Question

4. Compare and contrast the three forms of foreign direct investment with examples?

answer with in 500. words

Answer 1

Here are the description and comparison of three forms of foreign direct investment along with examples - A foreign direct investment is when business from one nation invests in another. The reason can be to start or expand the existing one.

Here are the three types of Foreign Direct Investment

Horizontal FDI

• This is when the funds are invested in the foreign market but in the same industry.
• In this, a business invests in a foreign firm that produces the same type of goods or services.
• For example - Nike which is a US-based firm may purchase Puma which is a Germany based form.
• Both Nike & Puma are from the same industry & hence comes under the category of the Horizontal FDI.

Vertical FDI

• This is when an investment is made within the same supply chain but unlike Horizontal FDI it is not the same industry.
• Here the business invests in an international market that it may supply or sell.
• Here an example would include Hershey's which is a chocolate manufacturer based out of the US looking to invest in Cocoa producers in Brazil.
• It can take the form of backward vertical integration as a firm is investing in supplier or the supply chain.
• It also has forward vertical integration where investment in the International company is don't that is further along in the supply chain. Like Hershey's decision to purchase a share in Amazon where it may sell its products.

The third type of FDI is - Conglomerate FDI

• This form of FDI is where investment is made in a totally different industry or sector.
• It ensures that there is no link between the investors business & the business the firm is investing in.
• Example - Walmart, a US retailer may invest in Audi which is an automobile manufacturer.
• This offers the business an opportunity to expand & diversity its business lines & enter into new areas.
• This happens when a situation arises where the fundamental products start to decline in its sales or attraction & in order to survive or cope with changing times the firm may invest in new ventures.
• Though that need to be the sole factor as the big businesses with strong demand also may look to invest in other areas which will further add to growth & return on investment.

The different type of FDI helps to boost international trade & allow production to flow to parts of the world which might be cost-effective and generate more returns. It also helps to reduce regional and global risk & tensions. It helps to create a culture of technology, knowledge & success factors that helps in overall economic development. Diversification, lower costs, increased efficiency, incentives in the form of taxes & employment boost are other advantages of various forms of FDI mentioned above.

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