International Business

Topics: Foreign direct investment, Investment, Tax Pages: 3 (586 words) Published: April 14, 2014
Foreign Direct Investment
Foreign direct investment (FDI) is a direct investment into production or business in a country by an individual or company of another country, either by buying a company in the target country or by expanding operations of an existing business in that country. The accepted proportion for a foreign direct investment relationship, as defined by the OECD Organization for Economic Co-operation and Development, is 10%.

That is, the foreign investor must own at least 10% or more of the voting stock or ordinary shares of the investee company.

Example of foreign direct investment:
American company taking a majority stake in a company in China. Canadian company setting up a joint venture to develop a mineral deposit in Chile.

Foreign direct investment is in contrast to portfolio investment which is an Indirect (passive) investment in the securities of another country such as shares . Types of FDI
Strategically FDI comes in three types:
1) Horizontal: where the company carries out the same activities abroad as at home Example: Toyota assembling cars in both Japan and the UK. 
2) Vertical: when different stages of activities are added abroad. Forward vertical FDI is where the FDI takes the firm nearer to the market. Example: Toyota acquiring a car distributorship in America

Backward Vertical FDI is where international integration moves back towards raw materials Example: Toyota acquiring a tire manufacturer or a rubber plantation).  3) Conglomerate: where an unrelated business is added abroad. This is the most unusual form of FDI as it involves attempting to overcome two barriers simultaneously: entering a foreign country and a new industry.  This leads to the analytical solution that internationalization and diversification are often alternative strategies, not complements. Notice:

Horizontal FDI decreases international trade as the product of them is usually aimed at host country; the two other types generally...
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