Chapter 6: Foreign trade investment
MSc. Pham Ha Trang
1
Content
1. Overview of Foreign direct investment (FDI)
1.1. FDI vs FPI
1.2. FDI trends in Vietnam
1.3. Types of FDI
1.4. Impacts of FDI
2. FDI theories
3. Government interventions on FDI
1. Overview of Foreign direct investment (FDI)
1.1. FDI vs FPI
International portfolio investment - FPI Foreign direct investment
(Đầu tư gián tiếp nước ngoài ) (Đầu tư trực tiếp nước ngoài)
1. Overview of Foreign direct investment (FDI)
1.1. FDI vs FPI
Foreign portfolio investment Foreign direct investment
It is a form of investing abroad by owning Is an investment activity in which foreign
foreign stocks/bonds with the aim of economic organizations and individuals, by
generating capital profit and minimizing themselves or together with economic
investment risks, but the investor does not organizations of the host country, invest capital
directly manage and operate the activities in a certain subject, directly manage and
using that investment capital operate to gain profits in business
1. Overview of Foreign direct investment (FDI)
1.1. FDI vs FPI
1. Overview of Foreign direct investment (FDI)
1.1. FDI vs FPI
Home
country
Host
Parent firm
country
FDI terms
Implemented Foreign
capital investor
Registered
investing Investee
capital
1. Overview of Foreign direct investment (FDI)
1.2. FDI trends in Vietnam
Inflow FDI in Vietnam (1990-2022)
(mil USD)
Source: UN Trade and Development
1. Overview of Foreign direct investment (FDI)
1.2. FDI trends in Vietnam
Outflow FDI in Vietnam(1990-2022)
(mil USD)
Nguồn: UN Trade and Development
1. Overview of Foreign direct investment (FDI)
1.3. Types of FDI
Vertical FDI Horizontal FDI
Invest in industries and products that are closely Make investments in the same industry and foreign
related to the products the company is producing products
domestically
Purpose: providing input and consuming products Purpose: to provide similar products/services
of domestic enterprises
Phụ tùng ô tô biên hoà giá rẻ - cạnh tranh
1. Overview of Foreign direct investment (FDI)
1.3. Types of FDI
Joint venture
Contracts
M&A/Brownfield
investment (BCC, BOT, BTO,
BT)
Greenfield
investment FDI Wholly owned
subsidiary
1. Overview of Foreign direct investment (FDI)
1.4. Impacts of FDI
FOR HOME COUNTRY
BENEFITS COSTS
1. Overview of Foreign direct investment (FDI)
1.4. Impacts of FDI
FOR HOST COUNTRY
BENEFITS COSTS
2. Theories of FDI
International product
life cycle Market power
(Lý thuyết về vòng đời (Lý thuyết về quyền
quốc tế của sản lực thị trường)
phẩm)
Market imperfection
Electic theory
(Lý thuyết thị trường
(Lý thuyết chiết trung)
không hoàn hảo)
2. Theories of FDI
2.1. International product life cycle
• Explain why manufacturers shift their business activities from exporting
products to FDI
• Content: in the early stages, products are produced in the home country even
though the cost of production abroad may be lower. As products become
standardized during the growth period, manufacturers are encouraged to invest
abroad to take advantage of costs and prevent the market from falling into the
hands of local manufacturers
• Disadvantages: why choose FDI over other modes of market entry?
2. Theories of FDI
2.2. Market power
Is the ability of a firm to adjust the price of its products or services without facing significant
competition from other firms. Firms with market power can raise prices without significantly reducing
revenue
Firms engage in foreign direct investment to increase their control over markets and gain a
competitive advantage
Companies undertake FDI for the following reasons:
• Raw material supply is increasingly scarce, local companies are not capable of exploration
and exploitation → Vertical FDI
• Thanks to vertical FDI, oligopolies (các công ty độc quyền nhóm) create barriers that prevent
other firms from accessing resources
• Vertical FDI creates cost advantages through technical innovation by coordinating production
and transferring products between different stages of the production process
2. Theories of FDI
2.3. Market imperfection
Content: When there are imperfect factors in the market that make business
activities less effective, companies will carry out FDI to stimulate business
activities and overcome those imperfect factors
Imperfect factors of the market:
Special know-
Trade barriers
how/knowledge
2. Theories of FDI
2.4. Electic theory (OLI framework)
Ownership advantage
Do you have any tangible/intangible assets that other
competitors do not own?
Location advantage
Characteristics of the host country that make it an attractive
place for investment (market size, resource availability,
labor costs, infrastructure quality, and favorable regulatory
environments)
Internationalization advantage
A firm's ability to control and manage its foreign operations
internally rather than relying on external entities like
licensing or franchising
3. Government interventions on FDI
Reasons Tools
For Host country: For Host country:
• Balance of payments: cash inflow, • Investment restrictions: restrictions on
increased exports, decreased imports ownership, content of activities
• Resource mobilization: technology, • Investment incentives: financial
management know-how, labor incentives, infrastructure
For Home country:
For Home country: • Investment restrictions: corporate
income tax policy, penalties/bans
• Outflow of production resources
abroad • Incentives: hedging, lending, tax
incentives
• Increase competitiveness
• Take advantage of outdated
technology
