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IAI Actuarial Core Principles · Business Economics · Globalisation and multinational business

Which motive best explains vertical FDI, in which a multinational sets up a subsidiary abroad?

Vertical FDI is undertaken to locate a particular stage of the production chain, such as assembly, where it is cheapest or inputs are available. Replicating the same product near foreign customers is horizontal FDI, so the other options describe different motives or are untrue.

  1. ATo produce a different stage of its production chain in a location where that stage is cheaper, such as assembly in a low-wage countryCorrect
  2. BTo replicate the same final product close to foreign customers solely to avoid transport costs and tariffs
  3. CTo avoid all taxation in the home country
  4. DTo reduce the number of countries in which it operates
  5. To eliminate exchange rate exposure entirely

Explanation

Vertical FDI fragments production across countries, locating each stage where it is cheapest or where inputs are available. Replicating the same product near customers is horizontal FDI. The other options are not defining motives of vertical FDI, and FDI does not remove exchange rate exposure.

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