Int'l Investment Handout 2020

12/7/20
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
12/7/20 Slides by Pham Thi Mai Khanh-FTU 2
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Part I:
AN OVERVIEW OF
INTERNATIONAL INVESTMENT
STRUCTURE
I.  The concepts of Investment, Foreign

Investment and International Investment
II.  Taxonomy of International Financial Flows
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INVESTMENT
•  You sacrifice something of value now,
expecting to benefit from that sacrifice later.
Current resources Future benefits

(Capital)
Financial benefits Social benefits
•  in expectation that….
•  “risk-return trade-off”
Investment
•  “An Investment is the current commitment of
money or other resources in the expectation of
reaping future benefits.”
Z. Bodie, A. Kane and A. J. Marcus, Investments, 8th edition, Mc Graw-Hill Irwin,

2009
•  “A sum of money or other resources (including

e.g. knowledge or time) spent with the
expectation of getting a future return from it.”
UNCTAD, Virtual institute teaching Material on ECONOMIC AND LEGAL

ASPECTS OF FOREIGN DIRECT INVESTMENT, United Nations: New York
and Geneva, 2010
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Capital
•  Resources
•  Investible
•  Mobilization of capital
•  Invested capital
3 approaches:
(a)  In macro-economics and national accounts:
expenditure on new capital goods (goods that are not consumed
but instead used in future production). Such investment is the
source of new employment and economic growth.
(b) In finance:
investment refers to the purchase or ownership of a financial
asset with the expectation of a future return either as income
(such as dividends), or as capital gain (such as a rise in the value
of the stock).
(c) Legal definitions of investment:

found in laws and legal agreements, focus on the issue of
property, notwithstanding the productive or financial nature of the
investment, unless specific limitations are made.
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Effective use of capital
n  An individual project: ROI (Return on Investment)
ROI = Profit/Total Investment

(Profit = Turnover - Cost)
n  A country: ICOR (Incremental Capital Output Ratio)

ICOR = Total Investment/Δ GDP
(Δ GDP = GDPt- GDPt-1 )
Harrod-Domar Model
developed by Hollis Chenery.
g = k/ICOR
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Harrod Dormar model
I ΔGDP
k = g=
GDP GDP
k I
ICOR = =
g ΔGDP
(Total Investment = Domestic Investment + Foreign Investment)
INVESTMENT TAXONOMY
•  Official Flows of Investment
•  Private Investment
•  Domestic Investment
•  Foreign Investment
•  Direct investment
•  Indirect investment
•  Fixed capital formation – Productive investment (contribute

directly to the productive capacity of the economy)
•  Financial Investment (do not contribute directly to the productive
capacity of the economy)
NOTE: Capital fundamentalism considers capital formation is the

single most-important determinant of growth and development.
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International Investment
•  Capital movement across borders.
12/7/20 Slides by Pham Thi Mai Khanh- 13

FTU
Foreign Investment
•  Capital movement across a certain
country’s borders
•  Inflow and Outflow

FTU
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II. INTERNATIONAL
FINANCIAL FLOWS

FTU
INTERNATIONAL FLOW OF
FINANCIAL RESOURCES
Official Flows Private Flows

FOREIGN AID
FDI FPI Private

ODA OA OOFs
loans
Porfolio Bond Commercial

Concessional Non-Concessional Equity Debt Loans
Grants
loans Loans Flows Flows
Bond Debt Flows X 2
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II.1. FOREIGN AID
FOCUS: Official Development Assistance
Kinds of Foreign Assistance

n  Development Aid:
q  Transfer of finance, commodities etc.
q  Technical co-operation
q  Debt relief
n  Humanitarian Aid:
q  Disaster relief assistance
n  Military Assistance
n  Food Aid
q  offered to countries facing food shortages
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Foreign Aid consists of
n  Financial Flows
n  Technical Assistance
n  Commodities
given by the residents of one country to the

residents of another country, either as grants
or as subsidized loans.
Official Development Assistance

(ODA)
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The origin of today ODA
•  The establishment of the UN, WB, IMF

•  The Marshall Plan
-  Post-World War II reconstruction plan for Europe,
initiated by U.S. Secretary of State George
Marshall (Nobel Prize winner) in 1947.
-  European Recovery Program (1948-1952): USD
13.3 bi to 16 countries (1.5% of U.S. GDP, >1% of
major recipients’ GDP)
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What is the DAC?
•  Development Assistance Committee (DAC) of the

OECD.
•  22 Bilateral Donors, plus European Commission (EC).

