International Trade

International Trade 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 France was one of the few countries that saw FDI inflows increase in The cumulative stock of FDI in France grew from $86 billion in 1990 to $310 billion by 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.

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?