ĐẠI HỌC QUỐC GIA HÀ NỘI
TRƯỜNG ĐẠI HỌC KINH TẾ
VNU UNIVERSITY OF ECONOMICS & BUSINESS
CHAPTER 6:
FDI IMPACTS
Ths. Vũ Thiện Bách – bach12360@gmail.com
CHAPTER OBJECTIVES
1 Identify and analyze the impacts of international
investment on the host economy (Level 2,3)
2 Identify and analyze the impacts of international
investment on the home economy; (Level 2 and 3)
3 Discuss impacts on economic growth, social affairs and
environmental protection (Level 2)
4 Explain and apply case study (Level 2 and 3)
CONTENTS
1. Impacts on the Host country
o Economic growth
o Social affairs
o Environmental issues
2. Impacts on the home country
o Economic growth
o Social affairs
o Environmental issues
3. Case-study:
o Impacts of FDI on environment protection in the home/host countries.
o Impacts of FDI on society in the host/home countries
READING MATERIALS
Compulsory readings:
• Kavaljit Singh (2007), Why Investment Matters: The political Economics of International Investment, The
Corner House pp. 42-59.
• Phung Xuan Nha (2012), Foreign Direct Investment in Vietnam: Argument and practice (in Vietnamese),
VNU Publishing House
• Phung Xuan Nha (2010), Adjustment of policies on foreign direct investment in Vietnam in the process of
international economic integration. (in Vietnamese), VNU Publishing House. ,
• UNIDO, FDI Policy Instrument: Advantages and Disadvantages’. Research and Statistics
Branch, 2009
• WIR 2010
• UNCTAD, 2007, World Investment Report, pp.129-154.
• UNCTAD, 1999. WIR, pp.157-313
• UNCTAD, 2006. WIR,pp.183-197 (on Host developing country)
Optional readings:
• Moosa, Imad. Foreign direct investment: theory, evidence and practice. Springer, 2002.
pp.68-100
CHAPTER 6-WEEK 1: IMPACTS OF INTERNATIONAL INVESTMENT (II) ON ECONOMIC-SOCIAL
DEVELOPMENT OF THE HOST COUNTRY
GOAL To be able to analize positive and negative impacts of II especially
FDI on host countries’ economic-social development
✓ To grasp how II directly and indirectly affects host countries
OBJECTIVE
✓ To analize the impacts of FDI on Vietmam’s economic-social development
• Economic effect
CONTENTS • Social effect
• Environmental effect
• Learn the theory
STUDY • Case study/Class discussion
METHODS
• Group Presentation
1. Capital formation and balance
of payment
2. Technology improvement
How II affects? 3. International trade
4. Linkages effects
5. Job creation and Human
resource development
Host country II inflow
II inflow 2. Environment
FIEs
FIEs
1. Economy FIEs 2.1. Waste
2.2.Natural
1. Culture 3. Society resource
2. Social security ...
3. Legislation.
II inflow
6.1.1. ECONOMIC GROWTH
6.1. IMPACTS ON THE HOST COUNTRY
6.1.1. Economic Growth
Direct Impact
(1) IMPACTS ON CAPITAL FORMATION AND BALANCE OF PAYMENT
Capital Formation:
It is used also in economic theory, as a modern general term for capital accumulation, referring to the
total "stock of capital" that has been formed, or to the growth of this total capital stock.
Được sử dụng trong lý thuyết kinh tế, như một thuật ngữ chung hiện đại để chỉ tích lũy tư bản, đề cập đến
tổng số "vốn dự trữ" đã được hình thành, hoặc sự tăng trưởng của tổng vốn dự trữ này.
6.1. IMPACTS ON THE HOST COUNTRY
6.1.1. Economic Growth
Direct Impact
(1) IMPACTS ON CAPITAL FORMATION AND BALANCE OF PAYMENT
◼ Effects on Capital formation
◼ Direct:
◼ II inflow;
◼ crowding-in/out other foreign firm
◼ Indirect:
◼ increase domestic private and government savings,
consequently increase investment
6.1. IMPACTS ON THE HOST COUNTRY
6.1.1. Economic Growth
Direct Impact
(1) IMPACTS ON CAPITAL FORMATION AND BALANCE OF PAYMENT
◼ Effects on Balance of payment
Bd= (I+X) – (Ck+Cr+R+D+I’)
I = II inflow
X = Export revenue of FIEs
Ck = Value of imported technology of FIEs Cr = Value of imported raw R = materials of FIEs
Rents/fees for licensing or technology transfer paid by FIEs
D = Dividents and/or profit remittance abroad
I’ = disinvestment in case of high risk in host country’s investment environment.
