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CHAPTER 5.
FDI POLICIES OF THE HOST
COUNTRY

Dr. Thanh Tran 1

Required materials
• Phung Xuan Nha, Điều chỉnh chính sách đầu tư nước ngoài ở Việt Nam,
NXB ĐHQGHN, 2010, Chương 1, tr. 11-23.
• Phung Xuan Nha, 2001, International Investment, (Đầu tư quốc tế).
Ch.5
• Kavaljit Singh, 2007, Why international investment matters?
• Vietnam’s Investment Law, 2005.
• UNCTAD, WIR 2006, pp. 219-228, Host country’s FDI policy
• UNCTAD, WIR 2007, pp.157-182
• UNCTAD, WIR 2008, 10-20
• UNCTAD, WIR 2010

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Goals and Contents

1. Goals
• To analyze host countries’ instruments regulating and directing
inward FDI
2. Objectives
• To understand contents of FDI polices and measures
• To analyze and assess FDI policies and measures
• To assess Vietnam’s FDI policies and measures
3. Contents
• FDI policies
• FDI policy measures
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Definition
• FDI policy is an integral part of a nation’s economic development
policy made out to regulate FDI activities in order to achieve goals
of economic-social development of the nation in a specific period.

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Objectives of FDI Policies

§ Attract and maintain foreign investment
§ To acquire
§ capital and jobs
§ technology, production, and R&D skills
§ organizational and managerial skills
§ marketing and exporting skills
§ Facilitate technology transfer, and spillover/diffusion
§ Encourage human resource development
§ Access international market
§ Strengthen national competitiveness in luring FDI
§ Retain national control over strategic industries and strategic decisions

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Objectives of FDI Policies

n To be highly systematic and comprising rules, tools and measures imposed
by the host government to adjust FDI activities
n Objects of FDI policy are foreign-factored investments. The policy aims at
protecting foreign investors’ property rights on physical and knowledge
capital including capital, equipment, managerial and business skills, brand
name
n Scope of regulated objects is wide including investment carried out by
foreign investors from various countries and territories. On the other hand,
FDI closely links with international production network, therefore, any
change in investment environment of the host country or the relevant region
will directly affect investment decisions of foreign investors.
n To impact strongly on different benefit groups in the host country, possibly
induce contradictions and conflicts among local and foreign investors.

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Objectives of FDI Policies

§ For the host government
§ Create a stable legal framework for the effective

performance of FDI; express the government’s transparent

attitude and standpoint towards attracting FDI.
§ Regulate foreign productive factors in accordance with the

host country’s economic development orientation.

§ Improve FDI attraction and utilization efficiency.
Source: Phung Xuan Nha, Điều chỉnh chính sách đầu tư trực tiếp nước ngoài ở
Việt Nam trong tiến trình hội nhập kinh tế quốc tế, NxB ĐHQGHN, 2010, ch.1

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Objectives of FDI Policies

n For foreign investors:
n Provide the norms so domestic and foreign investors can
select suitable partners (in terms of technology, industry,
managerial ability, business strategy, and culture…)
n Provide legal documents based on which domestic and foreign
investors settle disputes (including instruction on process,
measures, relevant authorities, and applicable rules…)
n Protect and encourage ownership-specific advantages of
foreign investors.

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Objectives of FDI Policies

• Ownership ratio and investment guarantee

FDI • Investment orientation and sector

• Fiscal and financial incentives

policies
• Foreign exchange control
• Project screening and management
• Other guarantees

FDI • Investment promotion

• Market access regulation

measures
• MNC operation regulation

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Ownership ratio and investment

guarantees
n Ownership ratio:
n Depends on the form and field to which the project relates.

n Other conditions: export ratio, project size, technology transfer …

n Protect the ownership of invested capital and legal rights of foreign

investors
n Guarantee not to requisite, confiscate lawful assets of foreign investors,
and not nationalize enterprises with foreign capital investment.
n Facilitate foreign investors to remit abroad their profit and assets.

n Legal framework for the guarantee:

n Host country’s legislation

n International agreements: bilateral or multilateral arrangements (BTAs

and MAIs)
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Vietnam’s FDI Policies

n FDI Law (1992): apply “non-retroactive principle” (Nguyên tắc không hồi tố)
n Law on Investment (2005): “Chapt.2. Investment guarantees, Art.6.
Guarantees regulating to capital and assets:
1. Lawful assets and invested capital of investors shall not be nationalized or
confiscated by administrative measures
2. In case of real necessity for the purpose of national defense and security and
in the national interest, if the State acquires compulsorily or requisitions an
asset of an investor, such investor shall be compensated or paid damages at
the market prices at the time of announcement of such compulsory
acquisition or requisition”.

