The Car Industry and Foreign Direct Investment

Foreign Direct Investment (FDI) is a method companies use to invest and expand in another country. This can either be done through Greenfield investment, through the acquisition of another company or through joint ventures. Each method offers different advantages and disadvantages and decisions are based around the purpose of the FDI and what works best for the company.

There are many reasons why companies use FDI instead of licensing or exporting. Licensing can spread knowledge which can reduce any competitive advantage the company currently has. Exporting is expensive and there can be trade barriers depending on the country of import. Hymer (1976) identified these two factors as the main reasons companies choose FDI.

Recently Fiat has announced plans to invest in Russia. They are spending $1.1bn to build a Greenfield project in St Petersburg, which they hope will help them to enter the Russian market successfully. In addition to the purpose built plant, they are also entering into a partnership with local company ZIL to assemble the cars. FDI has been chosen over importing due to the high costs of getting the cars from Italy to Russia.

Within the car industry joint ventures are common as they enable the companies involved to reduce costs and share technologies to produce a style of car. An example of a successful joint venture is PSA Peugeot Citroën and Toyota. They created a joint venture in 2005 to produce a small city car. They produce three cars: the Peugeot 107, Citroën C1 and Toyota Aygo. The three cars share the same technology with the only differences being cosmetic for example the rear lights. This means production costs are low, meaning that the high costs of shipping them from the specially made plant in the Czech Republic does not create a high selling price.

Through the joint venture they were able to develop an affordable range of cars built for city driving and target an increasingly important market due to the low emissions and cheap running costs. If they had all individually created a car, the costs would be much higher and that could have affected the sales figures.  They were able to share technology and built a specialist plant in Koln to assemble the cars. They then adapted the cars to target their own potential customers with minor cosmetic changes.

The potential problems of building a plant to produce the cars in Koln such as high import duties can be reduced through bi-lateral trade agreements and double-taxation treaties between governments. These will help reduce the costs of transportation and make it cheaper to import rather than build in the desired country.

Personally I feel that FDI is a great choice not just for companies to expand but also for the local economies. When companies chose to develop either through a joint venture, buying a company out or Greenfield investment, jobs within the local economies are either created or retained.

Although the downside of this is that FDI typically is between developed countries, rather than investments in developing countries that would really benefit from investments and job creation. Once companies have invested it is important that the jobs are sustainable and are not negatively affecting the local economy. A problem of FDI is that when large companies enter local markets they often create problems for local companies who are unable to compete with the lower prices offered by the large multinational companies.

The current problem with FDI is that it tends to be between developed countries that do not need large cash investments. If companies invest in developing countries, FDI is one of the first things to be reduced during times of financial hardship. When companies do invest in developing countries, they often take employees from a certain sector which creates the question does FDI create jobs or just substitute one job for another? Either way, FDI does help the local economy and provides an essential transfer of resources such as knowledge or capital.