8/6/24

FDI, Trade and Geography

Sanjay Kalra
skalra1010@outlook.com
skalra1010@gmail.com

Lecture 2
1. FDI—Benefits and Costs
2. FDI and MNEs

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Outline

1. Benefits and Costs of FDI

2. FDI and MNEs
A. Concepts
B. Entry modes

1. Benefits and Costs of FDI

Benefits
• Resource-transfer effect
• Employment effect

• Balance-of-payment effect

• Competition and economic growth

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Resource transfer effect

• FDI makes contribution to host economy by supplying:

• Capital
• Technology
• Management

Balance-of-Payment effect
Three Balance of Payment consequences of FDI:
• MNE investment causes a one time inflow of capital
in the capital account
• If FDI is a substitute for imports of goods or services,
it can improve the current account of the host
country’s balance of payments.
• When MNE uses a foreign subsidiary to export
goods and services to another country.

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Effects on Competition and Growth

• Economic theory: markets function efficiently when
there is competition between different producers.
• If FDI via greenfield investment – you have another
producer in the market
o Increases level of competition
o Increases level of R&D etc. by competitors

Cost of FDI to Host Countries

• Adverse effects on competition

• Adverse effects on the Balance of Payments

• National Sovereignty

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Questions?

2. FDI and MNEs

FDI often seen as MNE activity, BUT not everything that MNEs do is captured by FDI data

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A. Concepts

FDI statistics are a proxy for what MNEs do

• Suppose a Vietnamese firm invests in China, and it goes to a bank in Vietnam to finance this…
is this captured in FDI statistics?
• Suppose a Vietnamese firm invests in China, and it goes to a bank in China to finance this… is
this captured in FDI statistics?
• Suppose a Vietnamese firm invests in China, and it goes to a bank in London to finance this…
is this captured in FDI statistics?
• What about raising capital on equity markets?

In other words, FDI data are useful but do not fully reflect MNE activities.

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Why FDI and MNE data measure different things?

• Collected in BOP à FDI data captures a different reality, i.e., cross-border flows
• MNEs are the result from a decision to invest abroad
• FDI data do not fully reflect the economic importance of MNEs.
• FDI only measures part of what foreign affiliates use to finance their activities but not financial
resources they may raise in host economy.
• FDI is a financial input, excluding the contribution of labor à FDI stocks underestimate
activities of MNEs

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MNE Activity: Indicators

FDI, Sales, Value Added

BEA

Exercise: Update this

table for 2021

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MNEs: Objectives

• Resource seeking – seek real low cost of resources

• Market seeking – protect market share and increase sale in a
targeted market
• Efficiency seeking – seek an organizational structure more
efficient via culture, policy, market, partners in a local area.
• Strategic asset seeking – seek a strategic asset (visible and
invisible) from a foreign firm to promote long-term cooperation

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Fortune Global 500 Top Ten List of MNEs

2022 2023
1. Walmart (U.S.)
2. Amazon (U.S.)
3. State Grid (China)
4. China National Petroleum (China)
5. Sinopec (China)
6. Saudi Aramco (Saudi Arabia)
7. Apple (U.S.)
8. Volkswagen (Germany)
9. China State Construction
Engineering (China)
10. CVS Health (U.S.)

Mapping the Global 500

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Fortune Global 500—Geography

Fortune-global-500 CSIS

Wikipedia August 2022

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Foreign affiliates—Activity

MNEs-in-the-global-economy-policy-note 2018 OECD.pdf

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Foreign affiliates—Activity

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Foreign affiliates—Activity

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Foreign affiliates—Activity

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Foreign affiliates—Activity

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ok, but still changing economic geography of the world

https://www.csis.org/blogs/trustee-china-hand/biggest-
not-strongest-chinas-place-fortune-global-500

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Questions?

