Foreign Direct Investment

In a global economy today, FDI is becoming more important than trade as a mode of international economic transaction. There are two categories of investment: direct investment and portfolio investment. Portfolio investment (i.e. devoid of control) has its own importance in a firm financial management and strategy. It is also an influencing factor affecting exchange rate.

IMF defined FDI as “investment that is made to acquire a lasting interest in an enterprise operating in an economy other than that of the investor. The investor’s purpose being to have an effective voice in the management of the enterprise.” (IMF 1977). FDI refers to an investment in a foreign country that involves some degree of control and participation in management. The FDI corresponds with investment undertaken by a multinational enterprise in a foreign country. It should not be misconstrued with portfolio investment, which is solely motivated by profit through financial investment and does not seek management control.

Motivations/objectives for FDI

Business firms are motivated to indulge in FDI with the following objectives:

(i) Sales expansion

(ii) Resource acquisition

(iii) Diversification

(iv) Competitive risk minimization

FDI may be distinguished into:

1. Horizontal foreign investment (HFI): it refers to investment of a firm in a foreign country to produce the same product which produces in its home country.

2. Horizontal FDI: implies that FDI is undertaken in the same industry by the firm as it operates in at home. For example Electrolux Swedish firm the manufacturing of household appliances (such as washing machines refrigerators dishwashers and so on) invested in Asia and Eastern Europe for producing similar household appliances is the case of horizontal FDI.

3. HFI implies geographical spatial diversification of the firm product the 

4. It represents intra enterprise product transfer in the process of integration in marketing.

5. Vertical foreign investment (VFI): it is meant of integration process in the production there may be backward vertical investment or forward vertical integration:

6. Backward vertical integration (BVI): implies that the firms directly invest in a foreign country to produce intermediate goods that are meant to be used as inputs in ties domestic production porches in extractive investment in petroleum or minerals usually there is BVI.

7. Forward vertical investment (FVI): implies that the firm invests in a foreign country in producing the final stage goods or assembly of the product to market it directly to the foreign buyers. FVI, thus, involves establishment of an assembly plant or sales branch for exports.

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