FOREIGN DIRECT INVESTMENT
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.
It involves acquiring or merging with an existing firm in the foreign country.
Types of FDI:
There are 2 various types of FDI. These,
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.