Foreign Direct Investment Types

Why This Matters

Foreign Direct Investment sits at the heart of multinational corporate strategy—it's how companies actually commit capital across borders rather than just exporting goods or licensing technology. You're being tested on your ability to distinguish why a firm chooses one FDI approach over another, which means understanding the strategic logic behind each type: Is the company seeking markets, resources, efficiency, or strategic assets? Is it building from scratch or acquiring what already exists?

These FDI types connect directly to core course concepts like entry mode selection, ownership advantages, location decisions, and internalization theory. When you see an FRQ asking why a tech firm acquired a foreign startup versus building its own facility, you need to recognize the underlying motivations and trade-offs. Don't just memorize definitions—know what strategic problem each FDI type solves and when a multinational would choose one over another.

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Build vs. Buy: Entry Mode Decisions

The most fundamental FDI choice is whether to create something new or acquire something that already exists. This decision hinges on speed-to-market, control preferences, and available capital.

Greenfield Investment

• Complete operational control—the firm designs facilities, hires staff, and builds culture from scratch without inheriting legacy problems
• High capital and time requirements make this suitable for companies with strong balance sheets and long investment horizons
• Best for differentiated strategies where brand consistency and operational precision matter more than speed

Brownfield Investment

• Faster market entry through purchasing or leasing existing facilities that are already operational
• Lower upfront costs but potential hidden liabilities including outdated infrastructure, environmental remediation, or workforce issues
• Immediate production capacity allows firms to capture market opportunities before competitors establish presence

Mergers and Acquisitions (M&A)

• Instant market access—acquires customers, distribution networks, and local expertise in a single transaction
• Synergy potential through combining complementary capabilities, though integration challenges frequently destroy expected value
• Regulatory scrutiny varies by jurisdiction and deal size, particularly in strategic industries or concentrated markets

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Strategic Motivation: Why Firms Invest Abroad

FDI motivations explain the purpose behind the investment. Dunning's OLI framework and the Four Motives model (market-seeking, resource-seeking, efficiency-seeking, strategic asset-seeking) show up repeatedly on exams.

Market-Seeking FDI

• Access to local customers drives investment when exporting faces tariffs, transport costs, or requires local adaptation
• Demand proximity allows firms to customize products for local preferences and respond quickly to market changes
• Brand building through local presence often generates stronger customer loyalty than imported goods

Strategic Asset-Seeking FDI

• Acquiring intangible assets—technology, patents, brands, or skilled talent—that cannot be easily purchased through arm's-length transactions
• Common in knowledge-intensive industries where innovation capabilities determine competitive advantage
• Long-term strategic value often justifies premium acquisition prices for unique resources

Export-Platform FDI

• Production hub strategy—establish operations in a low-cost location to serve multiple export markets
• Tariff and trade barrier arbitrage by manufacturing inside free trade zones or preferential trade agreement countries
• Supply chain optimization through strategic geographic positioning that minimizes total logistics costs

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Value Chain Position: Horizontal vs. Vertical Integration

These categories describe where in the industry value chain the investment occurs, connecting directly to concepts of scope economies and supply chain control.

Horizontal FDI

• Same industry expansion—replicating domestic operations in foreign markets to increase geographic reach
• Economies of scale through spreading fixed costs (R&D, branding, management systems) across larger output
• Market power enhancement by capturing share in multiple national markets simultaneously

Vertical FDI

• Supply chain integration either backward (acquiring suppliers) or forward (acquiring distributors)
• Transaction cost reduction by internalizing activities that would otherwise require costly contracts with external parties
• Resource security particularly important for firms dependent on scarce inputs or specialized distribution channels

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Risk Management: Diversification and Partnership Strategies

Some FDI types prioritize spreading risk across markets, industries, or partners rather than maximizing control or efficiency.

Conglomerate FDI

• Unrelated diversification—investing in foreign businesses outside the firm's core industry
• Portfolio risk reduction by spreading investments across industries with different economic cycles
• Cash deployment strategy for firms with excess capital seeking returns beyond their primary markets

Joint Ventures

• Shared ownership structure where two or more firms create a new entity with pooled resources and split profits
• Risk and investment sharing makes large projects feasible and reduces individual firm exposure
• Local partner advantages including regulatory navigation, cultural knowledge, and established relationships—often required by host country laws in restricted industries

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Quick Reference Table

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Self-Check Questions

1. A European automaker wants to enter the Indian market quickly to capture growing middle-class demand but lacks local supplier relationships. Which two FDI types should it consider, and what trade-offs does each involve?

2. Compare and contrast Greenfield investment and Brownfield investment in terms of control, speed, and risk. Under what circumstances would a firm choose each?

3. A pharmaceutical company acquires a biotech startup in another country primarily for its patent portfolio and research team. Which FDI motivation does this represent, and how does it differ from market-seeking FDI?

4. Explain how Export-Platform FDI and Market-Seeking FDI might lead a firm to choose different host country locations, even within the same region.

5. If an FRQ describes a firm entering a foreign market where regulations require local ownership participation, which FDI type is most appropriate, and what strategic considerations should the firm address in structuring the arrangement?