TYPES OF FDI

FDI may be classified under various heads depending upon the criteria
used. Major type of FDI are as:
On the basis of Direction of Investment.
On the basis of Types of Activity.
On the basis of Investment Objectives.
On the basis of Entry Modes.
On the basis of Sector.
On the basis of Strategic Modes.
ON THE BASIS OF DIRECTION OF INVESTMENT
Inward FDI: Foreign firms taking control over domestic assets is termed
as Inward FDI. From an Indian perspective, direct investments made by
foreign firms, such as Suzuki, Honda, LG, Samsung, GM, etc., in India are
examples of inward FDI.
Outward FDI: domestic firms investing overseas and taking control over
foreign assets is known as outward FDI. Such Outward FDI is also known as
Direct Investment Abroad(DIA). From an Indian point of view, direct
investments overseas by Indian firms, such as Tata Motors, Infosys,
Videocon, ONGC, etc., are illustrations of Outward FDI.
ON THE BASIS OF TYPES OF ACTIVITY
Horizontal FDI: When a firm invests in a foreign country in similar
production activity as carried out in home country, it is termed as
Horizontal FDI. A number or MNEs such as Coke, Pepsi, Kodak, HSBC, LG,
etc., expanded internationally by a way of Horizontal FDI.
Vertical FDI: Direct investments in industries abroad so as to either
provide operations or sell its domestic outputs overseas is termed as
Vertical FDI. Vertical FDI takes place when multinational fragments the
production process internationally, locating each stage of production in the
country where it can be done at the least cost.
Backward Vertical FDI
Forward Vertical FDI
Conglomerate FDI: Direct investment overseas aimed at manufacturing
products not manufactured by the firm in the home country is termed as
Conglomerate FDI.
ON THE BASIS OF INVESTMENT OBJECTIVES

 Resource Seeking FDI: To seek and secure natural resources e.g.

minerals, raw materials, or lower labor costs for the investing company.
For example, a German company opening a plant in Slovakia to produce
and re-export to Germany.
The major economic determinants for resource seeking FDI include :
Availability of raw material, Complementary factors of production
and physical infrastructure.
Market Seeking FDI: To identify and exploit new markets for the firms`
finished products Unique possibility for some type of services for which
production and distribution have to be contemporaneous (telecom, water
supply, energy supply) Automotive TNCs have invested heavily in China.
The major economic determinants for market seeking FDI include :
Market Size, Market Growth and Regional integration.
Efficiency Seeking FDI: To restructure its existing investments so as to
achieve an efficient allocation of international economic activity of the
firms.
International specialization whereby firms seek to benefit from
differences in product and factor prices and to diversify risk
Global sourcing resource saving and improved efficiency by
rationalizing the structure of their global activities. Undertaken
primarily by network based MNCs with global sourcing operations.
The major economic determinants of efficiency seeking FDI include:
Productivity adjusted labour costs, Availability of skilled labour,
Availability of Business Related Services and Trade Policies.
ON THE BASIS OF ENTRY MODES
Greenfield Investments: Investing in a creation of new facilities or
expansion of existing facilities is termed as greenfield investment. Firms
often enter international markets by way of greenfield investments in
industries where technological skills and production technology are the
key. Further, the selection of FDI mode is influenced by
Institutional factors.
Cultural factors.
Transactional cost factors.
Mergers and Acquisitions: For establishing overseas production
facilities, M&As are crucial tools for firms internationalisation strategy. It
is estimated that about 70-80 percent of FDI are in the form of M&As.
ON THE BASIS OF SECTOR

 Industrial FDI: Investment by foreign firms in the manufacturing sector is

termed as Industrial FDI. Major objectives of FDI in the manufacturing
sector include:
To achieve cost efficiencies by way of taking advantage of
availability of raw material inputs and manpower at cheaper costs.
Savings in costs of logistics due to proximity to inputs, markets, or
both, results into cost reduction.
To bypass trade barriers such as high import tariffs and other import
restrictions.
To be closer to the markets and serve them more efficiently.
To have physical presence due to strategic reasons.
Non-Industrial FDI: Investment by foreign firm in services sector is
termed as non-industrial FDI. The major reasons for non-industrial FDI are:
As services are non tradable , FDI becomes a strategic option to
enter international markets.
To overcome regulatory obstacles.
To create regular contact with the customers.
ON THE BASIS OF STRATEGIC MODES
Export replacement: in response to trade barriers of the host country,
such as import restrictions and prohibitive tariff structure, FDI is made a
substitute for exports. It is aimed to serve the target market and its
surroundings effectively. Entry mode for such types of FDI is typically
through M&As. Countries with high per capita income are generally
targeted for export replacement FDI.
Export Platforms: In order to minimize a firms cost of production and
distribution, FDI is made so as to utilize the target country to serve the
global markets. The competitive advantage and the incentives offered by
the host country plays a crucial role in attracting such FDI. Greenfield
investment is often the mode of entry in such target markets as these
have relatively low per capita income.
Domestic Substitution: Firms invest in foreign countries so as to use the
target market as a base to serve investors home country. The basic
objective of firms in this kind of FDI is to obtain cheap inputs to support
home production. Bilateral trade agreements play an important role in
FDIs to promote substitution. Firms generally target countries with middle
to high per capita income, using greenfield operations as entry mode.
FDI TRENDS AND PROSPECTS
Global foreign direct investment (FDI) flows exceeded the pre-crisis
average in 2011, reaching $1.5 trillion despite turmoil in the global

economy. However, they still remained some 23 per cent below their 2007
peak.
Leading indicators the value of cross-border mergers and acquisitions
(M&As) and greenfield investments retreated in the first five months of
2012 but fundamentals, high earnings and cash holdings support
moderate growth.
Longer-term projections show a moderate but steady rise, with global FDI
reaching $1.8 trillion in 2013 and $1.9 trillion in 2014, barring any
macroeconomic shocks.
FDI inflows increased across all major economic groupings in 2011. Flows
to developed countries increased by 21 per cent, to $748 billion.