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OPENING CASE: Volkswagen in Russia
The opening case considers Volkswagen’s decision to invest over $1 billion in Russia beginning
in 2007. The decision was motivated by surging demand in Russia and Volkswagen’s desire to
avoid Russian import tariffs. In 2014, however, plunging oil prices and international political
tensions initiated an economic downturn in Russia, and Volkswagen’s managers were faced with
the difficult decision whether to suffer short-term losses in the hopes of an economic turnaround,
or to close their Russian plants entirely. Discussion of the case can revolve around the following
questions:
QUESTION 1: What were the primary motivators that convinced Volkswagen to invest in
Russian manufacturing facilities?
ANSWER 1: As the Russian economy began to expand on the strength of its oil and natural
QUESTION 2: How did the changing economic landscape in Russia affect the factors that
brought Volkswagen to Russia? How might those changes affect Volkswagen’s future operations
there?
ANSWER 2: The decline of the Russian economy that began with the collapse of global oil
prices in 2014 strongly affected the growth of Russia’s consumer market. This led to a downward
QUESTION 3: What other strategies might Volkswagen have pursued to gain a foothold in
Russia without taking on such a large financial risk?
ANSWER 3: Answers to this question may vary. Volkswagen may have pursued a licensing
strategy, allowing Russian manufacturers to produce some or all of the Volkswagen branded
Another Perspective: For more information on the impact of Russia’s economic woes on foreign
automakers, go to
{http://www.wsj.com/articles/ruble-pressures-auto-makers-to-rethink-russia-business-141892745
3}.
CRITICAL THINKING AND DISCUSSION QUESTIONS
QUESTION 1: In 2008, inward FDI accounted for some 63.7% of gross fixed capital formation
in Ireland, but only 4.1% in Japan (gross fixed capital formation refers to investments in fixed
assets such as factories, warehouses, and retail stores). What do you think explains this
difference in FDI inflows into the two countries?
ANSWER 1: One approach to this question is to look at government policy: Ireland is
QUESTION 2: Compare and contrast these explanations of FDI: internalization theory and
Knickerbocker's theory of FDI. Which theory do you think offers the best explanation of the
historical pattern of FDI? Why?
QUESTION 3: What are the strengths of the eclectic theory of FDI? Can you see any
shortcomings? How does the eclectic theory influence management practice?
QUESTION 4: Read the Management Focus on Cemex and then answer the following questions:
a) Which theoretical explanation, or explanations, of FDI best explains Cemex’s FDI?
b) What is the value that Cemex brings to the host economy? Can you see any potential
drawbacks of inward investment by Cemex in an economy?
c) Cemex has a strong preference for acquisitions over greenfield ventures as an entry mode.
Why?
QUESTION 5: You are the international manager of a US business that has just developed a
revolutionary new personal computer that can perform the same functions as existing PCs but
costs only half as much to manufacture. Several patents protect the unique design of this
computer. Your CEO has asked you to formulate a recommendation for how to expand into
Western Europe. Your options are (a) to export from the US, (b) to license a European firm to
manufacture and market the computer in Europe, and (c) to set up a wholly owned subsidiary in
Europe. Evaluate the pros and cons of each alternative and suggest a course of action to your
CEO.
CLOSING CASE: Foreign Direct Investment in Nigeria
Summary
The closing case explores Walmart’s investment in Japan. For years, Japan has been relatively
closed to significant foreign direct investment, but more recently the government has changed its
policy and actually now encourages inward investment. Walmart, taking advantage of this shift
in policy, acquired a large Japanese retailer in 2002. Walmart’s initial venture into Japan has
been challenging and has forced the company to change its approach to better compete with local
retailers and meet the needs of Japanese consumers. Discussion of the case can revolve around
the following questions:
QUESTION 1: What factors held back the flow of foreign direct investment (FDI) into Nigeria
for most of the country’s history as an independent nation?
QUESTION 2: Why did foreign direct investment into Nigeria start to accelerate after the
mid-2000s?
QUESTION 3: How do you think FDI might benefit the Nigerian economy? Is there any
potential downside to Nigeria from more FDI?
QUEsTION 4: Nigeria is largely dependent on oil exports to drive its economy forward. What
impact do you think the sharp fall in global oil prices that occurred in 2014 will have on FDI into
Nigeria?
QUESTION 5: Nigeria’s government is currently fighting a vicious insurgency mounted by
Boko Haram in the country’s remote and sparsely populated northeast. Should this be of concern
to potential foreign investors, most of whom invest in the country’s populated southern region?
QUESTION 6: Imagine that you work for a large consumer products company selling basic
household goods. List the pros and cons of investing in Nigeria. Under what circumstances
would you recommend investing?
MHE INTERNATIONAL BUSINESS VIDEO LIBRARY
Please click here to visit our International Business Video Library on Pinterest, which is updated
on a monthly basis. While there, be sure to "like" the clips that work well for you, and add notes
that might be helpful to your colleagues.
INCORPORATING globalEDGE™ EXERCISES
Use the globalEDGE™ site {globaledge.msu.edu/} to complete the following exercises:
Exercise 1
The World Investment Report published annually by UNCTAD provides a summary of recent
trends in FDI as well as quick access to comprehensive investment statistics. Identify the table of
largest transnational corporations from developing and transition countries. The ranking is
based on the foreign assets each corporation owns. Based only on the top 20 companies, provide
a summary of the countries and industries represented. Do you notice any common traits from
your analysis? Did any industries or countries in the top 20 surprise you? Why?
Exercise 1 Answer
Search phrase: largest transnational corporations
Resource Name: UNCTAD: Largest Transnational Corporations
Website: http://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Annex-Tables.aspx
globalEDGE Category: Rankings
Additional Info:
The ranking of the largest transnational corporations in the world is an annex to the annual World
Investment Report published by the United Nations Conference on Trade and Development
(UNCTAD). There are two separate rankings, one for financial corporations and another one for
the non-financial corporations.
Exercise 2
An integral part of successful foreign direct investment (FDI) is to understand the target market
opportunities as well as the nature of the risk inherent in possible investment projects,
particularly in developing countries. You work for a company that builds wastewater and
sanitation infrastructure in such countries. The Multilateral Investment Guarantee Agency
(MIGA) provides insurance for risky projects in these markets. Identify the sector brief for the
water and wastewater sector, and prepare a report identifying the major risks projects in this
sector tend to face and how MIGA can assist in such projects.
Exercise 2 Answer
