Volkswagen and FDI | Essay

Running head: VOLKSWAGEN AND FDI
Volkswagen and FDI
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Introduction
This essay discusses about the foreign direct investment (FDI) decision of Volkswagen in
an emerging market. Volkswagen is a car manufacturing company based in the Germany. It is
among the top car manufacturers in the world. The FDI decision of Volkswagen is going to be
discussed in the essay based on the Dunning eclectic paradigm. The emerging country in which
Volkswagen is aiming to make FDI is India. With a critical review on Dunning eclectic
paradigm, the essay discusses about the ownership, location and internalization aspects of
Volkswagen decision of FDI in India. Therefore, aim of the essay is to discuss the OLI of
Volkswagen.
Literature Review
Dunning eclectic paradigm states that FDI decision of a multinational company depends
on three factors and those are ownership, location and internalization. A multinational company
makes FDI only if it has advantages in all the three areas. These three aspects are important
because ownership of an organization means the existing know how, technology, size of the
organization and management structure that provides the organization an upper hand over the
companies in the host country. Additionally, locational advantage of a host country in which the
organization is thinking of making FDI (Dunning 2015). The locational factors that matters in
case of FDI are availability of natural resources, labor cost, existing laws and political and
cultural environment. Finally, the internalization aspect under which an organization maximizes
the profit earned from making FDI in the host country by the use of advantages of ownership and
location such that the market imperfection that exist externally can be avoided. However, there
are several critics of Dunning eclectic paradigm the.

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The Dunning eclectic paradigm may seem suitable to make decision on making FDI and
internationalize the operation of an organization. However, the factors may vary and attracts
disadvantageous situation. The ownership advantages are the ones that are internal to an
organization. Conversely, location and internalization are external factors and that may vary in
several situations. Locational advantages depends on several factors as discussed above
(Sharmiladevi 2017). Among those factor, cost of labor is a bit vague because low cost of labor
could be due to low skilled labor in the host country. The legal part too needs examination as
favorable legal framework does not mean the process of legalities are smooth. In addition to that,
internalization is difficult in an emerging market because the organization may not face
competition from host companies but other foreign companies investing in the country could be a
threat. These factors are not in the Dunning eclectic paradigm and are the limitation of the
model.
Ownership
Volkswagen is large and multinational company with its base in Germany, a developed
country. It was founded in 1937 in Germany. It has its headquarters in Wolfsburg. During the
2016 and 2017, Volkswagen was the largest automobile manufacturer in the world (Agarwal and
Wu 2015). The company manufactures several car models using different types of technology.
The technology the company uses are hybrid cars, electric cars, flexible fuel cars and pure
ethanol cars. As per the data, in 2018 Volkswagen had more than 0.6 million employee
worldwide (Kim and Kent 2019). The management structure is quite well as it focuses on the
employees of the company in order to sustain in the market with rising productivity. Volkswagen
is old company that strive to improve its technology used in manufacturing the cars. As from the
aspect of capital, the company is in advantageous position. It invests significant amount in R&D

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to keep upgrading its technology such that it remains in leading position. With improved
technology, the company is able to exploit its existing economies of scale to the full potential.
Volkswagen operates in around 150 countries in the world with production plants in more than
30 of them. Hence, it is evident that the country has huge capital to run the business in any part
of the world. This is an advantage for the country. However, the from the aspect Indian market of
cars the domestic car manufacturers are technologically the backward than Volkswagen. With
the rise in income level of the residents in India. The demand for improved and technologically
advanced car in India is increasing. Apart from that, the Indian car market is more inclined
towards the sedan and the hatchback car models.
Understanding the prospect of the car market in India Volkswagen invested in India
(Dahiya and Gayatri 2018). The entry of the company in India dated back in 2007. In 2018, the
company announced investment of $ 1 billion in India. In 2019, the Volkswagen announced
merger of its three subsidiaries in India. The organization so far has been operating with three
subsidiaries in India. One with core focus on the luxury car market lie Audi and the other two for
Skoda and Volkswagen separately. The differentiation of brand is made on the basis of
technology, design and premium segment. The premium segment cars comes with state of the art
technology. In these cars the safety features, comfort, design and driving features are highly user
friendly. Domestic car manufacturing companies are not that technologically advanced such that
they can produce car with those advanced technologies (Ray and Miglani 2016). It is the main
premise for Volkswagen in which the company has advantage. The company also caters to the
budget and small car segment in order to expand and capture larger share of market in the
country. Production facility of the organization is so flexible that it can manufacture budget
segment cars as well as premium segment cars. It is possible due to the technological status of