Tài liệu A study on the foreign direct investment in the telecommunications sector in lao pdr.

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1 ACKNOWLEDGMENT The author would like to express his sincere gratitude to the supervisor Assoc. Prof. Dr. Bui Anh Tuan for this precious guidance, fully supported and valuable suggestions throughout the research study. Thanks are due to and advisor: H.E. Hiem Phommachanh, Dr. Thansamay Kommasith, Assoc. Prof. Dr. Lai Phi Hung, Assoc. Prof. Dr. Hong Van Cuong, Assoc. Prof. Khampheuy Khamkieng Phommachanh, Mrs. Phonephet Miphenglavanh MBA, Mrs. Phothirath, Mr. Phakavanh Phothirath, Mr. Ketsavanh Phothirath, Mr.Bounsaleumxay Khennavong MBA, Mr. Oudasack Lasoukanh MSc, Mr. Somlith Phouthonsy, Mr. Snith Xaphakdy MSc, Mr. Hoang Quoc Khanh, Mr. Phung Huy Tam, Mr. Doan Hieu, Miss. Phuong Tran Linh for their valuable contribution in serving as committee members, as well as for precious suggestions and comments on the research study. Thanks are also extended to committee council of the national level as: Prof. Dr. Tran Tho Dat, Assoc. Prof. Dr. Ta Van Loi, Prof. Dr. Nguyen Thi Thanh Minh, Assoc. Prof. Dr. Bui Huy Nhuong, Dr. Nguyen Thi Nguyet, Assoc. Prof. Dr. Le Quoc Hoi. Thanks General Director and Deputy Director of The National University of Laos are also extended to professors and General Director and Deputy Director of The National Economics University of Vietnam, and are also due General Director and Deputy Director of Telecommunications in Laos and Vietnam. Special thanks are expressed to the Minister of Education and Training of SR Vietnam and Minister of Education and sports of Lao PDR for providing access to different departments and different companies to support and collect data. Lastly, the grateful the Laos and Vietnam Government, for giving cooperation program to upgrade our knowledge furthermore and to obtain a prestigious Ph.D. degree from two Universities as the National Economics University of Vietnam, Hanoi, Vietnam SR and the National University of Lao, Vientiane capital, Lao PDR. 2 ABBREVIATIONS ADB Asia Development Bank AFTA ASEAN Free Trade Area ASEAN Association of South East Asian Nations BCC Business cooperation contracts BDS Business Development Services BMO Business Membership Organization BOT Build, operate and transfer BPO Business Process Outsourcing Industry BTA Bi-lateral trade agreement CSA Civil Society Associations CPI Consumer Price Index EBS Enterprise Baseline Survey (2005) ES Enterprise Survey (2007, 2009, 2011) ETL Enterprise of Telecommunications Lao EXIM Export-Import Bank FDI Foreign Direct Investment HRDME Human Resource Development for a Market Economy GDP Gross Domestic Product GIZ Deutsche Gesellschaft für Internationale Zusammenarbeit GmbH GoL Government of Lao PDR GNI Gross national income ISIC International Standard Industry Classification ICT Information and Communications Technologies IPT Institute of Posts and Telecommunications ISP Internet service provider IT Information Technology ITU International Telecommunications Union IXC Internet exchange carrier Lao PDR Lao People’s Democratic Republic LeG Lao PDR e-Government LTC Enterprise of Joint Venture of Lao Telecommunications LDC Least developed country LBF Lao Business Forum 3 LNCCI Lao National Chamber of Commerce and Industry MPT Ministry of Posts and Telecommunications MST Ministry of Science and Technology MOT Ministry of Trade MPI Ministry of Planning and Investment MDGs Millennium Development Goals MNE Micro and Nano Engineering MAI Multilateral Agreement on Investment MoES Ministry of Education and Sports MoIC Ministry of Industry and Commerce NGPES National Growth and Poverty Eradication Strategy NSEDP National Socio-Economic Development Plan NUoL National University of Laos NIPTS National Institute of Post and Telecommunications Strategy NPEP National Poverty Eradication Programme NICTA National ICT Association OoG Office of Government OSP On-line service provider OECD Organization for Economic Co-operation and Development SME Small and medium sized enterprises SOE State owned enterprise SMEPDO The National Small and Medium-Sized Enterprise Promotion and Development Office PPP Provincial Public-Private TRIMS Trade Related Investment Measures TFP Total Factor Productivity TNC Trans National Corporations USD United States Dollar VAS Value added services VoIP Voice over Internet Protocol WB World Bank WTO World Trade Organization IIA international investment agreement IPA investment promotion agency 4 LISTS OF TABLE Table 1.1: Internalization advantages............................................................................................. 29 Table 1.2: different types of FDI can be distinguished ................................................................ 29 Table 2.1: ICT spending on services and hardware, 2013.......................................................... 87 Table 2.2: Fixed-line subscribers and market share in 2014...................................................... 90 Table 2.3: Mobile subscribers and annual growth, 1995-2014 .................................................. 