Economics
Horizontal FDI
Horizontal FDI refers to foreign direct investment where a company invests in the same industry abroad as it operates in at home. The primary goal of horizontal FDI is to expand market presence, gain access to resources, or reduce production costs. This type of investment involves the replication of the firm's activities in a foreign location.
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10 Key excerpts on "Horizontal FDI"
eBook - PDFInternational Financial Operations
Arbitrage, Hedging, Speculation, Financing and Investment
- I. Moosa(Author)
- 2003(Publication Date)
- Palgrave Macmillan(Publisher)
There is no agreement, however, on what constitutes a controlling interest, but most commonly a minimum of 10% shareholding is regarded as allowing the foreign firm to exert significant influence, either poten- tially or actually exercised, over the key policies of the underlying project. Many firms are unwilling to carry out foreign investment unless they have 100% equity ownership and control. Others refuse to make such investments unless they have at least majority control (that is, a 51% stake). In recent years, however, there has been a tendency for indulging in FDI cooperative arrangements where several firms participate and no single party holds majority control (for example, joint ventures). 318 Classification of FDI FDI can be classified from the perspective of the investing firm and from the perspective of the host country (the recipient of FDI). From the perspective of the investor, it is possible to distinguish among Horizontal FDI, vertical FDI and conglomerate FDI. Horizontal FDI is undertaken for the purpose of hori- zontal expansion to produce the same or similar kinds of goods abroad (in the host country) as in the home country. Hence product differentiation is the crit- ical element of market structure for Horizontal FDI. More generally, Horizontal FDI is undertaken to exploit more fully certain monopolistic or oligopolistic advantages such as patents or differentiated products, particularly if expan- sion at home were to violate anti-trust laws. Vertical FDI, on the other hand, is undertaken for the purpose of exploiting raw materials (backward vertical FDI) or to be nearer to consumers through the acquisition of distribution outlets (forward vertical FDI). From the perspective of the host country, FDI can be classified into (i) import-substituting FDI, (ii) export-increasing FDI and (iii) government-initi- ated FDI.
eBook - PDFForeign Direct Investment and Development in Vietnam
Policy Implications
- Pham Hoang Mai(Author)
- 2003(Publication Date)
- ISEAS Publishing(Publisher)
4 Foreign Direct Investment and Development in Vietnam © 2004 Institute of Southeast Asian Studies, Singapore 2 Theoretical Overview of FDI While FDI is acknowledged as a significant form of capital in many developing economies, often constituting a large proportion of gross national investment, its socio-economic impact is hotly debated. This chapter reviews the various, often oppositional, theories about the nature, origins and patterns of transnational FDI flows. In addition, this chapter analyzes the role of government in influencing the effects of FDI on recipient economies. The arguments presented here set the background for this book’s analysis of the impact of the first decade of FDI flows in Vietnam, between 1988 and 1998. Definitions There are several ways to define foreign direct investment. According to the International Monetary Fund, FDI includes: • new equity purchased or acquired by parent companies in overseas firms they are considered to control (including the establishment of new subsidiaries); • reinvestment of earnings by controlled firms; and • intra-company loans from parent companies to controlled firms. (Graham and Krugman 1993, p. 16). The United Nations defines FDI as “an investment involving a long term relationship and reflecting a lasting interest of a resident entity (individual or business) in one economy (direct investor) in an entity resident in an economy other than that of the investor (host country)” (United Nations 1992 cited in Lindblad 1997, p. 1). In general, FDI has been defined as the long-term investment made by non-residents of a host country through the creation or acquisition of capital assets in the host country. FDI implies the ownership of capital assets large enough to have full or partial control of the enterprise and a physical presence by foreign firms or individuals (Gillis et al. 1992, 4 Reproduced from FDI and Development in Vietnam, by Pham Hoang Mai (Singapore: Institute of Southeast Asian Studies, 2004).
