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Abstract
This paper explores the relationship between foreign direct investment (FDI) and the productivity of host country domestic firms. We rely on a specially designed survey of over 4000 manufacturing firms in Vietnam, and separate out productivity gains along the supply chain (obtained through direct transfers of knowledge/technology between linked firms) from productivity effects through indirect FDI spillovers. In addition to identifying indirect vertical productivity spillovers from FDI, our results show that there are productivity gains associated with direct linkages between foreign-owned and domestic firms along the supply chain not captured by commonly used measures of spillovers. This includes evidence of productivity gains through forward linkages for domestic firms which receive inputs from foreign-owned firms.
JEL classification
D22
F21
O12
O3
Keywords
Foreign direct investment
Productivity spillovers
Direct linkages
Technology transfers
Vietnam
Cited by (0)
Copyright © 2015 The Authors. Published by Elsevier B.V.
Capital flow is the movement of money for the purpose of investment, trade or business production. This occurs within corporations in the form of investment capital and capital spending on operations as well as research and development. On a larger scale, governments direct capital flows from tax receipts into programs and operations and through trade with
other nations and currencies. Individual investors direct savings and investment capital into securities such as stocks, bonds and mutual funds. FDI: Foreign Direct Investment (FDI) is a direct
investment into production or business in a country by a company in another country, either by buying a company in the target country or by expanding operations of an existing business in that country. Foreign direct investment is in contrast to portfolio investment, which is a passive investment in the securities of another country such as stocks and bonds. Horizontal FDI decreases international trade as the product of them is usually aimed at host country; the two other types
generally act as a stimulus for it. The foreign direct investor may acquire voting power of an enterprise in an economy through any of the following methods:Definition of 'Capital Flows'
Types and Magnitude of Capital Flows
Types:
Methods
- by incorporating a wholly owned subsidiary or company anywhere
- by acquiring shares in an associated enterprise
- through a merger or an acquisition of an unrelated enterprise
- participating in an equity joint venture with another investor or enterprise
Foreign direct investment incentives may take the following forms:
- low corporate tax and individual income tax rates
- tax holidays
- other types of tax concessions
- preferential tariffs
- special economic zones
- EPZ – Export Processing Zones
- Bonded Warehouses
- Maquiladoras
- Investment Financial Subsidies
- Soft Loan or Loan Guarantees
- Free Land or Land Subsidies
- Relocation and Expatriation
- Infrastructure Subsidies
- R&D Support
- Derogation from Regulations (usually for very large projects)
Importance and Barriers of FDI
The rapid growth of world population since 1950 has occurred mostly in developing countries. This growth has not been matched by similar increases in per-capita income and access to the basics of modern life, such as education, health care, sanitary water and waste disposal.
Foreign Direct Investment and the Developing World
A meta-analysis of the effects of foreign direct investment on local firms in developing and transition countries, conducted in the year 2011, suggests that foreign investment robustly increases local productivity growth. The Commitment to Development Index ranks the "development-friendliness" of rich country investment policies.
Foreign Institutional Investor - FII
The term is used most commonly in India to refer to outside companies investing in the financial markets of India. International institutional investors must register with the Securities and Exchange Board of India to participate in the market. One of the major market regulations pertaining to FIIs involves placing limits on FII ownership in Indian companies.
FDI vs FII
- FDI is an investment that a parent company makes in a foreign country. On the
contrary, FII is an investment made by an investor in the markets of a foreign nation.
2. FII can enter the stock market easily and also withdraw from it easily. But FDI cannot enter and exit that easily.
3. Foreign Direct Investment targets a specific enterprise. The FII increasing capital availability in general.
4. The Foreign Direct Investment is considered to be more stable than Foreign Institutional Investor.
Portfolio Flows
In the early 1990s,
India opened up to portfolio inflows through “Foreign Institutional Investors” (FIIs). This policy framework was largely in place by the year 2000. Equity investment by foreign institutional investors involves the following constraints:
- The aggregate foreign holding in a company is subject to a limit that can be set by the shareholders of the company. This limit is, in turn, subject to “sectorial limits”, which apply in certain sectors only.
- A single foreign portfolio investor can never own more than 10% of a company. Foreign ownership in certain sectors (telecom, insurance and banking) is capped at various levels.
Sovereign Debt (Government Debt)
Government debt (also known as public debt and national debt) is the debt owed by a central government. (In the U.S. and other federal states, "government debt" may also refer to the debt of a state or provincial government, municipal or local government). By contrast, the annual "government deficit" refers to the difference between government receipts and spending in a single year, that is, the increase of debt over a particular year.