10 Types Of Foreign Direct Investment

Foreign Direct Investment (FDI) is when a company or individual from one country makes an investment into a business or entity in another country. This investment is characterized by a notion of direct control, meaning that the investor is interested in managing and having significant influence over the foreign business entity. Here are 10 types of Foreign Direct Investment:

Types Of Foreign Direct Investment

  1. Horizontal FDI: This occurs when a business expands its domestic operations to a foreign country, creating the same type of business activity in a new location. For example, a car manufacturer based in Germany opens production plants in China.
  2. Vertical FDI: This involves investment in a foreign business that is not the same as the investor’s but adds value to the company’s supply chain. For instance, a manufacturer may acquire an interest in a foreign company that supplies parts or raw materials required for its products.
  3. Conglomerate FDI: This type of investment is made by a company into an unrelated business overseas. This requires a significant investment and is often made to diversify the company’s business. For example, a technology firm might invest in a foreign food chain.
  4. Platform FDI: Also known as “export-platform FDI,” this is where a company invests in a country for the purpose of exporting to a third market. This can be beneficial due to trade agreements or tariff advantages.
  5. Brownfield Investment: This involves purchasing or leasing existing facilities or businesses abroad. It is often quicker to execute than greenfield investment because the infrastructure is already in place.
  6. Greenfield Investment: This refers to investing in new facilities or new projects in the foreign country. It often involves building new operational facilities from the ground up.
  7. Mergers and Acquisitions: This is one of the most common methods of FDI, where a company in one country buys a controlling interest in a company in another country.
  8. Joint Ventures: Companies may engage in FDI through joint ventures with foreign firms, which involves establishing a new company together, shared ownership, and pooling of resources and expertise.
  9. Strategic Alliances: This involves FDI where companies collaborate on certain projects but may not involve forming a new company or joint ownership.
  10. Franchising and Licensing: This is somewhat indirect but is often included in FDI discussions. A domestic firm in one country allows a foreign firm to use its brand, intellectual property, or operational model, in exchange for royalty fees.

Each type of FDI has its own strategic advantages and risks, depending on the investor’s objectives, the business climate of the target country, the sector in which the investment is made, and the existing geopolitical and economic relationships between the countries involved.

Leave a Comment