FDI and its Types

Strategically, FDI comes in three types −

●      Horizontal − In case of horizontal FDI, the company does all the same activities abroad as at home. For example, Toyota assembles motor cars in Japan and the UK.

●      Vertical − In vertical assignments, different types of activities are carried out abroad. In case of forward vertical FDI, the FDI brings the company nearer to a market (for example, Toyota buying a car distributorship in America). In case of backward Vertical FDI, the international integration goes back towards raw materials (for example, Toyota getting majority stake in a tyre manufacturer or a rubber plantation).

●      Conglomerate − In this type of investment, the investment is made to acquire an unrelated business abroad. It is the most surprising form of FDI, as it requires overcoming two barriers simultaneously – one, entering a foreign country and two, working in a new industry.

FDI can take the form of greenfield entry or takeover.

●      Greenfield entry refers to activities or assembling all the elements right from scratch as Honda did in the UK.

●      Foreign takeover means acquiring an existing foreign company – as Tata’s acquisition of Jaguar Land Rover. Foreign takeover is often called mergers and acquisitions (M&A) but internationally, mergers are absolutely small, which accounts for less than 1% of all foreign acquisitions.

This choice of entry in a market and its mode interacts with the ownership strategy. The choice of wholly owned subsidiaries against joint ventures gives a 2×2 matrix of choices – the options of which are −

●      Greenfield wholly owned ventures,

●      Greenfield joint ventures,

●      Wholly owned takeovers, and

●      Joint foreign acquisitions.

These choices offer foreign investors options to match their own interests, capabilities, and foreign conditions.

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