Foreign Direct

Investment (FDI)
 The tools of the Game
Learning goal: There are several ways that a firm can apply to
join the global market. In this chapter, we will learn some of
these ways, especially FDI
How can a company enter/join a global market?

Exporting Licensing FDI

Licensing involves Foreign direct
Exporting producing
granting a foreign entity investment (FDI) occurs
goods at home and
(the licensee) the right when a firm invests
then shipping them
to produce and sell the directly in facilities to
to the receiving
firm’s product in return produce or market a
country for sale
for a royalty fee on every good or service in a
unit sold. foreign country.
What are the forms of FDI?

GREENFIELD INVESTMENTS MERGER AND ACQUISITION

US$1.3
billion
What are the values of FDI?

FDI in Vietnam,
1990-2007

the total accumulated

Outward FDI value of foreign-owned
assets at a given time.
 What are the pros and cons of each market-entering method?

Exporting Licensing FDI

+ Fast + Fast + Reduce transportation costs

PROs + Cheap + Cheap + Prevent from trade

barriers, know-how loss
+ Less Risk + Less Risk
+ More control over operations
+ Maintain competitive advantages

- transportation costs - loss of technological

- time-consuming
know-how
CONs
- actual or threatened - lack of operations control - expensive
trade barriers for profit maximization
- riskier
- competitive advantage
cannot be licensed
How to make decision on the market-entering method?

Transportation
Low Export
Costs and Tariffs

high

Know-how
Amenable to NO FDI
Licensing

YES

Tight Control
over Foreign YES FDI
Operation

NO

Can Know-how Be
LICENSE YES NO FDI
Protected
 Decision Framework

 High-technology industries
 Global oligopolies
 Industries in which intense cost
pressures  need tight operations

 Low-technology
industries
 Service industry
 Another Decision
Framework

Be able to use the

resources
(natural/human) in
foreign country

Better to keep the

product know-how
internally

Dunning’s eclectic paradigm

 How the governments see FDI?
SHIFTING
gravitating toward the free market end
IDEOLOGY

THE THE FREE

RADICAL
VIEW
1945 -1980s
 MNE as a tool for exploiting
host countries & giving
nothing of value
 FDI keeps the less
developed countries
backward & dependent on
advanced capitalist nations
PRAGMATIC
NATIONALISM
 FDI has both benefits and
costs
 Countries pursue policies
designed to maximize the
national benefits and
minimize the national costs
MARKET
VIEW
 the MNE is an instrument for
dispersing the production of
goods and services
 FDI by the MNE increases the
overall efficiency of the world
economy
 FDI benefit the host country
and stimulate its economic
growth
 What are the costs and benefits of FDI?

Host Countries Home Countries

Benefits + Resource transfer effects
+ Employment effects
+ Balance of payments effects
+ Effects on competition and
economic growth
+ Inward flow of foreign earnings
+ Employment effects
+ Learning valuable skills from
foreign markets

- Adverse effects of FDI on

Costs - balance of payments suffer
competition within the host nation
- reduced home-country employment
- Adverse effects on the balance of
payments
- Adverse effects on the balance of
payments
- Perceived loss of national
sovereignty and autonomy
 How governments control FDI
Host Countries
Inward
tax concessions, low-interest
Encouraging FDI
loans, and grants or subsidies
ownership restraints and
Restricting FDI performance requirements
Home Countries
Outward
 government-backed insurance
programs
 special funds or banks that make
government loans
 used their political influence
 exchange-control regulations
 tax rules to try to encourage their
firms to invest at home
 informal pressure
Current FDI trend

UNCTAD Statistical Data Set,

http://unctadstat.unctad.org/
ReportFolders/reportFolders.
aspx
Current FDI trend

UNCTAD Statistical Data Set,

http://unctadstat.unctad.org/
ReportFolders/reportFolders.
aspx
 Mini presentation 6: FDI and Vietnam
Each group discuss and make a presentation about:
1. The impact of FDI into Vietnam after 1996 in terms of
GDP per capita (US$), Exports (US$), FDI (inflow) (US$)
2. What make Vietnam an attractive destination of FDI
3. Current policies to attract and/or restrict FDI
4. Introduce 3 new FDI projects/major new foreign
companies in Vietnam (Investing time, operating/just
approved, investors, values, industry, requirements,
etc.)
5. Introduce 1 foreign FDI company in Vietnam, describe
the nature of operations, new technological
sophistication and skills implied in that company.