Question

Explain briefly Foreign Direct Investment. What are the different forms of FDI?

Answer 1

Foreign direct investment (FDI) refers to an investment made by an individual or a business in a business interest in another country which provides the individual or the business a controlling ownership. For example, if an Indian entrepreneur makes an investment in the USA to start a restaurant business or if an American firm sets up a manufacturing facility in China, these would be examples of FDI. Investment in foreign stock markets does not come under FDI.

Following are the three main types of FDI:

1) Horizontal FDI: In horizontal FDI, the same business activities are carried out at home as well as the foreign market. For example, if Toyota assembles cars in Japan (home) and USA (foreign), then this is a horizontal FDI.

2) Vertical FDI: In vertical FDI, different activities are carried out at home and abroad. For example, if Toyota manufactures its parts in Japan (home) and assembles the same in China (foreign), this is a vertical FDI.

3) Conglomerate FDI: In this type of FDI, investment is made to acquire a business interest in an unrelated firm abroad. For example, if Apple computers make an investment in a healthcare firm in China, this would be a conglomerate FDI.