Aperiodic n 12/18 2 May 212 France: strengths to emphasise Current arguments concentrate on France s structural weaknesses and ways to overcome them to liberate its growth potential. Yet France can also front multiple strengths: efficient major corporations with internationally-acknowledged expertise; top-quality infrastructure and skilled labour; increased support for R&D; and relatively dynamic demographics. Showcasing (and advertising) these strengths seems equally as important as correcting the weaknesses. There has been much talk recently about the structural weaknesses in the French economy, with its high social security levies (especially employer payroll taxes), administrative unwieldiness (especially in the labour code), high ratio of public spending to GDP, low price competitiveness and export goods quality, and fragile SMEs (most of whom are neither sufficiently big nor financially robust). But while correcting these points can only help to strengthen the country s competitiveness and boost its growth potential, France can also seek to rely on its strengths and leverage these many assets. Large corporates successful in their fields of activity Although the weaknesses of the French entrepreneurial fabric are often held up for criticism due to their insufficient size and the reduced number of middle-market companies, France can be proud of having plenty of large, world-class corporations. Overall, those large corporates have proved quite resilient in the face of the 28-29 economic crisis. They have been able to recover and continue to compete with their international peers. In the global league tables, French corporates hold a leading place (see chart). The Forbes 2 list, drawn up on the basis of sales, profits, assets, and market value, identified 29 French groups in the top 5 worldwide, in 211. The Fortune 5 league table, drawn up on the basis of sales alone, lists 35 French groups in the top 5. By comparison, Germany has only 22 world-ranking groups in the Forbes list, but closes the gap with France in the Fortune 5, with 34 companies. 18 16 14 12 1 8 6 4 2 Top 5 global groups Forbes 5 Fortune 2 Source: Forbes, Fortune, Crédit Agricole S.A. The economic success of these large groups is driven by their acknowledged expertise in a certain number of areas of activity. French excellence is, for instance, displayed in the energy sector (Total, GDF-Suez, EDF, Areva), aerospace and arms (EADS, Safran, Thales, Dassault), agri-business (Danone, Pernod Ricard, Lactalis), luxury goods (LVMH, PPR), construction (Saint-Gobain, Vinci, Bouygues, Eiffage) and pharmaceuticals (Sanofi- Aventis). In these fields, these businesses occupy a natural leadership position, notably in the energy, transport (aviation) and agri-business sectors, as the concentration of the top ten groups by valueadded and headcount is very high (see chart). In 28, in the energy sector, the top ten groups generated 94% of the value added and employed 92.4% of the workforce.
1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 21 Werner PERDRIZET % Contribution of the top ten groups 1 9 8 7 6 5 4 3 2 1 Agri-business Transports Automotive Energy Added value Source: Insee, Crédit Agricole S.A. Workforce By definition, these large groups, which have achieved sufficient critical mass to export massively, have taken the lion s share on external markets. In an environment marked by a sharp deterioration in the French trade deficit, these sectors are the exception rather than the rule. Whereas the French trade deficit has been widening over for the past decade, their trade balance has either remained in the black, been stable, or in some cases even increased (see chart). In 21, for example, the trade surplus stood at 2.3 billion euros in the Agriculture, Forestry and Fisheries sector, 4.1 billion euros for the Electricity, Gas, and Water Generation and Distribution and Waste Treatment sectors, and 16.9 billion euros for Transport (despite a negative contribution from the automotive sector). EUR Bn 5 4 3 2 1-1 -2-3 -4-5 France: foreign trade balance Trade balance Agriculture, Forestry and Fisheries Electricity, Water, Gas generation and distribution Transport Source : Insee, Crédit Agricole S.A. The contribution of large corporates to the French economy is thus essential. In 29, they generated 33% of the value-added in all except the financial, farming and public administration sectors, employing 3.4 million people (or one in seven wage-earners in all) and raised 4% of private sector R&D funding. In 211, they were responsible for 2% of exports across all sectors. The attractiveness of France The French economy can also rely on a number of strengths to attract foreign investors and so foster the country s economic growth. In the first place, the size of its market and advantageous geographic position in Europe provide a major sales outlet for companies locating there. In terms of GDP, France is the world s fifth-biggest market behind the United States, China, Japan, and Germany. Consumers enjoy considerable purchasing power. Per capita GDP, expressed in purchasing power parity, stands at around 33, dollars lower than in the United States (47,) and Germany (37,) but on a par with Japan (see chart). Moreover, locating in France, which occupies a central place in Europe, opens the doors to the Single European Market. And when one looks at the GDP of the large global regions, the European market is the world s largest, ahead of the United States. In 21, European Union GDP was estimated at 16.282 trillion current dollars compared with 14.657 trillion for the United States. 5 45 4 35 3 25 2 15 1 5 Per capita GDP in Purchasing Power Parity (PPP) and dollars Source: World Bank, Crédit Agricole S.A. Businesses which locate in France also have access to high-productivity, skilled labour. Two indicators highlight the high level of qualification. The first is the proportion of people in the 25-34 age group with a higher-education diploma. France, with a rate of 43.2%, is well above the OECD average of 36% (and even of Germany s 25.7%). A second indicator, namely the number of research personnel per 1, active persons, is also above average, with 8.3 researchers per 1, in France, compared with 6.5 for the European Union as a whole, and 7.6% for Germany. These indicators highlight France s comparative advantage in terms of qualifications, to which should be added high productivity. A comparison of per capita productivity levels, measured by the ratio of volume GDP to the number of people employed, and, more significantly, measured by the ratio of GDP to hours worked, bears out this analysis. In 211, per No. 12/18 2 May 212 2
