Ford and General Motors in

Russia

Qn 4: Which theory of FDI best

explains the sudden increase in
interest by foreign auto companies
in Russian investment?
Horizontal FDI
 Definition: when FDI takes place in the
same industry abroad as the one in
which the company operates at home.
 Why Horizontal FDI?
 best explains the sudden increase in
interest by foreign auto companies to
invest in Russia due to the following
favorable factors in Russia…
1. Transportation cost
advantages
 Ford Focus currently sells for $14,000
due to transportation cost, import duties,
higher wages at Ford’s Western Europe
factories.
 With the new plan in Russia, they can
save transportation/import and wage
saving cost and price its car at $10,900.
 Booming import market of reused cars in
Russia.
2. Market imperfection
(factors that inhibit markets from working perfectly)

 Due to the market imperfection in Russia,

horizontal FDI is the best solution to penetrate
the market.
 Being in the market, foreign auto companies
can understand better the Russian consumer
behavior. There is less ambiguity and it is
easier to plan their marketing plans.
 Tap on the technological, management and HR
expertise of people already working in the car-
making industry in Russia or even bring in their
expertise from domestic country.
2. Market imperfection
(factors that inhibit markets from working perfectly)

 A big relatively untapped market that the

“first-movers” will be able grab a sizeable
market share in Russia.
 Ford’s plans to invest $45 million in local
suppliers to upgrade their capabilities,
the rest of the auto-car makers will take
advantage of that and invest into Russia
 If Russia can sell better, are better
organized, have control systems… do
you think their car industry is as down
as it is? It’s up for discussion…
3. Market structure/rivalry
 Entering the market with lower cost,
and with its long lasting good
reputation in its domestic market
-> competitive edge to acquire a new
potential market.
4. Location-specific
advantages
 Russia is labour-intensive and their
wages are lower as compared
-> produce lower production costs
automobiles
 Ford can now target to export to
neighboring countries with Russia
political climate stability.