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Activity 4 : Select one form o FDI and identify its main benefits and costs to business and countries

Dinh nghia ( slide da co nen chi can doc slide )

Foreign direct investment (FDI) is direct investment into production in a country by a company in another country, either by buying a company in the target country or by expanding operations of an existing business in that country. Foreign direct investment is done for many reasons including to take advantage of cheaper wages, growing market, special investment privileges such as tax exemptions offered by the country as an incentive to gain tariff-free access to the markets of the country or the region. For example : ( vi du thi noi o ngoai nhe) Toyota, a Japanese car manufacturer producing and marketing cars in Vietnam market. AVIS, a famous car rental service in the world, they operate their service in Vietnam market with 2 head offices in Ha Noi and Ho Chi Minh. Piaggio , famous Vespa production company from Italy opens factory and operate production system in Vietnam . They also open a lot of showrooms in many provinces of Vietnam Note that it does not include foreign investment into the stock markets. Besides, FDI is not the same as licensing , an approach in which a foreign company pays for the right to produce a product , use its production processes or use its brand name or trademark. ( Noi phan nay neu muon) Type of FDI ( slide da co) FDI can be classified as horizontal ( investing in the same industry as the business operates in its home country ) or vertical ( investing in a foreign company that provides inputs or sells outputs) Vertical FDI occurs when a company takes on the role of either supplier or distributor for its finished products. When a Japanese car maker builds an auto parts plant in the United States or buys a car dealer to sell its cars, the Japanese company has made a vertical FDI. Taking on the role of supplier refers to backward vertical FDI. Companies that become the distributor of their products in another country are practicing forward vertical foreign direct investment. Benefit of horizontal FDI ( Slide da co va may chi can hoc cai vi du) Transportation costs In fact, the expense for transportation cost is very high, especially for heavy and big product such as car. As a result of this, Toyota Vietnam can save a lot of money in transporting Market imperfection : These may relate to tariffs or exchange rates that increase the cost of exporting .Market imperfections may also relate to the sale of know how For example : It

involves tax policy, in 2009, government decided to reduce tax to encourage the purchasing in Vietnams automobile market however, since 1/1/2010, governments incentive policy in term of tax or fee of imported commodity really finished. It is hard to deny that Vietnam government always want to increase the consumption of domestic automobile and prevent foreign automobile from penetrating into Vietnam so Vietnam government requires high import tax ( about 60% to 82% in 2012) . As a result of this, the prices of foreign cars which are sold in Vietnam are 2 or 3 times higher than that in developed countries...Further more, business import automobile must suffer from specific tax before importing while domestic automobile business just only needs pay specific tax when their automobile has been sold It is clear the factors involved tax policy can be seen threats toward foreign automobiles if they want to expand into Vietnam, however, it is a opportunity for domestic automobile such as Toyota ( phan nay chinh la vi du)
Strategic behavour: If a relatively small number of competing business dominate an industry , they tend to copy each others behavior. They are trying to avoid a situation in which a competitor gains significant competitive advantage..For example : After Honda invested in Europe in 1980n, Toyota and Nissan rapidly carried out similar programmes Product life cycle : For example : Photocopiers were first developed in the USA by Xerox. Xerox developed FDI through joint ventures ( with Fuji Xerox in Japan and Rank- Xerox in the UK) . When other companies ( Canon in Japan and Olivetti in Italy) developed their own products and started to export them to the US . Eventually, Japanese companies also developed FDI, transferring their production to developing countries such as Singapore and Thailand. Location specific advantage : Companies may identify the availability of a low- cost , high skill , work force .They may want to benefit from being near to a source of suitable raw materials Or they may want to benefit from working in an environment where they can meet and appoint suitable staff, and quickly gain relevant new knowledge For example : It is clear that when Toyota operates in Viet Nam, they can take advantage of cheap labour cost in Viet nam. Cost of FDI to business ( Slide da co) -

For eign investments are always risky because the political situation in some countries can change in an instant. The investor could suddenly find his investment in serious jeopardy due to several different reasons, so the risk factor is always extremely high. Many times, the cultural differences between different countries prove insurmountable. Major differences in the philosophy of both the parties lead to several disagreements, and ultimately a failed business venture. So it is necessary for both the parties to understand each other and compromise on certain principles. This point is directly related to globalization as well. Investing in foreign countries is infinitely more expensive than exporting goods. So an investor should be prepared to spend a lot of money for the purpose of setting up a good base of operations. This is something that parent enterprises know and are well prepared for, in most cases.

