A Study on the Foreign Direct Investment in the Telecommunications sector in Lao PDR

1
ACKNOWLEDGMENT
The author would like to express his sincere gratitude to the supervisor Assoc. Prof.
Dr. Bui Anh Tuan for this precious guidance, fully supported and valuable suggestions
throughout the research study.
Thanks are due to and advisor: H.E. Hiem Phommachanh, Dr. Thansamay
Kommasith, Assoc. Prof. Dr. Lai Phi Hung, Assoc. Prof. Dr. Hong Van Cuong, Assoc.
Prof. Khampheuy Phommachanh, Mrs. Phonephet Miphenglavanh MBA, Mrs.
Khamkieng Phothirath, Mr. Phakavanh Phothirath, Mr. Ketsavanh Phothirath,
Mr.Bounsaleumxay Khennavong MBA, Mr. Oudasack Lasoukanh MSc, Mr. Somlith
Phouthonsy, Mr. Snith Xaphakdy MSc, Mr. Hoang Quoc Khanh, Mr. Phung Huy Tam, Mr.
Doan Hieu, Miss. Phuong Tran Linh for their valuable contribution in serving as
committee members, as well as for precious suggestions and comments on the research
study.
Thanks are also extended to committee council of the national level as: Prof. Dr.
Tran Tho Dat, Assoc. Prof. Dr. Ta Van Loi, Prof. Dr. Nguyen Thi Thanh Minh, Assoc.
Prof. Dr. Bui Huy Nhuong, Dr. Nguyen Thi Nguyet, Assoc. Prof. Dr. Le Quoc Hoi.
Thanks General Director and Deputy Director of The National University of Laos
are also extended to professors and General Director and Deputy Director of The National
Economics University of Vietnam, and are also due General Director and Deputy Director
of Telecommunications in Laos and Vietnam.
Special thanks are expressed to the Minister of Education and Training of SR
Vietnam and Minister of Education and sports of Lao PDR for providing access to
different departments and different companies to support and collect data.
Lastly, the grateful the Laos and Vietnam Government, for giving cooperation
program to upgrade our knowledge furthermore and to obtain a prestigious Ph.D. degree
from two Universities as the National Economics University of Vietnam, Hanoi, Vietnam
SR and the National University of Lao, Vientiane capital, Lao PDR.
2
ABBREVIATIONS

ADB Asia Development Bank
AFTA ASEAN Free Trade Area
ASEAN Association of South East Asian Nations
BCC Business cooperation contracts
BDS Business Development Services
BMO Business Membership Organization
BOT Build, operate and transfer
BPO Business Process Outsourcing Industry
BTA Bi-lateral trade agreement
CSA Civil Society Associations
CPI Consumer Price Index
EBS Enterprise Baseline Survey (2005)
ES Enterprise Survey (2007, 2009, 2011)
ETL Enterprise of Telecommunications Lao
EXIM Export-Import Bank
FDI Foreign Direct Investment
HRDME Human Resource Development for a Market Economy
GDP Gross Domestic Product
GIZ Deutsche Gesellschaft für Internationale Zusammenarbeit GmbH
GoL Government of Lao PDR
GNI Gross national income
ISIC International Standard Industry Classification
ICT Information and Communications Technologies
IPT Institute of Posts and Telecommunications
ISP Internet service provider
IT Information Technology
ITU International Telecommunications Union
IXC Internet exchange carrier
Lao PDR Lao People’s Democratic Republic
LeG Lao PDR e-Government

LTC Enterprise of Joint Venture of Lao Telecommunications
LDC Least developed country
LBF Lao Business Forum
3
LNCCI Lao National Chamber of Commerce and Industry
MPT Ministry of Posts and Telecommunications
MST Ministry of Science and Technology
MOT Ministry of Trade
MPI Ministry of Planning and Investment
MDGs Millennium Development Goals
MNE Micro and Nano Engineering
MAI Multilateral Agreement on Investment
MoES Ministry of Education and Sports
MoIC Ministry of Industry and Commerce
NGPES National Growth and Poverty Eradication Strategy
NSEDP National Socio-Economic Development Plan
NUoL National University of Laos
NIPTS National Institute of Post and Telecommunications Strategy
NPEP National Poverty Eradication Programme
NICTA National ICT Association
OoG Office of Government
OSP On-line service provider
OECD Organization for Economic Co-operation and Development
SME Small and medium sized enterprises
SOE State owned enterprise
SMEPDO The National Small and Medium-Sized Enterprise Promotion and
Development Office
PPP Provincial Public-Private
TRIMS Trade Related Investment Measures
TFP Total Factor Productivity

TNC Trans National Corporations
USD United States Dollar
VAS Value added services
VoIP Voice over Internet Protocol
WB World Bank
WTO World Trade Organization
IIA international investment agreement
IPA investment promotion agency