Werner PERDRIZET capita and hourly productivity were higher than in the main European countries (see chart). 7 6 5 4 3 2 1 211 hourly labour productivity In USD in PPP, 211 Source: Conference Board, Crédit Agricole France can also point to its particularly dense, top-flight transport infrastructure network covering the entire country. Its rail and motorway networks respectively add up to approximately 3,km and 11,km. Rail links with adjacent countries are well developed and fast. In 211, France ranked second in Europe for its high-speed rail network in terms of links between France and the main European capitals. A large-scale air transport network also facilitates international links. In 28, France had 78 important airports (operating over 15, passenger movements per year), a figure comparable to Germany s. This transport infrastructure is also likely to see largescale expansion in the years ahead. The maritime network is also one of the most highly developed in Europe, notably for goods transport (see chart). In 21, the ports of Marseille and Le Havre respectively ranked fourth and sixth among the main European ports by goods tonnage handled, at 82.4 million and 65.8 million tonnes respectively. Goods shipping: top six European ports millions of tonnes 45 396 4 35 3 25 2 15 1 5 16 15 82 73 66 These strengths make France a highly attractive country. Between 2 and 21, France received on average around 46.3 billion euros a year in Foreign Direct Investment (FDI, see chart). The total stock of FDI amounted to the equivalent of 39% of GDP in 21. Foreign countries play an active part in the operation of the economy. In 28, they employed 13% of the workforce (2 million people), created 17% of French valueadded, and accounted for 31% of French exports. In the industrial sector, their contribution is even greater, since they employ a quarter of the workforce, generate 31% of total turnover, and account for 34% of manufacturing exports. French subsidiaries of foreign companies also have an extremely strong presence in R&D activity since they accounted for 2% of total research spending in France in 211. In this respect, the measures implemented over the past decade to encourage R&D have strengthened the attraction of France for many international investors. Main Foreign Direct Investment Inflows in 211 Current USDbn 25 2 15 1 5 Source: Unctad, Crédit Agricole S.A. Strong, reinforced public support for R&D Launched at EU level in 2, the Lisbon Strategy aimed to achieve an investment target equivalent to 3% of GDP for each Member State in terms of public and private investment in R&D (see chart). Although France has been unable to meet the target, the first decade of the new century nevertheless marked a turning point, as the public authorities sought deliberately to develop and encourage innovation and knowledge. As is wellknown, research and innovation are major issues, as the low competitiveness of French products is partly due to non-price factors such as quality and innovation content, as pointed out in the January 212 issue of Perspectives France. The mid-range positioning of French products, combined with declining margins against a backdrop of fierce competition, are notably responsible for the limited corporate investment in R&D. Public support in this area should help offset these weaknesses by encouraging companies to invest to expand into No. 12/18 2 May 212 3
1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 21 Werner PERDRIZET new markets in order to adapt to changes in demand and also move further upscale. During that first decade, several reforms and measures were rolled out in this respect. Among them were the launch of Competitiveness Centres ( pôles de compétitivité ) in 25, the reform of the research tax credit in 28, and programmes for investing in the future ( Grand Emprunt ) in 29. 2,5 2,4 2,3 2,2 2,1 2, 1,9 1,8 1,7 1,6 1,5 R&D spending as % of GDP France EU 27 average Source: Insee, Eurostat, Crédit Agricole S.A. The Competitiveness Centres were launched in July 25. Following a number of mergers and creation of new Centres, these now total 71, compared with 67 when first set up. They group together businesses, research laboratories and training centres, and break down into three categories: Global Centres (7), Centres with a Global vocation (1), and national Centres (54). Public funding for these centres takes the shape of public subsidies and a favourable tax regime involving, eg, tax exemptions and reduced payroll taxes. Apart from simply providing public funds for R&D projects, the Centres are designed to encourage the geographic concentration of players in a particular activity sector in order to drive economies of scale, cut transaction costs among players in a specific sector, and encourage innovation and the accumulation of know-how. The research tax credit, implemented as long ago as 1983, is a tax break aimed at supporting corporate investment in R&D. Since 28, only the volume of spending committed is taken into account when calculating the credit, and the volume is no longer capped. The tax credit amounts to 3% of the total research spend up to 1 million euros and to 5% beyond that figure. In certain conditions, the tax credit for companies that have not benefitted from a tax credit in the previous five years rises to 5% for the first year and 4% for the second, before reverting to the 3% rate. With the reform of this mechanism, public funding for R&D has risen sharply. The OECD has estimated that in France, for each euro spent on research,.37 euros was subsidy