FOREIGN DIRECT INVESTMENT

PAPER

To fulfill the assignment of Business International

instructed by

Mr. Burhanuddin, S.E., M.Sc.

By:

Group 6

Andini Salsabila (2201206107)

Neisya Fellina Zahra (2201026151)

Tasya Julia Suwandi (2201026064)

S1 MANAGEMENT

FACULTY OF ECONOMICS AND BUSINESS

MULAWARMAN UNIVERSITY

SAMARINDA

2025
 PREFACE

Bismillahirrahmanirrahim,

All praise and praise the presence of Allah SWT for all His blessings and mercy so that we can
finish the paper entitled "Foreign Direct Investment Paper".

We would like to thank Mr. Burhanuddin, S.E., M.Sc. for guiding and with this assignment also
added insight and experience in understanding the Business International course.

We realized that this paper is far from perfect both in terms of writing, language, and
composition. Therefore, we expect suggestions and criticisms from all readers so that they can
be our reference in writing in the future. Hopefully this paper can add insight to all of us.

Warm Regards,

Group Six

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 TABLE OF CONTENT

Pages
CHAPTER 1 ......................................................................................................................... 1

INTRODUCTION ................................................................................................................. 1

1.2. Problem Formulation ................................................................................................. 2

1.3. Objectives................................................................................................................... 2
CHAPTER II ......................................................................................................................... 3

DISCUSSION ....................................................................................................................... 3

2.1. Introduction of Foreign Direct Investment ................................................................ 3

2.2. Theory of Foreign Direct Investment ......................................................................... 4
CHAPTER III ........................................................................................................................ 5

STUDY CASE ....................................................................................................................... 5

CHAPTER IV...................................................................................................................... 10

CONCLUSSION.................................................................................................................. 10

REFERENCES..................................................................................................................... 11

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 CHAPTER 1
INTRODUCTION
1.1. Background
Economic globalization has led to an increase in cross-border investment flows, and
foreign direct investment (FDI) has become an important instrument supporting
international economic integration. FDI includes not only foreign investment in the form
of funds but also active participation in the direct supervision and control of the
company's management in the host country. In the context of the global economy, foreign
investment plays a strategic role in facilitating capital flows, technology transfer,
improving market efficiency and creating jobs. As a result, many countries are competing
to attract foreign investment by offering various incentives, such as tax breaks and
regulatory simplification.
On the other hand, the decision to invest directly abroad depends on a number of
factors. According to Charles W.L. Hill in his book International Business, there are three
main approaches that underlie FDI decisions: export control, licensing control
(internalization theory), and the eclectic paradigm developed by John Dunning (the OLI
fra. This paradigm integrates ownership advantages, location advantages, and
internalization advantages as the main determinants of FDI decisions.
Furthermore, political approaches also influence a country's FDI policy. There are
three main perspectives on the issue: the radical view, which rejects FDI as a form of
economic colonialism; a free market view, which sees FDI as an engine of economic
growth; and pragmatic nationalism, which seeks to maximize the benefits of FDI while
minimizing its impact on the domestic economy. This ideological difference shows that
FDI not only affects economic aspects but also social and political aspects of the host
country.
Foreign direct investment has a significant impact on the host country and the country
of origin. For recipient countries, FDI can increase capital flows, create jobs, improve the
balance of payments, and increase the competitiveness of the domestic market. However,
there are also risks, including a decrease in the competitiveness of local companies,
adverse impacts on the balance of payments due to profit repatriation, and the possibility
of loss of economic sovereignty. At the same time, foreign direct investment in the home
country can strengthen the balance of payments through profit inflows from overseas

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subsidiaries and create export demand. However, there are concerns that the relocation
of production bases could result in a reduction in domestic employment (Investopedia,
2024).
Given the complexity of the benefits and costs of foreign direct investment, public
policy plays a crucial role in regulating investment flows. Countries of origin generally
have policies that encourage or restrict foreign investment depending on their economic
and political needs. At the same time, host countries seek to attract FDI through
incentives and limit adverse impacts through ownership policies and performance
requirements.
Given the complexity and significant impact of foreign direct investment, a
comprehensive study is needed to understand the various aspects that affect these
investment flows. The study aims to provide more in-depth insights into the role of
foreign direct investment in the global economy and its impact on the economic policies
of host and source countries.

