What are the different types of FDI

Foreign Direct Investment (FDI) can be categorized into several types based on the nature of the investment and the relationship between the investor and the foreign enterprise. The main types of FDI include:

1. Horizontal FDI

• Description: This type of FDI occurs when a company invests in the same industry in a foreign country where it already operates. Essentially, the company replicates its domestic operations abroad.
• Example: A car manufacturer from Germany establishing a new car production plant in the United States.

2. Vertical FDI

• Description: Vertical FDI occurs when a company invests in a foreign business that operates in a different stage of the supply chain. It is further divided into:
  • Backward Vertical FDI: When a company invests in a foreign supplier or resource provider to secure the supply of raw materials or components.
  • Forward Vertical FDI: When a company invests in a foreign entity closer to the consumer, such as in distribution or retail.
• Example: A clothing company based in Italy investing in a textile manufacturing plant in India (backward) or opening retail stores in Japan (forward).

3. Conglomerate FDI

• Description: Conglomerate FDI involves a company investing in a foreign business that operates in an entirely different industry. This type of FDI is less common because it requires the investing company to enter a new and unfamiliar market.
• Example: A technology firm from the U.S. acquiring a food processing company in Brazil.

4. Greenfield Investment

• Description: This type of FDI involves a company starting a new venture from the ground up in a foreign country. It typically involves building new facilities, such as factories or offices.
• Example: A pharmaceutical company from the UK building a new research and development center in India.

5. Brownfield Investment

• Description: Brownfield FDI occurs when a company or individual purchases or leases existing facilities in a foreign country to start a new production activity.
• Example: A telecommunications company from Japan acquiring an existing mobile network infrastructure in Australia to expand its services.

6. Joint Ventures

• Description: This type of FDI involves a partnership between a domestic firm and a foreign firm to create a new business entity, sharing ownership, risks, and profits.
• Example: An automotive company from France forming a joint venture with a Chinese company to produce electric vehicles in China.

7. Mergers and Acquisitions (M&A)

• Description: FDI through mergers and acquisitions involves purchasing or merging with an existing foreign company to gain control over its operations.
• Example: A U.S. tech company acquiring a European software firm to expand its product offerings.

These types of FDI allow companies to expand internationally in various ways, depending on their strategic goals, resources, and the specific conditions of the target market.