•  Objective:improve development assistance through
coordination and collaboration with major stakeholders.
•  Collect and synthesize data on aid and foreign

assistance and deliver the data to the public.
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DAC Statistics
•  Measure resources for development (not just aid)

including;
ü Official Development Assistance (ODA)
ü Other Official Flows (OOF)
ü Private Flows (NGOs)
ü Net Private Grants
•  DAC statistics are the only reliable source of both total
and comparative data on aid performance
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DAC Reporters
•  Data is collected data from:

ü All DAC Member Countries
ü Non DAC Donors (voluntary)
ü Multilateral Agencies (voluntary)
•  Limited data on aid only (ODA) from non-DAC
members.
•  In the future, we hope to improve reporting from non-

DACs, multilaterals and foundations.
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Current DAC Members
Australia France Luxembourg Sweden
Austria Germany Netherlands Switzerland
Belgium Greece New Zealand United Kingdom

Canada Ireland Norway United States
Denmark Italy Portugal European Commission

(Multilateral)
Finland Japan Spain
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Current Non-DAC Reporters
Arab Donors Israel Slovak

Republic
Czech Korea, South Slovenia
Republic
Estonia Mexico* Thailand
Hungary Latvia Taiwan
Iceland Lithuania Turkey
Poland
Bolded countries are the non-DAC OECD Members

* Only textual information reported, no data
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What is ODA?
•  The official measure of foreign aid.

•  Only internationally comparable measure of
donor assistance.
•  Reported by donor countries to the OECD/

DAC on an annual basis.
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Official Definition of ODA
“Those flows to countries and territories on DAC List of ODA

Recipients and to multilateral institutions which are;
I. Provided by official agencies, including state and local

government, or by their executives agencies; and
II. Each transaction of which;

a) Is administered with the promotion of the
economic development and welfare of developing
countries as its main objective; and
b) is concessional in character and conveys a
grant element of at least 25 per cent (calculated at a rate of
10 per cent).”
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Explanation of ODA
ODA are official flows to or for developing countries that

are provided:
•  for developmental purposes

•  by the official sector (Government, public funds)
•  as grants or
•  as “soft loans” (ODA loans are at terms significantly softer than
commercial transactions, and bear a “grant element” of at least 25%
compared with a loan at 10%.)
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ODA Eligible Countries
•  Specifically defined set of countries

•  Includes all low and middle income countries
•  Exceptions: G8 members, EU Members and countries with
a firm date of accession to the EU
•  Reviewed every three years by the DAC

•  Countries may graduate from the list, or change income
groups
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ODA Eligible International Organizations
Agencies to which core contributions are reported as

ODA in whole or in part include:
•  Many United Nations & UN Administered Funds

•  European Commission
•  International Monetary Fund (concessional windows only)
•  World Bank (IDA)
•  World Trade Organization (technical assistance activities)
•  Regional Development Banks
•  Other Multilaterals
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Grant element
Determining Factors:
•  Interest rate (%);

•  Grace period, i.e. the interval from commitment
date to the date of the first payment of
amortisation);
•  Maturity, i.e. the interval from commitment date
to the date of the last payment of amortisation.)
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Grant element (cont)

Meaning:
The present value of a the loan (taking into
account its interest rate and maturity
structure ) must be at least 25% below the
present value of a comparable loan at
market interest rates (presumed 10% by
DAC)
Grant element (cont.)
PV(Loans) − PV (Payments)
Grant element = x100%
PV(Loans)
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Definition of ODA Flows
•  Commitment: Firm undertaking to provide specified funds

