Slide 5

INTERNATIONAL INVESTMENT

INTERNATIONAL FINANCIAL FLOWS
(CONT.)

Slides by Cao Thi Hong Vinh – FTU

1


INTERNATIONAL FLOW OF
FINANCIAL RESOURCES

Official Flows
FOREIGN AID

ODA

Grants

OA

Concessional
loans

Private Flows

OOFs

Non-Concessional
Loans

FDI

fpi

Porftolio
Equity
Flows

Private
loans

Bond
Debt
Flows

Commercial
Loans

Bond Debt Flows X 2
05/27/19

2


PRIVATE FLOWS
 Foreign

direct investment

(FDI)
 Foreign portfolio
investment (FPI)
 (International) private
loans (IPL)


FDI - Definition
OECD Benchmark Definition of
FDI:
Foreign direct investment reflects
the objective of obtaining a lasting
interest by a resident entity in one
economy (‘‘direct investor’’) in an
entity resident in an economy other
than that of the investor (‘‘direct
investment enterprise’’)


FDI – Definition (cont.)
Lasting interest:
- The existence of a long-term

relationship
- A significant degree of influence
on the management of the
enterprise

Via ownership of ≥ 10% voting power of
incorporated enterprise, or equivalent

of an unincorporated enterprise


FDI – Definition (cont.)
Incorporated vs. Unincorporated enterprises
OECD definition:
/>- An unincorporated enterprise is a producer unit which is
not incorporated as a legal entity separate from the
owner (household, government or foreign resident);
- the fixed and other assets used in unincorporated
enterprises do not belong to the enterprises but to their
owners, the enterprises as such cannot engage in
transactions with other economic units nor can they enter
into contractual relationships with other units nor incur
liabilities on their own behalf;
- their owners are personally liable, without limit, for any
debts or obligations incurred in the course of production.


FDI – Definition (cont.)
Incorporated vs. Unincorporated
enterprises
OECD definition:
/>An incorporated enterprise (or a corporation) is a
legal entity, created for the purpose of producing
goods or services for the market, that may be a
source of profit or other financial gain to its
owner(s); it is collectively owned by shareholders
who have the authority to appoint directors
responsible for its general management.

FDI – Definition (cont.)
Incorporated vs. Unincorporated
enterprises
- Formation cost
- Formality level
- Liability
- Taxation
- Ease of raising capital


FDI – Definition (cont.)
Vu Chi Loc (1997):
Foreign direct investment is the
category of international
investment that an investor in one
country invest the whole or a
substantial part of a project's
capital amount in another country
to control or join in controlling
activities of that project.


FDI – Characteristics
A voice in management
Threshold-equity ownership
- OECD (IMF)
- UNCTAD
- Vietnam

FDI – Characteristics
(cont.)

Return of investors

Technology transfer


FDI – Components
Equity capital
Reinvested earnings
Other capital


Types of FDI
Moosa, I.A. (2002), Foreign Direct
Investment: Theory, Evidence and Practice

Perspectives of investor:
+ Horizontal FDI:
to produce the same or similar kinds of
products abroad (in host country) as in
home country

13


Types of FDI (cont.)

Perspectives of investor (cont.):
+ Vertical FDI:

. Exploit raw materials (Backward
vertical FDI) or
. Be nearer to the consumers through
the acquisition of
distribution outlets
(Forward vertical FDI)
+ Conglomerate FDI:

Manufacture products not manufactured
by the parent company at home
14


Types of FDI (cont.)
Perspectives of host country:

+ Import-substituting FDI
+ Export-increasing FDI
+ Government-initiated FDI

15


Modes of FDI entry
Greenfield vs. M&A
Greenfield: (UNCTAD)
undertaken to set up a new

production venture in a host
country

16


Modes of FDI entry (cont.)

M & A: (UNCTAD)
Investing firm merge with or
acquire an existing firm
 transfer of assets from
domestic to foreigner
investors

17


Modes of FDI entry (cont.)

M & A: (UNCTAD)
-

-

Acquisition: transfer of assets
and operations from a local to
a foreign company.
Merger: Assets and operations
of two firms are combined to

set up a new legal entity.
18


Modes of FDI entry (cont.)
M & A: (UNCTAD)
-

Advantages:
+ speed of attaining desired
goals (market, production
capacity, profit)
+ strategic assets,
+ others (market, gains via
synergies, risk reduction…)
19


Modes of FDI entry (cont.)
M & A (cont.):
- Concerns:
+ economic (no productive
capacity, lay-offs and closing,
dominance..),
+ social..
(culture, identity,
sovereignty..)
20

FPI – Definitions
IMF, Balance of Payment:
Portfolio investment is the
category of international
investment that covers investment
in equity and debt securities,
excluding any such instruments
that are classified as direct
investment or reserve assets


FPI – Definitions (cont.)
Vu Chi Loc (1997), Foreign
Investment:
Foreign portfolio investment is the
category of international investment
that an investor in one country buy
securities of enterprises in another
country equal to or below a certain
threshold to gain profit but not
control those security issuers.


FPI – Characteristics
- No voice in management
Sornarajah (2004)
UNCTAD

- Return of investors

FPI – Characteristics
(cont.)
- Less stable
- No technology transfer


IPL – Definitions
Vu Chi Loc (1997), Foreign
Investment:
International Private Loan is
the category of international
indirect investment that
investors lend their money and
gain profits via interest.