Foreign direct investment (FDI)

Foreign direct investment FDI

Foreign Direct Investment FDI arises when a company invests

directly in new facilities for manufacturing and/or marketing in strange country.

• Company becomes a multinational company

• FDI may take the form of:

 green field investment

Completely new overseas operations

Acquisition of brownfield investment or

Merger with an existing overseas company

Types of Foreign Direct Investment (FDI)

Vertical FDI

Vertical FDI invests within the supply chain, but not directly in the same industry. In other words, companies invest in foreign companies that can also supply or sell.

For example, US chocolate maker Hershey's may be looking to invest in a Brazilian cocoa producer. This is called backward vertical integration. This is for companies to purchase suppliers or potential suppliers in their supply chain.

Then there is vertical forward integration. Here are companies investing in foreign companies further down the supply chain. For example, Hershey's may try to buy Alibaba shares. A place where you sell your products.

Horizontal FDI

In horizontal direct investment, funds are invested abroad in the same industry. That is, a company invests in a foreign company that manufactures similar goods. For example, the US-based company Nike could acquire the German-based company Puma. Both are active in the sportswear industry and are therefore classified as forms of horizontal FDI.

Conglomerate FDI

Conglomerate FDI invests in a completely different industry. In other words, it is not directly related to the investor business. For example, US retailer Walmart can invest in German automaker BMW.

This may seem strange to some, but it offers large companies the opportunity to branch out and diversify into new areas. To explain, some large companies reach a point where the demands of their basic business begin to decline. To survive, you must invest in new ventures. Even large companies with high demand can look to new industries with significantly higher growth and return on investment.

Benefits of Foreign Direct Investment

• Boost to International Trade
• Reduced Regional and Global Tensions
• Sharing of Technology, Knowledge, and Culture
• Diversification
• Lower Costs and Increased Efficiency
• Tax Incentives
• Employment and Economic Boost

Disadvantages of Foreign Direct Investment

•  Foreign Control
•  Loss of Domestic Jobs
•  Risk of Political or Economic Change

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