Foreign Direct Investment (FDI) – A.V.HARIHARAN

Foreign Direct Investment (FDI) – A.V.HARIHARAN


Foreign Direct Investment (FDI) occurs when a firm invests directly in facilities to produce and/or market a product in a foreign country.

Forms of FDI:

FDI has 3 main forms. These are,

1. Green-Field Investment:

It involves the establishment of a wholly new operation in an abroad.

2.  Acquisitions:

It involves acquiring or merging with an existing firm in the foreign country.

Types of FDI:

There are 2 various types of FDI. These,

1.Horizontal FDI:

It is FDI in the same industry in which a firm opeates at home country.

2. Vertical FDI:

Vertical FDI takes 2 forms.

i. Backward vertical FDI

It is FDI into an industry abroad that provides inputs for a firm’s domestic production process.

Most backward vertical FDI has been in extractive industries.

Example: Oil extraction, Copper mining.

ii. Forward vertical FDI:

It is in which an industry abroad sells the outputs of a firm’s domestic processes.

Motivations for handling international business through direct investment:

Business and governments are motivated to engage in FDI in order to,

–          to Expand the sales

Here, the FDi used to increasing the firm’s sales volume. This is the main purpose most of the persons they are investing money on foreign.

–          to acquire the resources

This is the another advantage of the FDI. Through this acquiring the resources, the company get more financial, material and other facilities from foreign nations.

–          to diversify the sources of supplies

It is one of the technology now a days companies are doing. Companies producing the product in one country and sales in another country.

–         to minimize the competitive risk

FDI minimize the domestic copetition and increasing the global competition.

Advantages of FDI:

–          to earn the more profit

–          more stable to sales and earnings

–          it makes the effective and quality products

–          Firms using the proper technology.

–           Increasing the brand image.