Depending on the conditions of each country, the above FDI forms are applied differently. Each form of investment has its own strengths and limitations, so it is necessary to study, apply and diversify investment forms to bring high efficiency, meeting the country's development goals.
1.1.2. Some theories on FDI
FDI capital flows in the world have been continuously increasing strongly over the past decades, becoming a prominent phenomenon in international economic activities, thus attracting many researchers on FDI theory. The thesis only approaches the following theories:
- Macroeconomic theory group
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Macroeconomic theories are based on the classical 2 X 2 model (two countries, two goods, two factors of production) to compare the efficiency of investment capital or profit rate, thereby explaining and predicting the phenomenon of foreign investment based on the principle of comparative advantage of investment factors (capital, labor, technology) between the investing country and the receiving country [28, p. 16].
Heckcher - Ohlin - Samuelson international trade theory (also known as the HOS model): This theory is built on the following assumptions: (1) Two countries participate in the exchange of goods or investment (country I and country II), two factors of production (labor - L and capital - K), produce two goods (X and Y); (2) the level of production technology, tastes, and economic efficiency of scale in the two countries are the same; the markets in the two countries are perfectly competitive, there are no transportation costs, no policy intervention, no investment restrictions, and capital is freely transported. From this assumption, the HOS model analyzes the cost ratio of production factors (L and K) in the two countries and shows that the output of the two countries will increase if each country focuses on producing for export goods that use a lot of surplus production factors and saves scarce factors; On the contrary, it will import goods that contain less abundant factors and use more scarce factors. This model is also known as the theory of production factors (Dominick Salvantore, 1993).
Another approach, Richard S. EcKaus based on the HOS model but he removed the assumption of no movement of production factors between countries.
in the HOS model and expand the analysis to build a theory on the difference in investment efficiency, thereby explaining the cause of foreign investment. The author argues that the investing country often has low capital efficiency (capital surplus), while the receiving country has high capital efficiency (capital shortage). From there, it is concluded that the difference in capital efficiency between countries is the cause of the flow of international investment capital from places with excess capital to places with capital shortage in order to achieve the goal of maximizing profits on a global scale of the investor.
Also based on the principle of comparative advantage of the HOS model, K. Kojima proposed the view that the cause of foreign investment is due to the difference in profit rates between countries and this difference originates from the difference in comparative advantage in the international division of labor.
Macdougall-Kemp theory (also known as the Macdougall-Kemp model). This model also has the same viewpoint as the HOS model, at the same time assuming perfect competition between two countries, the law of diminishing marginal productivity of capital and the price of capital is determined by this law. According to the author, because developed countries have excess investment capital, the marginal productivity of capital is lower than the marginal productivity of capital in developing countries. The difference in marginal productivity of investment capital between countries is the cause of international capital flows. Therefore, it is necessary to explain the phenomenon of international investment from a comparative analysis of the costs and benefits of moving capital abroad [50, p. 17].
Some other theories in this group have also explained the causes of FDI from the macroeconomic policies of investing countries such as exchange rates, protective tariffs, etc. For example, Sibert argues that high taxes do not encourage FDI, so domestic investment factors cannot exploit comparative advantages [26, p. 21].
Through some macroeconomic theories on FDI above shows:
Theories have shown that the cause of foreign investment is due to the difference in the efficiency of capital use between countries. The theories are all based on the theory of international division of labor, consistent with the general principles of trade theory and the movement of international production resources, but the development of foreign investment is based on the theory of international division of labor.
develop international trade theory under conditions of capital mobility, because trade theory is based on the principle of cost ratio while the above theories are based on the difference in profit rates.
Although the causes and effects of FDI on the economies of the investing countries have been explained, because the theories are based on simplified assumptions and static analysis, they do not fully reflect the reality of the economy. To compare the profit rates between countries, many other factors must be considered regarding the investment environment, economic development policies of the countries, the role of transnational corporations (TNCs), the trend of trade and investment liberalization, especially in the current conditions of globalization and increasingly deep international economic integration... For example, the US is a very large supplier of FDI abroad but at the same time is also the largest FDI capital absorbing country in the world. Moreover, FDI is not only the movement of investment capital between countries but also the transfer of technology and management skills... Therefore, the investment recipient countries, especially developing countries, have been and are having policies to improve the attractive investment environment and increase competition to attract FDI.
- Microeconomic theory group
Along with the development of macroeconomic theories, many microeconomic theoretical perspectives have also studied FDI.