91 Table 2.4: Postpaid and prepaid mobile subscribers by operator, 2014 ................................. 93 Table 2.5: ICT Development Index results for LAO PDR ....................................................... 103 Table 2.6: FDI’s Telecommunications sector by partner, up to 2014 ................................... 108 Table 2.7: Telecommunications sector Revenue Summary year 2008 to year 2014 ........... 109 Table 2.8: Telecommunications sector Revenue Summary year 2014 to 2020 .................... 110 Table 2.9: The Company’s establish of FDI ................................................................................ 120 LISTS OF FIGURE Figure 1.1: Porter’s National Competitive Advantage Theory ............................................ 13 Figure 2.2: The international connection point ................................................................... 79 Figure 2.3: Fixed lines in service, 1995 – 2014 ................................................................... 82 Figure 2.4: Fixed-line subscribers and market share in 2013 .............................................. 83 Figure 2.5: Mobile subscriber’s growth, 2014 ..................................................................... 85 Figure 2.6: Mobile subscribers and market share, 2014 ...................................................... 86 Figure 2.7: Internet users, 1998 – 2014 ............................................................................... 89 Figure 2.8: Overview of the ICT Development Index ......................................................... 95 Figure 2.9: FDI’s Telecommunications sector by partner, up to 2013 .............................. 101 Figure 2.10: The companies’ share of FDI ........................................................................ 114 Figure 2.11: Telecommunications sector facility ............................................................. 122 Figure 3.3: Strategic human resource development serves as the key link between the overall strategic plan and human resource management. .................................................. 146 5 INTRODUCTION 1. Rational of the research The Lao People’s Democratic Republic (Lao PDR) is developing country, it is facing critical changes. Recently, this has evolved to the stage of adopting a so-called “New Economic Mechanism” for economic reform that attempts to transform its centrallyplanned economy toward a market-oriented one. Foreign Direct Investment has played a very important role in the development of the telecommunications sector in Lao PDR but inflow of Foreign Direct Investment still small and going down in the period from 20002010. Party focuses on enhancing its leadership role (Choummaly Sayasone, Party Secretary General of Lao revolution people). Party Secretary General will focus on bolstering the leadership of the Party and closely monitoring the country’s top priorities to realize the resolution of the 9th Party Congress approved in March, 2011. The commitment was made at the 2nd session of the 9th Party Central Committee convened in Vientiane from 16-20 May, 2011 chaired by Party Secretary General Choummaly Sayasone. The leaders have seen the need to boost Socio-Economic development based on the potential of various areas. The session proceeded as the entire Party, army and society are focusing on formulating action plans to realize the Resolution of the 9th Party Congress and the Seventh (7) Socio-Economic development plans for 2011-2015 and all these efforts can lay the foundation for Lao PDR to rise above least developed country status in year 2020 [14]. Foreign Direct Investment (FDI) has played a very important role in the development of the Lao’s telecommunication sector in Lao PDR. The Government has formulated policies to attract FDI to this sector. But FDI inflow to Lao’s telecommunications sector is not enough as expected. This issue has affected the development of the sector as well as the economic development of the country. The results, starting from an extremely low base, were striking - growth averaged 6% per year from 1988-2008 except during the short-lived drop caused by the Asian financial crisis that began in 1997. Laos' growth exceeded 7% per year during 2008-13. Despite this high growth rate, Lao PDR remains a country with an underdeveloped infrastructure, particularly in rural areas. It has a basic, but improving, telecommunications system, and limited external and internal land-line telecommunications. Laos' economy is heavily dependent on capital-intensive natural 6 resource exports. The economy also has benefited from high-profile foreign direct investment in telecommunications, logging, and construction though some projects in these industries have drawn criticism for their environmental impacts. Lao PDR is in the process of implementing a value-added tax system. Simplified investment procedures and expanded bank credits for small companies and small entrepreneurs will improve Laos' economic prospects. The government appears committed to raising the country's profile among investors, but suffered through a fiscal crisis in 2013 brought about by