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Foreign direct investment (FDI) has been viewed as a potential catalyst for economic growth.

It is a type of investment whereby a country will make a physical investment by acquiring the
tangible assets or ownership in another country. This type of investment is a long term
investment and it does not only involve the acquisition of the tangible assets or transfer of
capital ownership, but there will be a transfer of organizational and management skills,
technology and know-how (Hans-Peter Lankes, 1996).
FDI can be classified into three types: horizontal, vertical and conglomerate. Horizontal FDI
is where a company enters a foreign company to set up the same production facilities, then
operating and producing the same products similar way to its home production (Shenkar,
2007). For instance, Honda Malaysia has its assembly plant in Malaysia that is similar to
Yorii plant of the Saitama Factory in Japan (Tan, 2014).
Vertical FDI involves different stages of production process being added abroad. There are
two forms of FDI: Forward and Backward FDI. Forward FDI is where the company will
acquire distributorship (Head, 2007). An example can be seen in Malaysia is where Ford
Motor Company acquire car distributorship in Malaysia and act as a sole distributor to
distribute Ford vehicles in Malaysia. Backward FDI involves a company acquiring input
provider. (Bucar, Rojec, & Stare, 2009). For example, Seagate that manufactures electronic
products invest in Malaysia. The last type of FDI is the conglomerate FDI where companies
operating in an unrelated business (Herger & McCorriston, 2014). For instance, Mitsubishi
Group is a conglomerate company that invest in Malaysia such as in automotive and
electronic products.

Criteria (for FDI)

There are several criteria for a company to consider a foreign investment such as the
assessment of internal resources, competitiveness, market analysis and the market
expectations (Devajit, 2012). A company need to have an assessment of the internal
resources before it decides to have a foreign direct investment. A firm that is considering for a
foreign direct investment have to ensure that they have sufficient internal resources to support
the set up time and operating the business. In terms of competitiveness, it is important for a
firm conduct a market research on the products and industry. A firm must develop its own
competitive advantage in order to stay competitive and sustain in the market. Market analysis
and research on information for foreign investment such as rules and regulations, profit
retention, distribution and other factors that might affect the firms performance should be
carried by investors when they decides to enter into markets. Lastly, investors that are going
for FDI must have their own capital market expectations for future returns such as
anticipating the economic changes, all types of risk and returns and governmental policies
when they enter into the new market.