•  Disbursement: Actual payment or expenditure of funds
•  Grant: Non-repayable
•  Loan: Initial Loan plus Repayments. Only report repayments
of loan principal, not interest
•  Performance assessed on net disbursements

•  Net disbursements = disbursements of grants +
disbursements of loans - repayments of loan principal
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Important Notes
•  ODA is a measure of donors’

expenditures on aid.
•  It is NOT a measurement of the amount

of value received by a recipient country.
•  ODA is a subset of foreign assistance.
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Notes (cont.):
•  Grant vs. grant element
•  ODA vs. OA (official aid)
Notes (cont.):
•  ODA vs. OOFs (other official flows)
•  ODA vs. ODF (official development finance)
•  ODA vs. TC (technical cooperation)
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Examples of ODA Activities
•  Development Projects – schools, clinics, water supply

systems etc…
•  Emergency Aid for Natural or Man-made Disasters
•  Contributions to Multilateral Development Agencies
•  Food Aid, Emergency and Developmental
•  Aid to Refugees and IDPs
•  Debt Relief outlined by Paris Club Agreement
•  Officially Financed Scholarships for students in developing
countries
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Non Eligible ODA Activities
•  Military or Security Assistance

•  Cultural programmes for the donor’s nationals resident in
other countries
•  Aid from NGOs financed from private sources
•  Foreign Direct Investment
•  Official export credits or other commercially motivated
transactions
•  Guarantees on private export credits or investments
•  Reduced tariffs or other concessions on imports from
developing countries
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ODA Targets & Performance
•  1970 UN Resolution urged advanced countries to provide

0.7% of their national income as ODA.
•  The average ODA/GNI ratio for DAC countries was only

0.31% in 2006.
•  Only five countries achieve the 0.7% target, but several

others have plans to do so.
•  The EU has set ambitious ODA targets of GNI of 0.17% of

GNI by 2010 and 0.33% by 2015 for the 12 new members.
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Foreign Por*olio Investment
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FDI versus Foreign Portfolio Investment
•  Foreign Portfolio Investment – the

investment by individuals, firms, or
public bodies in foreign financial
instruments.
– Stocks, bonds, other forms of debt.
•  Differs from FDI, which is the investment
in physical assets.
•  Portfolio theory – the behavior of
individuals or firms administering large
amounts of financial assets.
Chapter 3: Foreign Direct Investment Theory and Application
Why international portfolio investment :

international correlation structure and risk diversification
-  Portfolio investment income in different

countries is less correlated than in one
country:
+ Economic, political factors, structures and
even psychological factor affecting portfolio
investment income in each country are
different,
+ Business circles are different among
countries,
therefore, international correlation is very
44 low.
Slides by Pham Thi Mai Khanh-FTU
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International Correlation
Stock Market AU FR GM JP NL SW UK US
Australia (AU) .586
France (FR) .286 .576
Germany (GM) .183 .312 .653
Japan (JP) .152 .238 .300 .416
Netherlands .241 .344 .509 .282 .624

(NP)
Switzerland .358 .368 .475 .281 .517 .664
(SW)
United Kingdom .315 .378 .299 .209 .393 .431 .698
(UK)
United States .304 .225 .170 .137 .271 .272 .279 .439
(US)
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Types of FPI
Foreign Equity Flows Bond Dept Loans
Financial
instruments
Investor-
Issuing
Organization
Relationship
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Foreign Equity Flows Bond Dept Loans

Income
Payable by
Issuing
Organizations
* common stock vs. preferred stock
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Foreign Equity Flows Bond Debt Loans
Benefit- -
Cost
Analysis
48
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Foreign Equity Flows Bond Debt Loans

Income of
the
Investors
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International Portfolio Theory
•  Factors contribute to the strong

growth in international portfolio
investment
-  Demographic changes
-  The increasing securitisation of the
global flows of funds
-  The worldwide privatization trend
-  The benefits of diversifying
internationally become more apparent
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Regulations on FPI in Vietnam
Part II:
FOREIGN DIRECT INVESTMENT
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STRUCTURE
I.  Economic Aspects of Foreign Direct

