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

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

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

Answer & Explanation (1)

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.

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