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B. Entry Mode

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Entry modes

1. Licensing: An arrangement in which the owner of intellectual property grants another firm the
right to use that property for a specified period of time in exchange for royalties or other
compensation.
2. Franchising: An arrangement where the firm allows another firm the right to use an entire
business system, in exchange for fees, royalties or other forms of compensation.
3. Alliances: An agreement and collaboration between a firm in the home market and a firm
located in a host country to share activities in the host country.
4. Joint ventures: A form of collaboration between two or more firms to create a jointly owned
enterprise through equity investment. A partner in a joint venture may enjoy minority, equal
or majority ownership.
5. Acquisitions: A direct investment to purchase an existing company or facility.
6. Greenfield: A direct investment to build a new manufacturing, marketing or administrative
facility, as opposed to acquiring existing facilities.
wholly owned subsidiary
Source: Cavusgil et. al., 2008

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** Entry modes—Dimensions

• Flexibility
• Control
• Resource commitment
• Risk

Source: Cavusgil et. al., 2008

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có thể enter vào the whole market bằng nhiều cách, tùy thuộc vào resource mình có, amount of risk, và
the operation of your company

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**

Entry modes—Pros and Cons

Type of Entry Advantages Disadvantages

Less control, licensee may become a
competitor, legal and regulatory
Licensing and Franchising Fast entry, low cost, low risk
environment (IP and contract law)
must be sound
Shared costs reduce investment Higher cost than licensing or
Alliance and Joint Venture needed, reduced risk, seen as local franchising; integration problems
entity between two corporate cultures
Fast entry; known, established High cost, integration issues with
Acquisition
operations home office
Gain local market knowledge; can be
Greenfield Venture (Launch of a new, High cost, high risk due to unknowns,
seen as insider who employs locals;
wholly owned subsidiary) slow entry due to setup time
maximum control

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Entry modes—Examples

1. Licensing:
2. Franchising:
3. Alliances:
4. Joint ventures:
5. Acquisitions:
6. Greenfield:

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Forms of FDI **

có nhà máy, xưởng ở quốc

gia khác và bán 1 sản phẩm
hoàn chỉnh tại quốc gia đó

vận chuyển components qua

1 quốc gia khác có nhà máy,
xưởng để lắp ráp, hoàn thiện
sản phẩm và send back to
cty mẹ. có thể nó cũng bán 1
vài finishd product tại
country đó.
efficieny seeking, viet nam
has labour and 1 vàì
components produced in viet
nam, the mother company
send the comonents to VN in
terms of cheaper cost
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Forms of FDI

• Horizontal FDI– MNEs enter the host market to produce the same
products as they do in the home country.
• Conglomerate FDI – MNEs produce products which are not yet
produced at home. sản xuất sản phẩm tại home country hơi khác 1 chút so với mặt
hàng dc xuất khẩu
• Vertical FDI – MNEs produce intermediate goods in both upstream and
downstream supply chains.
• Backward vertical FDI: industry abroad provides inputs for a firm’s domestic production processes.
v Historically most backward vertical FDI has been in extractive industries (oil extraction, bauxite mining, tin
mining and copper mining) – Royal Dutch/Shell, BP, ALCOA
• Forward vertical FDI: industry abroad sells outputs of a firm’s domestic production processes. Less common than
backward VFDI.
v Volkeswagen entered the US and acquired a large number of dealers rather than distribute its cars through
independent US dealers

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Forms of FDI—Examples

• Horizontal FDI
• Conglomerate FDI
• Vertical FDI

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FDI Flows Types—Trends

Exercise: Locate this table in WIR, 2023

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TOP 9 MULTINATIONAL COMPANIES IN VIETNAM

Monday 08, 06 2020

1. Unilever
Starting its business in Vietnam in 1995, Unilever has invested over USD 300 million to build a modern manufacturing plant in Ho Chi Minh City and Bac
Ninh Province. With an annual growth rate higher than the market average, Unilever Vietnam has become one of the most successful foreign investors in
Vietnam. Many Unilever brands such as OMO, P/S, Clear, Pond's, Knorr, Lifebuoy, Sunsilk, VIM, Lipton, Sunlight, VISO, Rexona, etc. have become
household names to Vietnamese people. It is estimated that 35 million Unilever’s products are used every day by consumers across the country.

2. Procter & Gamble (P&G)

P&G is one of the first US corporations to invest in Vietnamese market. P&G Vietnam was established in 1995, and it has made a significant contribution
to the development of Vietnam through investing in technology and building modern factories.Over 20 years of operation in Vietnam, P&G has grown
strongly. With professional staff, P&G Vietnam is considered one of the fastest growing branches of the P&G Group.