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LISTS OF TABLE

Table 1.1: Internalization advantages 29

Table 1.2: different types of FDI can be distinguished 29

Table 2.1: ICT spending on services and hardware, 2013 87

Table 2.2: Fixed-line subscribers and market share in 2014 90

Table 2.3: Mobile subscribers and annual growth, 1995-2014 91

Table 2.4: Postpaid and prepaid mobile subscribers by operator, 2014 93

Table 2.5: ICT Development Index results for LAO PDR 103

Table 2.6: FDI’s Telecommunications sector by partner, up to 2014 108

Table 2.7: Telecommunications sector Revenue Summary year 2008 to year 2014 109

Table 2.8: Telecommunications sector Revenue Summary year 2014 to 2020 110

Table 2.9: The Company’s establish of FDI 120





LISTS OF FIGURE
Figure 1.1: Porter’s National Competitive Advantage Theory 13

Figure 2.2: The international connection point 79

Figure 2.3: Fixed lines in service, 1995 – 2014 82

Figure 2.4: Fixed-line subscribers and market share in 2013 83

Figure 2.5: Mobile subscriber’s growth, 2014 85

Figure 2.6: Mobile subscribers and market share, 2014 86

Figure 2.7: Internet users, 1998 – 2014 89

Figure 2.8: Overview of the ICT Development Index 95

Figure 2.9: FDI’s Telecommunications sector by partner, up to 2013 101

Figure 2.10: The companies’ share of FDI 114

Figure 2.11: Telecommunications sector facility 122

Figure 3.3: Strategic human resource development serves as the key link between the
overall strategic plan and human resource management. 146



5
INTRODUCTION
1. Rational of the research
The Lao People’s Democratic Republic (Lao PDR) is developing country, it is facing
critical changes. Recently, this has evolved to the stage of adopting a so-called “New
Economic Mechanism” for economic reform that attempts to transform its centrally-
planned economy toward a market-oriented one. Foreign Direct Investment has played a
very important role in the development of the telecommunications sector in Lao PDR but
inflow of Foreign Direct Investment still small and going down in the period from 2000-
2010.
Party focuses on enhancing its leadership role (Choummaly Sayasone, Party Secretary
General of Lao revolution people). Party Secretary General will focus on bolstering the
leadership of the Party and closely monitoring the country’s top priorities to realize the
resolution of the 9
th
Party Congress approved in March, 2011. The commitment was made
at the 2
nd
session of the 9
th
Party Central Committee convened in Vientiane from 16-20
May, 2011 chaired by Party Secretary General Choummaly Sayasone. The leaders have
seen the need to boost Socio-Economic development based on the potential of various

areas. The session proceeded as the entire Party, army and society are focusing on
formulating action plans to realize the Resolution of the 9
th
Party Congress and the Seventh
(7) Socio-Economic development plans for 2011-2015 and all these efforts can lay the
foundation for Lao PDR to rise above least developed country status in year 2020 [14].
Foreign Direct Investment (FDI) has played a very important role in the development
of the Lao’s telecommunication sector in Lao PDR. The Government has formulated
policies to attract FDI to this sector. But FDI inflow to Lao’s telecommunications sector is
not enough as expected. This issue has affected the development of the sector as well as
the economic development of the country. The results, starting from an extremely low
base, were striking - growth averaged 6% per year from 1988-2008 except during the
short-lived drop caused by the Asian financial crisis that began in 1997. Laos' growth
exceeded 7% per year during 2008-13. Despite this high growth rate, Lao PDR remains a
country with an underdeveloped infrastructure, particularly in rural areas. It has a basic, but
improving, telecommunications system, and limited external and internal land-line
telecommunications. Laos' economy is heavily dependent on capital-intensive natural
6
resource exports. The economy also has benefited from high-profile foreign direct
investment in telecommunications, logging, and construction though some projects in these
industries have drawn criticism for their environmental impacts. Lao PDR is in the process
of implementing a value-added tax system. Simplified investment procedures and
expanded bank credits for small companies and small entrepreneurs will improve Laos'
economic prospects. The government appears committed to raising the country's profile
among investors, but suffered through a fiscal crisis in 2013 brought about by public sector
wage increases, fiscal mismanagement, and revenue shortfalls. The World Bank has
declared that Laos' goal of graduating from the UN Development Program's list of least-
developed countries by 2020 is achievable, and the country is preparing to enter the
ASEAN Economic Community in 2015.
This dissertation needs to be fulfilling the following tasks: to analyses the

development of the telecommunications of Lao PDR from 2003 to 2013; to analyses and
evaluate the role of FDI to develop the telecommunications sector in Lao PDR in the
period 2003-2013; to investigate the main drivers of improve FDI to the
telecommunications sector in Lao PDR in the period 2003-2013; to give the solutions to
attract FDI to develop the telecommunications sector in Lao PDR in the period is better of
2015 to 2020.
This study aims to analyses the current situation of FDI in the sector in the period from
2000 to 2010 and to set up solutions to attract FDI to the sector in the period from 2011 to
2015 in the new context of international economic integration.
2.
Literature Review

