Why would a multinational corporation conduct a vertical foreign direct investment?

By Albert Phung AAA
A:

In many cases, multinational corporations conduct horizontal foreign direct investment (FDI) activities in order to expand their operations into another market. For example, an American retailer that builds a store in China is trying to earn more money by exploring the Chinese market. Vertical FDI, on the other hand, occurs when a multinational decides to acquire or build an operation that either fulfills the role of a supplier (backward vertical FDI) or the role of a distributor (forward vertical FDI).

Companies that seek to enter into a backward vertical FDI typically seek to improve to the cost of raw materials or the supply of certain key components. For example, one of the major materials used for car manufacturing is steel. An American car manufacturer would prefer that steel be as cheap as possible, but the price of steel can fluctuate dramatically depending on overall supply and demand. Furthermore, the foreign steel supplier would prefer to sell steel for as high as possible in order to please its owners or shareholders. If the car manufacturer acquires the foreign steel supplier, the car manufacturer would no longer need to deal with the steel supplier and its market-driven prices.

On the other hand, the need for a forward vertical FDI stems from the problem of finding distributors for a specific market. For example, assume that the before-mentioned American car manufacturer wants to sell its cars in the Japanese auto market. Since many Japanese auto dealers do not wish to carry foreign brand vehicles, the American car manufacturer may have a very difficult time finding a distributor. In this case, the manufacturer would build its own distribution network in Japan to fulfill this niche.

To learn more about acquisitions, see Mergers And Acquisitions - Another Tool For Traders and The Wacky World Of M&As.

RELATED FAQS

  1. What is the difference between revenue and sales?

    Learn to distinguish between a company's revenue and its sales, and see why the distinction is important when analyzing a ...
  2. What is the difference between revenue and income?

    Understand the difference between income and revenue, how these terms are often confused in day-to-day usage and how to identify ...
  3. What is the difference between revenue and profit?

    Understand the difference between revenue and profit, two key concepts in business accounting, including where each can be ...
  4. Can I still set up an SEP if one of my employees refuses to participate?

    You can establish the SEP IRA, even if the employee refuses to participant. However, you would need to establish an IRA for ...
RELATED TERMS
  1. Protected Cell Company (PCC)

    A corporate structure in which a single legal entity is comprised ...
  2. Registered Holder

    Shareholders who hold their shares directly with a company.
  3. Duty Of Loyalty

    A director's responsibility to act at all times in the best interests ...
  4. Duty Of Care

    One of two primary fiduciary duties of directors, the duty of ...
  5. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  6. Adverse Domination

    A legal doctrine that allows regulators to bring litigation against ...

You May Also Like

Related Articles
  1. Stock Analysis

    Breaking Down the Halliburton Baker ...

  2. Investing Basics

    Enterprise Resource Planning System: ...

  3. Economics

    Profiting From China's Breakout: The ...

  4. Brokers

    Key Differences Between M&A Advisors ...

  5. Investing Basics

    How To Calculate Goodwill

Trading Center