Concept, Characteristics and Requirements for Foreign Direct Investment in the Direction of Sustainable Development in Key Economic Zones

Chapter 2

THEORETICAL AND PRACTICAL BASIS

ON FOREIGN DIRECT INVESTMENT TOWARDS SUSTAINABLE DEVELOPMENT IN KEY ECONOMIC REGIONS

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2.1. CONCEPTS, CHARACTERISTICS AND REQUIREMENTS FOR FOREIGN DIRECT INVESTMENT TOWARDS SUSTAINABLE DEVELOPMENT IN KEY ECONOMIC ZONES

2.1.1. Concept of foreign direct investment and foreign direct investment towards sustainable development of key economic zones

2.1.1.1. Concept of foreign direct investment

After World War II, foreign direct investment has increased continuously, attracting the attention of economists. The increase in FDI capital flows has become an important feature of modern economies. Therefore, up to now, there have been many different definitions of FDI.

According to the International Monetary Fund (IMF), FDI is defined as:

“An investment involving lasting relationships whereby an entity in one economy(the direct investor) acquires a lasting interest in an enterprise located in another economy. The direct investor's purpose is to have a greater influence on the management of the enterprise located in that other economy ”  137, p.31  .

The United Nations Conference on Trade and Development (UNCTAD) also defines FDI as follows:

“An investment is considered a direct investment when the investor's ownership is sufficient to allow control of the company, while an investment that only gives the investor income but does not give control over the company is generally considered an indirect investment ”  92, p.73  .

The World Trade Organization (WTO) defines FDI as follows:

FDI occurs when an investor from one country (the host country) acquires an asset in another country (the host country) with the right to manage that asset. The management aspect is what distinguishes FDI from other financial instruments. In most cases, both the investor and the assets it manages in a foreign country are businesses. In such cases, the investor is often referred to as the “parent company” and the assets are referred to as “subsidiaries” or “affiliates”  111  .

The Organization for Economic Cooperation and Development (OECD) defines:

“A direct investment enterprise is an enterprise with or without legal status , in which the direct investor owns at least 10% of the common stock or voting rights. The key point of direct investment is the intention to exercise control over the company”  137, p.31  .

However, not all countries use the 10% level as a benchmark for determining FDI. In reality, there are cases where the investor's ownership ratio in the enterprise is less than 10% but they still have the right to manage the enterprise, while many times it is larger but they are still only indirect investors .

The 1987 Law on Foreign Investment in Vietnam introduces the concept:

“Foreign direct investment is the act of foreign organizations and individuals bringing into Vietnam capital in foreign currency or any assets approved by the Vietnamese Government to cooperate in business on the basis of contracts or to establish joint ventures or 100% foreign-owned enterprises in accordance with the provisions of this law”  93, p.6  .

According to the Investment Law 2005:

“Foreign investment is the act of foreign investors bringing capital into Vietnam in cash and other legal assets to carry out investment activities” [ 56, p.10] and “ Direct investment is a form of investment in which investors invest capital and participate in the management of investment activities” [56, p.8] .

Although there are many different ways to define FDI, it can be seen that most organizations and economists acknowledge and agree on the concept of FDI in two points: the right to control business activities and the controlling ownership of foreign investors . The right to control production and business activities is the advantage that direct investors have over foreign indirect investors. However, the right to control business is affected to a certain extent by the minimum shareholding ratio or the controlling ownership of foreign investors. The minimum shareholding ratio of foreign direct investors is the decisive factor in the direct nature of foreign investors in making investment decisions and corporate governance, which is regulated by the laws of each country. In many countries in the region, foreign investors are only allowed to establish 100% foreign -owned enterprises in certain fields and are only allowed to participate in joint ventures with foreign equity capital of less than 49%; the remaining 51% of shares are held by the host country. Meanwhile, Vietnam's Law on Foreign Investment allows more broadly for the form of 100% foreign capital and stipulates that foreign parties must contribute at least 30% of the project's legal capital.