public sector wage increases, fiscal mismanagement, and revenue shortfalls. The World Bank has declared that Laos' goal of graduating from the UN Development Program's list of leastdeveloped countries by 2020 is achievable, and the country is preparing to enter the ASEAN Economic Community in 2015. This dissertation needs to be fulfilling the following tasks: to analyses the development of the telecommunications of Lao PDR from 2003 to 2013; to analyses and evaluate the role of FDI to develop the telecommunications sector in Lao PDR in the period 2003-2013; to investigate the main drivers of improve FDI to the telecommunications sector in Lao PDR in the period 2003-2013; to give the solutions to attract FDI to develop the telecommunications sector in Lao PDR in the period is better of 2015 to 2020. This study aims to analyses the current situation of FDI in the sector in the period from 2000 to 2010 and to set up solutions to attract FDI to the sector in the period from 2011 to 2015 in the new context of international economic integration. 2. Literature Review The Lao’s Telecommunications development, since then government has encouraged the expansion of foreign direct investment (FDI). The liberalization measure in 1994 has changed with foreign investments radically. The inflows will allow multiple benefits such as technology transfer, market access, improvement in voice and data quality and organizational skills. It increases the flow of foreign currency and helps in maintaining harmonious relationship with the country from which the investment is made. It has been decided to enhance the FDI in telecom services in areas like basic telecom, cellular unified access services, internet and intranet, long distance vast, public mobile, radio service and radio frequency services. 7 The above services would be subject to licensing and security requirements, wherever required. The FDI is limit increase, any change of investment flowing into Lao PDR and have a magnanimous effect on the telecom sector by way of economic reforms and would also affect the economy as a whole, and would likely have a chain reaction on various other sectors. It has been proclaimed by the Finance Minister of Lao PDR that the decision about increasing the FDI in the Lao telecom market has been taken as telecom sector is perceived as the capital intensive and thus the aim is to draw more and more capital investment in this sector. Moreover the aim was also to make the whole system in the telecom market lucid and methodical. FDI in services responds well to openness especially when it comes to the telecoms sector. This is quite evident looking at the recent boom in the Lao Telecoms sector. Further liberalization of services involves potential advantages for Lao economy. Benefits can arise from increased competition, lower prices, and better quality of services. FDI in services like telecommunications provide key inputs to other productive activities that lead to further investment and competitiveness of an economy. Efforts should be made towards attracting efficiency seeking FDI through a right policy that expands operation, improve local skills, establish linkages and upgrade technology. However, precautions should be taken to avoid the risk of foreign investors outcompeting domestic investors especially in case of infrastructure services like telecommunications. Services where domestic investors are not able to cater to the growing demand, or where domestic service-providers do not have the ability or capacity to provide the required quality of services. To circumvent such spirals it is important for the region to have appropriate domestic regulations or enabling environment in place, which will assure better quality of services at affordable prices. Clear domestic regulations increase transparency in the system and encourage FDI. To sustain the momentum of growth in services trade in the region, conscious efforts should be made to improve the competitive advantage of the region as a whole. Inclusion of trade in services may help attract FDI in services and lead to greater intra-regional trade. Access to more efficient services could lead to higher growth in productivity in other sectors, which, in turn, could improve the overall competitive strength of the region. 8 Thus it can be concluded that the recent upward swing in the telecommunication sector in Lao PDR is due to the introduction of FDI in this sector by the Lao Government since 1991 but at the same time we must also be careful and not get carried away by this development and should have proper regulations in place to actually utilize this situation to our advantage. Laos and Vietnam will struggle strive target for a 20 percent trade growth in two-way trade next year, up from the US$1Billion expected for the year ending on December, 2012. Two-way trade between Laos and Vietnam over the first 10 months of 2013 reached US$817Million. In addition, Vietnamese enterprises have invested in 412 projects in Laos totaling US$5Billion, which rank the country second after China. [31]. To circumvent such spirals it is important for the