in 28, compared to just.6 euros in 21 (see chart). Due to recent budget limitations, the mechanism was tightened slightly in 211. The higher rates referred to above have in particular been cut to 4% and 35% respectively for the first and second years.,5,4,3,2,1 -,1 Tax treatment of R&D: fiscal benefit per dollar invested DEU ITA USA JPN GBR FRA ESP Source: OECD, CA S.A. The investing in the future progammes (programmes d investissements d avenir) bring together all the projects that have benefited from or are benefiting from a 35 billion euro public fund specially set up to invest in the future. For the most part (22 billion euros), the funds are raised by Agence France Trésor on the financial markets. The remaining 13 billion euros of public funding derive from the repayment of funds lent by the State to the banks at the time of the 28-29 financial crisis. Investing in the Future programmes are grouped around five strategic sectors: higher education and training (11 billion euros allocated), research ( 7.9bn), industry sectors and SMEs ( 6.5bn), sustainable development ( 5.1bn) and IT ( 4.5bn). The funds are transferred to several public institutions ( operators like the CDC or Oséo), tasked with selecting projects. By end- August 211, some 4 projects had been chosen (ie, launched) for a total of 12 billion euros, of which 3 billion euros were contracted for and 1.5 billion euros effectively disbursed. Overall, these reforms are making a positive contribution to developing innovation in France and to making the country more attractive to investors. Training, and the increased geographic concentration of companies in a cluster effect, together with their ties to research and training facilities, should foster the emergence of innovative research projects. The mechanism could nevertheless be improved by focusing public funding on a more limited number of projects and by simplifying the administrative procedures, often deemed overly complex and unwieldy. Strong demographic growth 21 28 The dynamic French demographic is also a genuine asset. In Europe, France boasts a fertility rate second only to Ireland s, with 2.3 children per female, compared to the EU average of 1.6 (in No. 12/18 2 May 212 4
Werner PERDRIZET 21). France in fact seems to have sidestepped the post baby-boom second demographic transition with a less-marked drop in fertility than elsewhere. France is one of the few countries more or less able to replace its generations, as its fertility rate of 2.3 children per female (an average of 1.95 over the past decade) is very close to the replacement rate of 2.1 1 (see chart). Fertility rate: average 2-21 Number of children per female 2,5 2, 1,5 1,,5, The central assumption in Insee s population forecasts is based on an average fertility rate of 1.95 children per female from 215 to 26. As a result, while France, like all other countries in Europe, will have to cope with the population ageing phenomenon (an outcome of higher life expectancy and more generations reaching old age) it will feel the impact less, in relative terms (see chart). The French dependency ratio (measured on the basis of the proportion of people over 65, and no longer on that of the 15-64 age group) which currently falls only slightly short of the EU average (25.7% compared with 25,9%) is forecast to grow more slowly, rising to 45.5% by 25 compared with 5.2% at EU level (and 58.2% for Germany). A direct benefit of this is therefore a relatively lower pressure with respect to funding pension requirements given the potential for a stable workforce and not a declining one as in most other European countries. This is because France is forecast to sustain a relatively constant number of persons aged 15-64 over the next 4 years. This population group is forecast to stabilise at around 4 million, whereas it is slated to fall to 37 million individuals at EU level between 21 and 25. % 55 5 45 4 35 3 Demographics: dependency ratio 25 21 215 22 225 23 235 24 245 25 EU 27 France Apart from a relative advantage in terms of pension funding, maintaining an equivalent level of the potential workforce would above all help to bolster France s potential growth (which, to simplify, is the result of growth in the labour force and in productivity gains). The dynamic French demographic, in contrast with that of the rest of Europe, could become a discriminating factor in terms of attractiveness to investors. The French market, due to the foreseeable growth in its population (73 million inhabitants in 25 compared with 65 million now) retains a degree of potential where elsewhere in Europe, the issue will be more one of population decline. 1 This threshold corresponds to the number of children a woman must bear in order to be replaced by one reaching the average fertility age. Crédit Agricole S.A. Group Economic Research 12 place des États-Unis 92127 Montrouge Cedex Chief Editor: Jean-Paul Betbèze Sub-editor: Fabienne Pesty Contact: publication.eco@credit-agricole-sa.fr Website: http://www.credit-agricole.com - Economic Research Subscribe to our free online publications This publication reflects the opinion of Crédit Agricole S.A. on the date of publication, unless otherwise specified (in the case of outside contributors). Such opinion is subject to change without notice. This publication is provided for informational purposes only. The information and analyses contained herein are not to be construed as an offer to sell or as a solicitation whatsoever. Crédit Agricole S.A. and its affiliates shall not be responsible in any manner for direct, indirect, special or consequential damages, however caused, arising therefrom. Crédit Agricole does not warrant the accuracy or completeness of such opinions, nor of the sources of information upon which they are based, although such sources of information are considered reliable. Crédit Agricole S.A. or its affiliates therefore shall not be responsible in any manner for direct, indirect, special or consequential damages, however caused, arising from the disclosure or use of the information contained in this publication. No. 12/18 2 May 212 5