Horizontal fdi

Definition

Horizontal foreign direct investment (FDI) occurs when a company invests in a foreign market by establishing or acquiring facilities that produce the same goods or services it offers in its home market. This type of investment aims to expand the company's market reach and increase its production capacity without altering its product line. By engaging in horizontal FDI, firms can benefit from economies of scale, enhance their competitive advantage, and respond effectively to local consumer preferences.

5 Must Know Facts For Your Next Test

1. Horizontal FDI is commonly pursued by multinational corporations seeking to enter new markets and capture local demand for their products.
2. This type of investment allows firms to establish a local presence and build brand recognition among consumers in the host country.
3. Companies may choose horizontal FDI to mitigate risks associated with trade barriers and fluctuations in exchange rates.
4. Horizontal FDI can lead to knowledge transfer between the parent company and its foreign subsidiaries, enhancing innovation and efficiency.
5. The success of horizontal FDI often depends on understanding the cultural, economic, and regulatory environment of the host country.

Review Questions

• How does horizontal FDI differ from vertical FDI in terms of strategic objectives and operational focus?
  • Horizontal FDI focuses on establishing operations in a foreign market that replicate the same production activities as in the home country, aiming to increase market share and access local consumers. In contrast, vertical FDI targets different stages of production by investing either upstream or downstream, often to control supply chains or improve distribution. The strategic objectives of horizontal FDI center around market expansion, while vertical FDI emphasizes cost efficiency and resource control.
• Discuss the advantages and challenges companies face when engaging in horizontal FDI compared to other market entry strategies.
  • The advantages of horizontal FDI include gaining immediate access to established markets, enhancing brand presence, and reducing the risk of trade barriers. However, companies also face challenges such as cultural differences, regulatory compliance, and competition from local firms. Unlike joint ventures or exporting, which may involve sharing risks and resources with partners, horizontal FDI requires significant capital investment and a deeper commitment to understanding local consumer preferences.
• Evaluate how horizontal FDI can impact a company's overall competitiveness in global markets over time.
  • Over time, horizontal FDI can significantly enhance a company's competitiveness by providing insights into local market dynamics and fostering innovation through exposure to diverse consumer needs. As firms establish their presence in various countries, they can leverage economies of scale and localized strategies to outperform competitors. Additionally, successful horizontal investments can lead to enhanced brand loyalty and customer relationships that are difficult for rivals to replicate. However, companies must continuously adapt to evolving market conditions and potential political or economic shifts in their host countries to maintain this competitive edge.

Related terms

Vertical FDI:

Vertical foreign direct investment involves a company investing in foreign operations that are at different stages of production, either upstream (sourcing raw materials) or downstream (distribution and sales).

Greenfield Investment: A greenfield investment refers to a type of FDI where a company builds new facilities in a foreign country from the ground up, as opposed to acquiring existing businesses.

Market Entry Strategy: A market entry strategy is a planned method of delivering goods or services to a new target market, which can include horizontal FDI, joint ventures, or exporting.