Foreign direct investment (FDI) is made by a company (or individual) into a business located in another country. FDI can occur horizontally, which happens when a company establishes the same business in another country, or vertically when it establishes or acquires a supplier or distributor. Some of the common reasons why companies go through vertical FDI include lowering the cost of raw materials or taking advantage of cheaper labor.

Understanding Vertical Fo💞reign Direct Investmen♉t (FDI)

Vertical foreign direct investment occurs when a multinatio༺nal corporation invests in a part of the supply chain. This means the company acqᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚuires or builds an operation that fulfills the role of a supplier or the role of a distributor. 

There are two types of vertical FDI:

• Backward Vertical FDI: A company establishes operations as or assumes control of an existing supplier that fits into its 澳洲幸运5官方开奖结果体彩网:supply chain.
• Forward Vertical FDI: A company takes over a distributor in another country or sets up shop to sell its goods and services in a foreign market.
  

Reasons for Ve🔯rtical Fore🎀ign Direct Investment (FDI)

Backward Vertical FDI

Companies that make a backward vertical FDI typically seek to improve costs, including 澳洲幸运5官方开奖结果体彩网:raw materials and/or labor, or the supply of certai🔯n key components. This is common when carmakers set up shop in another country.

Suppose an American car manufacturer is looking for cheaper steel, whose price can fluctuate dramatically depending on overall 澳洲幸运5官方开奖结果体彩网:supply and demand. The foreign steel supplier would prefer to sell steel for as high a price as possible to benefit its owners or 澳洲幸运5官方开奖结果体彩网:shareholders. If the manufacturer acquires the foreign steel su🐓pplier, it would no longer need to transact with the steel supplier 😼and its market-driven prices.

Forward Vertical FDI

Companies may have trouble finding distributors in different markets—especially in new countries.🍎 Forward vertical FDI takes care of these problems because the company can take over this part of the supply chain to sell its goods and services to its customers.

For example, let's assume the American car manufacturer wants to sell its cars in Japan. Since many Japanese auto dealers do not wish to carry foreign vehicles, the American car manufacturer may lack sales channels. In this case, the manufacturer might engage in vertical FDI and build a 澳洲幸运5官方开奖结果体彩网:distribution network of its own in Japan to fill this niche.

Vertical Foreign Direct Investment (FDI) ♈vs. Other Types of Foreign Direct Investment (FDI)

Vertical foreign direct investment is just one type of FDI. Let's explore the other types.

Horizontal FDI

A horizontal direct investment occurs when a company establishes the same type of business operation in a foreign country as it operates in its home country. For example, Toyota assembles cars in both the United States and China.

Most FDI is horizontal rather than vertical. Because developed countries engage more heavily in FDI suggests that market access is more important than reducing production costs as a motive for FDI. 

Conglomerate Investment

There is a third type of FDI. 澳洲幸运5官方开奖结果体彩网:Conglomerate investment occurs wh♔en a company acquires an unrelated business in another country. This type ofও FDI helps diversify business risk because it allows the company to participate in multiple markets.

There are two main obstacles to this strategy. The first is overcoming the barriers and hurdles related to entering a foreign market. The other is engaging in a new industry. Beating these challenges often leads to successful integration in this market and may help facilitate the lead into another, newer one.

The Bottom Line

Foreign direct investment is a way for countries and companies with limited capital to obtain financing beyond national borders from wealthier countries. China's rapid economic growth was aided by exports and FDI. The World Bank states that FDI is one way to develop the private sector in lower-income economies and reduce poverty.