eBook - PDF- Giorgio Barba Navaretti, Anthony J. Venables(Authors)
- 2020(Publication Date)
- Princeton University Press(Publisher)
6 Determinants of FDI: the Evidence We have identified two distinct reasons why a firm would want to invest abroad. One is to supply a market directly through an affiliate (horizontal investment (HFDI), as discussed in Chapter 3). The other is to find low-cost locations for parts of the production process (vertical investment (VFDI), as discussed in Chapter 4). In each case a firm faces trade-offs in its investment decision. Avoiding trade costs through HFDI implies foregoing economies of scale, as production is distributed across several plants. Exploiting international differences in factor prices through VFDI means incurring costs of geographically disintegrating production. Theory suggests factors that are important in these trade-offs; some of these factors are firm or industry specific (e.g. the importance of economies of scale), some are country characteristics (e.g. market size or factor prices), and often it is the interaction of these firm and country characteristics. This chapter is devoted to empirically testing the hypotheses suggested by theory and to measuring the quantitative importance of different factors in determining MNE activity. 6.1 A General Framework Theory comes up with a number of predictions on how firm, industry and country characteristics influence the investment decision. These predictions are summarized in Table 2.3 and derived in Chapters 3 and 4. Some of the main ones are that HFDI will take place when gains in trade costs and strategic advantage are large relative to the fixed cost of setting up a new plant. We therefore expect to find MNEs mainly among firms that can spread assets across several plants at little cost, i.e. when firm-level economies of scale are large relative to plant-level economies of scale. VFDI is predicted to occur when factor cost savings are large relative to the costs of fragmenting activities in several locations.
eBook - PDFLiberalizing Financial Services and Foreign Direct Investment
Developing a Framework for Commercial Banking FDI
- L. Páez(Author)
- 2011(Publication Date)
- Palgrave Macmillan(Publisher)
2 Correspondingly, a definition of FDI will reflect these statistical and legal discrepancies. Nonetheless, a concept that has had grow- ing acceptance in an important number of countries is the OECD Benchmark definition. This definition is consistent with the IMF Balance of Payments Manual and has also been systematically taken up by the United Nations Conference for Trade and Development (UNCTAD) in its World Investment Report. 3 The OECD defines foreign direct investment as follows: Foreign direct investment reflects the objective of obtaining a last- ing interest by a resident entity in one economy (“direct investor”) Understanding FDI 9 in an entity resident in an economy other than that of the investor (“direct investment enterprise”). The lasting interest implies the existence of a long-term relationship between the direct inves- tor and the enterprise and a significant degree of influence on the management of the enterprise. Direct investment involves both the initial transaction between the two entities and all sub- sequent capital transactions between them and among affiliated enterprises, both incorporated and unincorporated. 4 As the word foreign denotes, foreign direct investment is a cross-bor- der transfer of capital from a source to a host country. In essence, FDI reflects an interest on behalf of the “direct investor” to seek establishment in the host country through a “direct investment enterprise.” Further, this interest is accompanied by the objective to exercise some form of control over the investment, since the investor holds “a significant degree of influence on the management of the enterprise.” Two important considerations arise in the context of this defini- tion. First, how much FDI is required to qualify establishment of an enterprise as a direct investment enterprise? Second, to what extent does the direct investor have an influence over the enterprise management? These questions can be answered when ownership control is addressed.
eBook - PDFForeign Direct Investment in Transitional Economies
A Case Study of China and Poland
- Kenneth A. Loparo, Michael Du Pont(Authors)
- 2000(Publication Date)
- Palgrave Macmillan(Publisher)
Therefore production on a smaller scale will be encouraged, favouring assembly technologies that do not require large fixed investments likely to be found abroad (Flamm and Grunwald, 1985); although still seemingly under the aegis of an individual company, albeit one that is changing its shape, size and organisational design (Yongwoong and Simon, 1994). THE TRADITIONAL VIEW There are two major schools of thought concerning FDI. The con- ventional school, pioneered by Hymer (1960) and Caves (1974), states that FDI is undertaken only by firms that possess some intangible asset. These firms invest in a foreign country in order to exploit the firm-specific ownership advantage embodied in the intangible asset. FDI is, therefore, seen as an aggressive action to extract economic rent from a foreign market (Tain-Jy Chen, Yin-Hwa Ku and Meng- Chun Liu, 1994). The other school, represented by Vernon and Kojima, portrays FDI as a defensive action undertaken by firms to protect their export market which is either threatened by competitors in the local market (Vernon, 1966) or damaged by unfavourable developments in macro- economic conditions at home (Kojima, 1973), such as wage increases and/or currency appreciation. `Defensive' FDI is often made in low- wage countries where cheap labour enables investors to reduce their production costs in order to restore international competitiveness. `Aggressive' FDI may be made in any countries where local produc- tion is seen as the best way to enter the market. If both types of FDI exist in the real world, it is empirically difficult to distinguish one from the other because actual FDI may be undertaken for a mixture of 9 Theory and Evidence on FDI reasons including market exploitation and labour-seeking motives.