The Lao’s Telecommunications development, since then government has encouraged
the expansion of foreign direct investment (FDI). The liberalization measure in 1994 has
changed with foreign investments radically. The inflows will allow multiple benefits such
as technology transfer, market access, improvement in voice and data quality and
organizational skills. It increases the flow of foreign currency and helps in maintaining
harmonious relationship with the country from which the investment is made. It has been
decided to enhance the FDI in telecom services in areas like basic telecom, cellular unified
access services, internet and intranet, long distance vast, public mobile, radio service and
radio frequency services.
7
The above services would be subject to licensing and security requirements, wherever
required. The FDI is limit increase, any change of investment flowing into Lao PDR and
have a magnanimous effect on the telecom sector by way of economic reforms and would
also affect the economy as a whole, and would likely have a chain reaction on various
other sectors. It has been proclaimed by the Finance Minister of Lao PDR that the decision
about increasing the FDI in the Lao telecom market has been taken as telecom sector is
perceived as the capital intensive and thus the aim is to draw more and more capital
investment in this sector. Moreover the aim was also to make the whole system in the

telecom market lucid and methodical.
FDI in services responds well to openness especially when it comes to the telecoms
sector. This is quite evident looking at the recent boom in the Lao Telecoms sector. Further
liberalization of services involves potential advantages for Lao economy. Benefits can
arise from increased competition, lower prices, and better quality of services. FDI in
services like telecommunications provide key inputs to other productive activities that lead
to further investment and competitiveness of an economy. Efforts should be made towards
attracting efficiency seeking FDI through a right policy that expands operation, improve
local skills, establish linkages and upgrade technology.
However, precautions should be taken to avoid the risk of foreign investors out-
competing domestic investors especially in case of infrastructure services like
telecommunications. Services where domestic investors are not able to cater to the growing
demand, or where domestic service-providers do not have the ability or capacity to provide
the required quality of services.
To circumvent such spirals it is important for the region to have appropriate domestic
regulations or enabling environment in place, which will assure better quality of services at
affordable prices. Clear domestic regulations increase transparency in the system and
encourage FDI. To sustain the momentum of growth in services trade in the region,
conscious efforts should be made to improve the competitive advantage of the region as a
whole. Inclusion of trade in services may help attract FDI in services and lead to greater
intra-regional trade. Access to more efficient services could lead to higher growth in
productivity in other sectors, which, in turn, could improve the overall competitive strength
of the region.
8
Thus it can be concluded that the recent upward swing in the telecommunication sector
in Lao PDR is due to the introduction of FDI in this sector by the Lao Government since
1991 but at the same time we must also be careful and not get carried away by this
development and should have proper regulations in place to actually utilize this situation to
our advantage.
Laos and Vietnam will struggle strive target for a 20 percent trade growth in two-way

trade next year, up from the US$1Billion expected for the year ending on December, 2012.
Two-way trade between Laos and Vietnam over the first 10 months of 2013 reached
US$817Million. In addition, Vietnamese enterprises have invested in 412 projects in Laos
totaling US$5Billion, which rank the country second after China. [31].
To circumvent such spirals it is important for the region to have appropriate domestic
regulations or enabling environment in place, which will assure better quality of services at
affordable prices. Clear domestic regulations increase transparency in the system and
encourage FDI. To sustain the momentum of growth in services trade in the region,
conscious efforts should be made to improve the competitive advantage of the region as a
whole. Inclusion of trade in services may help attract FDI in services and lead to greater
intra-regional trade. Access to more efficient services could lead to higher growth in
productivity in other sectors, which, in turn, could improve the overall competitive strength
of the region.
Thus it can be concluded that the recent upward swing in the telecommunication sector
in Lao PDR is due to the introduction of FDI in this sector by the Lao Government since
1991 but at the same time we must also be careful and not get carried away by this
development and should have proper regulations in place to actually utilize this situation to
our advantage.
3. Research of objectives and tasks.
The objectives of this study and research aims to identify the important role of FDI
related to improve and success of the telecom business performance in the Lao PDR in
order to recommend some solution to attract FDI into Lao PDR and suggestions for new
potential foreign direct investors. The Lao PDR is still young country and
telecommunication market is small too, but really wants to be successful in doing business
in the world new market management for improving to best for Lao’s economic.
9
To meet above objects, this dissertation needs to be fulfilling the following tasks:
- To analyses the development of the telecommunications of Lao PDR from 2003 to 2013.
- To analyses and evaluate the role of FDI to develop the telecommunications sector in Lao
PDR in the period 2003-2013.

- To investigate the main drivers of improve FDI to the telecommunications sector in Lao
PDR in the period 2003-2013.
- To give the solutions to attract FDI to develop the telecommunications sector in Lao PDR
in the period is better of 2015 to 2020.
4. Research Questions.
- How does Lao’s telecommunications sector contribute to the development of Lao’s
economy?
- How the FDI have played in the development of the telecommunications sector in Lao
PDR in the period 2003-2013?
- What is the current situation of FDI in the telecommunications sector from 2003-
2013?
- What are factors to improve the FDI inflow into Lao’s telecommunications sector?
- What and how to improve FDI in to Lao’s telecommunications sector in the period
2015-2020?
5. Research Methodology.
Overall, the section of this paper is concerned with the social construction and
disbursement of rationality and the way in which this rationality affects the power and
political structure of organizational functioning through a variety of organizational and
sociological theories. The organizational and sociological theories utilized are referred to
as interpretive perspectives, which also draw from the organizational decision-making
perspective. Exclusively, a number of organizational and social theories including
institutional theory, resource dependency theory, political perspectives, and the sociology
of professions are looked at to examine the relevance of interpretive perspectives. In
summary, "interpretive perspectives of managerial accounting have begun to see
managerial accounting practices and information as socially constructed phenomena with
the full implications of the power and politics of social construction rather than as a
technically rational function driven by and serving the internal operations of
10
organizations." Managerial accounting is seen as being implicated in the social
construction of reality rather than as being passively reflective of the reality as depicted in

