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ultinational enterprises, production takes place in both countries. Therefore this implies that production can be from the skilled rich country or un-skilled country, hence, the Horizontal FDI graph shows its curve on both sides of the zero skilled level.

Factors to be kept in mind or which act as a guideline for companies adopting the horizontal FDI approach:

Transportation costs- for products that are cheap to produce but would incur huge expense during shipping and transporting, therefore it is profitable to invest in a producing the product rather than export.

Market imperfections – it is advisable to establish production facility in those countries where restrictions such as quotas, tariffs and other government regulations concerning imports are rigid and unfavourable policies for investment exist. Ex in India the FDI was not entertained in the IT sector on a high scale before liberalisation policy (1991) was introduced.

Technology/trade secrets potential loss- it might be more wise to keep the production in home country and if the foreign country does not have any suitable structure in place to protect intellectual property rights or trade secrets. Alternatively, if the government allows foreign control of the company without any restrictions, it might be more favourable to export technology into the foreign country while keeping it under own control.

Following a competitor- there are many examples where when opportunity arises; multinational competitors follow each other into markets. Ex first it was Vodafone who entered India with its expertise, and then soon virgin telecommunication entered into the market. So companies like Vodafone and virgin would never want to be left behind exploring in the emerging markets

Product Life Cycle – when a particular market in a country develops and expands, the opportunity for companies, willing to invest in such country increases. Ex: the IT industry in India.

Location Specific Advantage – moving production into another country might give a direct access to country specific expertise, country’s natural resources, and/or a customer base. Ex. The IT industry is expanding into India to gain optimal utilization of the resources available in the country.

The vertical model of FDI

In the year 1984 appeared the general equilibrium models of multinationals. The vertical model formed by Helpman (1984) has a model in which production is engaged with two activities, one is the capital-intensive and the other is the labour intensive activity, which could be geographically separated, in this theory Helpman assumed the trade –cost to be zero and firms never choose multiple plants. Hence, Helpman model focussed on the view of vertically integrated firms that geographically fragment the two activities, but due to the assumption of zero trade cost, there is no investment between similar countries.

Vertical FDI from Parent i to Host j

(Hunting High and Low for Vertical FDI, International Economics, 2008Ronald B. Davies)

In vertical multinational enterprises, production occurs only in the host country, while all the skill and technological development is produced in the parent country. This implies that there is no production in the parent country and therefore the curve lies on the right hand side of the zero skille