Question

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2. Answer whether the following examples of Foreign Direct Investment (FDI) describe horizontal or vertical FDI. Explain your answers. a) Volvo builds a car factory in Austin, Texas, which is similar to Volvo’s factory in Gothenburg. The main purpose is to avoid US import tariffs. (5 points)

b) H&M relocates production of its clothes from Sweden to Bangladesh to reduce wage costs.

c) Microsoft splits up its R&D department so that it no longer only has one in the US but also four new R&D departments in four additional countries.

d) Following Brexit, Honda splits its UK factory, which produces only for the European market, into one which remains in the UK and a new one in Germany.

e) Volkswagen’s location of production across countries such that each input in its value chain is produced in the location in the world where its quality-adjusted cost is the lowest.

Answer 1

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Question:

FDI:

Foreign direct investment (FDI) is an investment made by a company or individual in one country in business interests in another country, in the form of either establishing business operations or acquiring business assets in the other country, such as ownership or controlling interest in a foreign company.

Horizontal FDI:

Horizontal FDI refers to the type of direct investment between industrialized countries as ways to avoid trade barriers, gain better access to the local economy, or draw on technical expertise in the area by locating near other established firms.

Vertical FDI:

Vertical FDI refers to the Foreign direct investment by a firm to establish manufacturing facilities in multiple countries, each producing a different input to, or stage of, the firm's production process.

Difference Between Horizontal FDI and Vertical FDI:

A horizontal direct investment occurs when a company establishes the same type of business operation in a foreign country as it operates in its home country. example: Toyota assembles cars in both the United States and China.

Vertical foreign direct investment occurs when a multinational decides to acquire or build an operation that either fulfills the role of a supplier (backward vertical FDI) or the role of a distributor (forward vertical FDI). Companies that seek to enter into a backward vertical FDI typically seek to improve to cost of raw materials or the supply of certain key components. For example, a Japanese car manufacturer acquires a tire manufacturer.

a). Answer:

Volvo builds a car factory in Austin, Texas, which is similar to Volvo’s factory in Gothenburg is an example of a horizontal direct investment because volvo establishes the same type of business operation in Texas and Gothenburg .

b). Answer:

H&M relocates production of its clothes from Sweden to Bangladesh to reduce wage costs. we know that Hennes & Mauritz AB is a Swedish multinational clothing-retail company known for its fast-fashion clothing for men, women, teenagers and children. It is also an example of a vertical direct investment because H&M is a retail brand and have numbers of outlets but now its changed his production location from Sweden to Bangladesh.

c). Answer:

Microsoft splits up its R&D department so that it no longer only has one in the US but also four new R&D departments in four additional countries. It is also an example of a horizontal direct investment because Microsoft R&D splits up its R&D department (establishes the same type of business operation in a foreign country as it operates in its home country), so that it no longer only has one in the US but also four new R&D departments in four additional countries.

d). Answer:

Following Brexit, Honda splits its UK factory, which produces only for the European market, into one which remains in the UK and a new one in Germany. This is an example of a horizontal direct investment because company establishes the same type of business operation in a foreign country as it operates in its home country.

e). Answer:

Volkswagen’s location of production across countries such that each input in its value chain is produced in the location in the world where its quality-adjusted cost is the lowest. Horizontal This is an example of a horizontal direct investment because company establishes the same type of business operation in a foreign countries as it operates in its home country.

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