives of a host country to
encourage investment
–  the communication of information and opportunities to
investors and the process of convincing those investors
to invest.
•  Evolution (3 generations):
–  liberalization of FDI regimes + global promotion of
locational advantages
–  ‘marketing’
–  target foreign investors at the level of industries and
firms and in the light of the country’s developmental
priorities (targeted investment promotion)

56
 8/19/21

Investment Promotion

•  Targeted Investment Promotion: main steps

–  Investor targeting (screening)
–  Investor communication
•  Image building
•  Investment generation (persuade the investor to decide to
invest in a location). Dealing with enquiries?

–  Investment facilitation and management of investor

relationships
•  a detailed “road map” for assisting the investor in each phase
of the investment process.
•  Corporate Development Support (CDS) -“aftercare”

Investment Promotion

•  Good Governance and Investment Promotion

–  Predictability
–  Accountability
–  Transparency
–  Participation

57
 8/19/21

Theme II.2: International rules on FDI

•  Concept, Nature and Types of IIAs

•  Evolution of and recent trends in IIAs
•  International investment disputes
•  The concept of national policy space

•  The development dimension in IIAs

•  Ensuring coherence of national and
international investment policy

IIAs: definition, nature

•  IIAs are agreements between States that

address and regulate various issues related to
international investment including FDI.

•  binding international instruments

•  focus on the treatment, promotion and
protection – and sometimes liberalization – of
international investment

58
 8/19/21

Types of IIAs

•  Bilateral: two parties

•  Plurilateral: a limited no. of parties
•  Multilateral: no limit on the no. of parties

•  “Pure” IIAs
•  Other international agreements that
concern investment (DTTs, EIAs, FTAs)
•  Contracts between a State and a foreign
investor (State contract)

Types of IIAs

•  Bilateral Investment Treaties (BITs)

– deals exclusively with issues concerning the
admission, treatment and protection of foreign
investment
•  Double Taxation Treaties (DDTs)
– International double taxation: two different States
impose the same type of tax on the same taxpayer and
on the same taxable item (e.g. income).
– DTTs are the primary means of avoiding
double taxation.

59
 8/19/21

Types of IIAs

•  Other IIAs (regional)

Eg. RTA, EPA, FTA

–  Agreements with investment chapters that contain

obligations commonly found in BITs;
–  Agreements with limited investment-related provisions
confined for example to investment (i.e. commercial
presence) in services or the right of establishment;
–  Agreements that express a commitment to promote
investments and/or establish an institutional framework
to monitor, cooperate or negotiate on investment or
investment-related issues

Types of IIAs

•  Other IIAs
EIAs facilitate international trade in goods and services and
cross-border movements of other factors of production.

–  A preferential trade arrangement (reduce trade barriers)

–  A free trade area/agreement (elimination of trade barriers)
–  A customs union (+ common system of external tariffs and
quotas)
–  A common market (+ free movement of production factors)
–  An economic and monetary union (+common currency and
common economic policies)
–  Complete economic integration

60
 8/19/21

Types of IIAs

•  Other IIAs
EIAs facilitate international trade in goods and services and
cross-border movements of other factors of production.

–  (Intra-)regional agreements
–  Inter-regional agreements

Types of IIAs

•  Multilateral investment agreements

– Failed to conclude:
•  United Nations Code of Conduct on Transnational
Corporations.(UN)
•  Multinational Investment Agreement (MAI)
– Non-binding instruments
•  Guidelines on the Treatment of FDI (WB)
•  Guidelines for Multinational Enterprises (OECD)
•  Guidelines for Recipient Country Investment Policies
Relating to National Security (OECD)

61
 8/19/21

Types of IIAs

•  Multilateral investment agreements

– Dealing with specific aspects of investment:
•  Convention on the Settlement of Investment Disputes
(ICSID)
•  Convention Establishing the Multilateral Investment
Guarantee Agency (MIGA)
•  Energy Charter Treaty

Types of IIAs

•  Multilateral investment agreements

– In the framework of WTO:
•  General Agreement on Trade in Services (GATS)
•  Agreement on Trade-Related Investment Measures
(TRIMs)

62
 8/19/21

The “Spaghetti Bowl” of “other” IIAs (plus

over 2,800 BITs): is it manageable?

Evolution of and recent trends in IIAs

•  BITs-key issues:
•  Scope and definition of investment;
•  Admission and establishment;
•  National treatment;
•  Most-favoured-nation treatment;
•  Fair and equitable treatment;
•  Compensation in the event of expropriation or damage to
the investment;
•  Guarantees of free transfers of funds;
•  Investor-State dispute settlement.

63
 8/19/21

Evolution of and recent trends in IIAs

•  BITs- new key issues:

•  Exception clauses, covering national security and public
order, the protection of health, safety, the environment,
and the promotion of core labour rights and cultural
diversity.
•  The “Right to Regulate”, Flexibility for development,
Policy space
•  corporate social responsibility
=> Re-negotiation

The concept of national policy space

•  The flexibility for governments to pursue

development policies
–  based on the Right to Regulate, State sovereignty
•  The coherence of national and international
investment policies
–  trade-off between the benefits of accepting international
rules and commitments and the constraints posed by
the loss of policy space.

64