region to have appropriate domestic regulations or enabling environment in place, which will assure better quality of services at affordable prices. Clear domestic regulations increase transparency in the system and encourage FDI. To sustain the momentum of growth in services trade in the region, conscious efforts should be made to improve the competitive advantage of the region as a whole. Inclusion of trade in services may help attract FDI in services and lead to greater intra-regional trade. Access to more efficient services could lead to higher growth in productivity in other sectors, which, in turn, could improve the overall competitive strength of the region. Thus it can be concluded that the recent upward swing in the telecommunication sector in Lao PDR is due to the introduction of FDI in this sector by the Lao Government since 1991 but at the same time we must also be careful and not get carried away by this development and should have proper regulations in place to actually utilize this situation to our advantage. 3. Research of objectives and tasks. The objectives of this study and research aims to identify the important role of FDI related to improve and success of the telecom business performance in the Lao PDR in order to recommend some solution to attract FDI into Lao PDR and suggestions for new potential foreign direct investors. The Lao PDR is still young country and telecommunication market is small too, but really wants to be successful in doing business in the world new market management for improving to best for Lao’s economic. 9 To meet above objects, this dissertation needs to be fulfilling the following tasks: - To analyses the development of the telecommunications of Lao PDR from 2003 to 2013. - To analyses and evaluate the role of FDI to develop the telecommunications sector in Lao PDR in the period 2003-2013. - To investigate the main drivers of improve FDI to the telecommunications sector in Lao PDR in the period 2003-2013. - To give the solutions to attract FDI to develop the telecommunications sector in Lao PDR in the period is better of 2015 to 2020. 4. Research Questions. - How does Lao’s telecommunications sector contribute to the development of Lao’s economy? - How the FDI have played in the development of the telecommunications sector in Lao PDR in the period 2003-2013? - What is the current situation of FDI in the telecommunications sector from 20032013? - What are factors to improve the FDI inflow into Lao’s telecommunications sector? - What and how to improve FDI in to Lao’s telecommunications sector in the period 2015-2020? 5. Research Methodology. Overall, the section of this paper is concerned with the social construction and disbursement of rationality and the way in which this rationality affects the power and political structure of organizational functioning through a variety of organizational and sociological theories. The organizational and sociological theories utilized are referred to as interpretive perspectives, which also draw from the organizational decision-making perspective. Exclusively, a number of organizational and social theories including institutional theory, resource dependency theory, political perspectives, and the sociology of professions are looked at to examine the relevance of interpretive perspectives. In summary, "interpretive perspectives of managerial accounting have begun to see managerial accounting practices and information as socially constructed phenomena with the full implications of the power and politics of social construction rather than as a technically rational function driven by and serving the internal operations of 10 organizations." Managerial accounting is seen as being implicated in the social construction of reality rather than as being passively reflective of the reality as depicted in contingency theory. Main research methods will be used in this study are desk study and field study, comparative study with figures. The field study includes interview, questionnaires and observations. 6. Expected Results The economic reforms that the Lao PDR has undertaken from 2011 to 2015 have produced significant progress. Over this period, gross domestic product (GDP) in real terms grew by about 8.3% per annum on the average. Foreign Direct Investment (FDI) has contributed greatly to changing the economic landscape of the country. The telecommunications is also very fast growth and first economic in Lao PDR. And also all telecom operators will be convergence to the centralization in the one gateway and also will be develop well for the future. Foreign Direct Investment (FDI) plays an extraordinary and growing role in global business. It can provide a firm with new markets and marketing channels, cheaper production facilities, access to new technology, products, skills and financing. For a host country or the foreign firm which receives the investment, it can provide a source of new technologies, capital, processes, products, organizational technologies and management skills, and as such can provide a strong impetus to economic development. The direct investment in buildings, machinery and equipment is in contrast with making a portfolio investment, which is considered an indirect investment. In recent years, given rapid growth and change in global investment patterns, the definition has been broadened to include the acquisition of a lasting management interest in a company or enterprise outside the investing firm’s home country, such as a direct acquisition of a foreign firm, construction of a facility, or investment in a joint venture or strategic alliance with a local firm with attendant input of technology, licensing of intellectual property, in the past decade, FDI has come to play a major role in the internationalization of business. 