France’s New Economy

Entrepreneurship is becoming fashionable in France, as French innovation policy quietly adopts the model of Silicon Valley. In the year 2000, French start-up companies accounted for the largest number of initial public offerings in Europe.

France also boasts the widest use of stock-option plans in Europe, and is the third largest market for venture capital in the world (behind Britain and the United States).

A January 2000 survey of French adults found that 13 million hoped to create their own company over the course of their career. Only 3 million had indicated such an interest in 1992.

And a panoply of private venture capital funds, technology incubators, and wealthy “business angel” investors has emerged to support their projects. Even French technology giants such as Vivendi and France Télécom have created their own venture capital funds to promote start-ups in related technologies. French president Jacques Chirac described this new entrepreneurialism as “a type of cultural revolution in the strongest sense of the term.”

The new focus on entrepreneurial startups constitutes a dramatic shift in French innovation policy, and a challenge to French society. French industrial successes in the postwar period-in military and civilian aviation, nuclear and space programs, telecommunications and weaponry-have had their origins in collaborative research and development projects undertaken between France’s large firms, the so-called national champions, and the state. This system of state-led innovation proved hugely successful. It is been credited with the creation of the world’s the first national digital network, Minitel, and what is arguably the best high-speed train system in the world, the Train à grande vitesse (TGV). While large companies still play an important role in the French economy, government reforms designed to encourage risk-taking have increasingly promoted innovation in the context of small entrepreneurial firms. Many question what the new approach will mean for French society. “How do we catch up with the United States,” asks Christian Sautter, Lionel Jospin’s former Economics Minister, “without sacrificing the solidarity that lies at the heart of the European model?”

France Turns to High-tech Start-ups

Three sets of concerns in the late 1990s have driven the Jospin Government to pursue policies that promote high-tech start-ups. First, France has been concerned about a fuite de cerveaux, a brain drain. An estimated 1.8 million French citizens were living abroad in 1998, including up to 200,000 in Silicon Valley and the Bay Area. Many of these emigrants had been trained in France’s elite technical schools. The French government estimated at the time that almost a third of expatriates were working in the “management and intellectual professions.”

Moreover, a 1999 survey of small-business owners found that 48 percent were “ready to consider moving all or part of their company abroad.”

By making France more hospitable to entrepreneurship, the Jospin government has hoped to retain the considerable domestic technical and business talent that France trains.

The French government has also been deeply concerned about a growing technology gap. Internet penetration in France trails the rest of Europe. And France contributed only 2.5 percent of the total cost of research in the Human Genome project, compared to 33 percent from Britain and 55 percent from the US.

The problem,” according to France’s Minister of Research, Roger-Gerard Schwartzenberg, arises “…not from a lack of gray matter, but from an incomplete exploitation and valuation of resources.”

Newly discovered technologies were not being commercialized, and it was feared that this would lead France to fall behind in the new economy sectors that were likely to drive future growth. French patents issued in the United States, for example, fell from 3 percent of total patents in the period 1991-1994 to 2.7 percent in the period 1995-1998. Only about 20 researchers each year left government labs to create their own start-ups. By promoting entrepreneurship, the government hoped to encourage the transfer of technology from government and university labs into private sector applications.

Perhaps most important, Lionel Jospin came to power on a platform of creating new employment, and most new jobs in France come from newly created companies. Indeed, one in five salaried employees in France works in a company that is less than 5 years old.

In 2000, the 272,000 new companies that were created in France generated 540,000 new jobs. This far exceeds the 100,000 jobs estimated to have been created during 2000 by the government’s flagship 35-hour workweek initiative.

Moreover, new high-technology firms accounted for three times as many new jobs as other kinds of new companies. On a visit to Silicon Valley in 1998, President Jospin left impressed by the job-creating potential of small high-tech start-up firms. Yet France at the time had the lowest rate of new company formation in all of Europe.

Thus the promotion of new technology start-ups looked like a valuable source of new, high quality jobs for France.

Silicon Valley à la Française

In order to encourage new company creation, the French government has attempted to emulate policies that lie behind the success of the start-up culture found in the United States. They have worked to encourage private investment in risky ventures and to liberalize stock options. But these reforms have proved politically contentious, and France’s own Silicon Valley, if it succeeds, is likely to look different from its American prototype.

Perhaps ironically, the French government has had to play a guiding role in establishing the financial basis for high-tech innovation in the private sector. These efforts have included government support to seed private venture capital funds, public contests and educational programs promoting entrepreneurship, industry incubators sponsored by public research labs, and an entirely new legal form for companies tailored to the needs of high-tech start-ups. Jospin’s first Economics Minister, Dominique Strauss-Kahn?dubbed “minister of high-tech”?for his enthusiasm with the new economy-invested nearly $100 million from the 1999 sale of stock in France Télécom in a government-funded venture capital program called Public Funds for Venture Capital (FPCR).

New legislation has also made the government a gatekeeper for large volumes of private investment. Investors in France’s new Mutual Funds for Investment in Innovation (FCPI), for example, enjoy a tax exemption for earnings from technology start-ups-but only if target companies have been approved by the French government’s innovation agency, ANVAR. By June 2001, nearly $1.5 billion dollars had been invested in FCPIs. Almost all was directed toward start-ups certified by ANVAR.

France has also encouraged the use of stock option plans. By cutting the tax rate on stock-option earnings, Strauss-Kahn hoped to lure some of France’s technical elite away from prestigious corporate or government career tracks into entrepreneurial start-ups. But in a society committed to the principle of wage equality, the reform proved politically explosive. In September 1999, for example, newspapers revealed that former Elf-Acquitaine CEO, Philippe Jaffré, had received a severance package including an estimated $23 million in stock options.

His lucrative deal fostered an acrimonious debate over the role of stock options in executive compensation. France’s solution has been to create a parallel system of stock options, called Subscription Bonds for Company Founders (BSPCE), that are exclusively for start-up companies. Dubbed stock-options à la française, the BSPCEs enjoy a low tax rate, but are accessible only to high-technology companies less than 15 years old. They also require a four-year vesting period. While the distinction between corporate and entrepreneurial stock options is unknown in the United States, it represents an emerging consensus in France that powerful financial compensation may be socially acceptable, but only if it offsets the real risks of entrepreneurship.

Reform without Deregulation

One of the greatest barriers to economic dynamism in France remains the administrative and regulatory burden on business. Companies in France submit an estimated 130 million separate reports to the government each year. Of these, 90 percent are due to a dozen mandatory labor- and welfare-related déclarations.

This burden of paperwork, what the French call la paperasserie, falls disproportionately on small employers, who do not have specialized accounting departments. A 1999 survey attributed to France the highest level of administrative regulation in the OECD and the second highest barriers (behind Italy) to entrepreneurship.

Entrepreneurs reported at that time that it required 15 weeks to register a new company in France, compared to only two weeks in the United States.

Ironically, government efforts to promote private venture capital and stock options have probably increased rather than decreased the burden of government regulation.

But even la paperasserie is now changing. France is attempting to streamline the way in which business interacts with the government, not by deregulating, but by embracing new technology. In an ambitious move toward e-government, the Jospin government has worked to make administrative forms available on line. Companies can now pay taxes and submit déclarations over the Internet. Already at the beginning of 2001, 20 percent of new company creations were occurring through electronic means.

Thus, far from leading France down the path of deregulation, new information technologies are offering the French government novel ways of perpetuating its intervention in the economy. The goal is to create an economic environment in which entrepreneurs will want to work.