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Investment Orientations and Sectors

n Orientation of investment
n Host country’s economic-social development plan
n Investment fields with priority
n Encouraged or restricted investment sectors
n Provide information on permitted areas so that investors can
select
n Increase of decrease protection of domestic production:
Strengthen or degradation competitiveness, gap between
domestic and foreign investors (inequity treatment).

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Vietnam’s Investment Law 2005:

Three investment groups

n Prohibited sectors: Investment is prohibited for both domestic and

foreign investors;
n Conditional sectors: Investment is conditional for both
domestic and foreign investors;
n Conditional sectors for foreign investors: Investment is
conditional only for foreign investors

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Fiscal and financial incentives

n Fiscal incentives
n List and tax levels for foreign investors

n International rules of tax ranges and categories: easily or

difficulty applicable for foreign investors
n Financial incentives: preference credit or another investment
service
n Subsidiary, loan

n Use the same service and at the same rates of charge as

domestic investors

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In-class working
- Find corporate income tax/ personnel income tax in ASEAN
countries
- Tax incentives for foreign investors in Korea and some ASEAN
Countries.

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FDI incentives
n Used by almost all countries
n Financial incentives in OECD; fiscal incentives in developing countries
n Probably becoming more important for corporate decision-making…
n WTO membership makes other policies more similar across countries

…but also risk excessive subsidization

n politically attractive

n competition between host countries

n uncertainty about spillover benefits

n Case study:
n Vietnam’s FDI incentives: Law on Investment (2005).

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Foreign exchange control

n Opening a bank account
n Procedures

n Conditions

n Policy of Exchange rate, and foreign exchange flow in and out

the host country
n Exchange rate

n Liberalization on transferring in/out foreign exchange

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Investment project license and

management
n Investment project screening and license
n Licensing procedure

n Time for permission grant

n Project management
n Troublesome and impediments caused by multiple level check

and control
n Treatment of arising issues/problems/disputes

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Other policies
n Technology transfer
n Environment protection
n Import of Machine and equipment
n Land use and site clearance
n Labor relationship, customs, immigration, resident…

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Objectives of Policy measures

n Investment promotion - to attract foreign MNCs
n Market access restrictions - to retain national control
n Regulation of MNC operations - to make the foreign MNCs behave
in the right way

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Investment promotions
n Financial and fiscal incentives
n Location-related marketing
n Hard/solf infrastructure improvement
n Human resource development
n Take care of FDI projetcs after issueing investment liciense.

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Investment promotion measures

n Neccesity
n Introduce investment environment…
n Actively encourage FDI inflow
n Base for TNCs to set up long-term investment strategy
n Forms of promotion
n on-the-spot survey aboard
n PRs of investment environment through mass media, workshop..…
n PRs through representative agencies abroad

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Upgrading infrastructure
n Hard infrastructure
n Transportations, electricity, water supply, communication system

…
n Fee levels equally treated between domestic and foreign

investors.
n Soft infrastructure
n Finance and banking system

n Quantity and quality of service

n Labor quality

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Construction of EZs, IZ, High-tech Zones

n EZs, IZ :
n Clear out / reduce barriers on cheap labor supply

n Facilitate foreign investors to access domestic market

n Supply favorable conditions for foreign investors …

n High-tech Zones and “Zone-in-Zone”

n Meet requirement of high-tech industries

n Create favorable conditions for foreign investors to select

strategy, reduce costs..

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The issue for further study

n Antonios Kalyvas, October 03, 2007, A tale of two countries
(Locational advantage between Mexico and Costa Rica),
http://www.fdimagazine.com
n Compare the advantages/disadvantages of the two nations

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