The effect of FDI on host country

Benefit can be classified under 4 headings


Resource transfer benefits ( sldie da co chi can noi them nhung cai slide chua ghi de coi nhu vi di cua minh)

FDI relates to the flow of capital , technology and management resource into the host country Capital : MNEs invest capital in foreign market. When Toyota developed factory , build up showroom in Vietnam, they transferred large amounts of capital from Japan to Vietnam Technology: The transfer of technology isnt just restricted to actual technologies. It involves manufacturing methods and even entire facilities. It can also refer to the knowledge passed by scientific research institutions. The advantages of foreign direct investment and the transferring of technology for the receiving country is great, as those countries usually dont have access to research facilities or the knowledge otherwise. Management : The transfer of skilled and experienced managers to the host country has direct benefits of the operation , it also has secondary benefits as local staff learn new skills from the managers

Employment benefit MNES , by investing in foreign countries, can create employment opportunities for the local workforce. Toyota Vietnam can generate direct growth in employment resulting from new factories, warehouses and other facilities. Besides, any resulting increase in wealth in the host country is likely to be converted into an increase in consumption as well as overall levels of employment Balance of payment benefit Balance of payment figures are used to continually assess the balance between income and expenditure . FDI can have great benefits: There is capital inflow when the MNE transfer capital during FDI If the FDI replaces imports from the MNEs home country , then there will be benefits for the host countrys current account If the MNE exports goods from its new facilities , there will again be a benefit for the host countrys current account

Competition and growth benefit Efficient functioning of market requires adequate level of competition between producers. Cost of FDI for the host country Adverse effect on competition

MNEs may have too much power and kill off competition. They may see a risk that MNE will dominate the market that a monopoly develops, the MNE will increase their price and customer

eventually suffer. The risk from competition is highest where the existing local business are small , especially for developing country such as Vietnam . Balance of payment cost

Countrys balance of payments can be adversely affected by : The return of earnings from the foreign subsidiary to its parent company An increase in imports to supply the new facility. National autonomy

Key decisions that affect the host countrys economy may be made by a foreign parent that has no real commitment to the host country

Activity 3 Distinguish between the various types of free trade agreement. Which of them is having the greatest benefit in your own country or region. We can classify them as: ( Slide da co ) Free trade area : The member remove the trade barriers between themselves, but maintain individual trade barriers against non- member state such as North America Free Trade Area Custom unions : It allows free movement of goods between member countries. The member also adopt a common policy towards external trade Common markets: such as CARiCOM in the Caribbean, allow free movement of goods, labour and capital between member states , the member states adopt a common policy towards external trade Economic unions as in the European Union, also allows free movement of goods , labour and capital between member states. But in addition there are unified policies on monetary , fiscal and welfare matters Political Union , in which all economic policies are unified and there is a single government

The AFTA ( ASEAN free trade area) agreement was signed on 28 January 1992 in Singapore. When the AFTA agreement was originally signed, ASEAN had six members, namely, Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand. Vietnam joined in 1995, Laos and Myanmar in 1997 and Cambodia in 1999. AFTA now comprises the ten countries of ASEAN. (slide da co) Loi ich tu to chuc ( Slide cung da co ) When joining AFTA, Vietnam will enjoy lower tax rate or tariff which have more favorable conditions for Vietnam goods can penetrate the market of all ASEAN member countries

Besides, the advantage from commercial activities when joining AFTA, Viet Nam can have chance to negotiate as well as join in multilateral trade with economic powers as well as international trade as well as US, Japan, EU Vietnam can attract investment, technology absorption, take advantage of labor, the use of capital and technology in the region.