6.1. IMPACTS ON THE HOST COUNTRY
6.1.1. Economic Growth
Direct Impact
FINANCIAL CONTRIBUTION
(i) FDI as a source of capital formation
⚫ Arguments:
o MNCs have plenty of capital and access to international capital markets
o MNCs may help mobilize local savings
o MNCs may stimulate aid flows
⚫ Objections:
o not much capital transfer going on, most of investments financed
locally
o FDI is an expensive source of funds
o profits are repatriated
6.1. IMPACTS ON THE HOST COUNTRY
6.1.1. Economic Growth
Direct Impact
FINANCIAL CONTRIBUTION
(i) FDI as a source of capital formation
⚫ FDI is an important source of financing for transition economies as it helps to cover the
current account deficit, fiscal deficit (in case of privatisation- related FDI), and supplements
inadequate domestic resources to finance both ownership change and capital formation.
FDI là một nguồn tài chính quan trọng cho các nền kinh tế đang chuyển đổi vì nó giúp bù đắp
thâm hụt tài khoản vãng lai, thâm hụt tài khóa (trong trường hợp FDI liên quan đến tư nhân
hóa), và bổ sung nguồn lực trong nước không đủ để tài trợ cho cả thay đổi sở hữu và hình
thành vốn.
⚫ The inflows of capital help to finance a current account deficit. (Basically, this means that
foreign investment enables developing countries to buy imports.)
6.1. IMPACTS ON THE HOST COUNTRY
6.1.1. Economic Growth
Direct Impact
FINANCIAL CONTRIBUTION
(i) FDI as a source of capital formation
⚫ Profit repatriated.
o Although multinationals invest in
developing economies, the profit is
repatriated to the location of the
multinational, so the net capital
inflows are less than they seem.
6.1. IMPACTS ON THE HOST COUNTRY
6.1.1. Economic Growth
Direct Impact
FINANCIAL CONTRIBUTION
(ii) Balance-of-payments effects
◼ Arguments:
◼ shortage of forex for imports of investment goods as common
development problem
◼ both export-oriented and import-substituting FDI should improve BoP
◼ Objections:
◼ MNCs import a lot. Import-substituting MNCs, in particular, may create import
dependence
◼ MNCs repatriatiate profits
6.1. IMPACTS ON THE HOST COUNTRY
6.1.1. Economic Growth
Direct Impact
FINANCIAL CONTRIBUTION
(ii) Balance-of-payments effects
◼ Effects on Balance of payment
Bd= (I+X) –(Ck+Cr+R+D+I’) I = II inflow
X = Export revenue of FIEs
Ck = Value of imported technology of FIEs
Cr = Value of imported raw
R = Rents/fees for licensing or technology transfer paid by FIEs
D = Dividents and/or profit remittance abroad
I’ = disinvestment in case of high risk in host country’s investment environment.
6.1. IMPACTS ON THE HOST COUNTRY
6.1.1. Economic Growth
Direct Impact
FINANCIAL CONTRIBUTION
(ii) Balance-of-payments effects
⚫ The balance of payments (also known as balance of international payments and
abbreviated B.O.P. or BoP) of a country is the difference between all money flowing into
the country in a particular period of time (e.g., a quarter or a year) and the outflow of
money to the rest of the world.
⚫ These financial transactions are made by individuals, firms and government bodies to
compare receipts and payments arising out of trade of goods and services.
6.1. IMPACTS ON THE HOST COUNTRY
6.1.1. Economic Growth
Indirect Impact
(iii) Competitive and anti-competitive - Crowding in/out effects
• Arguments:
o MNC entry may stimulate competition, efficiency, and development
o MNCs often enter industries where entry barriers for localnfirms are high
• Objections:
o MNCs are stronger and may outcompete local firms. Risk for foreign oligopolies and monopolies
Source: WIR 2007 p. 139
6.1. IMPACTS ON THE HOST COUNTRY
6.1.1. Economic Growth
Indirect Impact
Technology improvement: negative or positive effect?
• Transfer advance/appropriate/obsolete technology;
• Invesment in R&D
• Spillover effects
6.1. IMPACTS ON THE HOST COUNTRY
6.1.1. Economic Growth
Indirect Impact
FDI AS A SOURCE OF TECHNOLOGY
• Arguments:
o most commercial technology owned by MNCs
o few countries can afford comprehensive R&D programs on their own
o benefits possible even if MNCs keep ownership of technology: spillovers
• Objections:
o MNC technology may be too expensive
o MNC technology may not be appropriate
6.1. IMPACTS ON THE HOST COUNTRY
6.1.1. Economic Growth
Indirect Impact
SPILLOVERS
• When locals benefit from the presence of MNCs without paying the full price.
