FDI and its Types

FDI and its Types

Strategically, FDI comes in three types:
•Horizontal: In case of horizontal FDI, the company does all the same activities abroad as at home. For example, Toyota assembles motor cars in Japan and the UK.
•Vertical: In vertical assignments, different types of activities are carried out abroad. In case of forward vertical FDI, the FDI brings the company nearer to a market (for example, Toyota buying a car distributorship in America). In case of backward Vertical FDI, the international integration goes back towards raw materials (for example, Toyota getting majority stake in a tyre manufacturer or a rubber plantation).
•Conglomerate: In this type of investment, the investment is made to acquire an unrelated business abroad. It is the most surprising form of FDI, as it requires overcoming two barriers simultaneously – one, entering a foreign country and two, working in a new industry.
FDI can take the form of greenfield entry or takeover.
•Greenfield entry refers to activities or assembling all the elements right from scratch as Honda did in the UK.
•Foreign takeover means acquiring an existing foreign company – as Tata’s acquisition of Jaguar Land Rover. Foreign takeover is often called mergers and acquisitions (M&A) but internationally, mergers are absolutely small, which accounts for less than 1% of all foreign acquisitions.
This choice of entry in a market and its mode interacts with the ownership strategy. The choice of wholly owned subsidiaries against joint ventures gives a 2×2 matrix of choices – the options of which are:
•Greenfield wholly owned ventures,
•Greenfield joint ventures,
•Wholly owned takeovers, and
•Joint foreign acquisitions.
These choices offer foreign investors options to match their own interests, capabilities, and foreign conditions.

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