contingency theory. Main research methods will be used in this study are desk study and
field study, comparative study with figures. The field study includes interview,
questionnaires and observations.
6. Expected Results
The economic reforms that the Lao PDR has undertaken from 2011 to 2015 have
produced significant progress. Over this period, gross domestic product (GDP) in real
terms grew by about 8.3% per annum on the average. Foreign Direct Investment (FDI) has
contributed greatly to changing the economic landscape of the country. The
telecommunications is also very fast growth and first economic in Lao PDR. And also all
telecom operators will be convergence to the centralization in the one gateway and also
will be develop well for the future.
Foreign Direct Investment (FDI) plays an extraordinary and growing role in global
business. It can provide a firm with new markets and marketing channels, cheaper
production facilities, access to new technology, products, skills and financing. For a host
country or the foreign firm which receives the investment, it can provide a source of new
technologies, capital, processes, products, organizational technologies and management
skills, and as such can provide a strong impetus to economic development. The direct
investment in buildings, machinery and equipment is in contrast with making a portfolio
investment, which is considered an indirect investment. In recent years, given rapid growth
and change in global investment patterns, the definition has been broadened to include the
acquisition of a lasting management interest in a company or enterprise outside the
investing firm’s home country, such as a direct acquisition of a foreign firm, construction
of a facility, or investment in a joint venture or strategic alliance with a local firm with
attendant input of technology, licensing of intellectual property, in the past decade, FDI has
come to play a major role in the internationalization of business.
7. Structure of Dissertation.
1. Introduction
2. Chapter 1: FDI Theories framework and the important of FDI attraction into
telecommunication sector in Lao P.D.R
11

3. Chapter 2: Situation of FDI attraction into telecommunication sector in Lao P.D.R
4. Chapter 3: Solutions and recommendations in FDI attraction into telecommunication
sector in Lao P.D.R
5. Conclusion




















12
CHAPTER 1

FDI THEORIES FRAMEWORK AND THE IMPORTANT OF
FDI ATTRACTION INTO TELECOMMUNICATION
SECTOR IN LAO P.D.R

1.1 The theory of FDI
There are two main categories of international investment- Foreign Portfolio
Investment and Foreign Direct Investment: Foreign Portfolio investment refers to the
investment in a company’s stocks, bonds, or assets, but not for the purpose of controlling
or directing the firm’s operations or management. Typically, investors in this category are
looking for a financial rate of return as well as diversifying investment risk through
multiple markets. Foreign direct investment (FDI) refers to an investment in or the
acquisition of foreign assets with the intent to control and manage them.
(1) Porter’s National Competitive Advantage Theory.
In the continuing evolution of international trade theories, Michael Porter of
Harvard Business School developed a new model to explain national competitive
advantage in 1990. Porter’s theory stated that a nation’s competitiveness in an industry
depends on the capacity of the industry to innovate and upgrade. His theory focused on
explaining why some nations are more competitive in certain industries. To explain his
theory, Porter identified four determinants that he linked together. The four determinants
are (1) local market resources and capabilities, (2) local market demand conditions, (3)
local suppliers and complementary industries, and (4) local firm characteristics. [39]
1. Local market resources and capabilities (factor conditions). Porter recognized the
value of the factor proportions theory, which considers a nation’s resources (e.g., natural
resources and available labor) as key factors in determining what products a country
will import or export. Porter added to these basic factors a new list of advanced factors,
which he defined as skilled labor, investments in education, technology, and
infrastructure. He perceived these advanced factors as providing a country with a
sustainable competitive advantage.
13
2. Local market demand conditions. Porter believed that a sophisticated home market is
critical to ensuring ongoing innovation, thereby creating a sustainable competitive
advantage. Companies whose domestic markets are sophisticated, trendsetting, and
demanding forces continuous innovation and the development of new products and
technologies. Many sources credit the demanding US consumer

with forcing US
software companies to continuously innovate, thus creating a sustainable competitive
advantage in software products and services.
3. Local suppliers and complementary industries. To remain competitive, large global
firms benefit from having strong, efficient supporting and related industries to provide
the inputs required by the industry. Certain industries cluster geographically, which
provides efficiencies and productivity.
4. Local firm characteristics. Local firm characteristics include firm strategy, industry
structure, and industry rivalry. Local strategy affects a firm’s competitiveness. A
healthy level of rivalry between local firms will spur innovation and competitiveness.


Figure 1.1: Porter’s National Competitive Advantage Theory
Source: Theory of International Trade and Investment. International Business, the
challenge of global competition, twelfth edition. Dolnald A.Ball, J.Michael S.Minor,
Jeanne M.McNett
14
In addition to the four determinants of the diamond, Porter also noted that government
and chance play a part in the national competitiveness of industries. Governments can, by
their actions and policies, increase the competitiveness of firms and occasionally entire
industries.
Porter’s theory, along with the other modern, firm-based theories, offers an interesting
interpretation of international trade trends. Nevertheless, they remain relatively new and
minimally tested theories.
(2) Product Life Cycle


Figure 1.2: Product Life Cycle Theory
Source: Wild, John J., K. L. Wild, J. C. Y Han (2000), International Business: An
Integrated Approach, Prentice–Hall, Inc., Angelo Francesco Rossi (2013).

