What Is The Vertical Foreign Direct Investment?

There are two types of vertical direct investment.  The first type of foreign investment is called foreign vertical direct investment which is invest in the industry of foreign country. Historically most backward vertical foreign direct investment has been in extractive industries like oil extraction, bauxite mining, tin mining and copper mining. The objective has been to provide inputs into a firm's downstream operations for example oil refining, aluminum smelting and fabrication. Firms such as Royal Dutch/Shell, British Petroleum, RTZ and Alcoa are among the classic examples of such vertically integrated multinationals.

The second type of the foreign direct investment included forward vertical foreign direct investment in which an industry abroad sells the outputs of a firm's domestic production process. Forward vertical foreign direct investment is less common than backward vertical foreign direct investment. For example when Volkswagen entered the United States market it acquired a large number of dealers rather than distribute its cars through independent United States dealers.

With both horizontal and vertical foreign direct investment the question that must be answered is why would a firm go to all the trouble and expense of setting up operations in a foreign country? The location specific advantages arguments help explain the direction of such foreign direct investment.

Horizontal & vertical foreign direct investment