3. IBM
(International Business Machines) is an American multinational computer technology corporation headquartered in Armonk, New York. Operating in
Vietnam from 1938 to 1975, IBM was one of the first companies to return to Vietnam and opened a representative office in 1994, shortly after the US
lifted its economic embargo against Vietnam.

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TOP 9 MULTINATIONAL COMPANIES IN VIETNAM

4. Microsoft
Microsoft founded by Bill Gates and Paul Allen on April 4, 1975 is an American multinational corporation headquartered in Redmond, Washington.
Microsoft specializes in developing, manufacturing and trading software copyrights, supporting computer-related products and services. Currently,
Microsoft is the largest software manufacturer in the world. It set up a representative office in Vietnam in 1996, and in 2006, this representative office
officially became Microsoft Vietnam Co., Ltd. Microsoft Vietnam currently has 100 employees. General Director of Microsoft Vietnam is Mr. Pham The
Truong.

5. Pepsico Foods
PepsiCo, Inc. founded in 1965 is a multinational American food company, based in Purchase, New York. On 24/12/1991, International Beverage
Company (IBC) was established. In 1994, Pepsico officially entered the Vietnamese market through a joint venture with IBC. In 2003, the company was
renamed to PepsiCo International Beverage Vietnam. In 2004, through the merger and acquisition of Dien Ban Plant, the company expanded its
production and business activities to Quang Nam Province. In 2007, SPVB participated in soy milk industry. In February 2010, a new factory in Can Tho
was officially put into operation. The largest PepsiCo plant in Southeast Asia was inaugurated in Bac Ninh Province in October 2012.

6. Abbott
Abbott established an office in Ho Chi Minh City in 1995. The company currently has about 100 employees in Vietnam. Abbott provides innovative
nutritional, pharmaceutical and diagnostic products to Vietnamese people of all ages.

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TOP 9 MULTINATIONAL COMPANIES IN VIETNAM

7. Honda
In 1996, Honda Vietnam was established on the basis of a joint venture between three companies, Honda Motor Company of Japan, Asian Honda Motor
Company of Thailand and Vietnam Motors and Agricultural Machinery Corporation to produce motorbikes and cars. More than 20 years of presence in
Vietnamese market, Honda has continuously developed and become a leading company in the production of motorcycles and automobiles in this
market.

8. Nestlé
Nestlé Vietnam Co., Ltd. was established in 1995. The company is a 100% foreign-invested company, belonging to Nestlé S.A., the largest food and
beverage group in the world currently present in 191 countries with 328,000 employees worldwide, based in Vevey - Switzerland. Nestlé Vietnam
currently operates four food and beverage factories located in Dong Nai and Hung Yen, and employs more than 2000 employees nationwide. In addition
to the above four factories, Nestlé also has 02 La Vie mineral water factories located in Long An and Hung Yen, under the direct management of La Vie
Vietnam Co., Ltd., a joint venture between Pierre Vittel of Neslté and Long An Trading Company.

9. Samsung
Samsung Electronics Vietnam Co., Ltd. (SEV) was granted investment license on March 25, 2008 and officially went into operation in April 2009.
Samsung Electronics has 9 mobile phone manufacturing plants globally (in Korea, Indonesia, India, China, Brazil and Vietnam). Two factories in Vietnam
are SEV (Bac Ninh) and SEVT (Thai Nguyen, established in 2013, with an investment of USD5 billion). Currently, these are the two largest and most
modern Samsung Electronics mobile phone components and assembling factories in the world.

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Lecture 2. Wrap-up

• Benefits and costs of FDI

• Multinational enterprises (MNEs)
• Horizontal & vertical MNE activity
• Entry modes

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Next …

Lecture 3: FDI and Trade

Lecture 4: FDI Theories
Lecture 5: Vietnam: FDI, Trade and Policy

Activity:
• MNE selection and presentation
• Article selection and presentation
ü Search materials
ü Choose reading
ü Discuss with your group members
ü Prepare presentation
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Thank you

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