Product Life Cycle: The product life cycle is defined as the period that starts with the
initial product design (research and development) and ends with the withdrawal of the
product from the marketplace. It is characterized by specific stages, including research,
development, introduction, maturity, decline, and finally obsolescence as the product is
removed from the market (discontinued). Each stage is often linked with changes in the
flows of raw materials, parts and distribution to markets as production (input costs) is
15
adjusted to face increasing competition. Conventionally, four main stages compose a
product's life cycle:
•
Introduction. This stage mainly concerns the development of a new product, from the
time is initially conceptualized to the point it is introduced on the market. The great
majority of ideas do not reach the promotion stage. The corporation having an
innovative idea first will often have a period of monopoly until competitors start to copy
and/or improve the product (unless a patent is involved as it is the case in industries
such as pharmaceuticals). Generally, associated freight flows take place within
developed countries and/or close to markets where to product is likely to be adopted.
•
Growth. If the new product is successful (many are not), sales will start to grow and
new competitors will enter the market (by replicating the product or developing new
features on their own), slowly eroding the market share of the innovative firm. The
product starts to be exported to other markets and substantial efforts are made to
improve its distribution since competition mainly takes place more on the innovative
capabilities of the product than on its price. This phase tends to be associated by high
levels of profits and a fast diffusion of the product.
•
Maturity. At this stage, the product has been standardized, is widely available on the
market and its distribution is well established. Competition increasingly takes place
over cost and a growing share of the production is moved to low cost locations,
particularly for labor intensive parts. Associated freight flows are consequently

modified to include a greater transnational dimension.
•
Decline. As the product is becoming obsolete, production essentially takes place in low
costs locations. Production and distribution economies are actively sought as profit
margins decline. Eventually, the product will be retired, an event that marks the end of
its life cycle.
Conventionally, as a product went through its life cycle the least profitable
functions were relocated to lower costs locations, notably in developing countries. This
dichotomy is being challenged since it is becoming more common, even for high
technology products, that the manufacturing of a new product immediately takes place in a
low labor cost location. Multinational corporations have global production networks that
16
enable them to efficiently allocate design, production and distribution according to global
factors of production. This also relies on outsourcing and subcontracting.
(3) Imperfect competition and price discrimination
Competition emerges when different people recognize similar opportunities and set
up firms to exploit them. The classic forum for competition is the final product market,
where producers confront consumers. Competition based on freedom of entry into industry
discourages the exploitation of consumers because any attempt by a firm to raise prices
will attract entry, increase supply, reduce prices and restore profits to their normal level.
Likewise, competition for free labor will ensure that labor is not exploited either.
It is widely held that monopoly is not only inequitable, but also inefficient. It is
argued that monopolized industries produce too little output because the price is so high
that it restricts consumer demand. Strictly speaking, however, it is only differences in the
degree of monopoly between industries that reduce efficiency. If all prices were raised in
the same proportion, then relative prices would be unchanged and consumer purchasing
decisions would not be distorted (although other decisions might be distorted instead)
(Lerner, 1944)[45]. The argument against monopoly also assumes that the monopolist must
charge the same price to all customers. This ignores the possibility of discriminatory
pricing (Phillips, 2005)[46]. If the monopolist knows the maximum amount that each

customer (or type of customer) is willing to pay, then they can charge different prices to
different customers depending on how much they value the product. The main requirement
is to prevent the consumers from reselling to each other, or joining forces, to form a
buyer’s club. If these conditions are satisfied, the marginal consumer pays no more than
marginal cost and so the scale of output in each industry is efficient.
The efficiency of monopolistic price discrimination is widely used to support
intellectual property rights (IPRs) that confer monopolies for the creation or discovery of
knowledge. IPRs promote private enterprise in the creation of knowledge, but the argument
against them is that they discourage dissemination by charging for access. However, if the
owners of IPRs implement discriminatory pricing, then no one is asked to pay more than
they are willing to pay and so dissemination is not impaired (Casson,1979)[47]. Indeed,
private ownership encourages the active marketing of knowledge, so that more people may
use the knowledge than before. On the other hand, the administrative costs of collecting
payment may mean that people with low valuations are denied effective access.
17
These arguments apply not only to final product markets but to intermediate
product markets too. They suggest that efficient markets are either competitive, or involve
discriminating monopoly. There are two main mechanisms by which competition is
sustained. One involves a large number of suppliers confronting a large number of sellers,
and the other involves a small number of buyers and sellers, but with potential entrants on
either side waiting for an opportunity to join in (Baumol et al., 1982)[44]. Intermediate
product markets for agricultural products, linking farms to food processors, are a good
example of competitive markets with large numbers of traders. Markets for mineral ores
exemplify competition from potential entry; at any one time, only a small number of large
mines may be in operation, but there are usually other mines ready to be opened (or more
likely re-opened) if price increases. Competitive entry and re-entry is easiest when the sunk
costs of entry are small.
Under monopoly, market failure reflects the inability to discriminate. Consider, for
example, the licensing decision. A technology owner serving the global market may prefer
to license different firms in different countries because of their local knowledge, but it may

