NATIONAL TRAINING WORKSHOP ON PROMOTION AND … · FDI VS. FOREIGN PORTFOLIO INVESTMENT Foreign...

NATIONAL TRAINING WORKSHOP ONPROMOTION AND FACILITATION OF FOREIGN DIRECT

INVESTMENT (FDI) FOR SUSTAINABLE DEVELOPMENT IN TIMOR-LESTE

THIS SESSION

▪ Intro to ESCAP

▪ Self-introductions

▪ Fundamentals of FDI – theories, motivations, and

decision criteria

United Nations Economic and Social Commission for Asia and the Pacific

UNITED NATIONS ECONOMIC AND SOCIAL COMMISSION FOR ASIA AND THE PACIFIC (ESCAP)

▪ One of five regional commissions of the United Nations (ECE, ECA, ECLAC, ESCWA)

▪ 53 Member States and 9 Associate Members▪ Covering the Asia-Pacific region:

– home to 4.1 billion people, or 2/3 of the world’s population

▪ Set up 1947. Headquartered in Bangkok.

▪ Mandate: Regional cooperation for economic and social development.▪ ESCAP brings countries together to address issues that:

– are trans-boundary in nature, or that would benefit from collaborative inter-country approaches;

– all or a group of countries in the region face, for which it is necessary to learn from each other;

– would benefit from regional or multi-country involvement;– are of a sensitive or emerging nature and require further advocacy and negotiation.

▪ How? Analysis, policy dialogue, peer-learning, policy advice, capacity building

▪ Trade, Investment and Innovation – Focus

▪ Supporting member states to: • Reduce obstacles to trade and investment

• Develop policies on technology and innovation, including digital economy related policies

• Attract sustainable foreign direct investment and integrate SMEs in value chains

• Promote responsible business practices, social enterprise, impact investment and inclusive/bottom of the pyramid business models

• Increase women’s entrepreneurship and access to finance

• CWE project: piloting innovative financial solutions for women entrepreneurship (fintech, bonds and impact investment)

▪ How?

Facilitating trade and investment:- AP paperless trade agreement

- Policy and trends analysis

- Capacity building, knowledge networking and advice:

a) implementing single-windows /paperless trade;

b) attracting sustainable FDI

c) negotiating trade agreements

d) reducing non-tariff barriers to trade

Promoting sustainable and

innovative business models:- ESBN

- Promoting responsible business practices,

inclusive business models and social enterprise

- Catalyzing women entrepreneurship through

innovative finance and digital solutions

Tech innovation:- Frontier tech and DE studies

- AP Innovation Forum

- Support Gov’ts to develop policies

on innovation/tech/ industry 4.0

Convening and

consensus building

Technical support and capacity

building

Policy-oriented

research & analysis

HANDBOOK ON POLICIES, PROMOTION

AND FACILITATION OF FDI

FOR SUSTAINABLE DEVELOPMENThttps://www.unescap.org/resources/

handbook-policies-promotion-and-facilitation-foreign-direct-investment-sustainable-0

ASIA-PACIFIC TRADE AND

INVESTMENT REPORThttps://www.unescap.org/publications/APTIR2019


SOME PUBLICATIONS

SELF INTRODUCTIONS

▪ Name

▪ Title/function

▪ Responsibilities


FUNDAMENTALS OF FDI

Workshop on Promotion and Facilitation of Foreign Direct Investment (FDI) for Sustainable Development in Timor-Leste, Dili, 10-12 December 2019

OUTLINE

▪ How is FDI defined?

▪ How can FDI be explained?

▪ Which types and modes of FDI can be identified?

▪ What motives do multinational companies have to

engage in FDI? (determinants of FDI)


DEFINITION AND RATIONALE OF FDI


DEFINING FDIMACRO ECONOMIC PERSPECTIVE

▪ Foreign Direct investment (FDI) is an investment made by an entity

(i.e. the foreign investor) to acquire a lasting interest in or effective control over another entity operating outside of the economy of the investing entity.

– Direct investor = a company resident in one economy that has acquired, either directly or indirectly, at least 10% of the voting power of a company resident in another economy.

– The “other” entity may be established new or exist already.

– The direct investor can be an individual; an incorporated or unincorporated private or public company; an associated group of individuals; or a government entity.

▪ FDI net inflows are the value of direct investment made by foreign investors in the reporting economy - including reinvested earnings and intra-company loans, net of repatriation of capital and repayment of loans.


