This paper examines the impact of uncertainty on the profitability of vertical and horizontal foreign direct investment (FDI). Vertical FDI takes place when the multinational fragments the production process internationally, locating each stage of production in the country where it can be done at the least cost. Horizontal FDI occurs when the multinational undertakes the same production activities in multiple countries. We consider a model where the risk-neutral multinational must commit its investment prior to the realization of shocks. The multinational has monopoly power and confronts two types of risk. It may face random productivity shocks or encounter a host country that tries to confiscate its rents. We show that greater uncertainty reduces the expected income from vertical FDI but increases the expected income from horizontal FDI. In addition, predatory actions by the host country are more costly to the multinational that has structured its production vertically rather than horizontally. Consequently, increased uncertainty should encourage horizontal FDI but discourage vertical FDI. If vertical FDI is more likely to flow into emerging markets and horizontal FDI into mature markets, then the empirical finding that most FDI is horizontal rather than vertical might be due, in part, to the greater uncertainty associated with emerging markets. We report cross-country regression results that provide some support for the predictions of the model. Volatility appears to have a differential impact on FDI inflows into mature and emerging markets. For mature markets that supposedly attract mainly horizontal FDI, greater volatility significantly increases FDI inflows. For emerging markets that receive relatively more vertical FDI inflows, increased volatility does not increase FDI inflows.
Vertical foreign direct investment occurs when a multinational acquires an operation that either acts as a supplier or distributor. Horizontal FDI occurs when a company initiates a similar operation or business model in another country.
Horizontal FDI enables multinational corporations to gain access to larger or new markets, sidestep trade barriers, and achieve lower operating costs by shifting operations to countries where it's cheaper to operate.
The potential benefits of vertical FDI for the investing company include gaining access to local resources, lowering production costs, and securing control over the supply chain.
When a firm brings the goods or components back to its home country (i.e., acting as a supplier), this is referred to as backward vertical FDI. When a firm sells the goods into the local or regional market (i.e., acting as a distributor), this is termed forward vertical FDI.
With a horizontal FDI, a company establishes the same type of business operation in a foreign country as it operates in its home country. A U.S.-based cellphone provider buying a chain of phone stores in China is an example. In a vertical FDI, a business acquires a complementary business in another country.
A vertical market is a market in which vendors offer goods and services specific to an industry, trade, profession, or other group of customers with specialized needs. A horizontal market is a market in which a product or service meets the needs of a wide range of buyers across different sectors of an economy.
Vertical integration can be difficult to capitalize on — it's costly, complex and not easily undone. However, when well executed, it can confer a number of advantages, including greater control, reduced costs, increased profitability, better product or service quality, increased customer and market insights and more.
The main drivers behind Horizontal FDI are market access, cost savings and competition in the foreign market. Additionally, factors like regulations, technology transfer, cultural proximity and economic stability of the foreign country can also motivate companies to undertake Horizontal FDI.
Horizontal: a business expands its domestic operations to a foreign country. In this case, the business conducts the same activities but in a foreign country. For example, McDonald's opening restaurants in Japan would be considered horizontal FDI.
If McDonald's bought a large-scale meat processing plant in Canada or in a European country to bolster its meat supply chain in the target nation, it would amount to vertical FDI. This 3rd type is noticed whenever a business invests in a foreign country and buys an entity which manufactures totally different products.
Answer: Horizontal FDI refers to the type of direct investment between industrialized countries as ways to avoid trade barriers, gain better access to the local economy, or draw on technical expertise in the area by locating near other established firms.
Horizontal integration is an expansion strategy that involves the acquisition of another company in the same business line. Vertical integration is an expansion strategy where a company takes control over one or more stages in the production or distribution of its products.
Vertical FDI is mainly driven by production cost differences between countries (for those parts of the production process that can be performed in another location).
Vertical FDI is another common type of FDI which occurs when a company invests in the supply chain of a foreign company, which may or may not belong to the same industry. Through vertical FDIs, a company looks to invest in a foreign company that might become its supplier or buyer.
Horizontal integration is an expansion strategy that involves the acquisition of another company in the same business line. Vertical integration is an expansion strategy where a company takes control over one or more stages in the production or distribution of its products.
Answer: Horizontal FDI refers to the type of direct investment between industrialized countries as ways to avoid trade barriers, gain better access to the local economy, or draw on technical expertise in the area by locating near other established firms.
Vertical FDI is another type of foreign investment. A vertical FDI occurs when an investment is made within a typical supply chain in a company, which may or may not necessarily belong to the same industry. As such, when vertical FDI happens, a business invests in an overseas firm which may supply or sell products.
Introduction: My name is Van Hayes, I am a thankful, friendly, smiling, calm, powerful, fine, enthusiastic person who loves writing and wants to share my knowledge and understanding with you.
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