Industrial organization theories , born in the early 1960s, explained the strong development of large monopolistic companies in the US as an important cause of FDI flows. Stephen Hymer argued that the structure of the monopoly market has encouraged US companies to expand their branches abroad to exploit advantages in capital, technology, management techniques, and market networks that companies in the same industry in the host country do not have. That is the reason for the formation of TNCs and the establishment of branches abroad. Robert Z.Aliber explained the phenomenon of FDI from the influence of tax factors and market size on monopolies. According to Z.Aliber, taxes have increased import prices, so companies have to move production abroad to overcome protective tariff barriers to reduce costs, lower prices, and increase profits. On the other hand, efficiency
Economic efficiency also depends on market size, so monopolies have expanded their markets by establishing branches abroad. Richard E. Caver explains that products manufactured by new technology often tend to be monopolized due to low costs, so they actively expand their production scope abroad to exploit the advantages of technical monopoly to maximize profits, thereby forming FDI.
Vernon's product cycle theory proposed in 1966 explained the phenomenon of FDI based on the analysis of product development stages. According to Vernon, any product goes through three stages: Invention and testing stage - innovation; mature process development stage - growth, mass production; production standardization stage - saturation, entering recession. The product innovation stage only occurs in developed countries (USA), because: there is high income affecting the demand and consumption of new products; there are conditions for research and development (R&D); only in developed countries can advanced production techniques with the characteristic of using a lot of capital be highly effective. As a result, due to large-scale production, high labor productivity, and reduced product costs, product production has reached saturation. At that time, to avoid falling into crisis and continue to develop production according to the achieved scale, companies were forced to expand their consumption markets abroad. However, the consumption of products in foreign markets encountered major barriers such as transportation costs and tariff costs due to the protectionist policies of the host country. Therefore, to overcome these barriers as well as take advantage of the advantages of cheap labor costs and input materials in developing countries, companies chose to move production abroad by establishing new branches, thereby creating FDI capital flows.
From the product cycle theory, Akamatsu (1969) built the catch-up product cycle theory . Akamatsu sought to find the cause of FDI flows by studying and analyzing the continuous development process of the industry of the investment recipient country, from import to domestic production and consumption and then to export. According to Akamatsu, new products are invented and produced domestically (investing country) and then exported abroad. In the importing country (investment receiving country), due to the advantages of the newly penetrated product, the demand for the domestic market increases, when
This country then shifts to producing import-substituting products based on foreign capital and technology. Production reaches a certain level, the demand for products in the domestic market reaches saturation, then the demand for exports reappears and these cycles continue, leading to the formation of FDI flows.
Oberender extends the product cycle theory through the market development-oriented model to explain the motivation for FDI implementation. According to Oberender, the company that pioneers in product innovation will be successful in capturing the market, but at some point there will be a risk of losing its monopoly advantage because the company's production capacity is constrained by the domestic market becoming too narrow, at which time competitive pressure forces the company to seek foreign markets in many ways: (1) Exporting goods to countries where it is not yet possible to produce high-tech products; (2) through FDI activities to produce products right in the foreign market. In the context of trade protection barriers and high transportation costs, companies tend to choose to locate production facilities abroad, which is the reason for FDI.
Monopoly advantage theory of FDI : This theory is formed on the basis of the theory of monopolistic competition and market imperfections. According to this theory, TNCs hold monopoly advantages, allowing them to operate their branches abroad more effectively than local companies. Monopoly advantages in technology, management skills, consumer markets, etc. have given TNCs invisible competitive power that local companies do not have. However, this is only a necessary condition, another condition is that the profit earned from opening branches to produce and do business abroad must be higher than that of producing domestically and then exporting abroad for consumption, which is also the reason for implementing horizontal FDI.
The theory of internationalization of production (Rugman and Buckley) is built on the assumptions: TNCs maximize profits under conditions of imperfect competition; imperfection of semi-finished product markets; TNCs create internationalization of markets. From these assumptions, the theory has analyzed the first cause of formation of
The formation and development of TNCs is due to the impact of imperfect markets. TNCs are also considered a good solution to overcome market problems through expanding their scale to expand production and product distribution. Reuber believes that TNCs have played a role in developing countries, the internationalization process of TNCs has brought many benefits in terms of capital, techniques, technology, and jobs to developing countries. However, there are also authors such as Singer, Lall, Vaitsos... who have assessed the significant negative impacts of TNCs on developing countries.
In general, the above microeconomic theories on FDI have explained the causes of formation and impact of FDI on the world economy and each investing country, especially developing countries. The theories study from the analysis of a company, a specific commodity as a natural result of the process of exploiting monopoly advantages abroad to maximize profits on a global scale as well as explaining the formation of TNCs and why companies invest abroad, the impact of TNCs on the recipient country, mainly developing countries. Therefore, it is highly general, rigorous and closer to reality. However, the microeconomic theory on FDI has not yet reflected all the other practical causes contributing to the formation of FDI such as the development of science and technology, economic development policies, investment environment, etc.