7. Structure of Dissertation. 1. Introduction 2. Chapter 1: FDI Theories framework and the important of FDI attraction into telecommunication sector in Lao P.D.R 11 3. Chapter 2: Situation of FDI attraction into telecommunication sector in Lao P.D.R 4. Chapter 3: Solutions and recommendations in FDI attraction into telecommunication sector in Lao P.D.R 5. Conclusion 12 CHAPTER 1 FDI THEORIES FRAMEWORK AND THE IMPORTANT OF FDI ATTRACTION INTO TELECOMMUNICATION SECTOR IN LAO P.D.R 1.1 The theory of FDI There are two main categories of international investment- Foreign Portfolio Investment and Foreign Direct Investment: Foreign Portfolio investment refers to the investment in a company’s stocks, bonds, or assets, but not for the purpose of controlling or directing the firm’s operations or management. Typically, investors in this category are looking for a financial rate of return as well as diversifying investment risk through multiple markets. Foreign direct investment (FDI) refers to an investment in or the acquisition of foreign assets with the intent to control and manage them. (1) Porter’s National Competitive Advantage Theory. In the continuing evolution of international trade theories, Michael Porter of Harvard Business School developed a new model to explain national competitive advantage in 1990. Porter’s theory stated that a nation’s competitiveness in an industry depends on the capacity of the industry to innovate and upgrade. His theory focused on explaining why some nations are more competitive in certain industries. To explain his theory, Porter identified four determinants that he linked together. The four determinants are (1) local market resources and capabilities, (2) local market demand conditions, (3) local suppliers and complementary industries, and (4) local firm characteristics. [39] 1. Local market resources and capabilities (factor conditions). Porter recognized the value of the factor proportions theory, which considers a nation’s resources (e.g., natural resources and available labor) as key factors in determining what products a country will import or export. Porter added to these basic factors a new list of advanced factors, which he defined as skilled labor, investments in education, technology, and infrastructure. He perceived these advanced factors as providing a country with a sustainable competitive advantage. 13 2. Local market demand conditions. Porter believed that a sophisticated home market is critical to ensuring ongoing innovation, thereby creating a sustainable competitive advantage. Companies whose domestic markets are sophisticated, trendsetting, and demanding forces continuous innovation and the development of new products and technologies. Many sources credit the demanding US consumer with forcing US software companies to continuously innovate, thus creating a sustainable competitive advantage in software products and services. 3. Local suppliers and complementary industries. To remain competitive, large global firms benefit from having strong, efficient supporting and related industries to provide the inputs required by the industry. Certain industries cluster geographically, which provides efficiencies and productivity. 4. Local firm characteristics. Local firm characteristics include firm strategy, industry structure, and industry rivalry. Local strategy affects a firm’s competitiveness. A healthy level of rivalry between local firms will spur innovation and competitiveness. Figure 1.1: Porter’s National Competitive Advantage Theory Source: Theory of International Trade and Investment. International Business, the challenge of global competition, twelfth edition. Dolnald A.Ball, J.Michael S.Minor, Jeanne M.McNett 14 In addition to the four determinants of the diamond, Porter also noted that government and chance play a part in the national competitiveness of industries. Governments can, by their actions and policies, increase the competitiveness of firms and occasionally entire industries. Porter’s theory, along with the other modern, firm-based theories, offers an interesting interpretation of international trade trends. Nevertheless, they remain relatively new and minimally tested theories. (2) Product Life Cycle Figure 1.2: Product Life Cycle Theory Source: Wild, John J., K. L. Wild, J. C. Y Han (2000), International Business: An Integrated Approach, Prentice–Hall, Inc., Angelo Francesco Rossi (2013). Product Life Cycle: The product life cycle is defined