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 role of the nation-state in globalization?

    Learn about the evolving role of the nation-state in an increasingly globalized world as fewer boundaries restrict international ...
  2. What impact did the Sarbanes-Oxley Act have on corporate governance in the United ...

    Learn the effects the Sarbanes-Oxley Act has on corporate governance in the United States, including strict disclosures, ...
  3. Why is a Free on Board (FOB) designation important for freight transportation?

    Find out more about free on board destination, the variations of FOB destination and why FOB destination is important for ...
  4. Why should management teams focus more on horizontal integration?

    Understand the benefits of a horizontal integration and why management teams should focus more on a horizontal integration ...
RELATED TERMS
  1. Vertical Merger

    A merger between two companies producing different goods or services ...
  2. Horizontal Merger

    A merger occurring between companies in the same industry. Horizontal ...
  3. Value Of Risk (VOR)

    The financial benefit that a risk-taking activity will bring ...
  4. Business Judgment Rule

    A legal principle which grants directors, officers, and agents ...
  5. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative ...
  6. Separation Of Powers

    An organizational structure in which responsibilities, authorities, ...

You May Also Like

Related Articles
  1. Economics

    What is the role of the nation-state ...

  2. Stock Analysis

    Google Stock: A Tale of Two Share Classes

  3. Economics

    Gaining Market Influence-- The Case ...

  4. Fundamental Analysis

    Can You Invest in China's Huawei?

  5. Stock Analysis

    Today's Top ETFs: Worth a Bet or Should ...

Trading Center