FDI data = Balance of Payments based (e.g. IMF, UNCTAD, OECD, WB)

BMP6 identifies control and significant influence in two dimensions: ▪ Immediate direct investment relationship

– Arise when a direct investor directly owns equity that entitles it to 10% or more of the voting power in the direct investment enterprise.

– Control is determined to exist if the direct investor owns more than 50% of the voting power in the direct investment enterprise.

– A significant degree of influence is determined to exist if the direct investor owns from 10 to 50 percent of the voting power in the direct investment enterprise.

▪ Indirect direct investment relationship– arise through the ownership of voting power in one direct investment enterprise

that owns voting power in another enterprise or enterprises, that is, an entity is able to exercise indirect control or influence through a chain of direct investment relationships


FDI DATA - IMF BPM6 FDI DEFINITIONS

FDI DATA

▪ Balance of Payments based data – UNCTAD, IMF, OECD, WB

▪ Greenfield investments – e.g. fDi Markets (announcement based, i.e. not flows based)

▪ M&E data – e.g. Thomson Reuters

▪ ITC Investment Map – sectoral level data (compiled from UNCTAD, COMTRADE, etc) https://www.investmentmap.org/

▪ Investment environment indicators – e.g. Doing Business https://www.doingbusiness.org/


https://www.investmentmap.org/

https://www.doingbusiness.org/

▪ Branches are direct investment enterprises of which 100% of the voting power is held by the direct investor.

▪ Subsidiaries are direct investment enterprises of which 50% or more of the voting power is held by the direct investor;

▪ Associates or affiliates are direct investment enterprises of which 10-50% of the voting power is held by the direct investor; and


DIFFERENT LEVELS OF CONTROL

▪ Equity capital comprises equity in branches, all shares in subsidiaries and associates (except non-participating, preferred shares that are treated as debt securities and are included under other direct investment capital) and other capital contributions such as provisions of machinery, etc.

▪ Reinvested earnings consist of the direct investor’s share (in proportion to direct equity participation) of earnings not distributed as dividends by subsidiaries or associates and earnings of branches not remitted to the direct investor. If such earnings are not identified, all branches’ earnings are considered, by convention, to be distributed.

▪ Other direct investment capital (or inter-company loans) covers the borrowing and lending of funds, including debt securities and trade credits, between direct investors and direct investment enterprises and between two direct investment enterprises that share the same direct investor.


THREE COMPONENTS OF FDI

▪ The nationality of investors in and owners of foreign affiliates is becoming increasingly blurred. (UNCTAD WIR 2016)– More than 40 per cent of foreign affiliates worldwide have multiple

“passports”. These affiliates are part of complex ownership chains with multiple cross-border links involving on average three jurisdictions.

– The larger the MNEs, the greater is the complexity of their internal ownership structures.

▪ The blurring of investor nationality has made the application of rules and regulations on foreign ownership more challenging. – 80 per cent of countries restrict majority foreign ownership in at least

one industry– Indirect ownership structures and mailbox companies have the potential

to significantly expand the reach of IIAs. • About one third of ISDS claims are filed by claimant entities that are

ultimately owned by a parent in a third country (not party to the treaty on which the claim is based)


NATIONALITY – DOES IT MATTER?

1. Place of incorporation of the TNC, i.e. the state/country under which laws the TNC was established.

2. Siège social, i.e. the state/country which is the principal seat or centre of administration or headquarters of the TNC.

3. Control or substantial interest, i.e. nationality is established on the basis of the nationality of shareholders who hold majority shares or substantial portion of the shares.


ESTABLISHING NATIONALITY: THREE METHODS

▪ FDI is often associated with particular benefits for host countries, including a net financial inflow.

▪ However, if a resident investor in a given country channels funds abroad and then returns the funds to the country in the form of FDI, the associated benefits of FDI will not materialize. This phenomenon is known as “round-tripping.”

▪ Round-tripping is not genuine FDI and may reduce tax receipts and regulatory oversight in the country of the resident investor.


THE PROBLEM OF “ROUND-TRIPPING”

▪ Economies sometimes offer tax or other incentives to foreign investors to locate in their economy. If local investors do not receive this same preferential treatment, then they may engage in round-tripping to receive these benefits.

▪ Some economies have controls on capital movements or exchange rates that may lead domestic investors to round-trip to have more flexibility in managing their capital.

