1. 10/09/2015
Foreign Direct Investment (FDI) in a high risk environment: creation or reduction in
shareholder value? A case study of Fiat in the US market.
Y3810331
Supervisor: Professor Simon Sweeney
September 2015
Dissertation submitted in part fulfilment of the degree of MSc in Global Marketing
The York Management School
University of York
Word count: 12,101

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3. i
ABSTRACT
With the 2007 global crisis, a large proportion of foreign direct investments (FDIs) have been
directed to markets with several risks, from financial to cultural. This phenomenon has attracted
the attention of a number of authors (e.g. Casson and da Silva, 2013; Jones and Lubiniski, 2012).
However, the literature of FDIs in high risk environments is lacking in studies that quantitatively
evaluate the creation of value. The present dissertation combines qualitative and quantitative
methods to assess the rationale and the profitability of the FDI in a high risk environment. The
employed case study is the investment of the Italian automotive company Fiat in the USA during
the financial crisis. Fiat started a partnership with the automotive company Chrysler in 2009 that
ended with an acquisition in 2014. The findings of this analysis suggest that the rationale of
Fiat’s investment is based on the convenience to move towards a more attractive market from a
geographical and business point of view. The stringent management of the risk and the
implementation of ethnocentric strategies are shown to be essential for Fiat’s FDI in the US
high-risk market. Moreover, Fiat’s investment is quantitatively proven to be profitable from the
shareholders’ value creation perspective. The value creation for the shareholders during the
partnership between Fiat and Chrysler also led to mutual benefits among other stakeholders such
as the community, employees, and government.

4. ii
Acknowledgment
I thank my supervisor for the generous and genuine supervision and for the opportunity that he
gave me at the beginning of the academic year. I will always be grateful. I would also like to
thank all the professors from the Global Marketing course. More particularly, I would like to
thank Professor Teresa da Silva who inspired me in undertaking this particular type of research
during the first term. Furthermore, I thank my friends Andrea, Abhi, Morgan, Roberta and Ian
for the moral support and for their life teachings. Finally, I want to thank my parents and
brothers who have always been my continuous inspiration.

5. iii
Contents
1. Section: Introduction of the study ..............................................................................................................1
2. Section: Theoretical foundation of the study............................................Error! Bookmark not defined.
2.1 Significance and importance of Foreign direct investment (FDI)........Error! Bookmark not defined.
2.2 Rationale behind FDI according to theoretical frameworks.................Error! Bookmark not defined.
2.2.1 OLI Paradigm..............................................................................Error! Bookmark not defined.
2.2.2Vernon’s international product life cycle (IPLC) theory..............Error! Bookmark not defined.
2.3 High risk environment in a business perspective. ................................Error! Bookmark not defined.
2.4 The importance of shareholders’ value creation ..................................Error! Bookmark not defined.
3. Section: Methodology section..................................................................Error! Bookmark not defined.
3.1 Case study research design...................................................................Error! Bookmark not defined.
3.2 Qualitative document analysis..............................................................Error! Bookmark not defined.
3.3 Economic Value Added (EVA)............................................................Error! Bookmark not defined.
4. Section: Data collection for the case study...............................................Error! Bookmark not defined.
5. Section: Analysis and Findings ....................................................................Error! Bookmark not defined.
5.1 The case study: Fiat background...........................................................Error! Bookmark not defined.
5.2 The joint venture between Chrysler and Fiat ........................................Error! Bookmark not defined.
5.3 Application of theoretical frameworks..................................................Error! Bookmark not defined.
5.3.1 The OLI paradigm.......................................................................Error! Bookmark not defined.
5.3.2 Vernon’s international product life cycle theory.........................Error! Bookmark not defined.
5.4 The high risk of the US market and Fiat’s strategies ............................Error! Bookmark not defined.
5.5 Application of the EVA.........................................................................Error! Bookmark not defined.
6. Section: Conclusion......................................................................................Error! Bookmark not defined.
7. Limitations and Further studies....................................................................Error! Bookmark not defined.
Bibliography.....................................................................................................Error! Bookmark not defined.
Appendix 1- Table for identifying Default Spread from rating index..........Error! Bookmark not defined.
Appendix 2- Italian Key Interest Rates 2013-2012-2011-2010-2009..........Error! Bookmark not defined.
Appendix 3- Inflation rate calculated by ISTAT..........................................Error! Bookmark not defined.
Appendix 4- Mediobanca research to identify the expected return of marketError! Bookmark not defined.
Appendix 5- Calculation process of the WACC ..........................................Error! Bookmark not defined.
Appendix 6- Sources for the application of document analysis...................Error! Bookmark not defined.
Appendix 7- Sources for the application of EVA approach.........................Error! Bookmark not defined.
Appendix 8- Application of EVA (in thousands of euros)...........................Error! Bookmark not defined.

