‘Horizontal FDI’ means :
When a firm invests in a foreign country in similar production activity as carried out in home country exploiting its competitive advantage in the host country.
Producing the same thing abroad as at home — option 1.
The classification of FDI by the activity undertaken. Each of the four options in this question names a different type, so the task is to attach the right description to the word horizontal :
| Type | What the firm does abroad | Motive | Option |
|---|---|---|---|
| Horizontal | The same activity as at home | Serve the foreign market directly; exploit the firm’s advantage there; jump tariffs and transport costs | 1 |
| Backward vertical | An activity upstream — supplying inputs to the home operation | Secure raw materials — oil, ore, plantations | 3 |
| Vertical (either direction) | Upstream or downstream — inputs for home, or selling home output abroad | Control the chain | 4 |
| Acquisition of domestic assets by a foreign firm | A description of inward FDI by mode, not by activity | — | 2 |
Why a firm invests horizontally rather than exporting. Because at some point serving the market from a distance costs more than producing in it. The classic reasons are tariffs and quotas, high transport costs on bulky goods, the need to adapt the product to local taste, exchange-rate risk, and the advantage of being close to the customer. The condition for it to work is that the firm has an ownership advantage — technology, brand, process knowledge — strong enough to overcome the liability of foreignness, the inherent disadvantage of operating in a country one does not know as well as local rivals do.
The other axis of classification is worth pairing with this one: FDI may be greenfield, building new facilities from nothing, or brownfield, acquiring or merging with an existing firm — which is what option 2 describes. Greenfield adds to the host country’s productive capacity; an acquisition merely transfers ownership of it.
A third type sometimes distinguished is conglomerate FDI, where the firm invests abroad in an activity unrelated to its home business.
Hence, the answer is option 1.
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In the light of the above statements, choose the most appropriate answer from the options given below :
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List - I
(Organizations)List - II
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Important Questions from International Business
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- Which are the four cultural predispositions of MNCs?
- Which among the following pertain to international staffing policy?
A. Geocentric
B. Expatriates
C. Repatriates
D. Employee leasing
E. Career portability
Choose the correct answer from the options given below: - Fill in the blank
"The member countries of WTO have moved to product patent regime under the __________ to meet their obligations under the seven areas covered by the __________ agreement". - Match the List-I and List-ll regarding International business theories with developers:
List I List II (i) Absolute Cost Advantage theory (a) Raymond Xernon (ii) Comparative Cost Advantage theory (b) Adam Smith (iii) Factor Endowment theory (c) David Recardo (iv) Product Life cycle theory (d) Eli Heckscher