be difficult to partition local markets in this way. If licensees can export, then they can
invade each other’s territories; this threat will reduce the value of the licenses, and
ultimately reduce the technology owners’ rents. The technology owner may therefore be
obliged to use a single licensee for all markets, who will be less effective in each market
and generate fewer rents for the licensor.
Inability to discriminate can also be an issue for ordinary intermediate product
markets where production at certain stages exhibits economies of scale. Within a multi-
stage production system (a “value chain”), one stage (say the upstream stage) may exhibit
substantial economies of scale, so that industry production is in the hands of a single firm,
while the downstream stage may exhibit constant return to scale, so that many small firms
are involved. If the upstream firm sets a uniform monopoly price, then downstream
decisions will be distorted by the artificial scarcity of the intermediate input (e.g. excessive
costs will be incurred in avoiding wastage) (Warren-Boulton, 1978)[43]. On the other
hand, if the upstream firm charges all the downstream firms a two-part tariff, comprising a
lump sum payment for the right to purchase and a unit price equal to upstream marginal
costs, then distortion will be eliminated. The efficiency gain will accrue to the monopolist,
whose profits will increase as a result. However, if the downstream firms can re-sell, then
18
the system will be undermined, as they can form a buyers’ co-operative and pay the lump
sum only once. Furthermore, with a downstream buyer’s co-operative confronting an
upstream monopolist, a bilateral monopoly may develop; competition breaks down, and
exchanges of threats may ensue.
(4) Economic globalization.
Economic globalization went along with booming FDI in developing countries,
which attracted a rising share of world-wide FDI flows in the 1990s. In various developing
countries, FDI plays a more significant role than in developed countries. The good news is
that FDI is anything but a zero-sum game, in which one particular country could attract
FDI only at the expense of another country. Additional FDI is likely to take place when
new investment opportunities emerge in countries opening up to FDI. Essentially, all
developing countries have the chance to become attractive to foreign investors, not only

large and fairly advanced countries.
When competing for FDI, policy-makers have to be aware that various measures
intended to induce FDI are necessary, but far from sufficient to do the trick. For example,
this applies to the liberalization of FDI regulations and various business facilitation
measures. Other reforms, such as privatization, tend to be more effective in stimulating
FDI inflows, but need to be complemented by reform in further areas (e.g. competition
policy), in order to ensure that FDI inflows are beneficial. Still other determinants of FDI,
which were sufficient in the past, may prove to be less relevant in the future. The size of
local markets appears to be the most important case in point.
Globalizations can be expected to induce a shift from market-seeking FDI to
efficiency-seeking FDI. International competitiveness of local production by foreign
investors will, then, turn out to be a decisive factor shaping the distribution of future FDI.
This involves major challenges for policy-makers in developing countries. In general
terms, the task is to create (immobile) domestic assets that provide a competitive edge and
attract internationally mobile factors of production. This task has various dimensions,
ranging from human capital formation and capacity-building (in order to be able to absorb
advanced technologies applied by foreign investors) to the provision of efficient business-
related services.
Furthermore, the policy agenda includes critical trade policy choices: liberalizing
trade in capital goods and intermediate products is essential in competing for efficiency-
19
seeking FDI. There is some bad news as well. Promotional efforts will help little, if at all,
to attract FDI if economic fundamentals are not conducive to FDI. Fiscal and financial
incentives offered to foreign investors may do more harm than good, especially if
incentives discriminate against small investors and local firms. Policy-makers should not
ignore the direct and indirect costs of discretionary FDI incentives.
Finally, policy-makers should not expect too much from FDI inflows. The recent
boom of FDI notwithstanding, capital formation continues to be a national phenomenon in
the first place. Strongly positive growth effects of FDI cannot be taken for granted. FDI is
superior to other types of capital inflows in some respects, particularly because of its risk-

sharing properties, but not necessarily in all respects. The nexus between FDI and overall
investment as well as economic growth in host countries is neither self-evident nor
straightforward, but remains insufficiently explored territory.
- The theory of internalisation was long regarded as a theory of why FDI occurs
- By internalising across national boundaries, a firm becomes multinational
- Some economists have suggested that even though ownership specific advantages
and internalisation advantages are necessary for FDI to occur, it is still not a sufficient
explanation.
- Under what circumstances is it likely that a firm would want to replace the open
market and instead use an internal transaction?
- Ensure product quality (forward integration)
- Ensure stable supply of raw materials (backward integration)
- Market for knowledge?
(5) Internalization theory

Internalization theory focuses on imperfections in intermediate product markets.
Two main kinds of intermediate product are distinguished: knowledge flows linking
research and development (R&D) to production, and flows of components and raw
materials from an upstream production facility to a downstream one. Most applications of
the theory focus on knowledge flow. Proprietary knowledge is easier to appropriate when
intellectual property rights such as patents and trademarks are weak. Even with strong
protections firms protect their knowledge through secrecy. Instead of licensing their
knowledge to independent local producers, firms exploit it themselves in their own
production facilities. In effect, they internalize the market in knowledge within the firm.
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The theory claims the internalization leads to larger, more multinational enterprises,
because knowledge is a public good. Development of a new technology is concentrated
within the firm and the knowledge then transferred to other facilities.
(6) Eclectic Market or Market power.
The eclectic paradigm is a theory in economics and is also known as the OLI-

