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 are the most famous instances of backward integration?

    Learn more about backward integration in the supply chain and see how two famous examples, Carnegie Steel and Apple, used ... Read Answer >>
  2. Is backward integration the same thing as vertical integration?

    Learn if there are any differences between backward integration and vertical integration. Learn where on the production line ... Read Answer >>
  3. What is the difference between foreign portfolio investment and foreign direct investment?

    Learn about the significant differences between foreign direct investment and foreign portfolio investment, and how they ... Read Answer >>
  4. When is outsourcing preferable to vertical integration?

    Deciding between outsourcing and vertical integration can be challenging. Understand the benefits of each to make the most ... Read Answer >>
  5. How do I calculate the Macaulay duration of a zero-coupon bond in Excel?

    A horizontal integration consists of companies that acquire a similar company in the same industry, while a vertical integration ... Read Answer >>
  6. When does vertical integration reduce transaction costs?

    Trading is not just based on supply and demand, but negotiations between companies. Vertical integration can eliminate this ... Read Answer >>
Related Articles
  1. Investing

    How China Impacts the Global Steel Industry

    The Chinese economy is having a significant impact on the performance and profitability of steel and mining stocks.
  2. Investing

    Top 4 Steel Stocks of 2017

    Trump's plan to use US Steel for all new and pipelines and pipeline repairs position these four steel stocks to break out soon and have a stellar 2017.
  3. Insights

    United States Steel Upgraded By JPMorgan (X)

    Shares of U.S. Steel climbed as much as 4.22% Monday, reaching a session high of $19.75 after the company's shares were endorsed by analysts at JPMorgan.
  4. Investing

    Can U.S. Steel Stock Really Climb 50% in One Year? (X)

    United States Steel comes highly recommended for risk-tolerant investors, according to Barron's.
  5. Investing

    Is Now The Time To Invest In Steel?

    Recent price drops present long-term opportunities, while many stable ETFs remain attractive. Learn your best options for turning cold hard steel into cold hard cash.
  6. Insights

    U.S. Raises China Steel Import Duty Sixfold (SLX)

    The U.S. said Tuesday it would raise import duties on Chinese cold-rolled steel by 522%.
  7. Investing

    Why AK Steel Stock Surged 32% Last Week (AKS, SLX)

    Steel manufacturers posted strong gains last week in the wake of Donald Trump's surprise victory for the White House.
  8. Investing

    What's a Vertical Merger?

    A vertical merger occurs when two companies that produce goods or services for the same finished product merge operations.
  9. Insights

    Is Now the Time to Buy Steel Dynamics? (STLD)

    After 15% declines over the past three months, it certainly seems as if the risk-versus-reward profile of Steel Dynamics has drastically improved.
  10. Insights

    Top 6 Factors That Drive Investment In China

    FDI in China surpassed $100 billion in 2010, certain key factors drive foreign direct investment.
RELATED TERMS
  1. Steel Industry ETF

    A sector exchange-traded fund that invests only in companies ...
  2. Vertical Merger

    A merger between two companies producing different goods or services ...
  3. Vertical Integration

    When a company expands its business into areas that are at different ...
  4. Foreign Direct Investment - FDI

    A foreign direct Investment (or FDI) is an investment made by ...
  5. Vertical Well

    A well that is not turned horizontally at depth, and which allows ...
  6. Akio Mimura

    Served as chairman and president of Nippon Steel Corp. Mimura ...
Hot Definitions
  1. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
  2. Money Market

    A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. ...
  3. Block (Bitcoin Block)

    Blocks are files where data pertaining to the Bitcoin network is permanently recorded.
  4. Fintech

    Fintech is a portmanteau of financial technology that describes an emerging financial services sector in the 21st century.
  5. Ex-Dividend

    A classification of trading shares when a declared dividend belongs to the seller rather than the buyer. A stock will be ...
  6. Debt Security

    Any debt instrument that can be bought or sold between two parties and has basic terms defined, such as notional amount (amount ...
Trading Center