eBook - PDFThe Political Economy of Japanese Foreign Direct Investment in the US and the UK
Multinationals, Subnational Regions and the Investment Location Decision
- C. Aaron(Author)
- 1998(Publication Date)
- Palgrave Macmillan(Publisher)
Second, firms may undertake FDI within a process of incre- mental problem solving, whereby initial investments are in sales and distribution operations. The knowledge about a foreign mar- ket and location accumulated by the foreign managers of these investments over time can greatly reduce the risks and costs of a full-scale manufacturing investment such that a successful sales operation may be followed by a more substantial manufacturing one. 3 Finally, Caves suggests that the exact factors precipitating a 45 C. Aaron, The Political Economy of Japanese Foreign Direct Investment in the UK and the US © Carl Aaron 1999 46 The Political Economy of Japanese FDI in the UK and the US decision to invest abroad are often random. An external threat or opportunity may prompt a firm to allocate resources already at hand to an FDI project rather than another purpose. Also, a particular FDI proposal may only reach fruition if an individual believes in it enough to put his reputation on the line to back it. 4 With these observations in mind we turn to the larger perspective. GLOBALIZATION AND MARKET-BASED EXPLANATIONS In this section, we consider existing explanations of FDI location which focus on the globalization and market-oriented strategies of multinationals. We begin with the observation that '[f]oreign direct investment is generally an integral part of the global cor- porate strategy for firms operating in oligopolistic markets. Whereas traditional portfolio investment is driven by differential rates of return among national economies, foreign direct investment is de- termined by the growth and competitive strategies of the oligopolistic corporations.' 5 In the pursuit of these objectives oligopolistic firms may engage in either or both of the twin strategies of cost minimi- zation (cost-side investments) and revenue maximization (demand- side investments).
No longer available |Learn moreForeign Direct Investment and Development
Launching a Second Generation of Policy Research
- Theodore H. Moran(Author)
- 2011(Publication Date)
81 7 FDI, Host-Country Growth, and Structural Transformation The preceding chapters have examined how manufacturing and service-sector FDI can improve the efficiency with which factors of production are used in the host economy, raising domestic economic welfare. They have intro-duced the search for increases in total factor productivity in the horizontal and vertical direction (externalities benefiting rivals and/or suppliers), as well as the possibility of discovering export, labor market, and labor institution externalities. Chapters 2 and 3 investigated the potential benefits from FDI in natural resources and infrastructure. This chapter takes a more comprehensive look at how all these potential contributions might affect the host developmental track. It begins with the “simple” albeit controversial question of whether FDI augments the host-economy growth rate. It then introduces detailed investigation of the possi-bility that foreign investment can help bring about structural transformation in the host economy, assisting with “self-discovery” (Hausmann and Rodrik 2003), overcoming “idea gaps” (Romer 1992, 1994), and helping to upgrade and diversify exports (drawing on the “what you export matters” literature). The chapter examines what kinds of market failures impede the recasting of the host production frontier via FDI from taking place naturally. All in all, the analysis here completes the investigation of the 12 principal channels through which FDI can have an impact on host-country development (box 1.1).
