-What is backward vertical FDI?

: Backward FDI is buying “upstream” industries

within international vertical integration. “Backward” refers to the location of the
industry in the production chain. “Backward” or "upstream" means those parts of
the production chain dealing with supplies and raw materials.
- Example of a company using backward vertical FDI: Hershey Group invests in
cocoa production in Mexico
- Why Hershey chose to use backward vertical FDI? : Hershey produces chocolate, so
investing in cocoa production will save more input costs than buying cocoa from
farmers. Moreover, investing in cocoa production in Mexico is also a wise decision.
Mexico is the eighth largest cocoa producer in the world and has good quality. When
investing in cocoa production in Mexico Hershey can easily control the quality and
output of cocoa. On the other hand, the exchange rate is also one of the reasons
Hershey chose to invest in cocoa production in Mexico instead of investing in
domestic production.. 2000 Mexican dollar = 0.95 USD dollar. Hershey can save money
on labor and other input costs such as land leases, buying machinery,.. Now thái sơn
will give you some information of forward vertical fdi.
* Why do so many companies choose to use vertical FDI?: A company that undergoes
vertical integration acquires a company operating in the production process of the same
industry. Some of the reasons why a company may choose to integrate vertically include
strengthening its supply chain, reducing production costs, capturing upstream or
downstream profits, or accessing new distribution channels. To accomplish this, one
company acquires another that is either before or after it in the supply chain process.Not
only does vertical integration increase profits from the newly acquired operations by
selling its products directly to consumers, but it also guarantees efficiencies in the
production process and cuts down on delays in delivery and transportation.
* Advantage of vertical FDI
+Achieve economies of scale: When companies lower their per-unit fixed cost, they
achieve what is called “economies of scale.” One way to do this is to buy supplies in
bulk, spreading the cost over a larger quantity of products. Another way to achieve
economies of scale is to cut costs by eliminating expensive markups from middlemen,
consolidating management and staff, and optimizing operations.
+Create new profit centers: Online stores such as Amazon and Chinese e-commerce
giant Alibaba, now enable manufacturers to sell directly to customers anywhere, anytime,
creating an entirely new center of earnings. Why lease and staff stores when people can
buy your product from their homes?
+Expand geographically: Vertical integration can allow your business to expand
geographically by adding distribution centers in new areas or by acquiring a new brand.
Generally, geographical expansion works best when expanding within a company’s own
segment in the supply-distribution spectrum.
+Maintain quality control: If you're a cake maker and manufacture your own cake
mixes, you're not at risk of a supplier cutting down or substituting the eggs. If you're a
manufacturer of salad oil and own your own olive groves, you're not at risk of
mislabeling (which according to a UC Davis study was found to be the case in over two-
thirds of extra virgin olive oil sold in stores.) Companies that have more control over the
production process are able maintain higher quality standards.
+Differentiate from competitors: Vertical integration may allow a company to set itself
apart from its competitors. For example, a company that manufacturers electronics could
establish itself as a retailer, providing an experience for its customers that its competitors
cannot.
+Protecting proprietary processes or recipes: In some cases, secret recipes are so
valuable that they are maintained as true trade secrets and outsourcing their
manufacturing would be unthinkable, such as with Coca-Cola.
*Disadvantage of vertical FDI:
+Established distribution channels may be adversely affected: Let's assume you
manufacture handbags and your established sales have been through independently
owned gift shops. You are considering vertically integrating by selling direct to
consumers on your website. Your plans for going into online sales must take into account
potential loss of sales through your present avenues of distribution. Will you lose already
established sales to gift shops?
+ Unprofitable outcome: Vertical integration can be expensive, and growing the supply
chain does not always lead to greater profits. It may require a large investment to set up
and maintain manufacturing or distribution centers, and your company may find it
difficult to compete with other companies that outsource to countries with cheap labor.
Vertical integration also allows for less flexibility, so it is difficult to reverse.
+Obsolescence due to new technologies: Vertical integration could potentially hurt a
company when new technologies evolve quickly and become available. The company is
then forced to reinvest in the new technologies in order to stay competitive, which is
costly and may require retraining of employees.
+Higher cost due to lower volume
+Unforeseen labor issues
+Loss of continuing focus on the originating business