As the third largest manufacturer of automobiles, Toyota Motor Corporation decided in 1997 to invest over $600 million in a car plant in France as its second major commitment to Europe. The following discussion will focus on three main aspects: the foreign investment environment in France, the effects of Toyota’s investment on the company and the country, and its reasons for choosing France.
Foreign Direct Investment (FDI) in France
The Socialist French Government has been holding a radical view toward foreign direct investment as they believed that only by building their own enterprise can profits made be retained in France. However in the 1980s, the Government has shifted to a pragmatic nationalistic attitude. France realized that the benefits of job creation, technology transfer and increased export brought about by FDI outweigh the costs to local businesses. Hence the Government reduced obstacles to FDI and used various subsidies, financial aids or tax waivers to attract foreign firms like Toyota.
Benefits of Toyota’s investment to France
France was having a high unemployment rate at that time, and in the city of Valencienne, where the plant was planned to be built, the unemployment rate was as high as 20%. Toyota’s investment would not only create 4,000 new jobs in France, but also help balancing the current account by increasing France’s export through exporting Toyota’s automobiles to other European countries. Knowing that Toyota would build a plant in Europe anyway, French Government wanted to capture FDI away from other potential host countries and take this advantage as a signal to foreign firms that France is opened to FDI, hence stimulate more FDI and increase its economic growth relative to other European countries.
Reasons for Toyota’s investment in France
Toyota’s chose France as the site for investment because of the presence of impediments to exporting, reduction in transportation costs, incentives from host government, location-specific advantages and minimization of currency risk exposure.
Impediments of exporting and reduction in transportation cost
As Japanese automobile imports have been flooding European markets, many European countries erected various trade barriers limiting the imports so as to protect the local automobile industry. This also helps countries to maintain the balance of payment position by limiting imports and thus minimizing current account deficit. By building a plant in the country, Toyota can actually circumvent import duties and take advantage of the low transportation costs to export output from France to other countries within the European Union.
Incentives from host government and location-specific advantages
Although labor cost in the UK is cheaper and workforces put in longer hours than in France, the French Government was offering considerable subsidies, tax breaks and financial aids to Toyota. Moreover, to export autos to other EU countries, Toyota must abide by the EU standards and EU regulations to have 60 percent European content. The region of Valenciennes has a long tradition of auto engineering which can provide Toyota with sufficient trained labors, expertise, subcontractors and suppliers. They are all ready to work and the parts supplied are up to the standards of the EU.
Minimization of risk exposure
The most important factor for Toyota’s preference to France rather than the UK is French adoption of the euro. Not only did Toyota wish to increase its market share in France and in Europe’s single market, it also wanted to establish its presence within the euro single currency zone. UK’s strong pound has made Toyota’s operation unprofitable because this increases the price of outputs exporting from the UK, making it difficult to compete on price with their rivals among other EU countries.
Within the eurozone, Toyota can obtain raw materials and components in euro from suppliers on the European continent, exporting will also be carried out in euro. This minimizes the time and costs wasted to deal with predicting future exchange rate changes and the associated currency exchange risks in trading with pounds. Moreover, suppliers and dealers in the continent are psychologically closer with the use of euro, this further increases the ease of transactions across borders from France rather than from the UK which uses pound. By dispersing production in a different country instead of one single part of Europe, Toyota can also reduce the investment risks caused by individual country’s currency fluctuations and macroeconomic condition.
Although there are reasons supporting Toyota’s investment in France, Toyota has to cope with the higher labor costs and shorter 35-hour work week under the new Socialist Government. It also has to deal with the inflexibility of the one-size-fits-all monetary policy of euro, especially when there exist countries like Greece whose economy is not as good as other euro countries and a common monetary policy has to be adopted.