1.2. Problem Formulation

1. What is Foreign Direct Investment?
2. What are the theories that support Foreign Direct Investment?
3. What is the case study of foreign investment in the cooperation between Vietnam
and iPhone? Then what theory supports the cooperation activities supported by
iphone and vietnam, explain.

1.3. Objectives
1. To understand the Foreign Direct Investment.
2. To understand the theory of Foreign Direct Investment.
3. To identify and analyze the case study of iphone and vietnam cooperation in foreign
investment.

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 CHAPTER II
DISCUSSION

2.1. Introduction of Foreign Direct Investment

According to Hady (2009) Foreign Direct Investment (FDI) is real investment in the
form of company establishment, factory construction, purchase of capital goods, land,
raw materials, and supplies by foreign investors where the investor is directly involved in
the management of the company and controls the investment. Foreign Direct Investment
usually starts with the establishment of a subsidiary or the purchase of majority shares
of a company where in an international context, this form of investment is usually carried
out by multinational companies with operations in manufacturing, processing industries,
processing extraction, natural resource extraction, service industries and so on.
FDI can be categorized into two main types, namely horizontal FDI and vertical FDI.
Horizontal FDI occurs when a foreign company establishes or acquires a business of the
same type in the destination country, for example a Japanese automotive company
establishing a factory in Indonesia to produce cars (UNCTAD, 2021). Meanwhile, vertical
FDI occurs when a foreign company invests funds in a different sector but still in the same
supply chain, such as a technology company from the United States investing in the
component manufacturing sector in Vietnam to support their production of electronic
devices (OECD, 2008). These two types of FDI have different impacts on the economy of
the recipient country, depending on the policies and readiness of the economic
infrastructure in the country (Dunning, 1993).
FDI provides many benefits to the recipient country, such as increasing investment
capital, creating jobs, and increasing the competitiveness of domestic industries
(UNCTAD, 2021). However, there are also several challenges that can arise, such as the
dominance of foreign companies that can reduce the competitiveness of local companies
or the potential exploitation of natural resources (OECD, 2008). Therefore, many
countries implement regulations and policies to direct FDI to be in line with national
interests. These regulations can be in the form of tax incentives, restrictions on foreign
ownership, or regulations on technology transfer (Dunning, 1993). With the right policies,
FDI can be an effective instrument to increase economic growth and social welfare in the
recipient country (UNCTAD, 2021).

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2.2. Theory of Foreign Direct Investment
Based on the book from Charles W. L. Hill's "International Business" there are three
main complementary approaches to understanding Foreign Direct Investment:

1. Limitations of Exporting
This approach highlights the disadvantages of relying solely on exporting as an
entry mode. Factors like transportation costs, trade barriers (tariffs, quotas), and
logistical complexities can make FDI a more attractive alternative for serving
foreign markets (Hill, page 238). Exporting involves producing goods at home and
then shipping them to a foreign market. The limitations can include high
transportation costs or trade barriers (tariffs), thus making FDI a more attractive
alternative (as seen in the image you sent).
2. Limitations of Licensing (Internalization Theory)
Licensing involves granting a foreign entity the right to produce and sell the firm’s
product in return for a royalty fee on every unit sold. This theory, also known as
the internalization theory, addresses the drawbacks of licensing. According to the
image, one drawback of licensing may result in a firm giving away valuable
technological know-how to a potential foreign competitor (Hill, page 240). The firm
may reduce this risk by maintaining control over operations and retaining
technological know-how. This argument relates to what economists call the market
imperfections approach to foreign direct investment.
3. The Eclectic Paradigm (Dunning’s OLI Framework)
Developed by John Dunning, this framework integrates the limitations of exporting
and licensing to propose that location-specific advantages, ownership-specific
advantages, and internalization advantages are key determinants of FDI decisions
(Hill, page 242). The eclectic paradigm argues that in addition to the location-
specific advantages, there must also be ownership-specific advantages.

