Chapter 1: fdi theory, evidence, and practice - international investment overview môn Xác suất thống kê| Trường Đại học Ngoại Thương

10/18/2022
I n s t r u c t o r : N g u y e n H a L i e n C h i , M . A .
E m a i l : n g u y enh a l i e nc hi . c s 2 @ f t u . e du . v n 1
I. AN OVERVIEW OF INTERNATIONAL INVESTMENT
II. FOREIGN DIRECT INVESTMENT Ths.Nguyễn Hạ Liên Chi 2 1 10/18/2022
Chapter 1: An overview of International Investment
Chapter 2: Economic aspect of Foreign Direct Investment
Chapter 3: International production: long-term trends and current patterns
Chapter 4: Determinants of Foreign Direct Investment
Chapter 5: Policy aspect of FDI in developing countries Ths.Nguyễn Hạ Liên Chi 3
(1) Moosa, Foreign Direct Investment: Theory Evidence and Practice, Palgrave, NY, 2002
(2) UNCTAD, Virtual Institute Teaching Material on Economic and
Legal Aspects of Foreign Direct Investment, New York and Geneva, 2010
(3) UNCTAD, World Investment Report, New York and Geneva, 2019-2022
(4) Loc, V. C. (2012). International Investment. Hanoi: NXB Giaoduc. Ths.Nguyễn Hạ Liên Chi 4 2 10/18/2022 Assessment Rate [%] Time allowance Class participation 10% NA Mid-term assessment 30%
Assignment (report + presentation) 15% 20 mins/group Mid-term exam 15% 50 mins Final-term exam 60% 50 mins Ths.Nguyễn Hạ Liên Chi 5 6 3 10/18/2022 7
The concepts of Investment, Foreign
Investment and International Investment
Main categories of international
financial flows (introduction) Ths.Nguyễn Hạ Liên Chi 8 4 10/18/2022 INVESTMENT
You sacrifice something of value now, expecting to
benefit from that sacrifice later. Ex: Ths.Nguyễn Hạ Liên Chi 9 INVESTMENT Curren(t r C e a s p o it u a rlc ) es Future benefits • Financial benefits • Social benefits Ths.Nguyễn Hạ Liên Chi 10 5 10/18/2022 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) Ths.Nguyễn Hạ Liên Chi 11 INVESTMENT
3 approached according to UNCTAD:
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.
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).
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. Ths.Nguyễn Hạ Liên Chi 12 6 10/18/2022 Charateristics of Investment Capital Return Risk factor Ths.Nguyễn Hạ Liên Chi 13 Charateristics of Investment Capital: Resources Investible Mobilization of capital Invested capital Ths.Nguyễn Hạ Liên Chi 14 7 10/18/2022 Charateristics of Investment
Evaluate the 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) ICOR = Total Investment/ GDP ( GDP = GDPt – GDPt-1) Ths.Nguyễn Hạ Liên Chi 15 Charateristics of Investment
Harrod-Domar Model, developed by Hollis Chenery Ths.Nguyễn Hạ Liên Chi 16 8 10/18/2022 Charateristics of Investment Harrod-Domar Model g = k/ICOR
(Total investment = Domestic investment + Foreign investment) Ths.Nguyễn Hạ Liên Chi 17 International investment
Capital movement across border Ths.Nguyễn Hạ Liên Chi 18 9 10/18/2022 Foreign investment
Capital movement across a certain country’s borders Ths.Nguyễn Hạ Liên Chi 19 Invesment taxonomy Official Flows of Investment Private Investment Domestic Investment Foreign Investment Direct Investment Indirect Investment
Fixed capital formation – Productive investment (contribute directly to the productive capacity of the economy)
Financial investment (do not contribute directly to the productive capacity of the economy) Ths.Nguyễn Hạ Liên Chi 20 10 10/18/2022 INTERNATIONAL FLOW OF FINANCIAL RESOURCES Official Flows Private Flows Foreign Aid FDI FPI Private loans ODA OA OOFs Non- Portfolio Bond Commercial Grants Concessional Concessional Equity Debt loans loans loans Flows Flows Ths.Nguyễn Hạ Liên Chi 21
2.1. International Private Flows
Foreign Direct Investment – FDI:
IMF - Balance of Payments Manual, 5th edition (Washington, 1993):
“Direct investment is the category of international investment that reflects
the objective of a resident entity in one economy obtaining a lasting
interest in an enterprise resident in another economy.”
The resident entity is the direct investor and the enterprise is the direct investment enterprise. Ths.Nguyễn Hạ Liên Chi 22 11 10/18/2022
2.1. International Private Flows
Foreign Direct Investment – FDI:
OECD - Detailed Benchmark Definition of FDI, 3rd edition (Paris, 1996):
“Foreign direct investment reflects the objective of establishing a lasting
interest by a resident enterprise in one economy (direct investor) in an
enterprise (direct investment enterprise) that is resident in an economy
other than that of the direct investor.” Ths.Nguyễn Hạ Liên Chi 23 Ths.Nguyễn Hạ Liên Chi 24 12 10/18/2022
2.1. International Private Flows
Foreign Portfolio Investment – FPI:
FPI: the investment by individuals, firms, or public bodies in foreign financial
instruments (stocks, bonds, other forms of debt)
FPI is a form of international investment in which the investor of one country
buys securities of companies and issuers in another country with a certain
amount of control to earn profits but does not hold direct control over the securities issuer.
Differs from FDI, which is the investment in physical assets. Ths.Nguyễn Hạ Liên Chi 25
2.1. International Private Flows
Foreign Portfolio Investment – FPI: Why does investors choose FPI?
