Savings And Investment Flow Diagram

- Using capital: capital is resources that can be mobilized and used in production and business activities to gain benefits for the investor. Investment capital can exist in three forms: tangible assets (factories, machinery, equipment, goods, raw materials, etc.), intangible assets (inventions, inventions, know-how techniques, business secrets, trademarks, land use rights...), financial assets (money, other valuable papers...), .

- Profitable: the purpose of investment is to bring profit or socio-economic benefits. Normally, private individuals and businesses pursue the goal of profit: the difference between the income that investment activities bring to the investor and the costs that the investor must spend to conduct that investment activity. . The government pursues the goal of socio-economic benefits: the difference between what society gains and what society loses from investment activities. Socio-economic benefits are evaluated through qualitative indicators and quantitative indicators.

- There is risk: investment activities usually take place over a long period of time so it is

adventurous. The longer the investment period, the higher the risk.

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1.1.2. Investment classification:

Based on the nature of investment, people divide investment into 2 types, which are direct investment

direct and indirect investment.

- Direct investment

According to the Vietnam Investment Law (2005), direct investment is a form of investment in which investors invest capital and participate in managing investment activities. The investor can be the Government through different channels to invest in society. This represents the Government's spending through investment in social projects and policies. In addition, investors can be private, collective... including foreign investors investing directly in Vietnam. Depending on each specific case, participating entities express their rights, obligations and responsibilities in the investment process.

- Indirect investment

According to the Vietnam Investment Law (2005), indirect investment is a form of investment through the purchase of shares, stocks, bonds, other valuable papers, securities investment funds and through institutions. Other financial intermediaries in which investors do not directly participate in managing investment activities

Thus, indirect investment is a type of investment in which the person who invests capital and the person who uses capital are not the same entity. Indirect investment is usually through credit channels or investment channels on the stock market.

There is a close relationship between direct investment and indirect investment in the investment process. Direct investment is the premise for developing indirect investment, which is reflected through the need for businesses to borrow capital from credit institutions or businesses issuing shares on the primary market to raise capital. mobilize capital. On the other hand, the expanded indirect investment environment will promote direct investment with the expectation of easy access to capital sources. Because once the financial market develops, investors have many opportunities to choose capital sources with low capital costs, and can also use this advantage to increase financial leverage to implement. your business intention.

1.2. Investment capital sources

1.2.1. Concept of investment capital

Investment capital is money accumulated by society, production, business and service units, people's savings and capital mobilized from different sources such as joint ventures, partnerships or foreign sponsorship. ... to: reproduce fixed assets, to maintain the operation of existing technical facilities, to innovate and supplement technical facilities for the economy, for industries or service business establishments, as well as carrying out the necessary expenses to facilitate the start of operation of newly added or renewed technical facilities.

From the above concept, the following characteristics of investment capital can be drawn:

- First, investment is considered a basic starting factor for development and profitability, but to start a production process or re-expand this process, investment capital must first be available. Thanks to the conversion of investment capital into business capital to conduct operations, thereby growing and making profits. Among the factors that create growth and profitability, investment capital is considered one of the basic factors. This characteristic not only speaks to the important role of investment capital in economic development but also points out an important motivation to stimulate investors for profit purposes.

- Second, investment requires a large amount of capital, a large amount of investment capital is often objectively necessary to create the necessary material and technical conditions to ensure economic growth and development. Because it uses a large amount of capital, if used

Ineffective use of capital will cause many harms to socio-economic development and the growth of businesses.

- Third, the investment process must go through a very long labor process before it can be put into use. Each construction and project has a different style and nature that depends on many factors and conditions. nature, operating locations change continuously and are dispersed, exploitation and use time is usually 10 years, 20 years, 50 years or longer depending on the nature of the project. The investment process usually includes three stages: project construction, project implementation and project exploitation. When considering investment efficiency, it is necessary to consider all three stages of the investment process, avoiding bias, focusing only on the project implementation stage without paying attention to the entire project exploitation period. Payback period is a very important indicator in measuring and evaluating the efficiency of investment capital use.

- Fourth, investment is an area with great risk. Risks in the investment field are mainly due to the long duration of the investment process. During this time, economic, political and natural factors will cause losses that investors do not fully anticipate when planning the project. Policy changes such as nationalization of production facilities, changes in tax policies, interest rates, market changes, and changes in product demand can also cause losses to investors. Avoiding or limiting risks will yield large profits, and this is the hope that stimulates investors. Characteristics show that if you want to encourage investment, you need to pay attention to the interests of investors. The benefit that investors are most interested in is the full return of their investment and the maximum profit obtained by limiting or avoiding risk.

