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Types of FDI
This document summarizes the types and motivations of foreign direct investment. It discusses inward and outward foreign direct investment, and the factors that encourage and restrict them. It also describes different types of foreign direct investments like greenfield investments, mergers and acquisitions, horizontal and vertical foreign direct investments. Finally, it outlines the main motivations for foreign direct investment, including resource seeking, market seeking, efficiency seeking and strategic asset seeking.
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Types of FDI
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- 2. TOPIC TYPES OF FOREIGNDIRECT INVESTMENT
- 3. FDI It is theprocess whereby residents of one country acquire ownership of assets for the purpose of controlling the production, distribution and other activities of a firm in another country. Investment made to acquire lasting interest in enterprises operating outside the economy of the investor.
- 4. Direction MotiveTarget Inward FDI OutwardFDI Resource Seeking Market “ Efficiency “ Strategic Asset ” Greenfield Investments Mergers and Acquisitions Horizontal FDI Vertical FDI Types of FDI
- 5. Inward FDI • InwardFDI is a particular form of inward investment when foreign capital is invested in local resources. Inward FDI is encouraged by: • Tax breaks, subsidies, low interest loans, lifting of certain restrictions. • Long term gain is worth more than the short term loss. Inward FDI is restricted by: • Ownership limits. • Differential performance requirements.
- 6. Outward FDI • Calledas “direct investment abroad”. • Local capital is invested in foreign resources. Outward FDI is encouraged by: • Govt.-backed insurance to cover risk. Outward FDI is restricted by: • Tax incentives or disincentives on firms that invest outside of the home country. • Subsidies for local business.
- 7. Greenfield Investments • GreenfieldInvestments are the primary target of a host nation’s promotional efforts. Merits • Create new production capacity and jobs. • Transfer technology • Additional capital investments. Demerits • Loss of market share of domestic firms. • Profits flow back entirely to the multinational’s home country.
- 8. Mergers and Acquisitions Cross-borderacquisitions occur when the control of assets an operations is transferred from a local to a foreign company, with that local company becoming an affiliate of the foreign company.
- 9. Horizontal FDI Horizontal FDIoccurs when a company investment is made for conducting the similar business operations in another country.
- 10. Vertical FDI Vertical integrationis the expansion of a firm into a stage of the production process other than that of the original business.
- 11. Resource Seeking Investments whichseek to acquire factors of production that is more efficient than those obtainable in the home economy of the firm. Example, • Seeking natural resources in the Middle East and Africa. • Cheap labour in Southeast Asia.
- 12. Market Seeking Investments whichaim at either penetrating new markets or maintaining existing ones.
- 13. Efficiency Seeking Investments whichfirms hope will increase their efficiency by exploiting the benefits of economies of scale and scope and also those of common ownership.
- 14. Strategic Asset Seeking Atactical investment to prevent the gain of resource to a competitor. Example, Oil producers may not need the oil at present, but look to prevent their competitors from having it.
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