Question

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Q. 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.

b) H&M relocates production of its clothes from Sweden to Bangladesh to reduce wage costs. (5 points) 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

Answer)

Vertical FDI is the investment by a multinational in an industry that is similar to the multinational.

Horizontal FDI is the investment by a multinational in an industry that is either an input to it's production or in an industry that sells products in foreign.

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.

It is example of vertical FDI. Since investment is done to reduce input costs.

b) H&M relocates production of its clothes from Sweden to Bangladesh to reduce wage costs. (5 points)

It is example of horizontal FDI.

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.

It's example of Vertical FDI.

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.

It's example of vertical FDI.

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.

It's example of vertical FDI since investment is for lower input costs.

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