Foreign Direct Investments:
Volkswagen’s Entry Strategy in China’s Car Market

21/1/2013 Content Page

Table of Contents Abstract 1 Introduction 1 Literature review 2 Volkswagen rational for China – Dunning’s Eclectic Paradigm. 4 Conclusion 6 References 7

Abstract

China is one of the most attractive destinations for Foreign Direct Investments in the world. It is first destination for Inward FDI among developing countries (WTO, 2012). China has developed second world’s largest car market after U.S.A. and has been the largest car producer in the world since 2008.

German company Volkswagen (hereafter VW) is the world’s second largest motor vehicle manufacturer after Toyota Motor (CNN, 2012) and the biggest manufacturer in Europe. VW is one of the earliest investors and the biggest foreign car maker in China with 15% of market shares. This report, by applying relevant theories, such as Dunning’s eclectic paradigm or Hymer’s internationalization theory, will explain why VW Company decided to invest in China through joint venture rather than acquisition or Greenfield investment.

Introduction

Chinese car industry, as well as many other branches, is very young, although dynamic and fast growing. In 1978 Chinese government introduced policy of open doors which allowed foreign companies to invest and operate in China. Since then car sector has developed rapidly from an infant to a mature industry. Moreover, Chinese government provides various incentives in order to attract foreign firms invest in Chinese car market, which the cause for industry dramatic development.
VW entered Chinese market in 1984 setting up joint venture with the Shanghai Shanghai Auto Works which created Volkswagen Automotive Company Ltd. This was shortly followed by the Volkswagen Automotive Company Ltd in Changchun in 1990. Simultaneously European and North