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

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.