eBook - PDF- Andrew Walter, Gautam Sen(Authors)
- 2008(Publication Date)
- Princeton University Press(Publisher)
190 CHAPTER 6 is imported or raised locally. According to the H-O-S framework, for example, the import of capital favors labor and reduces the returns to capital in the host economy, but the reverse occurs if capital is raised locally. Greenfield FDI can increase industry capacity, which could favor nonspecific labor (unless it dramatically increases capital intensity, leading to workforce downsizing) but hurt industry-specific labor and capital. Even for nonspecific labor, FDI inflows can be associ-ated with reforms of labor law and practices that reduce the bargaining power and overall political influence of organized labor, which may prompt opposition. Any form of FDI can also bring new technology to the host economy. This is likely to be broadly beneficial for host economy factors, except for specific firms and labor disadvantaged by superior technology. Hence, the distributional effects of FDI are likely to vary depending on the particular bundle of factors involved in a given case. The societal interest approach suggests that even if most FDI had net positive aggregate welfare benefits for recipient countries, governments might still restrict it if some powerful domestic groups oppose entry by MNCs. Much is likely to depend on the mode of entry of FDI (green-field or M&A) and especially on whether the investment is intended to serve demand in the local market or in export markets. Competing domestic firms are most likely to oppose FDI intended to produce goods and services for the domestic market that are not already im-ported (as in the case of Korea before 1997, examined in chapter 4). Competing domestic firms often oppose greenfield FDI on the grounds that it will increase industry capacity, while M&As are opposed on grounds of retaining the control of existing (domestic) owners. Export-oriented FDI is often less threatening to domestic firms—indeed, do-mestic supplier firms may favor it along with labor.
- A. Bitzenis, V. A. Vlachos, P. Papadimitriou, A. Bitzenis, V. A. Vlachos, P. Papadimitriou(Authors)
- 2012(Publication Date)
- Palgrave Macmillan(Publisher)
● Many firms also follow their competitors, in order to exploit the latter’s experiences by following their successful steps and avoiding their mistakes (follow the competition). ● Firms in the financial industry such as banks and insurance firms follow their clients into the host country in order: (1) not to allow their clients to hire a local firm or another MNE that might in time take up their operations in the home country as well and (2) to exploit the ready-to-use clients in foreign markets. ● For firms that utilize raw materials that are supplied by only a given number of suppliers, an FDI project may come by following the expansion of suppliers, which open the way for their clients to follow (follow the supplier). ● The growing trend of globalization exerts pressure on firms to undertake FDI in many countries in order to secure their physical presence in most of them and establish themselves as economic giants. In many cases, the selection of the region is done according to the fashion trend of the time, which points out which regions are profitable or offer investment and privatization opportunities—for example, Central and South America, Asia, Central and Eastern Europe, and the Commonwealth of Independent States (CIS) countries. ● Firms may acquire assets (by making a joint venture or an M&A, and so forth) from a local firm in a host country for (a) the purpose of increasing market share in the global market, or (b) to decrease global competition (to become a global leader) in the specific indus- try/sector ( decrease competition or weaken the competition), or (c) for a geographical dispersion of knowledged-based assets from for- eign locations. ● A firm may decide to undertake FDI if it finds a market where no foreign firm from the same industry has any operations (first mover advantage).
eBook - PDFTrading Spaces
Foreign Direct Investment Regulation, 1970–2000
- Sonal S. Pandya(Author)
- 2013(Publication Date)
- Cambridge University Press(Publisher)
By expanding production, the firm can lower the cost of each unit of software it sells. FDI allows firms to expand internationally in order to maximize econ- omies of scale that arise from their intangible assets. 8 The additional pro- ductivity gains following FDI reflect the firms’ higher economies of scale. Helpman, Melitz, and Yeaple (2004) find that multinational exporting firms are, on average, 15 percent more productive than nonmultinational firms that export. This finding attests to the additional productivity of MNCs, above and beyond that of firms that are productive enough to compete in international markets. To reiterate, there are alternatives for capturing scale economies but they entail the contracting risks described above. In place of investment to manufacture production inputs in foreign countries, firms could instead rely upon separate foreign suppliers to provide low-cost inputs. Similarly, firms could take advantage of foreign market opportunities by licensing their spe- cific assets to firms in those markets. MNCs are so productive that they can profitably undertake FDI and bypass contracting risks. To understand how FDI affects recipient countries’ economies, it matters that the MNC is usually much more productive than the top local firms. To be sure, both trade and FDI expose the recipient country’s economy to com- petition from the world’s most productive producers. Trade introduce goods and services that embody their producers’ advantages. FDI introduces the technology necessary to produce goods and services. FDI openness, how- ever, exposes recipient countries to more international competition than 8 Brainard (1997) finds that the firms most likely to pursue FDI are those with high firm- level scale economies but low plant-level scale economies because FDI potentially sacri- fices production scale economies from concentrating production in one place. FDI 30 trade openness, because FDI occurs in industries that produce nontrad- ables.
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