Question

From the perspective of a developing country, why may FDI be preferable to FII?

Answer 1

FDI -The major methods of FDI are horizontal and vertical FDI. The former refers to the firm expanding abroad based on the same production line as in the home country. For instance Samsung or even Pepsi. Suzuki has expanded and manufactures cars in India. They have expanded in multiple nations through horizontal FDI. Whereas the latter is predominately division of the firm that is different segments of the production process is done in different places abroad where it is cheaper to do so hence bringing down the cost of production.Horizontal FDI is induced when the market size is large and the trade costs are high whereas in the vertical the market size and trade barriers are low. An example of vertical is Mac book pro its body is made in Taiwan, the processor factory in California, and finally, its assembled in China.  Firms that want to lower the cost of production or increase their control over the supply chain use the vertical FDI route. Most developing nation expand through horizontal as believe that market access is more important than reduced production cost

FDI is more preferred from the perspective of a developing country than FII as the former helps with an  inducement of  physical assets, along with technology transfer, and brings in increased innovation which is an asset to developing countries . It's not only a long term investment but also has a direct impact on wages and employment.FDI has a very strong impact on the productivity of the economy due to the production of goods and services which helps the economy to grow and develop. Whereas the latter is predominantly limited to the secondary market as its investment in financial assets. Its period is relatively short and it has no impact on wages and employment. Hence these are some reasons for preferring FDI to FII.