Horizontal FDI

Definition

Horizontal foreign direct investment (FDI) occurs when a multinational corporation (MNC) invests in the same industry in a foreign country as it operates in its home country. This type of investment allows companies to expand their production and services internationally, catering to local markets while maintaining their original business model. It helps MNCs to achieve economies of scale, diversify market presence, and enhance competitive advantage.

5 Must Know Facts For Your Next Test

1. Horizontal FDI allows companies to tap into new consumer bases while leveraging their existing brand reputation and operational knowledge.
2. This type of investment often leads to the creation of joint ventures or wholly-owned subsidiaries in foreign markets.
3. Companies engaging in horizontal FDI can benefit from lower transportation costs and reduced tariffs by producing goods closer to their target markets.
4. In many cases, horizontal FDI is motivated by the desire to overcome trade barriers and gain better access to local resources.
5. The success of horizontal FDI largely depends on understanding local market conditions, including consumer preferences and regulatory environments.

Review Questions

• How does horizontal FDI compare to vertical FDI in terms of business strategy and market expansion?
  • Horizontal FDI focuses on expanding a company's presence in the same industry across different countries, allowing for market diversification and consumer base expansion. In contrast, vertical FDI involves investing in different stages of production within the supply chain, which can streamline operations but does not necessarily lead to market diversification. Both strategies aim for growth but target different aspects of market and operational efficiency.
• What are some advantages and challenges associated with horizontal FDI for multinational corporations?
  • Advantages of horizontal FDI include increased market access, economies of scale, and the ability to leverage existing business practices in new markets. However, challenges may arise from cultural differences, regulatory compliance, and competition with local firms. MNCs must navigate these complexities while adapting their strategies to align with local conditions to ensure successful investment outcomes.
• Evaluate the impact of horizontal FDI on global trade patterns and local economies.
  • Horizontal FDI significantly influences global trade patterns by facilitating the flow of goods and services across borders, leading to increased competition and improved product availability for consumers. For local economies, such investments can create jobs and spur economic development through technology transfer and enhanced skills training. However, they may also pose risks such as market saturation or negative impacts on local businesses if not managed properly. Overall, the balance between positive economic contributions and potential disruptions must be carefully considered.

Related terms

Vertical FDI: Vertical foreign direct investment refers to investments where a company expands its operations by investing in different stages of production within the supply chain in a foreign country.

Multinational Corporation (MNC): A multinational corporation is a company that operates in multiple countries, managing production or delivering services in more than one nation.

Market Access: Market access refers to the ability of a company to enter and compete in foreign markets, which is often a primary motivation behind horizontal FDI.