International correlation structure and risk diversification
Portfolio investment income in different countries is less correlated than in one country:
Economic, political factors, structures and even psychological factor
affecting portfolio investment income in each country are different,
Business circles are different among countries,
therefore, international correlation is very low. Ths.Nguyễn Hạ Liên Chi 26 13 10/18/2022
The partial correlation graph for the international financial stock returns data
(Abdelwahab, A., Amor, O., & Abdelwahed, T. (2008)) Ths.Nguyễn Hạ Liên Chi 27
2.1. International Private Flows
Foreign Portfolio Investment – FPI: Characteristics
The amount of securities that foreign companies can buy can be
controlled to a certain extent.
Foreign investors do not hold control over the activities of securities issuers
The investor's income depends on the type of securities that the
investor buys, which can be fixed or not
Host countries do not have the ability and opportunity to absorb
modern technology, techniques, machinery and equipment and management experience. Ths.Nguyễn Hạ Liên Chi 28 14 10/18/2022 Portfolio Equity Flows Bond Debt Loans Financial Stocks (equity/share): certificate of Bond: debt certificate instruments ownership Investor- - Ownership
- Credit relations (creditor & borrower) Issuing
- Investor is the share-owner/owner of the
- Investor is the bond bearer/creditor of the organization company company relationship Income
- Divident: is the company's profit divided
- Interest: is the interest corresponding to the
in proportion to the capital contribution loan amount. payable by Issuing => Non-fixed income* => Fixed income organizations
Income of the Not only dividends, but also income from
Not only bonds, but also income from buying investors buying and selling securities (the
and selling securities (the difference between
difference between the buying and selling
the buying and selling prices – Spread) prices – spread)
*Only applicable to common stock, not applicable to preferred stock.
2.1. International Private Flows
Foreign Portfolio Investment – FPI: Factors contribute to the
strong growth in international portfolio investment Demographic changes
The increasing securitisation of the global flows of funds easier to invest on
The worldwide privatization trend foreign market
The benefits of diversifying internationally become more apparent Ths.Nguyễn Hạ Liên Chi 30 15 10/18/2022
2.1. International Private Flows
Foreign Portfolio Investment – FPI: Benefit-Cost Analysis For investors Benefits Cost • Provide income to • Financial risk owners. • Risks due to speculative • Help investors make factors investments in any field • Risk of insider trading • Help investors make • Interest rate risk investments in foreign • Currency buying power companies in a simple risk way. • Buying and selling is quick and easy Ths.Nguyễn Hạ Liên Chi
2.1. International Private Flows
Foreign Portfolio Investment – FPI: Benefit-Cost Analysis
For capital users – securities issuers Benefits:
Capital users – issuers of securities can raise capital at a lower
cost than borrowing directly from banks.
Stimulate securities issuers to perform better.
Control of a foreign-invested company always belongs to the host country. Ths.Nguyễn Hạ Liên Chi 32 16 10/18/2022
2.1. International Private Flows
Foreign Portfolio Investment – FPI: Benefit-Cost Analysis
For capital users – securities issuers Cost:
Sometimes seen as purely speculative, the country's balance of
payments is very sensitive to volatile capital flows such as foreign portfolio investment.
Bringing to the host country only capital (money), no chance to
absorb modern technology and techniques. Ths.Nguyễn Hạ Liên Chi 33
2.1. International Private Flows Private Loans: Definition
International private loan is a form of international investment in which
the investor of one country lends money to businesses or economic
organizations in another country and earns a profit through interest on the loan. Ths.Nguyễn Hạ Liên Chi 34 17 10/18/2022
2.1. International Private Flows
Private Loans: Characteristics
- The investor is not the owner of the recipient.
- Investment recipients only have the right to use capital for a certain period of
time and then have to repay both principal and interest when due.
- The investor earns profit through the lending interest rate according to the loan agreement/contract.
- Loans are usually in cash, without equipment, technology, know-how or technology transfer. Ths.Nguyễn Hạ Liên Chi 35
2.2. International Official Flows – Foreign Aid Kinds of Foreign Assistance Development Aid:
•Transfer of finance, commodities etc. •Technical co-operation •Debt relief Humanitarian Aid: •Disaster relief assistance Military Assistance Food Aid
•offered to countries facing food shortages Ths.Nguyễn Hạ Liên Chi 36 18 10/18/2022
2.2. International Official Flows – Foreign Aid Foreign Aid consists of: Financial Flows Technical Assistance Commodities
given by the residents of one country to the residents of
another country, either as grants or as subsidized loans. Ths.Nguyễn Hạ Liên Chi 37
Kimberly Smith, Administrator,
Development Cooperation Directorate, OECD, Moscow, Russia, 2008 19 10/18/2022
2.2. International Official Flows – Foreign Aid ODA: The origin of today ODA
(Story of official development assistance – Helmut Fuhrer – OECD – Paris 1996)
The establishment of the UN, WB, IMF The Marshall Plan:
- Post-World War II reconstruction plan for Europe, initiated by U.S.
Secretary of State George Marshal (Nobel Prize winner) in 1947.
- European Recovery Program (1948-1952): USD13.3 billion to 16 countries
(1.5% of U.S. GDP, >1% of major recipients’ GDP) Ths.Nguyễn Hạ Liên Chi 39
2.2. International Official Flows – Foreign Aid ODA: What is the DAC?
The Organization for Economic Cooperation and Development (OECD)
was established on December 14, 1960 in Paris.
The OECD established the Development Assistance Committee (DAC).
22 Bilateral Donors, plus European Commission (EC).
Objective: improve development assistance through coordination and
collaboration with major stakeholders.
Collect and synthesize data on aid and foreign assistance and deliver the data to the public. Ths.Nguyễn Hạ Liên Chi 40 20