Theories and realities of world development show that FDI is important not only to a host country but also the home one, specifically in terms of efficiency and competitiveness, especially of enterprises investing abroad and related sectors. However, in Vietnam, the view on the role and significance of outward FDI remains incomplete and somewhat mistaken, especially in the context of global financial recession that prolongs until now. This could be the reason as to why Vietnam hasn’t got an effective strategy of investment abroad, beside the fact that it only started in the field. Thus, studying international experience of successes and failures in promoting overseas investment is necessary thing to do.

This article aims mainly at summarizing theoretical and practical issues of the role and significance of outward FDI, and analyzing the experience in promoting investment abroad of developing and transitional countries so as to provide a complete picture of the current outward investment trend.

1. Motives for investment abroad

In their operation, some enterprises expand abroad. Many determinants are motives for this, which include “pushing” and “pulling” ones. As UNCTAD summarized (2006), pushing factors include: (i) the increase in production costs, or the scarcity of resources and inputs; (ii) restrictions in domestic trade and market conditions; (iii) new opportunities in business conditions in a host country; and (iv) home country’s policies that promote and encourage outward FDI.

Pulling factors often support pushing ones. Developed countries may be attractive for investments thanks to large markets, easy access because of their participation in multilateral agreement (such as WTO[1]). However, the adoption of highly protective measures of some groups of countries, especially developed ones, shifts investments from developing countries towards member countries of the same group so as to avoid protectionism. For developing countries, low input costs, and especially the availability of inputs such as resources, labor, are attracting factors.

The above determinants are supported by 5 main “classical” motives that motivate FDI in general and FDI from developing and transitional countries in particular.

First, motivation in searching, expanding markets to increase sales and profits: This is the most popular strategy of multinational companies from developing countries in their globalization.

Second, motivation in upgrading operational efficiency and competitiveness through cutting costs, increasing linkages between domestic and foreign markets: The popularity of this FDI varies among countries, regions and sectors.

Third, motivation in seeking and exploiting natural resources: In general, natural resources seeking FDIs are not very popular among MNCs from developing countries.

Fourth, motivation in targeting at and buying assets to own and manage a company, then implement one company’s strategies including competing strategies: This motivation is quite weak among MNCs from developing countries.

Fifth, other motivations affecting choices of investment locations for political reasons or for the sake of national strategic implemented under the name of government.

UNCTAD’s global survey among MNCs (2006) reveals partly the significance of each motive whereby the most significant motive is to expand markets  (40% of the respondents), followed by the motive to increase efficiency (19%), target assets 17%, increase financial capability and efficiency (16%), and increase linkages and seek natural resources 6% và 4% respectively.

2. Role and effects of investment abroad on related enterprises, industries and the economy of home country

The investment abroad have effects on not only host country but also the economy, industries and enterprises of home country. Effects vary dependend on investment motives, development levels, investment structures of both home and host coutries. In general, effects are positive for competitiveness and operational efficiency of investing enterprise and related industries (through 2 major channels: industry’s competitiveness and restructure)[2] and finally for the economy level (mainly through capital flows and balance of payment).

The reality in some East Asian enterprises shows that direct investment abroad plays an important role in turning Daewoo, Huyndai, Samsung (Korea), TCL, Lenovo (China)…into “powerful” multinational groups all over the world. At macro level[3], direct investment abroad, at the beginning, tends to cause increases in capital outflows. However, this difference gradually changes and when the investments generate incomes and other revenues, capital inflows will exceed capital outflows. This is clearly revealed in the global study by UNCTAD (2006).[4]

Table 1 summarizes affecting routes, direction and degree of direct investment abroad on economic variables/ aspects of host country. Details of effects are given in Le Xuan Sang and associates (2009) and UNCTAD (2006).

Table 1: Effects of outward FDI on home country

Note: (+) refers to affecting degree.

Source: General assessment based on UNCTAD (2006) and other sources.

However, there exist some certain concerns about possible negative effects of direct investment abroad on the economy of home country such as: (1) domestic investment reductions; (2) “hollowing out” effect on part of home country’s economy (due to shifts in manufacturing activities, technological transfer, R&D, and migrating labor); as a result, (3) deficits in international balance of payment and macro economic instability.