as the period that starts with the initial product design (research and development) and ends with the withdrawal of the product from the marketplace. It is characterized by specific stages, including research, development, introduction, maturity, decline, and finally obsolescence as the product is removed from the market (discontinued). Each stage is often linked with changes in the flows of raw materials, parts and distribution to markets as production (input costs) is 15 adjusted to face increasing competition. Conventionally, four main stages compose a product's life cycle: • Introduction. This stage mainly concerns the development of a new product, from the time is initially conceptualized to the point it is introduced on the market. The great majority of ideas do not reach the promotion stage. The corporation having an innovative idea first will often have a period of monopoly until competitors start to copy and/or improve the product (unless a patent is involved as it is the case in industries such as pharmaceuticals). Generally, associated freight flows take place within developed countries and/or close to markets where to product is likely to be adopted. • Growth. If the new product is successful (many are not), sales will start to grow and new competitors will enter the market (by replicating the product or developing new features on their own), slowly eroding the market share of the innovative firm. The product starts to be exported to other markets and substantial efforts are made to improve its distribution since competition mainly takes place more on the innovative capabilities of the product than on its price. This phase tends to be associated by high levels of profits and a fast diffusion of the product. • Maturity. At this stage, the product has been standardized, is widely available on the market and its distribution is well established. Competition increasingly takes place over cost and a growing share of the production is moved to low cost locations, particularly for labor intensive parts. Associated freight flows are consequently modified to include a greater transnational dimension. • Decline. As the product is becoming obsolete, production essentially takes place in low costs locations. Production and distribution economies are actively sought as profit margins decline. Eventually, the product will be retired, an event that marks the end of its life cycle. Conventionally, as a product went through its life cycle the least profitable functions were relocated to lower costs locations, notably in developing countries. This dichotomy is being challenged since it is becoming more common, even for high technology products, that the manufacturing of a new product immediately takes place in a low labor cost location. Multinational corporations have global production networks that 16 enable them to efficiently allocate design, production and distribution according to global factors of production. This also relies on outsourcing and subcontracting. (3) Imperfect competition and price discrimination Competition emerges when different people recognize similar opportunities and set up firms to exploit them. The classic forum for competition is the final product market, where producers confront consumers. Competition based on freedom of entry into industry discourages the exploitation of consumers because any attempt by a firm to raise prices will attract entry, increase supply, reduce prices and restore profits to their normal level. Likewise, competition for free labor will ensure that labor is not exploited either. It is widely held that monopoly is not only inequitable, but also inefficient. It is argued that monopolized industries produce too little output because the price is so high that it restricts consumer demand. Strictly speaking, however, it is only differences in the degree of monopoly between industries that reduce efficiency. If all prices were raised in the same proportion, then relative prices would be unchanged and consumer purchasing decisions would not be distorted (although other decisions might be distorted instead) (Lerner, 1944)[45]. The argument against monopoly also assumes that the monopolist must charge the same price to all customers. This ignores the possibility of discriminatory pricing (Phillips, 2005)[46]. If the monopolist knows the maximum amount that each customer (or type of customer) is willing to pay, then they can charge different prices to different customers depending on how much they value the product. The main requirement is to prevent the consumers from reselling to each other, or joining forces, to form a buyer’s club. If these conditions are satisfied, the marginal consumer pays no more than marginal cost and so the scale of output in each industry is efficient. The efficiency of monopolistic price discrimination is widely used to support intellectual property rights (IPRs) that confer monopolies for the creation or discovery of knowledge. IPRs promote private enterprise in the creation of knowledge, but the argument against them is that they discourage dissemination by charging for access. However, if the owners of IPRs implement discriminatory pricing, then no one is asked to pay more than they are willing to pay and so dissemination is not impaired (Casson,1979)[47]. Indeed, private ownership encourages the active marketing of knowledge, so that more people may use the knowledge than before. On the other hand, the administrative costs of collecting payment may mean that people with low valuations are denied effective access. 