From the above concepts and analysis , the author of the thesis agrees with the concept

The concept of FDI is as follows: Foreign direct investment is the act of foreign investors bringing in capital in cash.

or any assets into the host country to acquire ownership and management of an economic entity operating permanently in that country with the aim of profit.

Thus , the above definition shows that the nature of foreign direct investment is

Investment is the activity of seeking profit through business of foreign investors. Therefore, foreign direct investment has all the characteristics of investment in general. In addition, it also has some other important characteristics compared to other forms of investment as follows:

Firstly, FDI is a form of international capital circulation in which the owner of the investment capital is a foreigner, conducting investment activities abroad, meaning that the enterprise receiving FDI capital is not from the investor's country. This characteristic is related to aspects of nationality, law, language, customs, etc., which are factors that increase the risk and investment costs of foreign investors.

Second, FDI is associated with the movement of investment factors out of national borders . Investment factors can be tangible assets (machinery, equipment, technological processes, real estate, valuable contracts and licenses, etc.), intangible assets (intellectual property rights, know-how and management experience, etc.) or financial assets (shares, stocks, bonds, promissory notes, etc.). In addition, FDI activities also include technology transfer activities, management experience, and mechanisms to protect investors' ownership rights. Therefore , for each different type of asset , the country receiving the investment must have mechanisms and policies to protect the rights of investors in accordance with the nature and characteristics of each type.

Third, FDI is implemented through investing capital to establish new enterprises abroad , partially or completely acquiring operating enterprises or conducting business mergers and transfers . This shows the diversity of forms and methods of FDI investment .

Fourth, the right to manage FDI enterprises depends on the level of capital contribution of the investor to the legal capital . This controlling capital ownership ratio is stipulated by the law of each country and is a factor that determines the direct nature in making investment decisions and corporate governance of foreign investors. Accordingly, FDI will be the full owner or co-owner with a certain capital contribution ratio, sufficient to control and directly participate in managing the enterprise's operations. In the case of contributing 100% of the legal capital, foreign investors have full authority to decide on the production and business activities of the enterprise. Ensuring the ownership ratio at the controlling level is also the basis for enterprises with foreign investment capital to become branches of companies in the investing country. This is

factors that increase the global nature of the network of leading companies and create a basis for those companies to carry out capital and goods circulation activities within the company, avoid tariff barriers, and save transaction costs.

Fifth , FDI is mainly private investment with the basic goal of

profit . Therefore, the production and business sectors of FDI enterprises are mostly sectors with the potential to bring high profits.

Sixth, FDI is closely linked to the business activities of transnational corporations (TNCs) . These are corporations with a system of production branches abroad, with great potential in terms of capital, technology, prestigious and globally renowned product brands ; a team of highly qualified managers, capable of operating production and distribution activities globally, and with high competitiveness. Developing countries can approach transnational corporations through FDI activities to attract large capital sources, source technology, modern technology, management skills, improve competitiveness, etc.

Seventh , FDI is a form of direct and long-term investment. Therefore, FDI capital is a source of

FDI is a relatively stable capital , an important supplement to domestic investment capital in developing countries . FDI is not a loan, so the capital recipient country does not have to worry about repaying the debt, and FDI is also less subject to the influence and constraints of political relations between the investing country and the investment recipient country like ODA capital.

2.1.1.2. Concept of foreign direct investment towards sustainable development of key economic zones

- Concept of sustainable development of key economic zones

The complete concept of sustainable development was agreed upon at the World Summit on Sustainable Development (also known as the Rio +10 Conference or the Johannesburg Summit) held in Johannesburg, South Africa (2002). Accordingly: Sustainable development is a development process that closely, reasonably and harmoniously combines three aspects of development, namely: economic development, social development and environmental protection to meet the needs of human life in the present, but does not harm the ability to meet the needs of future generations .

This is a concept that affirms comprehensive development expressed in both

economic, social and environmental aspects , with the specific goal of being for people in the present while still ensuring continued development in the future. Sustainable development is the way of development that humanity is pursuing and hopes to solve the shortcomings of the past development process in the world. Therefore, sustainable development has now become

inevitable trend in the economic development process of human society and is an urgent requirement of all countries in the world.

