INTERNATIONAL INVESTMENT

ECONOMIC & LEGAL ASPECTS OF

FOREIGN DIRECT INVESTMENT

ECONOMIC ASPECTS
TNC AND INTERNATIONAL PRODUCTION

Slides by Cao Thi Hong Vinh – FTU 1

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 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

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 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

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 Types of FDI (cont.)
Perspectives of host country:
+ Import-substituting FDI

+ Export-increasing FDI

+ Government-initiated FDI

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 Modes of FDI entry
Greenfield vs. M&A

Greenfield: (UNCTAD)
undertaken to set up a new production
venture in a host country

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 Modes of FDI entry (cont.)
M & A:
- UNCTAD: transfer of assets from domestic
to foreigner investors
- Advantages: speed, strategic assets, others
(market, gains via synergies, risk
reduction…)

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

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TNC MNC MNE
???

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 TNC - Definition
Dunning (1993):
A TNC is an enterprise that engages in
FDI and owns or controls value-adding
activities in more than 1 country.

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 TNC – Definition (cont.)
OECD Guidelines for Multinational Enterprises:
“These usually comprise companies or other
entities whose ownership is private, State of mixed,
established in different countries and so linked that
one or more of them may be able to exercise a
significant influence over the activities of others,
in particular, to share knowledge and resources
with others”

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 TNC – Inclusion
- Parent enterprise
- Foreign affiliate
+ Subsidiary
+ Associate
+ Branch

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TNC – Inclusion (cont.)

Parent enterprise
controls assets of other entities

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TNC – Inclusion (cont.)

Foreign affiliate
. incorporated or unincorporated
. lasting interest in the management for
investor (ownership of ≥10%)

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 TNC – Inclusion (cont.)
Foreign affiliate
Subsidiary
Incorporated
Parent entity:
. ≥ 50% voting power
. Appoint or remove a majority of the members of the
administrative, management or supervisory body

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 TNC – Inclusion (cont.)
Foreign affiliate
Associate
Incorporated
Parent entity:
10%≤ X ≤ 50% voting power

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 TNC – Inclusion (cont.)
Foreign affiliate
Branch
Unincorporated
Parent entity:
wholly or joinly own

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 TNC – Measurement
- Performance:
Investment expenditures, sales, assets,
employment, output, exports…

- No. of TNC: parent and foreign affiliate

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 TNC – Measurement (cont.)
- Concentration ratios vs. Transnational index
+ Concentration ratios: within groups

+ Transnationality index:
FDI inflows/gross fixed capital information
FDI inward stock/GDP
Value added of foreign affiliates/GDP
Employment of foreign affiliates/total employment

UNCTAD database
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 Int. production - Definition
UNCTAD
Perspective of world economy:
All of the production that takes place in
parent firms (or home-country units), as
well as in foreign affiliates (or host country
units) constitutes international production

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 Int. production – Definition (c.)

Perspective of home and host countries:

The production by a domestic firm in a
foreign location, and the production of a
foreign firm in the domestic country that is
foreign to them constitutes international
production

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 Int. production – Measurement

Flows and Stock of FDI

Global sales, gross product, total assets,
exports, employment… of foreign
affiliates

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 Int. production –
Long-term trends and current patterns

UNCTAD:
- M&A increasingly drive FDI
- The sectoral composition of FDI
- Changing geography of FDI

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 Int. production –
Long-term trends & current patterns (c.)

M&A increasingly drive FDI

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 Int. production –
Long-term trends & current patterns (c.)

The sectoral composition of FDI

- Services

- Extractive industries

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 Int. production –
Long-term trends & current patterns (c.)

Changing geography of FDI

- Home country: less concentration (outward)

- Host country: more balanced distribution
- Host country: the shift towards Asia

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