• Several possible channels:
o Demonstration effects, ”copying” MNCs
o Training of employees who may leave the MNCs for jobs in local firms
o Forward and backward linkages
o Local firms are forced to work harder because of tougher competition
6.1. IMPACTS ON THE HOST COUNTRY
6.1.1. Economic Growth
Indirect Impact
SPILLOVERS
• Evidence:
o Lots of case studies showing that locals learn from MNCs
o Spillovers are not automatic. Effects are determined by the local environment:
▪ Technological capability and labor skills
▪ Level of competition
▪ Trade policy
6.1. IMPACTS ON THE HOST COUNTRY
6.1.1. Economic Growth
Indirect Impact
INTERNATIONAL TRADE
• Direct: import/export of FIEs
• Indirect:
o Access to international market network
o Gather information of international market
o Increase local content embodied in exports by FIEs
o Improvement competitiveness of domestic enterprise
o Crowding-out domestic enterprise
6.1. IMPACTS ON THE HOST COUNTRY
6.1.1. Economic Growth
Indirect Impact
INDUSTRIAL LINKAGES
• Improvement of supporting industries: Through linkages between foreign affiliates and
domestic enterprises, TNC participation may play a catalytic role in the development of
related industries (WIR01) and, under certain conditions, of an extractive industry cluster.
• Backward/foward linkages
o Backward linkages occur when foreign affiliates acquire inputs (goods or services) from
local suppliers
o Forward linkages occur when foreign affiliates sell outputs (minerals) to domestic buyers.
• Linkages can be developed with domestic firms or with other foreign affiliates in the host
country.
6.1.2. SOCIAL AFFAIRS
6.1. IMPACTS ON THE HOST COUNTRY
6.1.2. Social Affairs
Impact on Human Resource
• Create Jobs
6.1. IMPACTS ON THE HOST COUNTRY
6.1.2. Social Affairs
Impact on Human Resource
• Training and education
6.1. IMPACTS ON THE HOST COUNTRY
6.1.2. Social Affairs
Impact on Human Resource
• Improve healthcare and quality of life
• Provide opportunities to get higher real wage
6.1. IMPACTS ON THE HOST COUNTRY
6.1.2. Social Affairs
Impact on Human Resource
• On the one hand, their well-being can be
enhanced by the economic contributions of
TNCs, such as job creation and higher incomes,
or through improvements to local
infrastructure and social services.
• Such contributions can help reduce local
poverty and increase social welfare in absolute
terms.
• On the other hand, there may also be various
social costs.
o Example: brain drain
6.1. IMPACTS ON THE HOST COUNTRY
6.1.2. Social Affairs
Other impacts on society?
6.1. IMPACTS ON THE HOST COUNTRY
6.1.2. Social Affairs
SOVEREIGNTY AND AUTONOMY EFFECTS Example: Facebook and Australiagovernment
Australia has passed a world-first law aimed at making
• Arguments: Google and Facebook pay for Aus news content on their
o Foreign ownership always carries a cost. platforms. FB cut ties with Australia government.
Foreign MNCs may push for policies that
are good for them but not necessarily for
the host country
• Objections:
o "Who cares if the Americans own our
factories, as long as we get jobs and tax
revenue“
6.1. IMPACTS ON THE HOST COUNTRY
6.1.2. Social Affairs
OTHER EFFECTS
• Positive/Negative externalities from FDI,
• Cultural imperialism?
• Inappropriate consumption patterns - Camel,
Heineken, and
• Yves St. Laurent in poor countries?
• FDI create dependence on foreign capital?
6.1. IMPACTS ON THE HOST COUNTRY
6.1.2. Social Affairs
OTHER EFFECTS
• There are various sources of potential tension
at the community level, including the use and
management of land, the relocation of people
(including indigenous populations), and
accordingly the loss of land and livelihoods.
6.1. IMPACTS ON THE HOST COUNTRY
6.1.2. Social Affairs
OTHER EFFECTS
• Adverse social consequences are associated
with the relationship between TNCs and local
communities within the general area or region
where the FDI operations are located.
• The people that reside in the vicinity but
outside the lines of demarcation have no such
access to benefits and are often marginal in
terms of economic relations with the company.
• Conflicts around the large-scale sector that
prevail in some developing countries are driven
as much by this marginalization, as by the
distribution of benefits to the insider groups.
6.1.3. ENVIRONMENT PROTECTION
6.1. IMPACTS ON THE HOST COUNTRY
6.1.2. Enviroment Protection
DISCUSSION
• Positive/Negative externalities from FDI, e.g. on
the environment?
THANK YOU
Ths. Vũ Thiện Bách – bach12360@gmail.com
Thank you!