To achieve the goal of sustainable development, each country and each nation needs to plan its own sustainable development strategy in accordance with the natural, socio-economic , political, cultural, etc. characteristics of its country, but it is necessary to solve the following three contents and relationships : (i) economic growth must go hand in hand with ensuring social issues (creating jobs, increasing income, eliminating hunger and reducing poverty, ensuring social stability and improving the quality of life of the population); (ii) economic growth must go hand in hand with ensuring a clean environment (reasonably exploiting and effectively using natural resources; not causing pollution and environmental destruction and constantly nurturing and improving environmental quality); (iii) economic growth must go hand in hand with ensuring national defense, security and social safety.

In Vietnam, to realize the goal of sustainable development of the country, on August 7, 2004, the Government issued Decision 183/2004/QD-TTg on the Strategic Orientation for Sustainable Development in Vietnam (also known as Vietnam's Agenda 21 ) . Accordingly , the goals of Vietnam's Agenda 21 can only be realized on the basis of synchronous implementation of the Sustainable Development Strategy of each sector, each locality, each territory, with special emphasis on sustainable development of key economic zones.

The key economic zone is a component part of the national territory (including a number of certain provinces and cities) that converges favorable conditions, factors and potentials (natural conditions, socio-economic conditions, etc.) for development as a dynamic region, a locomotive capable of attracting and spreading positive impacts to other regions and sub-regions, as well as the entire country.

The KTTĐ region also has the following main characteristics: [101, pp.440 -441]

 Covers the area of many provinces and cities with quite similar characteristics (in terms of location, natural conditions, potential, strengths, etc.). The number and territorial scope of each key economic region may change over time, depending on the country's socio-economic development strategy.

 Converging all favorable conditions, concentrating economic potential and having an attractive position for investors, demonstrated by the outstanding development of infrastructure (transportation, electricity network, telecommunications); in terms of human resource quality, in terms of economic development level; ...

 Has a large proportion in the country's total GDP, has the ability to create rapid growth for the whole country and can support other regions.

 Capable of creating investment accumulation for expanded reproduction; at the same time, it can create a large source of budget revenue for the country. On that basis, the key economic zone not only ensures its own financial resources, but also has the ability to support other regions.

 Ability to attract new industries and key service sectors , to gain experience in all aspects for other regions nationwide. From here, the impact spreads to surrounding regions and sub-regions.

By clarifying the concept, requirements of sustainable development as well as the unique characteristics of the key economic regions, the author of the thesis presents the concept of sustainable development in the key economic regions as follows: Sustainable development in the key economic regions is the development that ensures a close combination between economic sustainability, social sustainability and environmental protection within the key economic regions and has a positive spillover effect on the sustainable development of the country. In the scope of the thesis, sustainable development in the key economic regions is considered within the framework of an economic region or the sustainable development of the key economic region itself, including sustainability in all three areas: economic sustainability, social sustainability and environmental sustainability. However, as a dynamic economic region, with the role of attracting other economic regions, the content of sustainable development in the key economic regions must be set with higher requirements, especially the requirement of economic sustainability.

According to this concept , the development of the economic zone must ensure the convergence of 3 contents: [79], [47]

+ Economic development of the key economic zones : reflected in the ability to effectively use the existing resources of the region, the ability to maintain economic growth effectively in the long term and higher than other regions in the country , creating a strong shift in economic structure towards industrialization and modernization. The evaluation criteria for this content include: (i) Economic growth rate and GDP growth scale: must be higher than the average growth rate of the whole country ; (ii ) GDP growth rate compared to the growth rate of production value - GO: if the economic growth rate is higher than the growth rate of production value, it reflects a reasonable and effective growth structure ; (iii) Efficiency in achieving economic growth targets in the key economic zone, including: labor efficiency calculated by GDP/labor at current prices or fixed prices; capital efficiency calculated by investment level per 1 GDP dong; (iv) Economic sector structure in the key economic zone: reflects the development level of the zone.