Model or OLI-Framework. It is a further development of the internalization theory and
published by John H. Dunning in 1980 [48].
Internalization theory itself is based on the transaction cost theory. This theory says
that transactions are made within an institution if the transaction costs on the free market
are higher than the internal costs. This process is called internalization.
For Dunning, not only the structure of organization is important. He added 3 more
factors to the theory:
•
Ownership advantages (trademark, production technique, entrepreneurial
skills, returns to scale) Ownership specific advantages refer to the competitive advantages
of the enterprises seeking to engage in Foreign direct investment (FDI). The greater the
competitive advantages of the investing firms, the more they are likely to engage in their
foreign production.
•
Location advantages (existence of raw materials, low wages, special taxes or
tariffs) Locational attractions refer to the alternative countries or regions, for undertaking
the value adding activities of MNEs. The more the immobile, natural or created resources,
which firms need to use jointly with their own competitive advantages, favor a presence in
a foreign location, the more firms will choose to augment or exploit their O specific
advantages by engaging in FDI.
•
Internalization advantages (advantages by own production rather than
producing through a partnership arrangement such as licensing or a joint venture) Firms
may organize the creation and exploitation of their core competencies. The greater the net
benefits of internalizing cross-border intermediate product markets, the more likely a firm
will prefer to engage in foreign production itself rather than license the right to do so.



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Table 1.1: Internalization advantages
Source:
Dunning (1981)
Categories of advantages
Ownership

advantages

Internalization

advantages
Location

advantages

Form of
market entry

Licensing

Yes No No
Export Yes Yes No
FDI Yes Yes Yes

Source: Dunning (1981)

 Theory
The idea behind the Eclectic Paradigm is to merge several isolated theories of
international economics in one approach. Three basic forms of international activities of
companies can be distinguished: Export, FDI and Licensing. The so-called OLI-factors

are three categories of advantages, namely the ownership advantages, locational
advantages and internalization advantages. A precondition for international activities of a
company are the availability of net ownership advantages. These advantages can both be
material and immaterial. The term net ownership advantages is used to express the
advantages that a company has in foreign and unknown markets [48].
According to Dunning two different types of FDI can be distinguished. While like
raw materials or other input factors, market seeking investments are made to enter an
existing market or establish a new market. A closer distinction is made by Dunning with
the terms efficiency seeking investments, strategic seeking investments and support
investments.
Table 1.2: different types of FDI can be distinguished
Trade and FDI patterns
for industries and countries.
Location advantages
Strong Weak
Ownership
advantages
Strong Exports Outward FDI
Weak Inward FDI Imports
Source: Dunning (1981)

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The eclectic paradigm also contrasts a country's resource endowment and
geographical position (providing locational advantages) with firm’s resources (ownership
advantages). In the model, countries can be shown to face one of the four outcomes shown
in the figure above. In the top, right hand box in the figure above firms possess competitive
advantages, but the home domicile has higher factors and transport costs than foreign
locations. The firms therefore make a FDI abroad in order to capture the rents from their
advantages. But if the country has locational advantages, strong local firms are more likely
to emphasize exporting. The possibilities when the nation has only weak firms, as in most

developing countries, leads to the opposite outcomes. These conditions are similar to those
suggested by Porter's diamond model of national competitiveness.
 Application in practice
In dependence of the categories of advantage there can be chosen the form of the
international activity. If a company has ownership advantages like having knowledge
about the target market abroad, for example staff with language skills, information about
import permissions, appropriate products, contacts and so on, it can do a licensing. The
licensing is less cost-intensive than the other forms of internalization. If there are
internalization advantages, the company can invest more capital abroad. This can be
achieved by export in form of an export subsidiary. The FDI is the most capital intensive
activity that a company can choose. According to Dunning, it is considered that locational
advantages are necessary for FDI. This can be realized by factories which are either
bought or completely constructed abroad.

1.2 FDI and role of FDI
1.2.1 Definition of FDI
Investment has different meanings in finance and economics. In Finance
investment is putting money into something with the expectation of gain that upon
thorough analysis has a high degree of security for the principal amount, as well as security
of return, within an expected period of time. Investment is related to saving or deferring
consumption. Investment is involved in many areas of the economy, such as business
management and finance whether for households, firms, or governments. To avoid
speculation an investment must be either directly backed by the pledge of sufficient
23
collateral or insured by sufficient assets pledged by a third party. A thoroughly analyzed
loan of money backed by collateral with greater immediate value than the loan amount
may be considered an investment. A financial instrument that is insured by the pledge of
assets from a third party, such as a deposit in a financial institution insured by a
government agency may be considered an investment.
Investment Casting (1) Casting metal into a mold produced by surrounding, or