▪ Some economies may not have well-developed capital markets, so domestic investors first invest overseas to access better financial services and then return the funds to the home economy.

▪ If an economy has investment treaties that give greater protections to foreign investors, domestic investors may round-trip to ensure their investments receive these greater protections.

▪ Some investors may want to conceal their identity.


REASONS FOR ROUND-TRIPPING

FDI VS. FOREIGN PORTFOLIO INVESTMENT

▪ Foreign portfolio investment (FPI) is a passive investment by

foreigners in securities (i.e. bonds and stock) issued by companies (and the government) in a given country, none which entails an active management or control of the securities' purchased by the investor.

▪ Investors engaging in FPI are interested in financial gain only and are not interested in involvement in the effective control or management of a company.

▪ There are stock exchanges where portfolio investments can be purchased, sold and/or exchanged (secondary markets).

▪ FDI is not speculative in nature, FPI usually is.

▪ FDI takes a long-term view, FPI a short-term view


▪ Contributes to sustained economic growth

▪ Socially inclusive

▪ Environmentally sustainable

▪ Good governance


DEFINING SUSTAINABLE FDI

Sustainable FDI

Economic development

Environmental sustainability

Social development

Good governance

FOUR DIMENSIONS OF SUSTAINABLE FDI

▪ Sustainable FDI consists of four dimensions that all together contribute to a host country's sustainable development:– Economic development: linkages, technology transfer, training, etc.

– Environmental sustainability: minimizing adverse impacts, mobilizing conservation (energy efficiency/renewable energy) technologies, etc.

– Social development and inclusion: labour and employment standards, community health and consultations, education, training, etc.

– Good governance: fair and efficient negotiations, contracts, etc.

▪ These four dimensions are unevenly addressed by investment promotion agencies (IPAs) and investment promotion strategies

▪ The dimension of “Economic development” (e.g. employment generation) is prioritized by IPAs


DIMENSIONS

22

Sustainable FDI

Economic development

Environmental sustainability

Social development

Good governance

Business Linkages

Capital

EmploymentTaxes

Tech. transfer

Exports

Infrastructure

Labour rights

Skills enhancement

Public health

Non-discrimination

Balanced development

Pollution control

Carbon footprint

Environmental Tech transfer

Water usage

Waste management

Transparency

Management

Stakeholder dialogue

Marketing practices

Supply chain standards

DRIVERS AND DETERMINANTS


FOREIGN MARKET ENTRY MODES:WHERE TRADE MEETS FDI

▪ Export

▪ Licensing/Franchising

▪ FDI– Joint

venture/Alliances

– Cross border M&A

– Greenfield FDI De

pth

of

invo

lve

me

nt

in

fore

ign

mar

kets

Investment volume

Licensing / franchising

Export

Cross border M&A

JV / Alliance

Greenfield FDI

HighLow

Low

High


▪ Primary reasons:– Procurement of essential raw materials

– Reduction of operating/production costs

– Proximity to cluster base/supply chain

– Broad-based market penetration

▪ Secondary reasons:– Access to unique technology or skills

– Reaction to, or anticipation of, competition


WHAT MOTIVATES FDI?THE INITIAL IMPETUS

MOTIVES

The motives for firms to engage in foreign production can be classified in four groups:

– Resource seeking

– Market seeking

– Efficiency seeking

– Strategic assets seeking


RESOURCE SEEKING FDI

▪ To seek and secure natural resources e.g. minerals, raw materials

▪ Upstream investments


MARKET SEEKING FDI

▪ To serve domestic or regional markets - new markets for the firms finished products

▪ Requires easy production expansion and thus economies of scale

▪ Preferably similar taste among consumers


EFFICIENCY SEEKING FDI

▪ To restructure its existing investments so as to achieve an efficient allocation of international economic activity of the firm– International specialization whereby

firms seek to benefit from differences in product and factor prices and to diversify risk

– Global sourcing – resource saving and improved efficiency by rationalizing the structure of their global activities

– Optimizing the supply/value chain


STRATEGIC ASSET/CAPABILITIES SEEKING FDI

▪ Motivated by investor interest in acquiring strategic assets (brands, human capital, distribution networks, etc)

▪ TNCs pursue strategic operations through the purchase of existing firms and/or assets in order to protect ownership- specific advantages in order to sustain or advance its global competitive position– Acquisition of key established local firms