However, within the past two decades, evidence for the above problems was vague, therefore; they are probably overemphasized, especially when some of them can be solved in the globalization context. The reasons are:

First, the reality has it that except for cases of some developed countries, home and overseas investments usually supplement instead of excluding each other (UNCTAD 2006). Those enterprises who invest abroad can raise capital abroad through stock market; or they themselves have enough capital, or are even subsidized by the Government (in the case of State owned enterprises) for national strategic benefits (in petroleum sector for instance).

Second, negative effects on domestic labor market are usually true for developed countries’ cases when companies, especially multinational ones (MNCs) have motives of improving performance and reducing expenses to invest abroad. For developing countries (China and India) with abundant and cheap labor force, the chance of “losing” job is very small, at least until the time of study (UNCTAD 2006). The situation of Japan should be taken into consideration. It is considered to be the most hollowed out country by outward FDI. However, Yoshiaki’s quantitative research (2004) shows that hollowing out process affects only small enterprises not the country’s industrial strength because know-hows and key component production sectors were sustained in the country. Especially, in recent years, the “hollowing out” process seems to cease and there appears a new trend of “anti hollowing out”, mainly because of the weakening of factors which previously encouraged Japanese MNCs to invest abroad and partly of MNCs’ decision to avoid possible negative effects of the “hollowing out”, especially the risk of “technological hollowing out”.

Third, as partly mentioned, UNCTAD’s experimental evidences (2006) show that investments of most of 12 Asian and Latin American developing countries in the 1992- 2000 period had positive effects on balance of international payment of those countries (with capital inflows exceeding outflows, on other words, causing surplus) (due to intra-company trade, investment earnings, copyright fee, service charges…).

Finally, it must be noted that direct investment abroad also brings about certain risks for the investing enterprises in the following aspects: (i) foreign facilities abroad might be disadvantaged compared with domestic ones; (ii) difficulties related to cultural, social and institutional differences between home and host country lead to higher cost of integration, management and transaction; (iii) enterprises must face increasing complexity when the number of facilities built up abroad increases; and (iv) financial risks caused by foreign exchange or political unrest (war, violence…).

3. International experience in making and completing policies to effectively promote investment abroad

In the recent 2 decades, there has been an important trend in which developing and transitional countries became increasingly considerable FDI sources. Especially, net outward FDI from those countries rose from about 14 billion USD in 1990 to about 150 billion in 2000 (UNCTAD’s estimates (2006)) and reached about 210 billion USD in 2010, accounting for 18% of total global FDI (Dilek Yukut 2011) (See more in Figure).

Source: Dilek Yukut 2011.

A detailed study of global investment of UNCTAD (2006) summarizes 7 major trends in FDI flows from developing and transitional countries before the year 2006, including: (1) investments from developing and transitional countries became more important; (2) investments from developing and transitional countries into developed ones had in small yet increasing volumes; (3) Asia became an important source of FDIs; (4) TNCs from developing countries increasingly participated in sizable volume transactions; (5) investments in service sectors were dominant; (6) the number and value of cross-border M&A accelerated; and (7) greenfield investment and expanding investment grew.

A recent study of Dilek Yukut (2011) reveals that the above features now remain quite true. Especially, in the context of global financial crisis, when FDIs from developed countries sharply dropped, FDI flows among developing countries rocketed, up about 34% in 2010 compared with 27% in 2007, of which FDIs from BRIC (Brazil, Russia, India and China) continued the highest, accounting for more than 60% of total outbound investment from developing and transitional countries. For Sub-Sahara countries and other low income ones, South-South investments remain dominant, especially those from Asian countries such as China, Malaysia and India.

Service sectors remain significant in South-South relations (together with mining), especially when Zain Africa (currently Airtel) was taken over by Bharti of India for 10.7 billion USD in 2010. South-South investments are mainly greenfield, up to 60%. However, investments from developing and transitional countries into developed ones are largely M&As.

The above achievements and features are induced by various factors in which the persistence in building and completing institutions and policies to promote outbound investment has had undeniable impacts. UNCTAD (2006) summarizes experience of developing and transitional countries in promoting investment abroad as follows:

First, gradually removing barriers to outbound investment: Most countries experienced the time when they controlled outward FDI through regulations, so as to avoid negative impacts on balance of payment (fleeing capital and foreign exchange). The removal of those barriers started when surplus in current account was large enough. Republic of Korea has been considered to harmonize investment liberalizing policies and sector protecting ones along with changes in the macro economy and balance of payment. Till now, a large part of developing and transitional countries have liberalized completely their investment abroad.

