[Intl Investment] Chapter 1_Investment.pdf

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1. Chapter 1: International
Investment Overview
1.TheconceptsofInvestment,ForeignInvestmentand
InternationalInvestment
2.ClassificationofInternationalFinancialFlows
1

2. WHAT IS INVESTMENT?
2

3. Investment
You sacrificesomething of value now,
expectingtobenefitfromthatsacrificelater.
3

4. Investment definition:
5
Macro-economics and
national accounts
•expenditure on new capital
goods with the expectation
to produce new
employment and economic
growth
Finance
•purchase or ownership of a
financial assetwith the
expectationof a future return
either as income, or as capital gain

5. Investment definition:
Current resources
(Capital)
•Financial assets
•Real assets
Future benefits
•Financial
benefits
•Social benefits
INPUT OUTPUT
expect

6. Financial Assets vs. Real assets
Real assets Financial Assets
-Assets that can be used to
produce goods and services.
-Generate net income for the
economy, contribute directly to
the productive capacity of the
economy.
E.g. Land, buildings, machines,
etc.
Means by which individuals hold
their claims on real assets.
-Claims on the income generated
by/derived from real assets.
-Define the allocation of income or
wealth among investors.
E.g. Shares, bonds,…
7

7. Characteristics of investment?
9
Capital
Profitability
Risk

8. Risk

9. Effective use of capital
An individual project: ROI (Return on Investment)
11

10. Effective use of capital
A country: ICOR (Incremental Capital Output Ratio)
ICOR = Total Investment/ΔGDP
(ΔGDP
= GDP
t-GDP
t-1 )

11. 13
Harrod-DomarModel
g=k/ICOR
g= s/ICOR

12. Problem 1
For a country in 2010, ICOR has a value of 5, GDP per capita is
1000 USD/year with the population of 85 million people.
(a) The growth rate of this country is 6% in comparision
to the previous year. How much is the total investment of that
country?
(b) If the expected annual growth rate is 6% for the
period from 2010 to 2015. How much is the total investment for
that country in that period?

13. Answer
a)24.056 billion
b)143.746 billion

14. Asian countries’ ICORs –same
development stage
16

16. Vietnam’s ICOR
18

17. INVESTMENT CLASSIFICATION
Official Flows of Investment
Private Investment
Domestic Investment
Foreign Investment
Direct investment
Indirect investment
Fixed capital formation –Productive investment (contribute directly to the productive capacity of
the economy)
Financial Investment (do not contribute directly to the productive capacity of the economy)19

18. International Investment concept
DefinitionofInvestment+capitalmovesoutsideacountry’s
border
1/14/2014 20

19. Foreign Investment vs. International Investment
21

20. Foreign Investment vs. International
Investment
Foreign
Investment
•Capital movement across a certain
nation’s border
International
Investment
•Capital movement across nations’
border

21. 23
A B
Outward
Inward
Home country
Vs.
Host country

22. 1.2 INTERNATIONAL INVESTMENT
CLASSIFICATION
24
INTERNATIONAL FLOW
OF FINANCIAL
RESOURCES
Official Flows
FOREIGN AID
ODA
OA
OOF
s
Private Flows
FDI
FPI
Private loans

23. Private Flows
1/14/2014 25

24. 1.3 INTERNATIONAL INVESTMENT
THEORIES
Moosa, I. A. (2002), "Foreign Direct Investment:
Theory, Evidence and Practice”
Theories assuming perfect markets:
The differential rates of return hypothesis
The portfolio diversification hypothesis
The market size hypothesis
26

25. FDI THEORIES
Theories assuming imperfect markets:
The industrial organization hypothesis
The internalization hypothesis
The location hypothesis
The product life cycle hypothesis
The eclectic theory (Eclectic/OLI paradigm)
The oligopolistic reactions hypothesis
27

26. FDI THEORIES (cont.)
The Product Life Cycle Hypothesis
-Situation:
-Cycle:
Initiation Exponential growth 
Slowdown Decline
28

27. 29
Product is
launched.
Only served
in domestic
market.
Product is more
complete, competitors
emerge in both foreign
and domestic markets.
FDI appears.
Product is
complete,
standardized,
popular in all
markets. FDI
continues.
Product
sales
fall 

28. 1. OLI Paradigm –John Dunning’s Theory
INTERNATIONALIZATION FDIFACTORS
OWNERSHIP
INTERNALIZATION
LOCATION
Which?
Why?
How?
Where to undertake FDI?
Why internalize through
FDI instead of other forms?
Which firms undertake FDI?

29. 2. Ownership-specific advantages (O)
Which firms undertake FDI?
Firms investing abroad must possess proprietary or
ownership-specific (“O”) advantages to overcome the extra
costs of operating in a different, less familiar environment

30. Ownership-specific advantages (O)
Technology
Brand name
Managerial and marketing expertise
Firm size, economies of scale and market power
…

32. 35
Top brands 2019

33. Top brands 2020

34. 37

35. 38

36. Location Advantages (L)
Economic determinants
Political, social advantages
...

37. Internalization Advantages (I)
Why do firms choose to internalize their advantages by direct
investment?
Foreign market entry modes: Exporting, Licensing.

38. 41