Some multinationals break up their production chain and perform some parts of that chain in their foreign facilities. This is categorized as vertical foreign direct investment (FDI). One alternative is to outsource those parts of the production chain to an independent foreign firm. Both of those modes of operation are categorized as offshoring. Relative to the option of no offshoring, offshoring involves lower production costs but an additional fixed cost. Only firms that operate at a big enough scale will choose to offshore. LO.1