1.2.2. Investment capital sources

There have been many studies proving that savings and investment are the driving force for economic growth in all countries. Savings determine the possible growth rate of productive power. There are many factors that influence savings rates: income growth rate, age structure of the population, and attitudes toward savings. Services the government provides, such as social grants, can affect savings as well as taxes and budget deficits.

The relationship between savings and investment shows that asset accumulation is an important source of economic growth and suggests that higher savings rates promote faster economic growth, because high savings rates also mean higher savings rates. with high investment rate. Although, in an open economy, external investment plays an important role in developing economies, high domestic savings remains a fundamental driving force for economic growth.

Figure 1.1 Flow diagram of savings and investment

According to the diagram above, we see that the sources to form investment capital include: domestic savings (savings of households, savings of businesses, savings of the Government) and foreign investment sources ( FDI, ODA and commercial loans). The financial system mediates only a portion of total national investment, as firms and households finance most of their investments directly from their own savings. The financial system has the role of transferring savings from surplus economic units to deficit units.

To have policies to attract investment capital for sustainable economic development, it is necessary to classify investment capital sources and properly evaluate the importance of each capital source. From the most general perspective within a country, investment capital is divided into two sources: domestic investment capital and foreign investment capital.

1.2.2.1. Domestic investment capital

Domestic capital represents the internal strength of a country. This capital source has the advantages of being sustainable, stable, low cost, minimizing risks and avoiding external consequences. Domestic capital sources include State capital, credit capital, capital of the private business sector and the population, mainly formed from savings sources in the economy.

Domestic savings are formed from the following areas:

- State budget savings: is the positive difference between total non-refundable revenues (mainly taxes) and total regular budget expenditures. Savings at this financial stage will form the state's investment capital. This means that the amount of financial income that the budget concentrates cannot immediately be considered a source of state investment capital, this also depends on the budget's spending policy. If the scale of consumption expenditure exceeds the amount of concentrated income, the state does not have the resources to create capital for investment.

For developing countries, because the economy's savings are limited by per capita income, to maintain economic growth and expand investment requires the state to increase economic growth. increase state budget savings, based on a combination of considering whether that policy will suppress the savings of businesses and people. Thus, to increase state budget savings, the economy must also pay a certain price due to the decrease in private sector savings. However, the decrease will not completely correspond to the increase in state budget savings if the budget savings are mainly realized by cutting budget consumption expenditures.

- Enterprise savings: is the net profit earned from business results. This is a basic source of savings for businesses to create capital for investment and development in breadth and depth. The size of a business's savings depends on direct factors such as business efficiency, tax policy, macroeconomic stability...

- Savings of households and social organizations (hereinafter referred to as the residential sector): is the remaining amount of income after distribution and use for consumption purposes. The scale of residential savings is influenced by direct factors such as the level of economic development, per capita income, interest rate policy, tax policy, macroeconomic stability...

In a market economy, the savings of the residential sector can be converted into capital for investment through forms such as depositing savings in credit institutions, buying securities on the financial market. , direct business investment... It can be said that residential savings hold a very important position in investment through the intermediary financial system. For example, if state budget savings do not meet investment spending needs, the State must look to this sector's savings capital to satisfy them by issuing Government bonds. Similarly, for the financial area

The same goes for businesses themselves, when there is a need for capital to expand business investment, through the financial market, businesses can mobilize savings from the residential sector in many diverse forms, such as developing issue stocks, bonds, borrow capital from credit institutions...

1.2.1.2. Sources of foreign investment capital

Compared with domestic capital, foreign capital has the advantage of supplementing investment capital for socio-economic development, thereby promoting economic and labor restructuring towards industrialization. - modernization, is an important bridge between the Vietnamese economy and the world economy, promoting businesses to improve competitiveness, innovate corporate governance methods as well as business methods; Many domestic resources such as labor, land, geo-economic advantages, and natural resources are exploited and used more effectively. In essence, foreign capital is also formed from savings of foreign economic entities and is mobilized through basic forms:

- Official development assistance (ODA):

ODA capital is a source of development capital provided by international organizations and foreign governments with the goal of assisting developing countries. ODA capital includes non-refundable aid, refundable aid or preferential credit from governments, United Nations organizations... ODA capital funded by governments is to promote economic growth. sustainable growth and poverty reduction in developing countries such as infrastructure construction, research investment... non-refundable elements of ODA loans of at least 25%, long loan period, volume Large loan, long grace period.

