1️⃣ Horizontal FDI

✅ Meaning: When a firm invests in a foreign country in similar production activity as carried out in home country exploiting its competitive advantage in the host country

Horizontal FDI occurs when a firm invests in a foreign country to produce the same goods or services that it produces in its home country.

In other words, the firm duplicates its domestic production activities abroad at the same stage of the value chain.

✅ Key Objective

To serve the foreign market directly and avoid trade barriers or high transportation costs.

✅ Example

If Toyota manufactures cars in Japan and sets up a car manufacturing plant in India to sell cars in the Indian market, it is Horizontal FDI.

✅ Characteristics

• Same product

• Same production stage

• Replication of business model abroad

2️⃣ Vertical FDI

✅ Meaning: Direct investment in industries abroad so as to either provide inputs for the firm’s domestic operations or sell its domestic output overseas.

Vertical FDI occurs when a firm invests in a foreign country to undertake a different stage of production in the value chain.

Here, production is fragmented internationally.

✅ Types of Vertical FDI

(a) Backward Vertical FDI

Firm invests abroad to acquire raw materials or inputs.

Example: Tata Steel investing in iron ore mines in another country.

(b) Forward Vertical FDI

Firm invests abroad to control distribution or sales activities.

Example: Apple Inc. opening retail stores in foreign countries.

✅ Characteristics

• Different production stage

• Fragmentation of production

• Cost optimization focus