– Acquisition of local capabilities including R&D, knowledge and human capital

– Acquisition of market knowledge

– Pre empting market entrance by competitors

– Pre empting the acquisition by local firms by competitors

▪ Modality: mergers and acquisitions (M&A)


HORIZONTAL VS. VERTICAL FDI

▪ Horizontal (usually market-oriented FDI)– Investment in the “same” industry as a firm operates in at home

• Examples:» Ikea, Tesco Lotus and Shell and their international expansion» MacDonald’s, KFC and Starbucks and their international expansion

▪ Vertical (along the supply chain)– Investment in a downstream supplier (backward) or upstream

purchaser (forward) as compared to the business that the firm operates in its home country

• Examples:» Backward: Volkswagen + Shanghai Automotive Industry Corporation

(SAIC) + First Automotive Works (FAW) to produce gearbox (an input to Volkswagen’s home operation)

» Forward: Less common. Volkswagen’s acquisitions of dealers in the US (Volkswagen “sold” cars to the dealers in the US. I.e., Volkswagen sold the output of its home country operations to the US dealers that it acquired)



TWO BASIC SETS OF DETERMINANTS OF FDI

• Political & economic stability

• Favouring FDI policies

• Adequate infrastructure & services

• Adequate skill and (trainable) labour base

• Good supplier networks & services

• Streamlined procedures

• Securing market access

• Securing access to labour and natural resources

• Access to suppliers

• Following a sourcing strategy

• Staying ahead of competition

• Lowering production costs

• Gaining access to technology and skills

Host-country determinants

Firm/industry determinants

▪ Vertical FDI (difference in factor prices) vs. horizontal FDI (trade costs, brands)

▪ Resource-seeking: availability of scarce resources, investment protection, political stability

▪ Efficiency-seeking: strength of domestic SMEs and competitive advantages to minimize costs along the supply chain

▪ Market-seeking: size of market (purchasing power, rising middle class, high growth)

▪ Sectoral FDI: – natural resources and agriculture

– manufacturing (costs and productivity of labour; exchange rates, infrastructure),

– services (liberalization level),

– high technology (level of IPR protection)

FDI DETERMINANTS DEPEND ON TYPE AND SECTOR



MAIN FOREIGN INVESTORS’ DECISION-MAKING FACTORS

▪ Regulations/Laws

– Taxation/tariffs

– Ownership rules

– Hiring practices

– Legal frameworks

– Investment incentives

– Intellectual property protection

▪ Finance

– Repatriation of funds

– Access to finance

– Investment costs

– Currency risk

– Credit assessment

▪ Commercial Practices

– Role and influence of large banks

– Role and influence of large corporations

– Business culture

– Attitude to profit

– Preferential relationships

▪ Culture

– Behaviour

– Religion

– Labour practices

– Attitude to foreigners

▪ Political/Economic Security

▪ Logistics/Distance

▪ Market/Profitability

GENERAL MOST IMPORTANT FACTORSFOR ATTRACTING FDI

▪ Open economy, high growth

▪ Rule of law and economic policy coherence

▪ Political and economic stability

▪ Cheap and productive labour

▪ Natural resources

▪ Large market

▪ Physical, financial and technological Infrastructure facilities

▪ Access to markets and trade facilitation

▪ Investment protection and promotion

▪ Good governance, quality of institutions and absence of red tape


▪ What kind of FDI/sectors does Timor-Leste want to attract? For what purpose?

▪ For what sectors / types of investments can Timor-Leste be an attractive location?

▪ What kind of FDI can contribute to sustainable development of your country? What would be needed to attract it?

▪ How can Timor-Leste be made more attractive to the kind of investments it wants to attract?


QUESTIONS FOR DISCUSSION

Presentation available at:

https://www.unescap.org/events/national-training-workshop-promotion-facilitation-fdi-timor-leste

Your questions please?

https://www.unescap.org/events/national-training-workshop-promotion-facilitation-fdi-timor-leste

UNITED NATIONS BUILDING

RAJDAMNERN NOK

BANGKOK 10200, THAILAND

TEL: +662-2881234

FAX: +662-2881000

http://www.unescap.org

HANDBOOK ON POLICIES, PROMOTION

AND FACILITATION OF FDI FOR SUSTAINABLE DEVELOPMENT:

http://www.unescap.org/resources/handbook-policies-

promotion-and-facilitation-foreign-direct-investment-sustainable-0


CONTACT DETAILS UNESCAP

http://www.unescap.org/resources/handbook-policies-

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