+ Social development of the economic zone: reflected in the positive impact of the regional economy on the ability to create jobs, improve the material and spiritual life of the people; the ability to solve basic social problems for the people in the economic zone. Criteria

Assessment for this content includes: (i) Number of jobs created in the region; (ii) Rate of trained labor; (iii) Average income per capita; (iv) Level of development of education, training, health; ...

+ Environmental protection in the key economic zone: reflected in the activities of the key economic zone must be closely linked to environmental protection plans in the key economic zone, ensuring the rational exploitation and effective use of natural resources; implementing resource regeneration, preventing environmental degradation and pollution; economic development is always associated with ecological environment protection to minimize the negative impacts of environmental pollution in the process of developing the key economic zone. The evaluation criteria for this content include: (i) Waste treatment capacity of the key economic zone; (ii) The level and ability to replace traditional resources with resources created by human knowledge; (iii) The development of ecological industrial models with reused products and waste.

- Concept of FDI in the direction of sustainable development in key economic regions

With the unique characteristics of the key economic zones as mentioned above, it can be said that the key economic zone is always the focus in attracting investment capital, especially foreign direct investment capital. Therefore, foreign direct investment in the key economic zone also has its own distinct features compared to foreign direct investment in other territories. Specifically: The number and scale of FDI projects are often larger; investment partners are diverse,

rich with different cultures; foreign direct investment in the key economic zone has the opportunity to access favorable conditions of "hard infrastructure" and " soft infrastructure" such as natural conditions, educational level, quality of human resources , consumer market , raw material sources , transportation system, preferential policies , etc., so it has a better chance of success; foreign direct investment projects in the key economic zone are often related to key industries, spearhead industries, thus , contributing significantly to the formation of new industries and promoting the industrialization process for the key economic zone.

However, the key economic zones are also where the difficulties of foreign investors, the shortcomings of the policy system, the new needs of investors , and the negative impacts of FDI are most clearly demonstrated in all three aspects of sustainable development: economy, society, and environment . This has raised the need for a specific management mechanism and policy for key economic zones, in order to direct FDI activities towards sustainable development in key economic zones.

From the above analysis, according to the author of the thesis, it can be understood that: Foreign direct investment in the direction of sustainable development of key economic zones is the investment activity of foreign organizations and individuals in the key economic zones of other countries, meeting the requirements of planning and development orientation of that zone; having a positive impact on the development of the zone to ensure a harmonious and reasonable combination between economic development, social development and environmental protection not only for the key economic zone, but also spreading to other zones both in the present and the future .

2.1.2. Characteristics of foreign direct investment towards sustainable development of key economic zones

Foreign direct investment in the direction of sustainable development of the key economic zones has all the characteristics of normal foreign direct investment. In addition, it also has the following specific characteristics :

Firstly, foreign direct investment in the direction of sustainable development in key economic zones is subjective to the investment receiving country in general and the key economic zone in particular.

Foreign direct investment is the investment of foreign organizations and individuals in a country with the aim of making a profit. Therefore, FDI in the direction of sustainable development of the key economic zone must meet the requirements and development goals of the key economic zone. This goal is entirely set by policy makers , based on the specific conditions of the key economic zone in terms of natural conditions, level of socio- economic development , development resources of the key economic zone ... Therefore, foreign direct investment in the direction of sustainable development of the key economic zone depends on the subjective awareness of the investment receiving country in general and of the key economic zone in particular.

Second, foreign direct investment in the direction of sustainable development in the key economic zone contains the goal of exploiting and effectively using resources, including: natural resources, capital, labor and science and technology in the key economic zone. Accordingly, FDI when put into operation must be calculated based on the reasonable capacity of the key economic zone in terms of conditions such as: water supply, land, environment, ecosystem, ... otherwise it will lead to overload in the development of the key economic zone, affecting the ability to provide input resources for FDI activities.

Third, foreign direct investment in the direction of sustainable development in the key economic zone always aims at balanced and harmonious development between economic development, social development and environmental protection; creating new momentum, having a spillover effect in the development of the key economic zone to other regions in the country.

Fourth, foreign direct investment in the direction of sustainable development in the key economic zones focuses on the quality rather than the quantity of F DI projects, which means focusing on projects

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