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.