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INTERNATIONAL INVESTMENT

Instructor: Lu Thi Thu Trang (LL.M.)


Slides by Pham Thi Mai Khanh-FTU

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05/27/19

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COURSE DISCRIPTION
 CONCEPTS AND PRINCIPLES OF 
INTERNATIONAL INVESTMENT FLOWS: 
ODA, FDI, FPI, IPL
 FOCUS: FDI, ITS RATIONALES, 
NATIONAL AND INTERNATIONAL RULES 

05/27/19

Slides by Pham Thi Mai Khanh­FTU

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COURSE OBJECTIVES
 Understand the concepts, features,

the economic rationales and trends of
main categories of international
investment flows.
 Analyze the roles of FDI in
development, its determinants, and
the national and international rules
regulating FDI flows.
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Slides by Pham Thi Mai Khanh-FTU

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COURSE STRUCTURE
I.

AN OVERVIEW OF INTERNATIONAL
INVESTMENT
II. ECONOMIC ASPECTS OF FOREIGN
DIRECT INVESTMENT
III. POLICY ASPECTS OF FOREIGN DIRECT
INVESTMENT
IV. KEY ISSUES AND FEATURES IN
INTERNATIONAL INVESTMENT
AGREEMENTS
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READING LISTS
 UNCTAD, Virtual Institute Teaching
Material on Economic and Legal
Aspects of Foreign Direct Investment,
New York and Geneva, 2010 
 Vu Chi Loc et al., International
Investment, Chapter 2, 2011 (in
Vietnamese)

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Slides by Pham Thi Mai Khanh-FTU

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GRADING
 Class attendance and participation:
10%
 Team project: 30%
 Final test: 60%

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Part I:
AN OVERVIEW OF
INTERNATIONAL INVESTMENT

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Slides by Pham Thi Mai Khanh-FTU

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STRUCTURE
I.

The concepts of Investment, Foreign
Investment and International Investment

II.

Taxonomy of International Investment Flows

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I. The concepts of Investment, Foreign
Investment and International Investment
 What is Investment???

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It takes money to make
money!

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INVESTMENT
• You sacrifice something of value now,
expecting to benefit from that sacrifice later.
Current resources
(Capital)

Future benefits
Financial benefits

Social benefits


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


(UNCTAD, 2010) 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.


Financial Assets vs. Real assets
Real assets

Financial Assets

E.g. Land, buildings, machines,
knowledge
- Can be used to produce goods
and services.
- Can be tangible and intangible
- Generate net income for the
economy, contribute directly to
the productive capacity of the
economy.

E.g. Shares, bonds,…
- Means by which individuals
hold their claims on real assets.
-Claims on the income generated
by/derived from real assets (or
claims on the income from the
government).
-Define the allocation of income
or wealth among investors.

Composition of national wealth
• Shares and bonds are financial assets of
individuals/households but are liabilities of the
issuers of the securities.
 When we aggregate over all balance sheets,
these claims cancel out, leaving only real
assets as the net wealth of the economy.
• National wealth consists of structures,
equipment, inventories of goods, and land


Methodology to measure effective use of capital



An individual project: ROI

(Return on Investment)

ROI = Profit/Total Investment
(Profit = Turnover - Cost)



A country: ICOR

(Incremental Capital Output Ratio)

ICORt = Total Investment/Δ GDP

(Δ GDP = GDPt- GDPt-1 )

05/27/19

Slides by Pham Thi Mai Khanh-FTU

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Harrod-Domar Model
developed by both
Domar

Harrod

and

g = k/ICOR

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Harrod Dormar model

I
k 

GDP

GDP
g
GDP

k
I
ICOR 

g
GDP
(Total Investment = Domestic Investment + Foreign
Investment)
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Harrod-Domar Model
g = k/ICOR
 Growth rate of an economy:
- positively related to the saving rates
(investment rate)
- negatively related to ICOR (the
economy’s capital-output ratio)
 Increase Investment  increase
economic growth

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Exercises
For a country in 2010, ICOR has a value of 5,
GDP per capita is 1000 USD/year with the
population of 85 million people.
(a)The growth rate of this country is 6% in
comparison to the previous year (2009).
How much is the total investment of that
country?
(b)If the expected annual growth rate is 6% for
the period from 2010 to 2015. How much is
the total investment for that country?
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ICOR’s Implication




Development strategy (calculate the
investment needed to get the targeted
economic growth)
Compare the effectiveness of using
capital in an economy
Higher ICOR , lesser effective use of
capital

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Slides by Pham Thi Mai Khanh-FTU

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Vietnam’s ICOR
Period

ICOR

1991 

­  1996 

2001 

2004 

1995

­2000

­2003

2006

3,5

4,8

5,24

­  2007 

5,04

2008

5,2

2009

6,66

2010

8,0

6,5

Source: General Statistics of Vietnam

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Characteristics of investment?
- Capital
- Profitability
- Risk

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INVESTMENT TAXONOMY
 Official Flows of Investment
 Private Investment
 Domestic Investment
 Foreign Investment
 Direct investment
 Indirect investment
 Productive investment (contribute directly to the productive
capacity of the economy)

 Financial Investment (do not contribute directly to the
productive capacity of the economy)