What are 3 types of foreign direct investment?
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- Updated On:26-May-2021
- Replies:3
Short Answer
FDI expands to Foreign Direct Investment. There are also various ways of making an Foreign direct investments. The three types of FDI are: Horizontal FDI, Vertical FDI and Conglomerate FDI.
Detailed Answer
Introduction to FDI:
FDI expands to Foreign direct investment. It occurs when a person or company from one country decides to invest in the other. This could be for the purpose of starting a new business or investing in an already current western company. By this, it basically means that you are showing your interest in the company and the investors do not only invest their money in the company but also get control over the same in some way.
When the differences are drawn between Portfolio investment and FDI, in portfolio investment the company purchases the equities of the western companies. For traders, open markets are more effective than closed economies when it comes to FDIs and also it is a win-win for both the investor and the company in which the investor is investing. It is said that the company when receives a lot of investments from foreign countries then, it is quite vibrant in nature.
The ways to make foreign direct investments are:
- Acquisitions and Mergers.
- Obtaining voting shares in a company headquartered in a different country.
- Joint projects with businesses operating in other countries.
- Establishing an international subsidiary of a domestic company.
Types of Foreign Direct Investment:
- Horizontal FDI:
It is one of the most common types of FDIs and mainly revolves across acquiring resources in a foreign business related to a certain enterprise as that held or run by the FDI shareholder. In this case, either the company runs the same sorts of activities in other country or invests their money in the company which is in the same sector as the company investing in.
Some of the examples are in case when Dominos opens in branch in other countries or maybe when L'Oréal, a French company invests its money in Huda beauty, an Iranian American brand- both being cosmetic brands.
- Vertical FDI:
It is another type of Foreign Direct Investment. A vertical FDI happens when a business makes a development within a conventional supply chain, that might or might not have been in the same sector. To put it another way, a company can engage in a variety of activities outside of its home country, as long as those factors are related to the primary business.
There are even two types of Vertical FDI:
Forward vertical FDI: In this, FDI helps the business get closer to a market.
Backward Vertical FDI: In this, the origins of global integration can be traced back to raw materials.
For example, if Audi, an automobile manufacturing company started investing in tire making companies- it basically means that they are at some point Audi is related to the tire i.e., its supply chain.
- Conglomerate FDI:
This is the case when one company invest in another company, but they are not related in any manner neither directly nor indirectly. This form is unusual because it entails the challenge of breaking into a new country and industry.
For example, Audi, an automobile manufacturing company is investing money in L'Oréal, a fresh cosmetic brand.
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Discussion (2)
FDI's are a great way of expanding your investment portfolio. However, through conglomerate, vertical and horizontal ways, FDI's are quite diverse. Based on the company and capital, seeking necessary investment measures can be taken into consideration to have a fruitful outcome.
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Rishika Agarwal
When it comes to investing, FDIs are an excellent addition to your portfolio. When you invest money, you are essentially expressing your interest in the firm, and stakeholders not only put money in the company, but also have some power over it.