What is FDI?
When a company invests in another company in a foreign land, the investment is said to be a foreign
direct investment (FDI). The FDIs are further categorised into four types. Read on to find out what they
are.
The Investment market is an enormous space. Individual investors and large companies can invest in
companies within their countries as well as overseas. When one company invests in a business in
another company in a foreign land, the investment is deemed as foreign direct investment or FDI. There
are four different types of foreign direct investments. They are as under:
Here are the different types of foreign investments
1:Horizontal FDI
The most common type of FDI is Horizontal FDI, which primarily revolves around investing funds in a
foreign company belonging to the same industry as that owned or operated by the FDI investor. Here, a
company invests in another company located in a different country, wherein both the companies are
producing similar goods. For example, the Spain-based company Zara may invest in or purchase the
Indian company Fab India, which also produces similar products as Zara does. Since both the companies
belong to the same industry of merchandise and apparel, the FDI is classified as horizontal FDI.
2:Vertical FDI
Vertical FDI is another type of foreign investment. A vertical FDI occurs when an investment is made
within a typical supply chain in a company, which may or may not necessarily belong to the same
industry. As such, when vertical FDI happens, a business invests in an overseas firm which may supply or
sell products. Vertical FDIs are further categorised as backward vertical integrations and forward vertical
integrations. For instance, the Swiss Coffee producer Nescafe may invest in coffee plantations in
countries such as Brazil, Columbia, Vietnam, etc. Since the investing firm purchases, a supplier in the
supply chain, this type of FDI is known as backward vertical integration. Conversely, forward vertical
integration is said to occur when a company invests in another foreign company which is ranked higher
in the supply chain, for instance, a coffee company in India may wish to invest in a French grocery brand.
Vertical FDI can be further classified into two types:
a) Backward integration: This type of FDI occurs when a company invests in a foreign country to
acquire raw materials or intermediate goods that it needs to produce its final products. For
example, a car manufacturer invests in a foreign country to acquire steel for car manufacturing.
b) Forward integration: This type of FDI occurs when a company invests in a foreign country to
sell its final products in the local market or for export. For example, a car manufacturer invests in
a foreign country to set up a dealership network and sell its cars in the local market.
FDI can also be classified based on the motive of the investor. For instance, FDI can be made for strategic
reasons such as diversifying the investor’s operations, acquiring new technologies, or gaining access to
new markets. FDI can also be made for financial reasons such as seeking higher returns, reducing risk, or
taking advantage of tax incentives in the host country.
3:Platform FDI
This types of foreign direct investment is platform FDI. In the case of platform FDI, a business expands
into a foreign country, but the products manufactured are exported to another, third country. For
instance, the French perfume brand Chanel set up a manufacturing plant in the USA and export products
to other countries in America, Asia, and other parts of Europe.
If you intend to invest via FDI, you must know about the different types of FDI with examples. With FDI,
the money invested can be used to start a new business in a foreign country or to invest in an already
existing business in a foreign country. For more information on FDIs, consult Angel One advisors.
4:Conglomerate FDI
When an investor chooses to invest in two entirely different businesses based in completely different
industries, it is known as conglomerate FDI. In this scenario, the FDI is not directly linked to the foreign
investor’s business. For instance, an automobile manufacturer may decide to invest in Pharma. Here, the
investor is undertaking foreign business investments that are completely unrelated to their domestic
business. This type is relatively uncommon since the difficulty of establishing a business in a new country
is compounded by the difficulty of a breakthrough in a new market or industry. The goal of a
conglomerate FDI Is to expand into new niches and explore different business opportunities.
5:Market-seeking FDI
Market-seeking – where a company looks to invest in a location due to its market size and growth
potential. There is a high correlation of foreign direct investment (FDI) trends and gross domestic
product growth.
Apart from market size and expected market growth, there are four main reasons for which market-
seeking firms may undertake foreign investment, namely: (a) a firm’s main suppliers or customers may
have expanded overseas and in order to retain its business, the firm needs to follow them.
6:Resource-seeking FDI
Resource-seeking – where a company looks to invest in a location due to its natural resources. This type
of FDI is particularly prevalent in energy, mining and agrifood industries.
Foreign direct investment (FDI) is made when a business takes controlling ownership in a company,
sector, individual, or entity in another country. Through FDI, foreign companies are directly involved with
day-to-day tasks from the other country, resulting in a transfer of money, knowledge, skills, and
technology.
7:Efficiency -seeking FDI
Where a company looks to invest in a location due to lower costs, better production processes and so on
in the host country. • Resour Advantages ce-seeking – where a company looks to invest in a location due
to its natural resources.
Efficiency-seeking FDI is not only export-oriented, but also key to export diversification. While typically
more difficult to attract, efficiency-seeking FDI can become more than a source of capital, creating new
jobs that are more diversified and with greater productivity and value.
Advantages of foreign direct investment:
1:Economic growth
The creation of jobs is the most obvious advantage of FDI, one of the most important reasons why a
nation (especially a developing one) will look to attract foreign direct investment. FDI boosts the
manufacturing and services sector which results in the creation of jobs and helps to reduce
unemployment rates in the country. Increased employment translates to higher incomes and equips the
population with more buying powers, boosting the overall economy of a country.
2:Human capital development
Human capital involved the knowledge and competence of a workforce. Skills that employees gain
through training and experience can boost the education and human capital of a specific country.
Through a ripple effect, it can train human resources in other sectors and companies.
3:Technology
Targeted countries and businesses receive access to the latest financing tools, technologies, and
operational practices from all across the world. The introduction of newer and enhanced technologies
results in company’s distribution into the local economy, resulting in enhanced efficiency and
effectiveness of the industry.
4:Increase in exports
Many goods produced by FDI have global markets, not solely domestic consumption. The creation of
100% export oriented units help to assist FDI investors in boosting exports from other countries.
5:Exchange rate stability
The flow of FDI into a country translates into a continuous flow of foreign exchange, helping a country’s
Central Bank maintain a prosperous reserve of foreign exchange which results in stable exchange rates.
6:Reduces cost of production
FDI is a means for you to reduce your cost of production if the labor market is cheaper and the
regulations are less restrictive in the target foreign market. For example, it’s a well-known fact that the
shoe and clothing industries have been able to drastically reduce their costs of production by moving
operations to developing countries.
7:FDI results in increased employment opportunities
As FDI increases in a nation, especially a developing one, its service and manufacturing sectors receive a
boost, which in turn results in the creation of jobs. Employment, in turn, results in the creation of
income sources for many. People then spend their income, thereby enhancing a nation’s purchasing
power.
8:FDI enhances a country’s finance and technology sectors
The process of FDI is robust. It provides the country in which the investment is occurring with several
tools, which they can leverage to their advantage. For instance, when FDI occurs, the recipient
businesses are provided with access to the latest tools in finance, technology and operational practices.
As time goes by, this introduction of enhanced technologies and processes get assimilated in the local
economy, which make the fin-tech industry more efficient and effective.
9:Increase in a country’s income
Another big advantage of foreign direct investment is the increase of the target country’s income. With
more jobs and higher wages, the national income normally increases which promotes economic growth.
Large corporations usually offer higher salary levels than what you would normally find in the target
country, which can lead to an increment in income.