- Marxist-Leninist economic theory
According to the theoretical perspective of capital export, Lenin believed that the export of value to obtain surplus value outside the national borders has become an economic characteristic of capitalism when entering the monopoly - imperialism stage. He pointed out that the typical point of old capitalism, in which free competition completely dominates, is the export of goods; the typical point of new capitalism, in which monopolies dominate, is the export of capital. When reaching a high level of development of financial capital, "surplus capital" appears, in order to obtain high profits under the condition that the rate of profit if invested domestically is low, capitalist countries will transfer investment capital abroad to have a higher rate of profit. Lenin believed that the reason for the need to export capital is because in some cases
Capitalist countries are over-ripe, and capital lacks profitable investment areas. Meanwhile, in many colonial countries, the economy is still backward and needs capital to develop, innovate techniques, learn management experience and expand markets, so there is a meeting between the capital exporting country and the capital receiving country [50, p. 13].
Developing the above theoretical viewpoint, Marxist economists argue that monopoly capitalist companies (manufacturing industry) invest in developing countries to exploit cheap labor and abundant natural resources. That is the reason for the formation of FDI. Thus, the Marxist-Leninist economic theory on capital export provides scientific bases to understand the nature of foreign investment.
1.1.3. The role of FDI for developing countries
Most developing countries have backward economic, cultural, scientific and technological levels or are newly developed, low labor productivity and living standards, high unemployment rates and population growth rates, and relatively dependent economies on developed countries. When implementing industrialization, developing countries have encountered challenges and severe contradictions between the requirements of economic growth and limited internal resources; the contradiction between the requirements of sustainable development and poverty, inequality and environmental degradation; the contradiction between the need for stability for development and the complex situation of security, politics and conflicts; the contradiction between the need to exchange and absorb world civilization and the protection of traditional cultural values...
Therefore, to achieve the goal of national development and international economic integration, in addition to promoting all internal potentials, developing countries must also make the most of external resources, in which FDI capital has advantages over other foreign capital sources. From the perspective of the investment recipient country, FDI has the following impacts on developing countries:
1.1.3.1. Positive impact
First: FDI supplements development investment capital, increases budget revenue, and improves the balance of payments.
Any country that wants to develop must increase investment capital, especially in the process of industrialization. Investment capital can be mobilized from two main sources from within.
domestic and foreign. Due to the low starting point and economic scale of developing countries, capital mobilization from within the country is very limited. Capital mobilization from outside can be through aid, commercial loans, indirect investment, and direct investment. However, in today's conditions, aid capital has many limitations, commercial loans will lead to a debt burden and at the same time make the economy develop unstably and always have the potential risk of crisis, inflation, not to mention being disadvantaged by inequality and conditions imposed from outside. Therefore, attracting FDI is an effective solution to supplement capital for investment in national development.
In recent decades, FDI flows into developing countries have been continuously increasing. If before 1985, the total FDI flows into developing countries only reached an average of 6.5 billion USD/year (an average increase of 1.7%/year), then in 1985 it reached 15 billion USD [26, p. 51]; in 1995 it reached 100 billion USD; in 2000 it reached 274 billion USD (accounting for 19.5% of the world's total FDI); in 2001, 2002, 2003 it decreased along with the general situation of the world's FDI flows with the corresponding capital of 232 billion USD, 193 billion USD, 187 billion USD; Since 2004, FDI has recovered and started to increase rapidly, reaching 230 billion USD in 2004 (up 22.8%, accounting for 30% of the world's total FDI flow) and 255 billion USD in 2005 [57, p. 35]. FDI capital accounts for a significant proportion of total social investment capital as well as GDP, contributing to promoting structural transformation, economic growth of developing countries reached 5.6% in 2000, followed by 2.4%, 3.6%, 4.9% in 2001 - 2003, respectively, and in 2004, it grew strongly again at 6.6% [58, p. 21].
FDI capital is invested in many industries and economic sectors, not only in cash but mostly in the form of fixed assets, with long investment periods, so this is a fairly stable source of capital, and investors cannot easily withdraw capital quickly. Therefore, countries receiving this capital source are not afraid of capital "rushing in and rushing out" like some other forms of investment, not to mention that during the operation process, many FDI projects also increase capital, reinvest from profits to expand production... Receiving capital through FDI, the receiving country avoids foreign debt, and at the same time, receiving capital increases the amount of money and assets for the economy, under the impact of FDI, investment capital