Typology of FDI

The literature classifies the FDI typology based on different aspects. This section aims to give an explanation of those classifications, based on direction, objective and the structure.

2.3.1. Classification based on the direction

The possibilities of FDI direction are the Outward and Inward Foreign Direct Investment. The Outward FDI refers to the investment that companies from a certain country have made abroad. Also called, Direct Investment Abroad. The Inward FDI refers to the investments made by foreign companies in the country. Figure 4 illustrates the classification based on direction.

Figure 4 – Inward vs Outward FDI

Source: author elaboration.

2.3.2. Classification based on the objective

We can identify four types of multinationals investment activities abroad (Dunning

& Lundan, 2008): natural resource seeking, market seeking, efficiency seeking, and strategic asset or capability seeking. But many multinationals pursue multiple objectives in their FDI ventures.

The natural resources seeking investments are from companies trying to acquire

specific natural resources with higher quality or for a lower real cost (if those are available in the home country). Commonly those resources tend to be exported to a more developed country, where high value-added activities take place. According to Dunning (2008), there are three main types of resource seeking investments:

• Those seeking physical resources. Including primary producers and manufacturers mainly with the motivation of cost-reducing or security of supply sources;

• Those seeking supply of cheap unskilled or semi-skilled labor. MNEs from countries with high real labor costs tend to set up or buy subsidiaries in countries with lower real labor costs for labor-intensive activities;

• The third type of resource seeking investments are those that aim to acquire technological capabilities, management or marketing expertise, and organizational skills.

The market seeking investment look for a certain country or region intending to

sell their goods or services in the local market or adjacent countries. Frequently those markets were already served by the company but costs with barriers from host countries or the market growth or the region may justify the investment. There are four main reasons why companies engage in the market seeking investments (Dunning and Lundan, 2008):

• One reason is that the main suppliers or customers of the company have shifted their activities to a foreign country and to retain their business they are forced to follow them;

• The second reason is that companies need to adapt their products to certain characteristics to be valuable in foreign markets, like local tastes or needs, and cultural factors. Foreign producers may face a disadvantage to local firms;

• The third reason is the possibility of reducing production and transportation costs compared to supplying it at distance. These benefits depend on transport costs being relevant, and on the quantity demanded in that region being enough for the company to operate (economies of scale);

• The fourth reason is that MNE, to compete in the global production and marketing strategy, may find necessary to be physically present in leading markets that are served by its main competitors.

The efficiency-seeking FDI is the rationalization of established resource and

market seeking activities, gaining from common governance of physically dispersed activities, the benefits are mainly economies of scale and scope and risk diversification (Dunning and Lundan 2008). Usually, they are experienced, large, and diversified multinationals producing standardized products with a globally accepted process. Efficiency-seeking FDI has two main forms: first is the ability to take advantage of the availability of tradition factor endowments in different regions; the second is to take advantage of economies of scale and scope in similar countries, with similar economic structures, income levels, consumer tastes and supply capabilities.

The strategic assets seeking focus on engaging in FDI usually by acquiring assets

of foreign corporations, developing their strategy, especially maintaining, or enhancing their global competitiveness. The main motive, in this case, is to enhance the company global portfolio of assets and human competences, sustaining their ownership-specific advantages or weakening those of their competitors.

2.3.3. Classification Based on the Structure

Concerning the structure of FDI, we have mainly horizontal, vertical, and conglomerate. Regarding the Horizontal FDI, it is characterized when a firm establishes a subsidiary in a foreign country that does the same activities as the company in the home country.

The Vertical FDI is represented by a company that engages foreign investment doing a different business than in the home country, but it does an activity that goes into the supply chain of the parent company. For example, when a manufacturing company acquires a supplier of parts for its products.

The Conglomerate FDI is defined when a company enters in a different line of business that is not related to its business in the home country. As the company does not have previous experience in this market, sometimes they might engage in a joint venture with another firm of the host country.

2.3.4. Greenfield and brownfield FDI

The classification of the FDI can be made by the form that the investment was made in the host economy. The greenfield FDI is defined as the set up of a new firm in the destination country, whereas the brownfield FDI is to acquire existing companies in the foreign country. In this last case, the investment can take the form of mergers and acquisitions (M&A), but it is important to highlight that brownfield is a broader concept, as any purchase that corresponds to more than 10% of the target company is considered a direct investment (Ragoussis, 2020).

In the current work, the studies made in chapter three considers both, greenfield and brownfield investments in Brazil. But the econometric model and analysis developed later in the work consider only greenfield investment projects toward Brazil.