Foreign direct investment (FDI) refers to the investment made by individuals, corporations, or governments from one country into businesses and assets located in another country. This form of investment brings about a host of opportunities, challenges, and implications that have far-reaching effects on both the host and source countries. Please contact immediately Apolo Lawyers Law Firm via email contact@apolo.com.vn or hotline - 0903.419.479 for legal advice and support.

1. The concept of foreign direct investment

The right to control (participating in making important decisions related to the strategy and development policies of the company) is the basic criterion that distinguishes between FDI and securities investment.

FDI activities have become very popular nowadays. The essence of this activity is the same, but there are many different interpretations depending on the aspects considered. According to the International Monetary Fund (IMF), FDI is an investment made to obtain lasting benefits in an enterprise operating in the territory of an economy other than that of the host country, the purpose of the investor is to gain the right to actually manage the business. FDI can be understood as a form of international investment in which the investor of a country invests all or a large enough capital to invest in a project in another country in order to gain control or participate in making profits. control that project.

Regulations On Foreign Direct Investment

2. Characteristics of Foreign Direct Investment

• FDI is mainly private investment with the primary purpose of seeking profit. According to the classification of foreign investment by many documents and according to the provisions of many countries laws, FDI is a private investment.

• Foreign investors must contribute a minimum percentage of capital in the legal capital or charter capital depending on the provisions of the laws of each country in order to gain control or participate in controlling the investment enterprise.

• Investors make their own decisions on investment, production and business decisions and are solely responsible for losses and profits. This form is feasible and highly economic, without political constraints.

• FDI is often accompanied by technology transfer to host countries by bringing machinery, equipment, patents, inventions, technical know-how, managers, etc. into the host country to project implementation. 

3. How to classify foreign direct investment

FDI activities can be classified according to different forms, namely: 

3.1 By way of penetration

• New investment is an investment by a company to build a new production, marketing or administrative facility, as opposed to the acquisition of existing business facilities.

• Acquisitions are investments or direct purchases of an existing company or business. The acquisition provided Lenovo with valuable method assets, such as the brand and distribution network. The acquisition helped Lenovo rapidly expand into markets and become a global company.

• Merge: It is a special type of acquisition in which two companies pool their capital together to form a new and larger company. Cross-border mergers also face many challenges due to differences in cultures, competition policies, corporate values ​​and operating methods among countries. Successful pouring requires research, planning, and firm upfront commitments.

3.2 According to the orientation of the host country

• Import-substituting FDI: FDI activities are conducted to produce and supply the investment recipient country market with products that the country previously had to import. The factors that greatly influence this form of FDI are market capacity, trade barriers of the host country and transportation costs.

• Export-enhancing FDI: The important factors affecting FDI inflows in this form are the ability of the host countries to provide cheap inputs such as raw materials and semi-finished products.

• FDI in other directions of the government: The government of the receiving country can apply investment incentives to adjust the FDI inflow into the country according to its intentions, such as increasing attracting FDI to solve the balance of payments deficit.

3.3 By legal form

• Business cooperation contract: is a document signed between two or more parties to conduct business investment, which clearly stipulates the responsibility of dividing business results for each party without establishing a new legal entity.

• Joint venture enterprise, is an enterprise established in the host country on the basis of a joint venture contract signed between two or more parties, in special cases may be established on the basis of an agreement signed between two or more parties. countries, to conduct investment and business in the host country.

• 100 percent foreign owned enterprise: is an enterprise owned by a foreign investor, established by a foreign investor in the host country, self-managed and responsible for business results.

• BOT, BTO, BT.

​Regulations On Foreign Direct Investment

4. The role of foreign investment in overall economic development

According to Hansen, although FDI is still governed by the government, FDI is less dependent on the political relationship between the two sides. On the other hand, foreign parties are directly involved in production and business management, so the feasibility of the project is quite high, especially in accessing international markets to expand exports. Because their interests are closely tied to the project, they are interested in business efficiency, so they can choose the appropriate technology, improve the management skills and workers skills. Therefore, FDI plays an increasingly important role in promoting economic development in the investing and receiving countries.

4.1. For the country of investment

Investment abroad helps to improve the efficiency of using the advantages of production in the host country, lower the cost of products, improve the rate of return of investment capital and build build a stable supply market for raw materials at affordable prices. On the other hand, investment abroad helps to expand economic power and enhance political prestige. Through the construction of production plants and consumption markets abroad, investment countries can expand consumption markets, avoiding trade protection barriers of other countries.

4.2. For investment recipient countries

• For developed economic countries, FDI has a great effect in solving socio-economic difficulties such as unemployment and inflation.

• For developing countries, FDI helps speed up economic development by creating new businesses, attracting more workers, and partially solving unemployment in these countries.

FDI helps to increase state budget revenue through taxing foreign companies. As a result, developing countries are more able to mobilize financial resources for development projects. 

5. What is the positive impact of FDI?

• Because foreigners are the ones who directly manage and manage capital, they have high responsibility and good skills.

• Exploiting abundant mineral resources and labor resources. Increase the number of jobs and train high-quality workers.

• Expanding the consumption market entails a large scale of production, raising production, and reducing product costs in line with consumers incomes.

• Avoiding protectionist trade barriers and trade fees of the host country.

• Supplementing capital for domestic socio-economic development, promoting economic growth.

• Create a large budget revenue for both parties.

Foreign direct investment serves as a conduit for cross-border collaboration, enabling the exchange of capital, technology, and knowledge between nations. By adopting appropriate strategies, both host and source countries can harness the benefits of FDI, propelling economic growth, technological advancement, and global integration. However, a prudent approach is essential to navigate the risks and challenges associated with foreign direct investment, ensuring that the interests of all stakeholders are safeguarded and sustainable development is prioritized. If you need advice and support, do not hesitate you can contact Apolo Lawyers Law Firm via email contact@apolo.com.vn or hotline - 0903.419.479.

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