REVIEW OF LITERATURE
TYPES OF FOREIGN DIRECT INVESTMENT
? By Direction
An outward-bound FDI is backed by the government against all types of associated risks. This form of FDI is subject to tax incentives as well as disincentives of various forms. Risk coverage provided to the domestic industries and subsidies granted to the local firms stand in the way of outward FDIs, which are also known as ‘DIRECT INVESTMENTS ABROAD’.
Different economic factors encourage inward FDIs. These include interest loans, tax breaks, subsidies, and the removal of restrictions and limitations. Factors detrimental to the growth of FDIs include necessities of differential performance and limitations related with ownership patterns.
Investment in the same industry abroad as a firm operates in at home.
• Backward Vertical FDI:
Where an industry abroad provides inputs for a firm’s domestic production process.
• Forward Vertical FDI:
Where an industry abroad sells the outputs of a firm’s domestic production.
? By Target
Direct investment in new facilities or the expansion of existing facilities. Greenfield investments are the primary target of a host nation’s promotional efforts because they create new production capacity and jobs, transfer technology and know- how, and can lead to linkages to the global marketplace.
Mergers and Acquisitions:
Transfers of exiting assets from local firms to foreign firm takes place; the primary type of FDI. Cross-border mergers occur when the assets and operation of firms from different countries are combined to establish a new legal entity. Cross- border acquisitions occur when the control of assets and operation is transferred from a local to a foreign company.
? By Motive
FDI can also be categorized based on the motive behind the investment from the perspective of the investing firm:
Investments which seek to acquire factors of production those are more efficient than those obtainable in the home economy of the firm. In some cases, these resources may not be available in the home economy at all. For example seeking natural resources in the Middle east and Africa, or Cheap labour in Southeast Asia and Eastern Europe.
Investments which aim at either penetrating new markets or maintaining existing ones. FDI of this kind may also be employed as defensive strategy; it is argued that businesses are more likely to be pushed towards this type of investment out of fear of losing a market rather than discovering a new one. This type of FDI can be characterized by the foreign mergers and acquisitions in the 1980’s Accounting, Advertising and Law firms.
Investments which firms hope will increase their efficiency by exploiting the benefits of economies of scale and scope, and also those of common ownership. It is suggested that this type of FDI comes after either resource or market seeking investments have been realized, with the expectation that it further increases the profitability of the firm.