Second, building policies for promoting investment abroad: Nations must reach certain development stages before adopting promotion measures for outbound investment. Incentives used to reduce costs for outward projects include preferential credits, equity, export credits, and tax incentives; participation in the Multilateral Investment Guarantee Agency (MIGA) and export credit departments; and information supply, related services and linkages. Support policies for overseas investment promotion are various and combined with other investment policies to enhance effectiveness of the activity (Table 2).

Table 2: Services by trade promotion agencies to promote outward direct investment

Source: UNCTAD’s survey on outward investment promotion agencies, Jan – Mar 2006.

Third, establishing outward direct investment promotion agencies: The most important governmental departments in this activity include: trade promotion agencies, investment promotion agencies (IPAs) and export credit and insurance; import – export banks; and related. However, each nation must determine the optimal degree and services of support for investment abroad in specific situation.

Fourth, other support policies: Support policies for outward FDI promotion are various and combined with other investment policies in order to enhance the effectiveness of this activity. They include: information supply, linkage service, promoting measures, feasibility research, legal support, training support, investment security. However, besides governmental departments, sector associations can also provide valuable supports to promote investment abroad.

Besides, so as to ensure the highest results, specific policies for outward FDI must be combined with other policies to enhance globalization (such as trade, migration, and FDI attraction) and policies encouraging domestic enterprises’ growth and improvement. In general, FDI policies are only effective when they are part of macro and micro economic policies.

Fifth, mitigating potential risks relating outward FDI. Investment abroad can cause hollowing out effects on the economy and other problems for balance of payment. Expected effects depend on motives of investment, domestic economic conditions and relative position of home country’s industrial sectors in the global value chain. Thus, governments must make specific public policies for negatively impacted subjects such as education and skill training programs, as well as encouragement of small and medium sized enterprises’ growth, supports for domestic industrial sectors of components and materials for exports, active inward FDI attraction, especially into hi-tech sectors. Here, supporting policies are used to mitigate negative impacts of outward FDI without preventing globalization.

Sixth, participating regional and international agreements in order to increase investments among developing and transitional countries: Participating bilateral investments, Double Tax Treaty, international and regional investment agreements to enhance sharing among organizations that can finance for South-South trade and investment, protect enterprises from developing countries against political risks, such as discrimination, dispossession and transfer restriction while at the same time helping the countries attract more FDI.

Last but not least, many countries have established National Wealth Fund for long term national strategy, especially reservation funds of natural resources (for instance crude oil, minerals…) and other goods, supports for M&A activity[5] (especially strategic buyouts) and indirect investments as well as for other political purposes.

[1] WTO accession has impacts on outward FDI through the following aspects: (i) market access; (ii) most favoured nation (MNF) and national treatment (NT) principles; AND (iii) property right protection.

[2] The spillover happens through 4 channels: (1) linkages with domestic enterprises, (2) spillovers to domestic enterprises, (3) competition with domestic enterprises and (4) linkages and interactions with institutions such as universities and research institutes. Through the channels, outward FDI improves an industry’s production process, products, operations, and value chain. All those improvements are necessary to upgrade the industry’s competitiveness.

[3] At macro level, financial flows related to overseas FDI including inflow or outflow capital such as investment earnings, franchise, services charges.

[4]UNCTAD’s statistics show that outward FDI projects tend to cause positive net investment outflow (i.e., a pressure of balance of payment deficits). However, when projects start to generate profits (investment earnings and other payments), later projects will create positive net investment inflow (i.e., balance of payment surplus). For example, in 1992, 1997, and 2002, net FDI inflow into the US from Mehico was 365; 3,110 and 1,539 million USD; Malaysia: 380; 761; and 296 million USD; Taiwan: 179; 1,855; and 1,719 million USD; in 1992 and 1995, the numbers of Arab Emirate were (-) 12 and 9 million USD; of Kuwait were (-) 208 and (-) 167 million USD.

[5] The year 2000 saw a boom in cross-border M&A deals (especially in IT sector) with more than 1,200 billion USD. In 2007, cross-border M&A deals climbed to 1,556 billion USD from 1,235 billion USD in 2006.