Horizontal fdi

Definition

Horizontal foreign direct investment (FDI) occurs when a multinational company invests in a foreign country to produce the same goods or services that it produces in its home country. This strategy allows firms to gain market access and leverage their existing capabilities in new markets, while also taking advantage of lower production costs or favorable economic conditions abroad.

5 Must Know Facts For Your Next Test

1. Horizontal FDI is primarily driven by the desire to access new markets and increase a company's customer base, which can lead to higher revenues.
2. By establishing operations in a foreign market through horizontal FDI, companies can bypass trade barriers and tariffs, enhancing their competitive edge.
3. This type of investment can help companies achieve economies of scale by increasing their production volume across multiple locations.
4. Horizontal FDI can facilitate technology transfer and innovation, as companies often bring their existing technologies and practices to new markets.
5. The impact of horizontal FDI on host countries can include job creation, skill development, and contributions to the local economy, although it may also lead to increased competition for local firms.

Review Questions

• How does horizontal FDI differ from vertical FDI in terms of its strategic objectives and outcomes?
  • Horizontal FDI focuses on producing the same goods or services in a foreign market as a company does in its home country, aiming for market expansion and increased revenues. In contrast, vertical FDI involves investing in different stages of the supply chain, such as production or distribution, often to enhance operational efficiency. While horizontal FDI is more about market reach, vertical FDI centers on optimizing processes and securing resources.
• Discuss the potential benefits and drawbacks of horizontal FDI for both multinational corporations and host countries.
  • For multinational corporations, horizontal FDI provides benefits like increased market access, reduced trade barriers, and opportunities for economies of scale. However, it can also pose risks such as cultural misunderstandings and potential backlash from local consumers. For host countries, the advantages include job creation and economic growth, while drawbacks may involve negative impacts on local businesses and potential environmental concerns due to increased production activities.
• Evaluate the long-term effects of horizontal FDI on the competitive landscape within host countries and how this might shape future multinational strategies.
  • The long-term effects of horizontal FDI on host countries can significantly alter the competitive landscape by increasing competition among local firms and foreign investors. As MNCs establish a presence, local companies may be pressured to innovate or enhance their efficiencies to survive. This dynamic can lead to a more vibrant business environment but may also result in monopolistic behaviors if large MNCs dominate the market. Consequently, future multinational strategies may increasingly focus on collaborative approaches with local firms or adapting products to better meet regional consumer preferences.

Related terms

Vertical FDI: A type of foreign direct investment where a company invests in different stages of the production process in a foreign country, often to secure supply chains or distribution channels.

Market Expansion: The strategy of increasing sales and market presence by entering new geographical areas, often through FDI, to reach more customers.

Multinational Corporation (MNC): A company that operates in multiple countries, often engaging in FDI to establish production facilities or subsidiaries abroad.