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 CHAPTER III
STUDY CASE

Vietnam has shown impressive economic growth in recent years. Vietnam's Gross Domestic
Product (GDP) growth is a topic of interest, especially with changes and challenges in the
global economy. There is a publication from CEIC Data that provides nominal GDP growth
data in Vietnam from 2022 to 2025 shows a significant growth trend. Here is a summary of
the relevant data:
• 2022: Vietnam's GDP experienced strong growth, with a growth rate of around 7.0%
compared to the previous year.
• 2023: GDP growth is estimated at 7.26%, with a total GDP value of around 429.72
billion USD
• 2024: It is estimated that there will be a surge in growth to 11.54%, with GDP value
projected to increase
• 2025: Projections show that Vietnam's GDP will reach around 455.50 billion USD, with
an annual growth of around 7.55%

Vietnam’s GDP growth in percent

Source: CEIC Data
Vietnam's GDP growth is of course influenced by several main factors are as follows:
• Foreign Direct Investment (FDI): Vietnam relies heavily on foreign direct investment
flows, which contribute significantly to economic growth. Between 2021 and 2023,
FDI inflows to Vietnam will average around $18,5 billion per year. Geopolitical tensions
between the US and China also encouraged Western investors to look for alternatives,
and Vietnam became the main choice (Dw.com, 2024).

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 Vietnam’s FDI Inflow (2021-2023)
Source: World Bank
• Manufacturing Export Recovery: The manufacturing sector, especially exports,
experienced a strong recovery, which contributed to GDP growth. Exports to large
markets such as the US increased sharply, with growth reaching 25.4% (YoY) in several
periods (alinea.id, 2024).
• People's Purchasing Power: Restoring people's purchasing power after the COVID-19
pandemic also plays an important role. The Vietnamese government reduced value
added tax (VAT) from 10% to 8% in 2022, which helped increase domestic purchasing
power and consumption (alinea.id, 2024).
• Structural Reforms: To maintain growth momentum, Vietnam needs to continue
structural reforms and increase public investment. This includes improving the
business environment and addressing challenges such as corruption and dependence
on the FDI sector (detik.com, 2024).
• External Conditions and International Cooperation: Cooperation in global initiatives
such as the Belt and Road Initiative (BRI) also provides benefits for Vietnam in terms
of access to technology and investment from other countries, especially China
(Maharani, 2022).

Apple's Strategic Shift in Investment from China to Vietnam: An Analytical Perspective

Apple has strategically redirected its investment focus from China to Vietnam, a move
driven by a combination of economic, geopolitical, and operational factors. This transition

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reflects a broader trend among multinational corporations seeking to diversify their supply
chains and reduce dependence on a single country (Suara.com, 2024).
Apple has increasingly shifted its production to Vietnam as part of its strategy to diversify
its supply chain and reduce reliance on China. This move has involved relocating factories of
key suppliers like Foxconn, Luxshare, Pegatron, and Wistron to Vietnam. For instance,
Foxconn signed a contract in 2022 to lease additional land in Bac Giang Province, aiming to
create jobs for approximately 30,000 workers. Vietnam's geographical proximity to China,
stable political environment, competitive labor costs, and extensive free trade agreements
make it an attractive destination for Apple's production needs. This cooperation has
positioned Vietnam as a critical hub in Apple's global value chain, boosting the country's
economy through job creation and increased foreign direct investment (FDI) inflows (Vietnam
Briefing, 2022).

Factors Driving Apple's Investment in Vietnam:

1. U.S.-China Trade Tensions: The ongoing trade war between the United States and
China has created uncertainty for companies such as Apple, which has a significant
manufacturing presence in China (Kompas.id, 2024). By moving some of its production
to Vietnam, Apple can reduce its exposure to potential tariffs and trade disruptions.
2. Supply Chain Diversification: Apple is actively working to diversify its supply chain to
mitigate risks associated with geographic concentration (Katadata.co.id, 2024). The
COVID-19 pandemic has further highlighted the vulnerability of global supply chains,
prompting Apple to look for alternative locations for manufacturing.
3. Competitive Labor Costs: Vietnam offers lower labor costs compared to China, making
it an attractive location for labor-intensive manufacturing operations (Kompas.id,
2024). Although wages in Vietnam have increased in recent years, they remain
competitive compared to other countries in the region.
4. Supportive Government Policies: The Vietnamese government has been actively
attracting foreign investment through various incentives, including tax relief,
regulatory simplification, and infrastructure investment (Kompas.id, 2024). This policy
has created a conducive business environment for companies like Apple.

