Question

Identify the forms of FDI (backward-vertical FDI, forward-vertical FDI and horizontal FDI) for the below examples:

a. John Deere U.S. (which manufactures/assembles tractors in the U.S.) sets up a wholly owned factory in India and begins manufacturing/assembling tractors in India.

b. John Deere U.S. invests with a local partner (50% each) to build a dealership network in Thailand from scratch.

c. John Deere U.S. buys a 10% stake in a German engine manufacturer to source engine components for its U.S. production process.

Answer 1

a. "John Deere U.S. (which manufactures/assembles tractors in the U.S.) sets up a wholly owned factory in India and begins manufacturing/assembling tractors in India", this is an example of horizontal FDI. That is,in case of horizontal FDI, the company does all the same activities abroad as at home.

b. "John Deere U.S. invests with a local partner (50% each) to build a dealership network in Thailand from scratch", this is an example of forward-vertical FDI which means that this type of FDI brings the company nearer to a market,usually internationally to provide input into its core operations.

c. "John Deere U.S. buys a 10% stake in a German engine manufacturer to source engine components for its U.S. production process" is an example of backward-vertical FDI. Backward vertical FDI is the FDI in which home country invest in the production plant of other country and then supply the raw material.