The French have always been somewhat ambivalent toward foreign direct investment. In the 1960s and 70s, successive French governments

International Trade

The French have always been somewhat ambivalent toward foreign direct investment. In the 1960s and 70s, successive French governments

Toyota in France (20 Marks)

The French have always been somewhat ambivalent toward foreign direct investment. In the 1960s and 70s, successive French governments used a mixture of socialist and nationalist rhetoric to spurn foreign investment proposals by companies such as General

Motors. These governments took the view that direct investment by foreign multinational enterprises would damage the French economy. Government officials believed strongly in the need for France to build its own indigenous enterprises. They argued that the economic power enjoyed by foreign multinationals gave them the ability to dominate any markets they entered, at the expense of locally grown enterprises. Successive socialist governments in France expressed a desire to control economic activity through extensive planning and the nationalization of private business. Letting foreign multinationals into the country was thought to be inconsistent with this goal. France’s policy toward inward foreign direct investment began to change in the early 1980s. Although France’s socialist president, Francois Mitterrand, remained suspicious of direct investment by foreign firms, his successive administrations reduced the bureaucratic obstacles to foreign investment and created a more coherent mechanism for luring inward investment. The change in policy reflected the growing realization that inward investment could have substantial benefits for the French economy, including the creation of jobs, the transfer of valuable technology, and the increase of exports that would bolster France’s balance-of-payments position. The shift toward a more liberal attitude accelerated under Mitterrand’s successor, Gaullist Jacques Chirac. Chirac, who espoused a free market philosophy with a unique French twist, made encouraging inward investment a priority. The results have been striking. According to UN data, FDI inflows into France surged from an annual average of $13.9 billion between 1998 and 1993 to a record $52.9 billion in 2001. France was one of the few countries that saw FDI inflows increase in 2001. The cumulative stock of FDI in France grew from $86 billion in 1990 to $310 billion by 2001. Among the foreign companies that made major investments in France over this time period were Toyota, IBM, Motorola, and Federal Express Corp. One noteworthy inward investment was Toyota’s December 1997 decision to invest $656.8 million in a car plant in France to produce 150,000 vehicles per year. The investment represents the Japanese company’s second major commitment to Europe. Toyota already has extensive operations in the United Kingdom. The decision to locate in France was taken despite intense lobbying from British government officials, who wanted Toyota to expand its UK operations. The investment represents a continuation of Toyota’s strategy to replace exports from Japan with direct production in important regional markets. This strategy was originally undertaken to reduce European demands for trade barriers to limit the “flood” of Japanese automobile imports. Plans called for the car to be produced at Toyota’s French plant to have 60 percent European content, thus qualifying it to be classified as “European” under European Union regulations and allowing Toyota to circumvent import duties. By 2001, some 2,000 people were employed at the new plant, and an additional 2,000 jobs were estimated to have been created among suppliers. Toyota has been exporting output from

the plant to other countries within the European Union, helping France’s balance of trade position. A number of factors motivated Toyota’s choice of France as a location for the plant. First, the company hoped that its new plant would help it to increase its market share in France from 1.1 percent in 1997 to around 5 percent. Second, Toyota picked France because the country has long had an indigenous automobile industry, which yields an adequate supply of trained labor and technical expertise, along with a network of experienced subcontractors. Third, the French government reportedly offered considerable subsidies to induce Toyota to invest in the country. These included tax breaks, the waiving of some social security contributions, and financial aid for training the work force. In addition, the city of Valenciennes, where the plant is located, waived or significantly reduced the annual property tax on the site. Estimates suggest that these subsidies reached 10 percent of the value of the investment. Fourth, one of the most important attractions of France was the priority of establishing a presence not only within Europe’s single market, but also within the euro single currency zone. Great Britain’s continued ambivalence to monetary (and currency) union with other European Union countries was a big hindrance to Toyota investing further in the United Kingdom.. As of January 1999, the exchange rate for the French France was locked against that of several other currencies – including that of Germany – in advance of full monetary and currency union which occurred in 2002. Early evidence suggested the French investment is paying dividends for Toyota. Sales from the French operation helped Toyota to raise its European market share from 2.5 percent in 1992 to 3.8 percent in 2001. By 2002 the company was selling 660,000 cars in Europe and was planning to sell 800,000 by 2005, the majority of which would be assembled either in the United Kingdom or in France. Leading Toyota’s expansion in Europe was the Toyota Yaris, a “Super-mini” model produced in France exclusively for the European market place.

The French have always been somewhat ambivalent

Answer the following question.


Q1. How would you characterize the shift in French attitudes and policies toward FDI? What do you think has driven this change in attitudes and policies?


Q2. What are the benefits to the French economy of Toyota’s investment in France?


Q3. How do you think European Union regulations affected Toyota’s decision to invest in France?


Q4. Why do you think Toyota chose France over the United Kingdom as a location for its new plant?


Q5. Can you see any downside for France of Toyota’s investment?

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