Different Types of Foreign Direct Investment

Foreign direct investments (FDI) are when a company invests money in another company located in a foreign country. There are four types of FDIs. Find out more about them.

The investment market is a vast space. Large companies and individuals can both invest in companies from their own countries. Foreign direct investment, or FDI, is when one company invests into a business in another country. There are four types of foreign direct investment. These are the four types of foreign direct investments.

These are the types of foreign investments

1. Horizontal FDI

Horizontal FDI is the most popular type of FDI. It involves investing funds in a foreign business that is part of the same industry or owned by the FDI investor. This is where a company invests money in another company in a country that produces similar goods. Zara, a Spanish-based company, may purchase or invest in Fab India, an Indian company that produces similar products to Zara. Horizontal FDI applies to both companies, as they are in the same apparel and merchandise industry.

2. Vertical FDI

Another type of foreign investment is vertical FDI. Vertical FDI is when an investment occurs within a supply chain of a company that may or not necessarily be in the same industry. Vertical FDI is when a company invests in an outsourced firm that may sell or supply products. Further, vertical FDIs can be classified as either backward or forward vertical integrations. Nescafe, a Swiss coffee producer, may invest in coffee plantations across countries like Brazil, Columbia, Vietnam, and others. This type of FDI occurs when the investor firm purchases a supplier in the supply chains. Forward vertical integration, on the other hand, is when a company invests into another foreign company that is higher up in the supply chain. For example, a coffee company from India might want to invest in a French grocery company.

3. Conglomerate FDI

Conglomerate FDI is when investments are made in two companies from completely different industries. The FDI does not directly relate to the investor's business. Walmart, for example, may invest in TATA Motors (an Indian auto manufacturer).

4. Platform for Foreign Direct Investment

Platform FDI is the last type of foreign direct investment. Platform FDI is when a business expands in a foreign country but its products are then exported to another country. The French perfume brand Chanel opened a factory in the USA to produce its products and then exported them to Asia, America and other parts Europe.

You need to be familiar with the various types of FDI if you plan on investing via FDI. The money you invest in FDI can be used to either start a business or to buy into an existing one in another country.