978-1259578113 Chapter 8 Solutions Manual

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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