Investment
II.  Policy Aspects of Foreign Direct Investment

in Developing Countries
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
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II. POLICY ASPECTS OF FDI
Theme II.1: Key national FDI policies in

host developing countries
Theme II.2: International rules on FDI
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
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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
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.)
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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.
MNC/TNC and FDI

•  Firms become •  FDI presents and
multinational internal
(transnational) when organizational
they undertake FDI expansion by
multinational/
transnational corps.
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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.
•  Manufacturing FDI requires the
establishment of production facilities.
•  Service FDI requires building service
facilities or an investment foothold via
capital contributions or building office
facilities.
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.
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Types of FDI
•  Horizontal FDI – the MNE enters a foreign

country to produce the same products product
at home.
•  Conglomerate FDI – the MNE produces
products not manufactured at home.
•  Vertical FDI – the MNE produces
intermediate goods either forward or
backward in the supply stream.
•  Liability of foreignness – the costs of doing
business abroad resulting in a competitive
disadvantage.
Entry Mode
•  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
•  Investment approaches:
–  Greenfield investment (building a new facility)
–  Cross-border mergers
–  Cross-border acquisitions
–  Sharing existing facilities
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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).
What cause the discrepancy in the FDI

reports???
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Theme I.1b
Theories of Foreign Direct Investment
There is not one but a number of

competing theories with varying
degrees of power to explain FDI
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Theme I.1b. Theories of FDI
•  Theories assuming perfect markets
•  Theories assuming perfect markets
•  Other theories
•  Theories based on other variables
Note: possible overlap
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?
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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?).
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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)
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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)
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Theories assuming perfect markets
•  Different rate of return theory/hypothesis
•  Portfolio Diversification theory/hypothesis
•  The market size theory/hypothesis
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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
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
12/7/20 movement 76
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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)
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Assumptions
n  Firms behave in such a way to equate the
marginal return on and the marginal cost of
capital.
n  Riskneutrality: domestic and foreign direct

investment to be perfect substitutes.
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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.
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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)
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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.
81
N1 N2
S2
P2
S0
I
P0
P
1
P1 S1
x2 x1
Q1 Q0 Qi Q2
Slides by Pham Thi Mai Khanh- 82

FTU
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Portfolio Diversification Theory

Main view:
FDI is undertaken to
reduce or minimize the
risk via diversification.
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Slides by Pham Thi Mai Khanh – Foreign Trade University
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
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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
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).
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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
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
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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.
Location theory/hypothesis
Factor Market Imperfections

¨  International immobility of some factors of production
- Labour
- Natural resources
Note: Appropriability Theory by Magee (information)
90
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5. Product life-cycle theory

Học thuyết vòng đời sản phẩm
t
Introductory stage Growth stage Mature stage
I II III
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
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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
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
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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
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
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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.
FDI inward performance index
The ratio between:
•  FDIi /FDIw : relative size of inward FDI

•  GDPi/GDPw : relative size of the economy
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Theme I.3. Determinants of Foreign Direct

Investment
•  Key factors determining FDI

•  Firm-specific determinants of FDI
•  Host-country determinants of FDI
Host country determinants
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Theme I.4. FDI Impact
•  On a Home Country
•  On a Host Country
-  Developed host country
-  Developing host country
Mac Dougall-Kemp Model

101
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.
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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
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.
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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.
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
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FDI as capital inflows affect
•  the volume and characteristics of

investible financial resources
•  actual investment
107
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.
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The impact of FDI on

financial resources
The inflow of foreign financial resources for

investment in host countries
•  Internal resources (FDI flows)
•  External resources (raised from international

financial markets)
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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
FDI vs. Domestic savings
•  Supplement
•  Substitute
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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
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.
57
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The impact of FDI on investment
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
58
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Enhancing Technological Capacity
Enhancing Technological Capability
•  Technology transfer
•  Technology Generation
59
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Technology Transfer
3 modes of technology transfer:

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

FTU
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
FTU
60
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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
Generating Employment and

