Vertical fdi

Definition

Vertical foreign direct investment (FDI) occurs when a company invests in different stages of production or supply chain in another country, either by acquiring or establishing operations. This type of investment typically aims to control various parts of the production process, from raw materials to final product distribution, leading to enhanced efficiency and reduced costs. Vertical FDI is often motivated by the desire to optimize production, secure supply chains, and gain competitive advantages in foreign markets.

5 Must Know Facts For Your Next Test

1. Vertical FDI can be categorized into backward and forward investment, where backward refers to investing in suppliers and forward involves investing in distribution channels.
2. Companies often pursue vertical FDI to mitigate risks associated with supply chain disruptions and to ensure consistent access to critical resources.
3. This type of investment can lead to economies of scale, as companies consolidate their operations across borders, reducing duplication and enhancing efficiency.
4. Governments may encourage vertical FDI through incentives such as tax breaks or subsidies aimed at attracting companies that contribute to local industry development.
5. Vertical FDI can have significant implications for local economies, including job creation in specific sectors and fostering technological transfers from the investing company.

Review Questions

• How does vertical fdi differ from horizontal fdi in terms of investment strategy and goals?
  • Vertical FDI focuses on investing in different stages of production within the supply chain, aiming for greater control over resources and efficiencies. In contrast, horizontal FDI involves replicating existing business operations in foreign markets. The strategic goals differ as vertical FDI seeks to optimize supply chains and manage costs effectively, while horizontal FDI primarily aims at market expansion and increasing market share.
• What are some motivations behind a company choosing vertical fdi over other types of investment?
  • Companies may opt for vertical FDI due to several motivations, including the desire to secure supply chains against disruptions, control input costs through direct access to raw materials, and enhance operational efficiencies by consolidating production processes. Additionally, vertical FDI can provide companies with strategic advantages over competitors by allowing them to respond quickly to market changes or demands.
• Evaluate the impact of vertical fdi on local economies and global trade dynamics in today’s market environment.
  • Vertical FDI significantly influences local economies by creating jobs, fostering skills development, and encouraging technological advancements within specific industries. It can also stimulate economic growth by integrating local suppliers into global supply chains. On a broader scale, this type of investment impacts global trade dynamics by altering competitive landscapes, facilitating international collaboration among firms, and potentially leading to increased trade between countries as firms seek new markets for their products.

Related terms

horizontal fdi: Horizontal foreign direct investment refers to a company investing in the same stage of production in another country, essentially replicating its domestic operations abroad.

multinational corporation (MNC): A multinational corporation is a company that operates in multiple countries, managing production or delivering services in more than one country.

supply chain management: Supply chain management involves overseeing and optimizing the flow of goods, information, and finances related to a product from the initial supplier to the final customer.