Vertical fdi

Definition

Vertical foreign direct investment (FDI) refers to investments made by a company in a foreign market that involves the acquisition of assets or operations at different stages of production within the same industry. This type of investment can either be backward, where a company invests in suppliers, or forward, where it invests in distribution channels. Vertical FDI is a strategic move for multinational corporations looking to enhance their supply chains, reduce costs, and gain greater control over their production processes.

5 Must Know Facts For Your Next Test

1. Vertical FDI helps companies achieve economies of scale by streamlining production processes and reducing overall costs.
2. This type of investment can lead to increased market power as companies control more aspects of their supply chains.
3. Backward vertical FDI allows companies to secure key inputs and raw materials, ensuring a steady supply for production.
4. Forward vertical FDI helps companies gain access to markets more directly, allowing them to establish distribution networks and enhance customer reach.
5. Vertical FDI can create synergies within multinational corporations by integrating operations across different stages of production.

Review Questions

• How does vertical FDI differ from horizontal FDI in terms of strategic objectives for multinational corporations?
  • Vertical FDI focuses on integrating different stages of production within the same industry, either by securing suppliers or expanding distribution networks. In contrast, horizontal FDI aims at establishing similar operations in different countries to increase market share. This difference highlights how companies use vertical FDI to enhance efficiency and control over their supply chains, while horizontal FDI is more about market expansion and competitiveness.
• Evaluate the potential advantages and disadvantages of vertical FDI for multinational corporations operating in global markets.
  • The advantages of vertical FDI include improved supply chain management, cost reductions, and enhanced control over production processes. However, disadvantages might include higher risks related to political instability in host countries, potential backlash from local communities, and challenges associated with integrating operations across different regions. This balance of pros and cons can greatly influence a corporation's decision-making process regarding foreign investments.
• Critically assess how vertical FDI influences global supply chain dynamics and its implications for international trade.
  • Vertical FDI significantly reshapes global supply chain dynamics by enabling firms to optimize their production processes through greater control over inputs and distribution channels. This shift can lead to increased efficiency and reduced costs, promoting international trade by facilitating the flow of goods across borders. However, it may also raise concerns about dependency on specific markets or suppliers, affecting global trade patterns and economic stability as nations navigate the complexities of interconnected economies.

Related terms

Horizontal FDI: Horizontal foreign direct investment occurs when a company invests in the same industry but in a foreign market, often establishing similar operations to those in its home country.

Multinational Corporation (MNC): A multinational corporation is a large company that operates in multiple countries, managing production or delivering services across borders.

Supply Chain Management: Supply chain management involves the coordination and management of a complex network of activities and processes involved in producing and delivering goods and services from suppliers to consumers.