17 These arguments apply not only to final product markets but to intermediate product markets too. They suggest that efficient markets are either competitive, or involve discriminating monopoly. There are two main mechanisms by which competition is sustained. One involves a large number of suppliers confronting a large number of sellers, and the other involves a small number of buyers and sellers, but with potential entrants on either side waiting for an opportunity to join in (Baumol et al., 1982)[44]. Intermediate product markets for agricultural products, linking farms to food processors, are a good example of competitive markets with large numbers of traders. Markets for mineral ores exemplify competition from potential entry; at any one time, only a small number of large mines may be in operation, but there are usually other mines ready to be opened (or more likely re-opened) if price increases. Competitive entry and re-entry is easiest when the sunk costs of entry are small. Under monopoly, market failure reflects the inability to discriminate. Consider, for example, the licensing decision. A technology owner serving the global market may prefer to license different firms in different countries because of their local knowledge, but it may be difficult to partition local markets in this way. If licensees can export, then they can invade each other’s territories; this threat will reduce the value of the licenses, and ultimately reduce the technology owners’ rents. The technology owner may therefore be obliged to use a single licensee for all markets, who will be less effective in each market and generate fewer rents for the licensor. Inability to discriminate can also be an issue for ordinary intermediate product markets where production at certain stages exhibits economies of scale. Within a multistage production system (a “value chain”), one stage (say the upstream stage) may exhibit substantial economies of scale, so that industry production is in the hands of a single firm, while the downstream stage may exhibit constant return to scale, so that many small firms are involved. If the upstream firm sets a uniform monopoly price, then downstream decisions will be distorted by the artificial scarcity of the intermediate input (e.g. excessive costs will be incurred in avoiding wastage) (Warren-Boulton, 1978)[43]. On the other hand, if the upstream firm charges all the downstream firms a two-part tariff, comprising a lump sum payment for the right to purchase and a unit price equal to upstream marginal costs, then distortion will be eliminated. The efficiency gain will accrue to the monopolist, whose profits will increase as a result. However, if the downstream firms can re-sell, then 18 the system will be undermined, as they can form a buyers’ co-operative and pay the lump sum only once. Furthermore, with a downstream buyer’s co-operative confronting an upstream monopolist, a bilateral monopoly may develop; competition breaks down, and exchanges of threats may ensue. (4) Economic globalization. Economic globalization went along with booming FDI in developing countries, which attracted a rising share of world-wide FDI flows in the 1990s. In various developing countries, FDI plays a more significant role than in developed countries. The good news is that FDI is anything but a zero-sum game, in which one particular country could attract FDI only at the expense of another country. Additional FDI is likely to take place when new investment opportunities emerge in countries opening up to FDI. Essentially, all developing countries have the chance to become attractive to foreign investors, not only large and fairly advanced countries. When competing for FDI, policy-makers have to be aware that various measures intended to induce FDI are necessary, but far from sufficient to do the trick. For example, this applies to the liberalization of FDI regulations and various business facilitation measures. Other reforms, such as privatization, tend to be more effective in stimulating FDI inflows, but need to be complemented by reform in further areas (e.g. competition policy), in order to ensure that FDI inflows are beneficial. Still other determinants of FDI, which were sufficient in the past, may prove to be less relevant in the future. The size of local markets appears to be the most important case in point. Globalizations can be expected to induce a shift from market-seeking FDI to efficiency-seeking FDI. International competitiveness of local production by foreign investors will, then, turn out to be a decisive factor shaping the distribution of future FDI. This involves major challenges for policy-makers in developing countries. In