6. FDIs in high risk environment, creation or destruction of shareholders value? The case study of Fiat in the US market
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1. Introduction of the study
Foreign direct investment (FDI) have assumed a central role in the last decades. Between
1980 and 2007, FDIs have spread out especially across the triad nations (EU, North America and
Japan). The great majority of these investments (around 80 per cent) were made by the first 500
largest multinational enterprises (MNEs) (da Silva Lopes, 2014). However, from 2007, the
global FDI flow has slightly decreased due to the strong financial crisis (UNCTAD 2009;
Sauvant, et al. 2009). The increasing financial pressure transformed the European and US
markets into high risk environments. In combination with the growing competition from
emerging market players, the 2007 global crisis fostered a migration of FDIs towards emerging
countries such as China and Brazil (Al-sadiq, 2013; Wernick, et al 2014). For instance, several
US companies (e.g. Apple, Ford Motor, Nike, H.J. Heinz and Gap) have expanded their business
in China during that period (Forbes, 2010; Leahy, 2009). Although still at high risk, the markets
in emerging countries’ offered better conditions, such as cheap labour, market development
potential, easier access to resources. This represented a strong incentive for MNEs, which
became more willing to internationalise (Rugman et al., 2006). The last ten years are therefore
characterised by a relevant proportion of FDIs in high risk environments.
Despite the concept of risk in international business environments has well-established
roots in the business management literature (e.g. Clark and Marois, 1996; Howell, 1998;
Robock, 1971), the literature on FDIs in high risk environments is recent. For example, Jones
and Lubinski, (2012) investigated the FDI strategies to manage the political risk in specific
country scenarios. Casson and da Silva (2013) combine the topic of the foreign direct investment
with the concept of high risk environment. It explores how a potential country-threat can be
converted into an opportunity, taking into account the historical perspectives of different
companies’ experiences. However, the literature of FDIs in high risk environments is lacking in
studies that measure the creation of value through quantitative tools.

7. FDIs in high risk environment, creation or destruction of shareholders value? The case study of Fiat in the US market
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The present dissertation bridges that gap by investigating the rationale and the profitability
of the FDI in a high-risk environment. It combines qualitative and quantitative methods to assess
the rationale and the profitability of the FDI in a high risk environment. The aim is to assess
whether FDIs in high risk environments can be explained through well-established theoretical
frameworks, and whether the resulting interpretations are coherent with quantitative evaluations.
The acquisition of the US automotive company Chrysler by the Italian manufacturer Fiat is
an interesting case study. Despite a number of American companies were moving towards
emerging countries because of the high risk in the US market, the Fiat group undertook a
maverick strategic investment in 2009 that ended with the acquisition of Chrysler in 2014
(Maclntosh and Simon, 2009; Caputo, 2012; Wright and Foy, 2014). The findings of this work
may provide a useful term of comparison with respect to other FDIs such as, for example, the
merger & acquisition operation involving Daimler and Chrysler in 1998.
More precisely, the following two questions are fundamental to pursue the goal of the
analysis:
 why did Fiat invest in the USA through an initial strategic partnership with Chrysler
concluding with the acquisition of the latter?
 what is the impact of Fiat’s FDI in a high risk environment on the business value?
Fiat’s FDI in the USA is widely analysed by a qualitative document analysis. A
comprehensive literature review is provided to understand the rationale of Fiat’s investment, the
implemented strategies, and the high risk features of the US market. Moreover, a management
tool called EVA (Economic Value Added) is employed to assess the shareholders’ value created
by Fiat’s FDI. The quantitative evaluation supplies a fundamental control for the qualitative
findings. The data used in the computation was collected from the annual report of Fiat-Chrysler
Automobiles (FCA) group and other sources, as explained in the methodology section.

8. FDIs in high risk environment, creation or destruction of shareholders value? The case study of Fiat in the US market
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The thesis is structured as follows. Section 2 provides the literature review. Section 3
describes the research methodology and the research strategy. Section 4 illustrates the data
collection process. Section 5 presents the findings related to the case study. Conclusions are
drawn in section 6. Finally, section 7 discusses potential further studies.

9. FDIs in high risk environment, creation or destruction of shareholders value? The case study of Fiat in the US market
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For further information regarding the study ask directly the author