Strengthening Skills
•  Employment Generation
•  Impact on Quality of Employment
– Wages
– Job Security
– Working conditions
•  Enhancing Skills
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MODULE II
Policy aspects of FDI in

Module II: Policy aspects of FDI in

•  Theme II.1:
Key national FDI policies in host
•  Theme II.2:
International rules on FDI
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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
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)
63
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I. Hành lang pháp lý về FDI Định hướng thị trường

1. Ổn định chính trị, kinh tế, xã hội Dung lượng thị trường
2. Quy định về thâm nhập và hoạt động Tăng trưởng thị trường
3. Tiêu chuẩn đối xử với những công ty Khả năng tiếp cận thị trường khu
nước ngoài vực và thế giới
4. Chính sách về chức năng và cơ cấu thị Cơ cấu thị trường
trường (Đb. chính sách cạnh tranh và chính sách Thị hiếu của người tiêu dùng
về M&A)
5. Chính sách cổ phần hóa
6. Chính sách thương mại Định hướng nguồn nguyên
7. Chính sách thuế liệu/ tài sản
8. Các hiệp định quốc tế về FDI Nguyên vật liệu
Lao động
Công nghệ, sáng chế và các tài
sản sáng tạo khác (VD. Nhãn
hiệu)
II. II. Các nhân tố kinh tế
Cơ sở hạ tầng vật chát (đường
III. Các nhân tố tạo thuận lợi cho kinh doanh xã, sân bay, bến cảng,...)
1. Xúc tiến đầu tư (xây dựng hình ảnh, các
hoạt động thúc đẩy đầu tư, dịch vụ đầu tư,...)
Định hướng hiệu quả/chi phí
2. Các biện pháp khuyến khích đầu tư
Chi phí nguồn nguyên liệu/tài sản
3. Dịch vụ hậu đầu tư
+ năng suất lao động
4. Các chi phí tham nhũng, hối lộ,...
Các chi phí đầu vào khác (VD:
5. Môi trường xã hội
vận tải, viễn thông, các sản phẩm
trung gian) 127
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
64
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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
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
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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.
•  The main measures:

– attracting FDI:
•  Reducing obstacles to entry
•  Improving standards of treatment of foreign
investors
•  Protecting foreign investors
•  Promoting FDI inflows
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– Benefiting from FDI:
•  Mandatory measures (performance
requirements)
•  Encouraging foreign affiliates to act in a desired
way, including offering incentives.

– Benefiting from FDI:
•  Mandatory measures (performance
requirements)
•  Encouraging foreign affiliates to act in a desired
way, including offering incentives.
67
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– 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.
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
68
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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
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
69
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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
•  National Treatment
– Pre-establishment
– Post-establishment
70
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•  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).
•  Dispute Settlement (investor-state)

– The possible choice between national
procedure and international procedure.
– Post-establishment
71
12/7/20
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?
•  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)
72
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•  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
73
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•  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
74
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•  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)
75
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•  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”
•  Good Governance and Investment Promotion

–  Predictability
–  Accountability
–  Transparency
–  Participation
76
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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
77
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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.
78
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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
79
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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)
80
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Types of IIAs

– 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

– In the framework of WTO:
•  General Agreement on Trade in Services (GATS)
•  Agreement on Trade-Related Investment Measures
(TRIMs)
81
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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.
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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.
83

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12/7/20

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

Slides by Pham Thi Mai Khanh-FTU 1

12/7/20 Slides by Pham Thi Mai Khanh-FTU 2

12/7/20 Slides by Pham Thi Mai Khanh-FTU 3

I. The concepts of Investment, Foreign

II. Taxonomy of International Financial Flows

12/7/20 Slides by Pham Thi Mai Khanh-FTU 4

Current resources Future benefits

Financial benefits Social benefits

Z. Bodie, A. Kane and A. J. Marcus, Investments, 8th edition, Mc Graw-Hill Irwin,

• “A sum of money or other resources (including

UNCTAD, Virtual institute teaching Material on ECONOMIC AND LEGAL

(c) Legal definitions of investment:

