Q1: What factors underlay the decision by Volkswagen invest directly in automobile production in Russia? Why was FDI preferable to exporting from existing factories in Germany?
The decision of Volkswagen to directly invest in automobile production in Russia came as a result of rapid growth of the county’s economy. At that time, the living standards were also rising which suggested that the demand for cars would also grow rapidly. Another factor that led to direct investment is that Volkswagen was avoiding being preempted by its major competitors the General Motors and Ford whose production facilities were also an investment in Russia.
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Volkswagen chose Foreign Direct Investment in Russia rather than exporting from existing factories in Germany because it was spurred by the Russian government’s incentives. The Russian government enabled Volkswagen to avoid the importation of tariffs and a pure tax on the importation of parts in case they produced more than 25,000 cars. The Russian government also announced keeping imported component’s tariffs at 0.3% if, by 2020, the automakers would build more than 300,000 cars in the country and 60% locally, which would add an advantage to the company.
Q3: How do you think FDI by foreign automobile companies might benefit the Russian economy? Is there any potential downside from this inflow of FDI?
FDI has been a major source of economic development in most developing countries. I think Russia’s economy will benefit from FDI if foreign automobile companies directly invest in the county’s production facilities ("2014 FDI Report: Russia | IFLR.com", 2019) . This will, in turn, increase productivity in the country which will boost the economy. Foreign direct investment will also allow the transfer of resources and knowledge which will increase experience and education and overall human capital if the country. With an increment of income, there will be a major boost in the Russian economy through FDI.
Despite the benefits of FDI to Russia, there is also a potential downside the inflow of FDI which might hamper with the development of the county’s economy. Foreign investors in Russia might buy over the domestic businesses in order to get rid of competition which is very harmful to the structure of the economy. The relatively more relaxed Russia’s environmental policy makes it easier for the transfer of production methods which might be a danger to human health and the environment policies.
Chapter 9: Regional Trade Deals and the Mexican Auto Industry.
Q1: What was the initial impact of NAFTA on the US and Mexican automobile markets? Who benefited most from this?
According to Villareal, & Fergusson, (2014) the establishment of the North America Free Trade Agreement in 1992 led to some significant impacts on the US and Mexican automobile markets. NAFTA removed the trade barriers of tariff and nontariff between United States, Mexico, and Canada. This gave the auto manufactures in Mexico free duty access to the US market and also lowered the prices of auto imports from the USA. As such the expansion of the US and Mexico markets has enabled shipments to be moved easily from the border at lower prices.
With NATFA Mexico benefited most compared to the US. The agreement has made most auto manufacturers consider Mexico in new plants for serving North America. The NATFA deals have also helped transform Mexico to become the 4th largest in exporter of automobiles globally. Infrastructure in Mexico has also dramatically improved, and clearance of customs at the border is now quicker.
Q3: Mexico has been very proactive in signing regional free trade deals in addition to NATFA. How has this strategy impacted automobile consumers and producers in Mexico? How has it impacted automobile consumers and producers in the United States?
In addition to NATFA, the signing of free regional trade deals has led to the transformation of Mexico into a larger automotive exporter in the world. The trade deals have attracted new investments in Mexico such as duty-free automobiles which are mostly available to manufacturers, and they can supply both the US and EU markets. The trade deals have enabled consumers to get imported automobiles at much lower prices which is also an advantage to the producers.
However, the free deals are a major milestone to the United States. This is because Mexico’s growth has come to the expense of some factories in the USA which has affected both the producers and the consumers. It has also led to a negative impact on the growth of employment in the US. For example, the BMW did not want to expand its plant in South Carolina because of its decision to build a factory in Central Mexico. As such, automobile consumers in the USA will experience a tough breakthrough because new plants are majorly found in the south of the border.
References
2014 FDI Report: Russia | IFLR.com. (2019). Retrieved from http://www.iflr.com/Article/3306943/2014-FDI-Report-Russia.html
Villareal, M., & Fergusson, I. F. (2014). NAFTA at 20: Overview and trade effects.
