FDIForeign Direct Investment

Diana Paola HernándezJuan Esteban Jaraba

What is?

• The foreign direct investment is when a firm invest directly in installations to do a product in other country. Also occurs when a firm buy other in the abroad.

Exist two types of FDI:

Horizontal FDI

It’s performed in the same sector abroad in which the firm operates in its country. Where the firm expands by entering a foreign market, increasing the volume of its operations while at the same time maintaining the same activities.

It’s performed in a sector abroad that provides inputs or selling the products of the operation of the company in its country.Denotes the simultaneous vertical integration in either upstream or downstream operations, along with the foreign market entry.

Vertical FDI

Advantages

Another advantage of FDI is that it can offset the volatility

created by "hot money." Short-term lenders and currency traders can create an asset

bubble in a country by investing lots of money in a short period

of time, then selling their investments just as quickly.

Investors receive additional benefits. Their risk is reduced because they can diversify

their holdings outside of a specific country, industry or political system

This gives a

competitive

advantage. It reduces

(but, of course,

doesn't eliminate)

the effects of

politics, cronyism

and bribery.

Disadvantages

Too much foreign

ownership of companies can be a concern, especially in

industries that are strategically

important.

Sophisticated foreign investors

can use their skills to strip the

company of its value without

adding any. They can sell off

unprofitable portions of the

company to local, less sophisticated

investors.

Example

Sources

• http://plataforma.unibague.edu.co/pluginfile.php/5850/mod_scorm/content/1/documents/Chapter%208%20Entering%20the%20international%20marketing.pdf

• IMF, Finance and Development Magazine, Prakash Loungani and Assaf Razin, How Beneficial Is Foreign Direct Investment for Developing Countries?, June 2001