Horizontal Foreign Direct Investment: Advantages and Disadvantages

Definition of horizontal foreign direct investment

Foreign direct investment is a common concept in the economic world. It involves investment in foreign markets by companies and private business ventures. This is one of the fundamental tools for economic growth and most developing countries struggle to attract this type of investment. Basically, foreign direct investment may occur in any of these three forms:

• Horizontal foreign direct investment. This type of foreign direct investment occurs when a multinational corporation duplicates activities of production in every host country it ventures into. An example of this is when Toyota uses the same production processes in Japan and every other country it has set up shop in.
• Vertical foreign direct investment. This occurs when a multinational corporation divides production processes in such a manner that every process is carried out in host countries with the lowest costs of production. This can be exemplified by the assembly of computers where every part of the machine is produced in a different country because of the low costs of production before final assembly is done.
• Platform foreign direct investment. This is where a multinational corporation uses a host country as a platform for exporting products into a third host country market.

Advantages of horizontal foreign direct investment

Horizontal foreign direct investment has some benefits for both the multinational corporations and the host countries. For the multinational corporation benefits include:

• The corporation does not have to start to change its processing procedures and this makes it much easier to set up shop and start production
• In case of any production problems, the multinational will have an easier way of dealing with the challenges because of previous experiences
• This type of investment is more predictable hence a multinational company can make accurate budgets and also forecast profits.
• The well renowned brands of multinational corporations can easily be accepted into the market by consumers who have bought them or heard of them before.

As for host countries, horizontal foreign direct investment can be beneficial because:

• It creates more employment
• Enables consumers to access foreign products more easily
• This type of investment assures consumers of quality production because the processes used are similar to that of the original country.

Disadvantages of horizontal foreign direct investment

Horizontal foreign direct investment can be challenging especially if the consumers of the host country appreciate a different type of culture and have diverse tastes. In this case using the original methods of production without addressing these unique tastes and preferences can be detrimental for the multinational corporation.

As for the host country, horizontal foreign direct investment can push out local producers from the market especially if they are manufacturing products that are similar or substitutable with those of the foreign companies.

How to improve horizontal foreign direct investment

Horizontal foreign direct investment can be improved to make it gainful for both the multinational corporations and the host countries involved. Multinational corporations can retain the original production methods whilst tailoring the product to suit the tastes of local consumers.

Host countries can protect their local producers by putting in place favorable policies that protect the local producers without necessarily hurting the foreign investors. One such policy is the implementation of joint ventures between domestic and foreign investors.

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Online sources:

http://en.wikipedia.org/wiki/Foreign_direct_investment

http://www.businessdictionary.com/definition/horizontal-foreign-direct-investment.html

http://www.nber.org/papers/w8631

http://lexicon.ft.com/Term?term=foreign-direct-investment