Foreign Direct Investment (FDI)

Foreign Direct Investment (FDI) involves an individual or a company from one country making an investment into businesses located in another country.

This type of investment typically includes acquiring lasting interest and significant influence in the management of the business, distinguishing it from portfolio investments which are more passive.

Types of FDI

Horizontal FDI:

Definition: Investment in the same industry abroad as the investor operates in at home.

Example: A car manufacturer based in Japan opening a production facility in the United States.

Vertical FDI:

Backward Vertical FDI: Investing in an industry abroad that provides inputs for the firm’s domestic production.

Forward Vertical FDI: Investing in an industry abroad that uses the firm’s domestic production.

Example: A textile manufacturer investing in a cotton farm (backward) or a clothing retail chain (forward).

Conglomerate FDI:

Definition: Investment in a business that is unrelated to the investor’s existing business.

Example: A technology company in Germany investing in a food processing plant in Brazil.

Greenfield Investment:

Definition: Building new facilities from scratch in the foreign country.

Example: Establishing a new research and development center in a foreign country.

Brownfield Investment:

Definition: Merging with or acquiring existing businesses in the foreign country.

Example: Acquiring an existing production plant in a foreign country.