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 5. Geographical Location: Vietnam is located close to China, which facilitates the transfer
of production and logistics (Kompasiana.com,2024). This proximity allows Apple to
leverage its existing supply chain and manufacturing expertise in the region.
6. Vocational Workforce Strength: Vietnam has a workforce with better vocational
strength to fill information technology manufacturing plants.

Vietnam's Role in Apple's Supply Chain:

Vietnam has become a major manufacturing hub for a variety of Apple products, including
AirPods, iPads, and Apple Watch (Tempo.co, 2024). Analysts predict that by 2025, Vietnam
will produce the majority of Apple products:
• 20% of all iPads
• 5% off MacBook
• 20% off Apple Watch
• 65% of AirPods

Comparison of Apple's Investments in Vietnam and Indonesia:

Although Apple has invested in Indonesia through the Apple Developer Academy, the level of
investment is significantly lower compared to Vietnam. UI economist, Teuku Riefky, stated
that Apple will choose an investment place that benefits the company (Suara.com, 2024).
Some of the factors that contribute to the investment difference between Vietnam and
Indonesia include: barriers to investment in Indonesia, issues of employment, innovation,
financing, legal certainty, and corruption and the value of Apple's proposed investment in
Indonesia is considered unfair compared to Apple's investment in other countries.

Implications for Vietnam:

Apple's investment in Vietnam has significant implications for the country's economy
(Tempo.co, 2024):
1. Job Creation: Apple's investment has created about 200,000 jobs in Vietnam through
its supply chain and iOS app industry.
2. Economic Growth: Foreign investment contributes to economic growth in various
sectors, increasing the income of the Vietnamese people.

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 3. Manufacturing Sector Development: Vietnam's superior FDI policy strategy has
increased the proportion of FDI flows in the manufacturing sector, improving the
competitiveness of the manufacturing industry.
4. Strengthening of Global Supply Chains: This expansion makes Vietnam the leading
Apple supplier hub in Southeast Asia and the fourth largest in the world.

Theoretical Framework Supporting the Cooperation

The cooperation between Apple and Vietnam FDI theories:

Eclectic Paradigm (OLI Framework):

• Ownership Advantages: Apple leverages its proprietary technology and brand

reputation to maintain competitive advantages in global markets.

• Location Advantages: Vietnam offers cost-effective labor, proximity to China's

supply chain ecosystem, and access to regional free trade agreements like RCEP
and CPTPP. These factors reduce operational costs and ensure smooth logistics.

• Internalization Advantages: By maintaining control over production through

partnerships with suppliers like Foxconn in Vietnam, Apple minimizes risks
associated with outsourcing and ensures quality control.

In summary, Apple's collaboration with Vietnam is supported by the OLI framework's

emphasis on ownership, location, and internalization advantages (Vietnam Briefing, 2022).

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 CHAPTER IV
CONCLUSSION

Foreign Direct Investment (FDI) plays a crucial role in the global economy by facilitating capital
flows, technology transfer, and employment creation in host countries. The decision to
engage in FDI is influenced by various factors, including economic stability, government
policies, labor costs, and infrastructure development. Several theoretical approaches, such as
the Eclectic Paradigm (OLI Framework) and Internalization Theory, provide insights into why
companies choose to invest in foreign markets rather than relying on exporting or licensing.

Vietnam has emerged as a highly attractive destination for foreign investors, particularly in
the technology sector. Apple's significant investment in Vietnam is driven by favorable
economic policies, competitive labor costs, strategic geographical location, and a stable
political environment. As a result, Vietnam has strengthened its position in the global supply
chain, particularly in manufacturing high-tech products such as iPhones and AirPods.

In contrast, Indonesia faces several challenges in attracting large-scale FDI, including

regulatory uncertainties, labor market inefficiencies, and financial barriers. Despite initiatives
such as the Apple Developer Academy, Indonesia has yet to match Vietnam's level of foreign
investment inflows. Addressing these challenges requires comprehensive policy reforms to
enhance investment attractiveness and foster economic growth.

In conclusion, while FDI provides significant economic benefits, host countries must develop
strategic policies to maximize its advantages while mitigating potential risks. By adopting
more investor-friendly policies, Indonesia has the potential to become a more competitive
FDI destination in the future.

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ekonomi-vietnam-lebih-baik-daripada-ri-b2ftB9IaD
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Foreign Direct Investment (FDI): What It Is, Types, and Examples

https://www.investopedia.com/terms/f/fdi.asp

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