Effective use of capital

n An individual project: ROI (Return on Investment)

ROI = Profit/Total Investment

n A country: ICOR (Incremental Capital Output Ratio)

12/7/20 Slides by Pham Thi Mai Khanh-FTU 9

12/7/20 Slides by Pham Thi Mai Khanh-FTU 10

Harrod Dormar model

(Total Investment = Domestic Investment + Foreign Investment)

12/7/20 Slides by Pham Thi Mai Khanh-FTU 11

• Fixed capital formation – Productive investment (contribute

NOTE: Capital fundamentalism considers capital formation is the

12/7/20 Slides by Pham Thi Mai Khanh- 13

• Inflow and Outflow

12/7/20 Slides by Pham Thi Mai Khanh- 14

12/7/20 Slides by Pham Thi Mai Khanh- 15

Official Flows Private Flows

FDI FPI Private

Porfolio Bond Commercial

Bond Debt Flows X 2

12/7/20 Slides by Pham Thi Mai Khanh-FTU 16

II.1. FOREIGN AID

FOCUS: Official Development Assistance

12/7/20 Slides by Pham Thi Mai Khanh-FTU 17

Kinds of Foreign Assistance

Foreign Aid consists of

given by the residents of one country to the

12/7/20 Slides by Pham Thi Mai Khanh-FTU 19

Official Development Assistance

The origin of today ODA

• The establishment of the UN, WB, IMF

What is the DAC?

• Development Assistance Committee (DAC) of the

• 22 Bilateral Donors, plus European Commission (EC).

• Collect and synthesize data on aid and foreign

• Measure resources for development (not just aid)

• Data is collected data from:

• In the future, we hope to improve reporting from non-

Current DAC Members

Australia France Luxembourg Sweden

Austria Germany Netherlands Switzerland

Belgium Greece New Zealand United Kingdom

Denmark Italy Portugal European Commission

Current Non-DAC Reporters

Arab Donors Israel Slovak

Bolded countries are the non-DAC OECD Members

• The official measure of foreign aid.

• Reported by donor countries to the OECD/

Official Definition of ODA

“Those flows to countries and territories on DAC List of ODA

Int'l Investment Handout 2020

Int'l Investment Handout 2020

I.  The concepts of Investment, Foreign

II.  Taxonomy of International Financial Flows

•  “A sum of money or other resources (including

n  An individual project: ROI (Return on Investment)

n  A country: ICOR (Incremental Capital Output Ratio)

•  Fixed capital formation – Productive investment (contribute

•  Inflow and Outflow

•  The establishment of the UN, WB, IMF

•  Development Assistance Committee (DAC) of the

•  22 Bilateral Donors, plus European Commission (EC).

•  Collect and synthesize data on aid and foreign

•  Measure resources for development (not just aid)

•  Data is collected data from:

•  In the future, we hope to improve reporting from non-

•  The official measure of foreign aid.

•  Reported by donor countries to the OECD/

•  for developmental purposes

•  Specifically defined set of countries

•  Reviewed every three years by the DAC

•  Many United Nations & UN Administered Funds

•  Interest rate (%);

•  Commitment: Firm undertaking to provide specified funds

•  Performance assessed on net disbursements

•  ODA is a measure of donors’

•  It is NOT a measurement of the amount

•  ODA is a subset of foreign assistance.

•  Grant vs. grant element

•  ODA vs. OA (official aid)

•  ODA vs. ODF (official development finance)

•  ODA vs. TC (technical cooperation)

•  Development Projects – schools, clinics, water supply

•  Military or Security Assistance

•  1970 UN Resolution urged advanced countries to provide

•  The average ODA/GNI ratio for DAC countries was only

•  Only five countries achieve the 0.7% target, but several

•  The EU has set ambitious ODA targets of GNI of 0.17% of

•  Foreign Portfolio Investment – the

-  Portfolio investment income in different

•  Factors contribute to the strong

I.  Economic Aspects of Foreign Direct

II.  Policy Aspects of Foreign Direct Investment

•  Modes of FDI entry

•  Measurements of FDI and TNC activity