Vertical fdi

Backward FDI

The expansion into an industry abroad that provides inputs for the firm’s domestic production processes [f.e extractive industries].

Objective: provide inputs for the firm’s downstream operations.

Forward fdi

The expansion into an industry abroad that sells the outputs of a firm’s domestic production processes.

Factors that promote vertical FDI:

Market power

The limitation of competition and strengthening of control over the market.

By integrating backward, the firm can restrict resources from competitors.

Attempt at circumventing the barriers established by firms already In the market.

Market imperfections

Impediments to the sale of know-how.

Investment in specialised assets.

Specialised asset: asset, which is designed to perform a specialised task and its value significantly declines in the next-best use