general terms, the task is to create (immobile) domestic assets that provide a competitive edge and attract internationally mobile factors of production. This task has various dimensions, ranging from human capital formation and capacity-building (in order to be able to absorb advanced technologies applied by foreign investors) to the provision of efficient businessrelated services. Furthermore, the policy agenda includes critical trade policy choices: liberalizing trade in capital goods and intermediate products is essential in competing for efficiency- 19 seeking FDI. There is some bad news as well. Promotional efforts will help little, if at all, to attract FDI if economic fundamentals are not conducive to FDI. Fiscal and financial incentives offered to foreign investors may do more harm than good, especially if incentives discriminate against small investors and local firms. Policy-makers should not ignore the direct and indirect costs of discretionary FDI incentives. Finally, policy-makers should not expect too much from FDI inflows. The recent boom of FDI notwithstanding, capital formation continues to be a national phenomenon in the first place. Strongly positive growth effects of FDI cannot be taken for granted. FDI is superior to other types of capital inflows in some respects, particularly because of its risksharing properties, but not necessarily in all respects. The nexus between FDI and overall investment as well as economic growth in host countries is neither self-evident nor straightforward, but remains insufficiently explored territory. - The theory of internalisation was long regarded as a theory of why FDI occurs - By internalising across national boundaries, a firm becomes multinational - Some economists have suggested that even though ownership specific advantages and internalisation advantages are necessary for FDI to occur, it is still not a sufficient explanation. - Under what circumstances is it likely that a firm would want to replace the open market and instead use an internal transaction? - Ensure product quality (forward integration) - Ensure stable supply of raw materials (backward integration) - Market for knowledge? (5) Internalization theory Internalization theory focuses on imperfections in intermediate product markets. Two main kinds of intermediate product are distinguished: knowledge flows linking research and development (R&D) to production, and flows of components and raw materials from an upstream production facility to a downstream one. Most applications of the theory focus on knowledge flow. Proprietary knowledge is easier to appropriate when intellectual property rights such as patents and trademarks are weak. Even with strong protections firms protect their knowledge through secrecy. Instead of licensing their knowledge to independent local producers, firms exploit it themselves in their own production facilities. In effect, they internalize the market in knowledge within the firm. 20 The theory claims the internalization leads to larger, more multinational enterprises, because knowledge is a public good. Development of a new technology is concentrated within the firm and the knowledge then transferred to other facilities. (6) Eclectic Market or Market power. The eclectic paradigm is a theory in economics and is also known as the OLIModel or OLI-Framework. It is a further development of the internalization theory and published by John H. Dunning in 1980 [48]. Internalization theory itself is based on the transaction cost theory. This theory says that transactions are made within an institution if the transaction costs on the free market are higher than the internal costs. This process is called internalization. For Dunning, not only the structure of organization is important. He added 3 more factors to the theory: • Ownership advantages (trademark, production technique, entrepreneurial skills, returns to scale) Ownership specific advantages refer to the competitive advantages of the enterprises seeking to engage in Foreign direct investment (FDI). The greater the competitive advantages of the investing firms, the more they are likely to engage in their foreign production. • Location advantages (existence of raw materials, low wages, special taxes or tariffs) Locational attractions refer to the alternative countries or regions, for undertaking the value adding activities of MNEs. The more the immobile, natural or created resources, which firms need to use jointly with their own competitive advantages, favor a presence in a foreign location, the more firms will choose to augment or exploit their O specific advantages by engaging in FDI. • Internalization advantages (advantages by own production rather than producing through a partnership arrangement such as licensing or a joint venture) Firms may organize the creation and exploitation of their core competencies. The greater the net benefits of internalizing cross-border intermediate product markets, the more likely a firm will prefer to engage in foreign production itself rather than license the right to do so.
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