During August 1995, Volvo released its new series, intending to call the cars S4[8][9]and F4.[10] However, as Audi had already reserved the "S4" name, Volvo opted to name the range S40 (saloon), and V40 (estate).[11] These cars were manufactured at the Nedcar factory at Born in the Netherlands (a pre Ford joint venture between Volvo and Mitsubishi Motors) and based on a common platform with the Mitsubishi Carisma, later used by the Proton Waja. They were also the last Volvos to be produced at the Born plant; a lineage that had begun in the early 1970s with Volvo's collaboration with DAF that had led to the Volvo 66 and the Volvo 300 series.

In the United Kingdom, it costs approximately 50% more than the related Mitsubishi Carisma. The car helped change perceptions of Volvo: "The S40/V40 range was the car that finally persuaded buyers that Volvo really could build a credible compact executive car", reported the RAC.[12] For the 2000 model year, Volvo expanded the S40/V40's market to North America, where this range went on sale exclusively with the 1.9 liter turbo.