3 Types Of Foreign Direct Investment

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3 Types Of Foreign Direct Investment
3 Types Of Foreign Direct Investment
Foreign Direct Investment, or FDI has so far proved to be
the best way to boost a developing nations, such as India’s economy, by bringing
in new and improved technologies, highly skilled resources, employment
opportunities, growth in the overall GDP (Gross Domestic Produce), and most importantly
the extensive funding.
They are known to bring in huge investments thereby, helping
the local businesses to flourish and help them increase the exports of the
country and even stabilize the forex rates.
Thus it is claimed to be extremely beneficial for any
growing economy, where the developed economies come and join hands with the
host country and have the managerial control over the stocks of the business in
which they are investing.
In this article, we will learn what are the various types of
FDI in India a little bit more in detail
as you read along.

Types Of FDI

Strategically, there are 3 main types of FDI that help the
investors find the right investment option for themselves, namely:
  • Horizontal FDI
  • Vertical FDI
  • Conglomerate FDI
Let us see what they actually are in detail as mentioned in
the upcoming paragraphs.

Horizontal FDI

A Horizontal FDI is an investment made by the investing
company, firm or organization in the same type of operations, activities and
tasks that it carries out in its home country.
Which apparently means, the foreign investors are investing
in the same industry segment albeit, operating in two different nations.
To state an example, take a smartphones manufacturing
company from the USA that assembles its smartphones even in India.

Vertical FDI

In the Vertical type of FDI, the investment is made by the
investing company or organization into a field that is related to its field of
operation. Thus basically these are nothing but the value adding activities of
a business.
For example, an investor belonging to the frozen food sector
ties up and invests in a food container manufacturing company of the host
country like India.
The Vertical FDI is further classified into two basic types
such as:

Forward Vertical FDI:

In these types of Investments, the investor invests in the
company of the other (host) country, which bring the manufactured products and
forward them to the target audience of that country, for example, a smartphone
manufacturing company from China investing in a wholesale smartphone dealer in
India.

Backward Vertical FDI:

In these types of Investments, the investor invests in the
organization or company of the host country, where the company is involved in
the raw material manufacturing or related sourcing of products of the
particular industry; for example, a smartphone manufacturer in China invests in
a gorilla glass manufacturer in India.

Conglomerate FDI

In the conglomerate FDIs, the investment is made in
unrelated business sectors in the foreign country in which the investing
company, individual or organization has never ventured before. Here the
investor usually has two important benefits, one is working in a new segment of
industry altogether and secondly attaining managerial control of business
operations in a foreign land. For example, a smartphone manufacturing company
in Australia investing in a durable good producer in India.
Apart from these, the FDIs also take the form of:
  • Greenfield entry and
  • Mergers &
    Acquisitions (takeovers)
What are they?

Greenfield Entry:

A principal mode or a special type of FDI, the Greenfield
entry is the investment made by the investor (company, individual or
organization) in a foreign company that assembles or indulges in the activities
from scratch production and this is extremely beneficial in developing
countries like India.

Mergers And Acquisitions (Takeovers):

Well, when an investing company or organization invests in
the already existing businesses or a fully operational company in the host or
foreign country, then it is called the Merger and Acquisition or basically the
foreign takeover.
These above-mentioned types of FDIs offer various
opportunities to the several foreign investors to choose one of their favored
types of investment depending upon their overall interest, ownership
strategies, and capabilities.
Investors have to keep themselves abreast of the latest
trends in the global market and what type of FDIs their competitors are
choosing and why. This will help them gain new market access and venture into
fields where they have never been before through the foreign investments.
Author Bio: I am
Pooja Tyagi, a professional writer, and a freelance blogger for the past two
years. I’ve spent my professional years curating content for many websites
across a wide range of topics like health, education, finance, travel, technology,
fashion and many more.
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