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How Decisions on Investing in Russia are made by German Firms?

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  • Kotov, Denis

Abstract

In the paper we have clarified how the German multinational (MNE) and small and medium sized enterprises (SME) appraise and perform their foreign direct investments in Russia. Our analysis was supported by a survey of German firms running their business in Russia which was made in the period from April to July 2008. In the survey we also asked about the problems and barriers which German companies face when they invest in Russia. Finally, we have presented how the ‘typical’ investment decision process is run in German firms that are going to Russia. German firms start up their operations in Russia by establishing a subsidiary (~80%). All information related to the investment decision is collected mainly internally (~80%). 66% of firms appraise foreign investment using the Discounted Cash Flow technique which incorporates principally macroeconomic factors, such as the expected inflation rate (~70%) and the GDP growth (86%). Institutional factors describing a country’s level of corruption, the quality of governance or economic policy and economic structure risks are generally ignored. One sixth of firms use these indicators only. The expansion is often financed by the parent company (43%) or by German home banks and their Russian subsidiaries. The main obstacles while investing are the weak and changing legislation, frequent tax inspections, complex tax system and corruption. Undeveloped transport infrastructure belongs to the significant barrier as well. However, such factors as language, domestic competition or limited access to the strategic important industries are considered as minor hurdles. Besides this, profit repatriation restrictions are assessed as a moderate problem. In two thirds of cases the expected return on investment has been achieved or even beaten. The key reasons for the failure of investment are overoptimistic market expectations, unsatisfactory qualifications of the domestic personnel, unreliability of business partners and non-accurate market research.

Suggested Citation

  • Kotov, Denis, 2009. "How Decisions on Investing in Russia are made by German Firms?," MPRA Paper 16373, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:16373
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    References listed on IDEAS

    as
    1. Kotov, Denis, 2008. "How Changing Investment Climate Impacts on the Foreign Investors Investment Decision: Evidence from FDI in Germany," MPRA Paper 8777, University Library of Munich, Germany.
    2. Lahiri, Sajal & Ono, Yoshiyasu, 1998. "Foreign Direct Investment, Local Content Requirement, and Profit Taxation," Economic Journal, Royal Economic Society, vol. 108(447), pages 444-457, March.
    3. Armitage,Seth, 2005. "The Cost of Capital," Cambridge Books, Cambridge University Press, number 9780521000444.
    4. Katariina Nilsson Hakkala & Pehr-Johan Norbäck & Helena Svaleryd, 2008. "Asymmetric Effects of Corruption on FDI: Evidence from Swedish Multinational Firms," The Review of Economics and Statistics, MIT Press, vol. 90(4), pages 627-642, November.
    5. Armitage,Seth, 2005. "The Cost of Capital," Cambridge Books, Cambridge University Press, number 9780521801959.
    6. Benjamin Gomes-Casseres, 1990. "Firm Ownership Preferences and Host Government Restrictions: An Integrated Approach," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 21(1), pages 1-22, March.
    7. Sanjeev Agarwal & Sridhar N Ramaswami, 1992. "Choice of Foreign Market Entry Mode: Impact of Ownership, Location and Internationalization Factors," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 23(1), pages 1-27, March.
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    Cited by:

    1. Csaba Weiner, 2011. "Foreign Direct Investments in Russia and the Hungarian-Based Investors," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 2, pages 104-115.
    2. Kotov, Denis, 2013. "Behavioral Biases and Corporate Decision Making on Investing Abroad," MPRA Paper 49858, University Library of Munich, Germany.

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    More about this item

    Keywords

    Investment Climate; FDI; Germany; Russia; DCF; Investment Valuation;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

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