Question

1. What factors underlay the decision by Volkswagen to invest directly in automobile production in Russia? Why was FDI preferable to exporting from existing factories in Germany? 2. Which theory (or theories) of FDI best explain Volkswagen’s FDI in Russia? 3. How do you think FDI by foreign automobile companies might benefit the Russian economy? Is there any potential downside to Russia from this inflow of FDI? 4. Russia is largely dependent on oil exports to drive its economy forward. Given the sharp fall in global oil prices that occurred in 2014 and 2015, what impact do you think this will have on FDI into Russia? 5. Volkswagen has signaled that it is going to stay the course in Russia, despite current political and economic headwinds. Why do you think it made this decision? What are the pros and cons of this decision? In your opinion, is it the correct decision?

Answer 1

1)

The factors that lead to automobile production in Russia were Russia's rapid economic growth, increasing living standards , and the relatively low level of car ownership percapita. FDI was preferable to exporting from germany due to no additional costs of building new factories, an increasing demand for cars, and low additional costs and tariffs.

2)

The strategic theory of pull strategy than a push strategy where outsourcing a customized model to their customers best explains Volkswagen’s FDI in Russia.

This is because as there is a falling demand in Russia, Volkswagen to cut its production at its Kaluga plan to 120,000 vehicles in 2014 from a planned 150,000.

Gone phase wise production increase in assembly lines.

VW would have conducted market survey and predicted rightly

3)

The economic landscape in Russia had factors viz. when the government of Russia created incentives for carmakers to invest directly in Russian Production facilities, allowing them to prevent import tariffs and a punitive tax on imports of parts when they produce at least 25000 cars in the country. In 2011, the government also announced that it would keep tariffs on imported components at 0.3% if a foreign automaker built at least 300,000 in the country by 2020, and produced 60% of the value of the car locally. This change in economic landscape in Russia affects the factors that brought Volkswagen to Russia.

In recent years especially 2014, 2015 slump in oil industry affected its economy and US sanctions on Russia also affected its economic growth. All these lead to its currency decline against $ value.

4)

As due to fall in oil price in Russia the economy slow downs due to which no industry will invest in such economy that's why it is difficult to influence to invest in their economy. This will have negative impact on russiaR economy.

5)

I believe Volkswagen is staying in Russia because although there are issues, Russia is still good for the automobile industry. Volkswagen has become the largest foreign auto investor in Russia, and has commited to the Russian market. Also Russia has offered tax previleges to Volkswagen in the past, so the idea of Volkswagen maintaining their relationship with Russia is a good one