Vertical foreign direct investment (FDI) occurs when a multinational company invests in a different stage of production in a foreign country, often involving the supply chain. This type of investment can either be backward, where a company invests in its suppliers, or forward, where it invests in distribution or retail operations. Vertical FDI helps firms gain control over their supply chains and can lead to efficiency gains and cost reductions.
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Vertical FDI allows firms to improve their competitive advantage by gaining better access to raw materials or improving their distribution channels.
This type of investment can reduce transaction costs by allowing companies to control different stages of production and distribution more effectively.
Vertical FDI can lead to technology transfer between the investing firm and its local subsidiaries, benefiting both parties.
Host countries often welcome vertical FDI as it can create jobs and stimulate economic growth by attracting new industries.
However, vertical FDI may also lead to concerns over resource exploitation or market monopolization by the investing firm.
Review Questions
How does vertical FDI differ from horizontal FDI in terms of investment strategy and objectives?
Vertical FDI focuses on investing in different stages of production, either upstream by acquiring suppliers or downstream by investing in distribution networks. In contrast, horizontal FDI involves investing in the same stage of production in a foreign country to expand market presence. Companies pursuing vertical FDI typically aim to enhance their supply chain efficiency and reduce costs, while those engaging in horizontal FDI seek to increase their market share and competitiveness.
Discuss the impact of vertical FDI on supply chain management practices within multinational corporations.
Vertical FDI significantly impacts supply chain management by allowing multinational corporations to control various stages of production and distribution. By investing directly in suppliers or distribution channels, companies can ensure quality control, reduce lead times, and optimize logistics. This control helps firms respond quickly to market changes, manage inventory levels better, and reduce reliance on external suppliers, ultimately leading to a more efficient and resilient supply chain.
Evaluate the long-term implications of vertical FDI for host countries' economies and industries.
The long-term implications of vertical FDI for host countries can be both positive and negative. On one hand, it can stimulate local economies by creating jobs, enhancing skills through technology transfer, and attracting further investments. On the other hand, concerns about resource exploitation and market monopolization may arise if foreign firms dominate key industries. Additionally, while vertical FDI can enhance efficiency, it may also lead to volatility in local markets if foreign companies withdraw or alter their investment strategies abruptly.
Related terms
Horizontal FDI: Horizontal foreign direct investment is when a company invests in the same stage of production in a foreign market, often to expand its market presence.
The management of the flow of goods and services from raw materials to the final product, crucial for companies engaging in vertical FDI.
Multinational Corporation (MNC): A company that operates in multiple countries, often utilizing various forms of FDI to establish its international presence.