What are the three types of foreign direct investment (FDI), and what rationale supports the use of each one?

Three types of foreign direct investment

Foreign direct investment (FDI) is whereby you find a business or an individual from a certain nation invest in another nation or country. This most likely could be to invest or start a new business in an existing foreign-owned business (Contractor et al., 2020). However, there are three types of foreign direct investment (FDI) that are as follows:

Horizontal FDI

This is where funds are invested overseas but in the same country. This means that a business invests in another country firm that produces similar goods. For instance, Nike, a US company, may purchase Puma, a Germany-based firm (Contractor et al., 2020). Both being in the industry of sportswear are classified as a form of horizontal FDI. This helps in boosting international trade.

Vertical FDI

Vertical FDI is where an investment is made within the supply chain but not directly in a similar industry. That is, a business invests in another country firm that it may supply and sell as well. So FDI creates a level of dependency between countries, creating a level of peace (Contractor et al., 2020).

Conglomerate FDI

Conglomerate FDI is where an investment is made in a completely different industry. In other words, it is not linked in any direct way to the investor's business. For instance, Walmart, a US retailer, may invest in BMW, a German automobile manufacturer. So Foreign direct investment allows the transfer of technology, knowledge, and culture (Contractor et al., 2020).

Reference

Contractor, F. J., Dangol, R., Nuruzzaman, N., & Raghunath, S. (2020). How do country regulations and business environment impact foreign direct investment (FDI) inflows? International Business Review, 29(2), 101640.