4.6 Summary: Part A
FDI is one option for a firm wishing to do business with another country. The other options are exporting to that country or licensing a local producer in that country. Exporting, which we discuss in detail in Chapter 9, may become the least favoured option when transportation costs and tariffs are added to the cost of production. Licensing may be ruled out if it risks:
- giving away expertise to potential competitors
- lessening control over fate of the product; or
- the expertise is not amenable to licensing.
FDI has two forms: horizontal FDI which is operating in the same industry as the home industry, and vertical FDI which is concerned with industries related to the home industry through vertical integration. There are two forms of vertical integration: backward or upstream toward the source of raw materials, and forward or downstream toward the sale of the end product.
Explanations of why firms embark on horizontal FDI embrace transportation costs, tariffs, and impediments to the sale of expertise or know-how. We refer to the latter two as 'market imperfections'. Horizontal FDI may also occur because firms in an oligopoly believe they have to match the initiatives of competitors, or it may be a consequence of events within the product life-cycle.
Explanations of the reasons firms embark on vertical FDI include the desire for market power: that is , control of the value-added chain of vertical integration. Vertical FDI may also be a consequence of 'market imperfections' which in the context includes impediments to the sale of expertise and the desirability of investment in specialised assets.
Previous Page