investing, an expendable pattern with a refractory slurry coating that sets at room
temperature, after which the wax or plastic pattern is removed through the use of heat prior
to filling the mold with liquid metal. Also called precision casting or lost wax process. (2)
A part made by the investment casting process.
Return on Investment (ROI) is the amount of profit or cost saving that will be
realized in return for a specific expenditure of money, usually express as a percentage of
the original monetary outlay. The ROI ratio compares the net benefits of a project to its
total costs. Examples: After a 30-day test, it was estimated that the average ROI for digital
signage in a 20,000 square foot grocery store would be 29%.
Investing in Stocks: There are many different ways you can invest in stocks,
including common stock, preferred stock, convertible stock and restricted stock. These
resources will help you learn the difference between each and help you understand
derivatives such as stock options and warrants. Investing Strategies: It's important to find
the right investing strategy or style to meet your needs, resources, risk-management goals,
temperament, and time horizon. By building a great portfolio, grounded in solid math
coupled with a strong intellectual framework, and consistently sticking with it over
decades, you can improve your chances at amassing significant wealth.
Investing in Exchange traded funds (ETFs): Exchange traded funds, also known as
ETFs funds, are a special type of mutual fund that trades on an exchange just like a stock.
There are benefits to ETFs, or exchange traded funds, over traditional mutual funds. A
professional investor can short ETFs or borrow against ETFs in a portfolio to come up with
cash quickly. Plus, ETFs sometimes provide small discounts to underlying net asset value
in volatile markets that can allow you to get more bang for your investing buck.
Foreign investment (FI) means the importation of capital which includes assets,
technology and expertise by foreign investors for business purposes. Foreign Investment
Flows of capital from one nation to another in exchange for significant ownership stakes in
24
domestic companies or other domestic assets. Typically, foreign investment denotes that
foreigners take a somewhat active role in management as a part of their investment.
Foreign investment typically works both ways, especially between countries of relatively

equal economic stature.
Advantages: 1 Causes a flow of money into the economy which stimulates
economic activity; 2 Employment will increase; 3 Long run aggregate supply will shift
outwards; 4 Aggregate demand will also shift outwards as investment is a component of
Aggregate demand.
Disadvantages: 1 Inflation may increase slightly; 2 Domestic firms may suffer if
they are relatively uncompetitive; 3 If there is a lot of FDI into one industry e.g. the
automotive industry then a country can become too dependent on it and it may turn into a
risk that is why countries like the Czech Republic are "seeking to attract high; value-added
services such as research and development (e.g.) biotechnology)" 4 Foreign
investment creates employment, and can lead to technological development through
technology transfers.
Types of Foreign Investment: When it comes to investment, many people turn to
foreign companies to invest in. People want to invest in other countries’ businesses
because of their economies. You may find that another nation’s economy is much better
than your own, and you can see a larger profit by investing in their businesses. Businesses
want foreigners to invest in their companies because it helps their business grow and
spread to other nations. If you are interested in foreign investment, you should consider the
four different types and decide which type of investment you will use. Companies such as
Great Plains Lending can help give you information and even issue loans.
Loan Investments: There are two different types of foreign loan investments,
including commercial loans and official loans. A commercial loan is a loan granted for the
use of a business, rather than for personal use. Commercial loans are generally short-term
loans issued to foreign businesses.
Foreign Direct Investment (FDI) plays an extraordinary and growing role in
global business. It can provide a firm with new markets and marketing channels, cheaper
production facilities, access to new technology, products, skills and financing. For a host
country or the foreign firm which receives the investment, it can provide a source of new
technologies, capital, processes, products, organizational technologies and management
25

skills, and as such can provide a strong impetus to economic development. FDI in its
classic definition is defined as a company from one country making a physical investment
into building a factory in another country. The direct investment in buildings, machinery
and equipment is in contrast with making a portfolio investment, which is considered an
indirect investment. In recent years, given rapid growth and change in global investment
patterns, the definition has been broadened to include the acquisition of a lasting
management interest in a company or enterprise outside the investing firm’s home country.
As such, it may take many forms, such as a direct acquisition of a foreign firm,
construction of a facility, or investment in a joint venture or strategic alliance with a local
firm with attendant input of technology, licensing of intellectual property, in the past
decade, FDI has come to play a major role in the internationalization of business. Reacting
to changes in technology, growing liberalization of the national regulatory framework
governing investment in enterprises, and changes in capital markets profound changes have
occurred in the size, scope and methods of FDI. New information technology systems,
decline in global communication costs have made management of foreign investments far
easier than in the past.
Advantage of FDI: (1) Integration into global economy - Developing countries,
which invite FDI, can gain access to a wider global and better platform in the world
economy. (2) Economic growth - This is one of the major sectors, which is enormously
benefited from foreign direct investment. A remarkable inflow of FDI in various industrial
units has boosted the economic life of country. (3) Trade - Foreign Direct Investments
have opened a wide spectrum of opportunities in the trading of goods and services both in
terms of import and export production. Products of superior quality are manufactured by
various industries due to greater amount of FDI inflows in the country. (4) Technology
diffusion and knowledge transfer – FDI apparently helps in the outsourcing of
knowledge especially in the Information Technology sector. Developing countries by
inviting FDI can introduce world-class technology and technical expertise and processes to
their existing working process. Foreign expertise can be an important factor in upgrading
the existing technical processes. (5) Increased competition - FDI increases the level of
competition in the host country. Other companies will also have to improve on their

processes and services in order to stay in the market. FDI enhanced the quality of products,
services and regulates a particular sector. Linkages and spillover to domestic firms-