On the one hand, ODA is a source of additional capital for domestic capital for economic development, and on the other hand, it helps recipient countries quickly access modern scientific and technical achievements and technology. In addition, it facilitates the development of socio-economic infrastructure and human resource development training. However, aid-receiving countries often face huge challenges, including the burden of future national debt, accepting strict conditions and constraints on capital transfer procedures, and sometimes even including political conditions

- Foreign direct investment (FDI):

This is a source of capital from foreign investors bringing capital into a country to invest

directly by creating businesses. FDI has become a form of mobilization

Foreign capital mobilization is common in many developing countries when capital flows from developed countries seek investment opportunities abroad to increase income on the basis of exploiting comparative advantages between countries. family.

The main forms of FDI in our country are joint venture enterprises, 100% foreign-owned enterprises, and business cooperation contracts in the forms of BOT, BTO, and BT. Unlike ODA, FDI does not simply bring foreign currency into the host country, but is also accompanied by technology transfer, advanced management skills and the ability to access world markets, create jobs, and use financial resources. domestic raw materials…

Foreign direct investment is an important source of capital for development investment not only for poor countries but also for technologically developed countries. Foreign investment capital has a different characteristic from other capital sources in that receiving this capital does not incur debt for the receiving country. Instead of receiving interest on invested capital, investors will receive an appropriate profit when the project operates effectively. Foreign investment brings all business resources into the receiving country, so it can promote the development of new industries, especially those that require high technical, technological or capital requirements. Therefore, this source has an extremely great effect on the process of industrialization, economic restructuring and rapid growth of the investment recipient country.

However, foreign direct investment also has its downsides:

Firstly, FDI capital is essentially a debt, it is still not owned and controlled by the host country. In addition, investment recipient countries also suffer many disadvantages due to having to apply a number of incentives (such as incentives on corporate income tax, land rental prices, business location, resource exploitation rights... ) for investors are often charged higher prices than the international level for input factors by foreign investors, as well as being subject to the transfer of outdated technologies and techniques...

Second, foreign capital moving into the country increases the income of foreign capital in the domestic market and reduces the income of domestic capital. In essence, this is the redistribution of income from domestic capital to foreign capital, thus it can cause covert or overt conflicts in the relationship between domestic capital and foreign capital.

Third, foreign capital is invested heavily in resource exploitation, leading to a reduction in the long-term development ability of domestic capital. One of these

The motive of foreign investors is to exploit cheap and abundant natural resources in receiving countries. They can exploit it to bring it back to their home country for production or produce it into products right in their home country. There is another form of exploitation which is to exploit attractive tourist destinations that are available or in our potential form. But our resources are limited, if we continue to exploit them like that, we don't know how long it will take to run out. This will reduce the long-term development ability of domestic capital.

Fourth, market manipulation by foreign investors and imbalanced competition between domestic enterprises and foreign-invested enterprises can bankrupt domestic enterprises and cause unemployment.

Fifth, causing brain drain to foreign-invested areas: Foreign enterprises also compete with domestic enterprises in the field of attracting human resources because of salary, bonus and subsidy policies. Normally, due to many incentives and a better working environment, the majority of skilled people often work in foreign-invested enterprises. This has significantly reduced talent for the domestic sector, contributing to reducing the sector's ability to develop.

Sixth, increasing environmental pollution: the goal of foreign businesses is to recover capital quickly and gain a lot of profits, so it will increase environmental pollution due to the use of outdated technology and not interested in investing in waste treatment technology.

1.2.1.3. The relationship between domestic and foreign capital

With the above division, we need to consider the relationship between these two sources of capital for economic growth and development. For poor countries, in order to develop economically, and from there to get out of difficulties, a difficult problem from the beginning is the severe lack of capital and that leads to a lack of many other things necessary for development such as technology, infrastructure... Therefore, in the initial steps, to create the first push for development, to get initial domestic accumulation for investment in economic development, it is impossible Do not mobilize capital from abroad. There is no underdeveloped country on the path of development that does not take advantage of foreign investment capital, especially in the context of an open economy. However, the technical facilities are needed to be able to absorb and promote the effectiveness of investment capital

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