Chapter 7 Outline

Toyota in France

The French have always been somewhat ambivalent toward foreign direct investment. In the 1960s and 1970s, 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 businesses. 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 president Jacques Chirac. Chirac, who espouses a free market philosophy with a unique French twist, has made encouraging inward investment a priority. The results have been striking. According to recent UN data, in 1996 France attracted $21 billion in inward investment, coming in fourth behind the United States, China, and the United Kingdom. Between 1991 and 1996, the cumulative total for France stood at $119 billion, forcing the United Kingdom into second place within Europe. Among the foreign companies that have undertaken major investments in France are Toyota, IBM, Motorola, and Federal Express Corp.

One noteworthy inward investment in recent years 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.

The car to be produced at Toyota's French plant will initially have 60 percent European content, thus qualifying it to be classified as European and allowing Toyota to circumvent import duties. Estimates suggest that 2,000 people will be employed at the new plant by the time it reaches full operation in 2001. An additional 2,000 jobs may be created among suppliers. Toyota's plans call for the plant to export its output to other countries within the European Union, which will help 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 hopes that its new plant will 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 to be located, is expected to waive or significantly reduce the annual property tax on the site. These subsidies are estimated to reach 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. The United Kingdom'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 franc was locked against that of several other currencies--including that of Germany--in advance of full monetary union and currency union in 2002.

http://www.toyota.com

Source: A. Jack, "French Consider Takeover Defences," Financial Times, November 15, 1997, p. 2; R. Graham and H. Simonian, "Toyota Picks France for New Plant," Financial Times, December 10, 1997, p. 6; and A. Jack, "French Go into Overdrive to Win Investors," Financial Times, December 10, 1997, p. 6.