Horizontal FDI

Horizontal FDI is FDI in the same industry abroad as that in which a firm operates at home, but why should a firm choose FDI rather than the options of exporting and licensing?
FDI is both expensive and risky compared with either exporting or licensing. It is expensive because the firm is literally starting from scratch to build a new enterprise in a foreign country, unless of course it has bought a going concern. It is risky because of the problems likely to arise in a different culture (which we discussed in Chapter 2) and because of distance and communication problems. The reasons FDI is often chosen in preference to the other two options are complex and are concerned with five factors:
• transportation costs
• market imperfections
• competition
• the product life-cycle
• location-specific advantages.
Transportation costs vary greatly with the type of product. When transportation costs are added to production costs it becomes unprofitable to ship low value-to-weight products such as cement and beverages over long distances. That makes exporting far less attractive than licensing or FDI. On the other hand, high value-to-weight products such as computer hardware and software, and medical equipment have little impact on the relative attractiveness of exporting, licensing, or FDI.
We will consider the other four factors listed above in the next section under 'Theories of horizontal FDI'. The reason for this is that in your textbook, Hill (2005) uses the word 'theory' with some elasticity. Thus 'transportation costs' are a 'factor', but 'market imperfections' rates it using the term 'theory'. Also, competitors are discussed under the rubric of Knickerbocker's theory and the product life-cycle theory (also discussed in Chapter 3), both of which are of course legitimately theories.



Backward FDI is investing in an industry which supplies your firm at home. Buying or building a supplier. For example, if Ford builds an engine production facility in Mexico which ships engines to it manufacturing site in Texas. This would be backward vertical FDI.

Read more: http://wiki.answers.com/Q/What_is_backward_vertical_foreign_direct_investment#ixzz16ml5MkEc


There are two types of vertical direct investment. The first type of foreign investmentis called foreign vertical direct investment which is invest in the industry of foreign country. Historically most backward vertical foreign direct investment has been in extractive industries like oil extraction, bauxite mining, tin mining and copper mining. The objective has been to provide inputs into a firm's downstream operations for example oil refining, aluminum smelting and fabrication. Firms such as Royal Dutch/Shell, British Petroleum, RTZ and Alcoa are among the classic examples of such vertically integrated multinationals.

The second type of the foreign direct investment included forward vertical foreign direct investment in which an industry abroad sells the outputs of a firm's domestic production process. Forward vertical foreign direct investment is less common than backward vertical foreign direct investment. For example when Volkswagen entered the United States market it acquired a large number of dealers rather than distribute its cars through independent United States dealers.

With both horizontal and vertical foreign direct investment the question that must be answered is why would a firm go to all the trouble and expense of setting up operations in a foreign country? The location specific advantages arguments help explain the direction of such foreign direct investment.