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What's American and Envied by France?

Chirac's government has opened yet another front. The purpose: to enhance French competitiveness through large-scale industrial programs, like those used to promote Airbus, the French space program and the French nuclear industry. Even here, France is looking to the United States and agencies like NASA for inspiration. "Don't forget," says Patrick Arthus, another leading economist, "that one of the keys to the U.S. paramount position in the world of R&D stems from the fact that substantial federal funds are injected into military programs that ultimately find civilian applications. In France the military budget is on the decline, so the state has to find different means to promote and finance high-tech research."

The last initiative designed to break France's economic stagnation is to set up a Small Business Administration à la française . A group of French senators and top officials have traveled to the United States to study the U.S. agency. The government has gone halfway toward setting up a comparable structure called OSEO. Launched in January, it merges an agency that promotes innovation in small- and medium-size businesses and a state-owned bank that specializes in financing them.

But key elements are still missing in France. One is the range of advice available to small U.S. businesses. French companies can obtain financial and technical advice through OSEO. However, small companies "do not have access to a network of consultants that provide them with managerial or legal support," says OSEO's president, Jean-Pierre Denis. This helps explain the stunted growth, not only of French startups but of what Denis calls "teenage" businesses.

One example is IDM, a company specializing in cancer immunotherapy. Founded in 1993, IDM opened a California subsidiary in 2002 to gain greater access to capital. "In the field of biotech, where companies usually have to spend a few hundred million dollars before becoming profitable, France cannot cope with maturing companies," says Herve Duchesne de Lamotte, IDM's chief financial officer. "In the U.S., investors are ready to invest approximately 10 times the amount you could raise in France." In March, IDM announced plans to merge with San Diego-based Epimmune, which is listed on Nasdaq. IDM's CEO will run the combined firm, which plans to take IDM's name.

French firms are also hobbled by rigid labor rules and a lack of flexibility that discourages innovation. And businesses are loath to add employees because it's expensive. According to the Organization of Economic Cooperation and Development (OECD), taxes here make up 48 percent of the cost to businesses of paying the average production worker. Among OECD nations, only Germany and Belgium impose higher payroll-related taxes. In the United States, taxes on the average production worker account for only 29 percent of labor costs. For a fraction of the amount paid to unemployed workers, who receive 54 percent of their previous pay for up to two years, the French government could provide incentives for employers by easing taxes on new hires.

It's not just a matter of taxes, though. "The difference is also cultural," explains Thomas White, the counselor for economic affairs at the U.S. Embassy. "It is not a bad word in the United States to be funded by private money or to work on a project that has commercial applications." But in France, there is a chasm between public and basic research on one side and private and applied research on the other.

Patrick Devedjian, until last week the minister of industry, has been on the front line when it comes to rethinking French industrial policy. "The state has been at the center of the country's industrial projects since Louis XIV or Napoleon," he explains, "but the problem today is that the state is locked into its own rigidity."

His ambition to keep the state from stifling innovation and creativity is a laudable one, but the lack of opportunities has driven some of France's most talented research scientists abroad. "Hopefully, our new policy will stop the brain drain, and we are considering using headhunters to bring some top scientists and engineers back," says Devedjian.

This might be easier said than done. For years members of the French scientific elite have gone abroad to find recognition and make a living for themselves in more open-minded environments. It will take more than words to entice them back.

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Anne Dumas, a French citizen, worked in South Africa for the French newsweekly Le Point during the 1980s, owned and ran a gourmet chocolate company in California in the 1990s, and has worked more recently as a journalist and business consultant in Paris.

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