Abstract
• Based on the findings of the 2019 France Attractiveness Scorecard developed by Business France, this article seeks to analyze France’s strengths and weaknesses in terms of economic attractiveness.
• Taxation, labor costs, and the regulatory environment are recurring and well-known shortcomings that undermine France’s competitiveness.
• However, a productive economy focused on high value-added services, an above-average quality of life stimulated by a high level of social benefits, a skilled workforce, and a dynamic financial center are all examples of assets that enhance France’s attractiveness.
• Numerous reforms have been implemented by the Macron administration with the aim of making France the most attractive economy in Europe: examples include corporate and capital tax cuts, simplification of the administrative and regulatory environment, and improvements to the research tax credit
Usefulness of the article: Attractiveness—or a country’s ability to attract and retain foreign investment—is essential for its development in a globalized economy, especially in an uncertain environment recently marked by Brexit and the health and economic crisis caused by the coronavirus.
« France is back. » When Emmanuel Macron uttered these words at the World Economic Forum in Davos in January 2018, he was clearly referring to one of his campaign priorities: to make France the most attractive and competitive economy in Europe. Corporate and capital tax cuts, simplification of the administrative and regulatory environment, and improvements to the research tax credit are among the reforms implemented since 2017 to make France more attractive, particularly to foreign companies and investors.
But how do we define a country’s economic attractiveness? A country’s ability to attract and retain foreign investment depends on many factors, including market size, human capital, research and innovation, infrastructure, the administrative and financial environment, the cost of capital and labor, and quality of life. According to the 2019 Scorecard on France’s attractiveness compiled by Business France and the DG Trésor, the 30,000 foreign companies established in France employ nearly two million people, account for 25% of private R&D spending, and represent 31% of French exports. Attracting international investors is therefore a key challenge.
What are the drivers of France’s attractiveness? Can the policies recently put in place help to increase it?
What do the figures say about France’s attractiveness?
Opinion polls of foreign investors paint a positive picture of France’s attractiveness. According to a Kantar Public study published in January 2019, 88% of foreign business leaders consider France to be attractive, and more than 75% of foreign companies based in France consider their investment to be a success. Even the recent « yellow vest » crisis had little impact on these impressions, as France benefits from structural qualities that we will detail below.
The pro-investment policies implemented by the Macron administration are also having a positive effect, with 61% of respondents to the Kantar survey believing that France’s attractiveness has improved over the last two years. Specific initiatives aimed at attracting foreign companies have also been put in place, such as the provision of turnkey industrial sites and the extension of the French Tech Visa to foreign start-ups based in France. Announcements such as those made by Coca-Cola (€1 billion in investments by 2025), Adecco (€100 million invested in 2020 to train 45,000 people) and AstraZeneca (US$500 million in investments by 2025) were included in the report of the latest « Choose France » summit, although the current health and economic crisis could call them into question.
This impression is confirmed by the investment figures. In 2018, FDI inflows into France totaled €32 billion, placing the country 12th in the world (but only 4th in Europe). In terms of investment decisions, Business France recorded a record 1,323 foreign investment projects in 2018, creating or maintaining 30,000 jobs. According to the EY 2019 barometer of France’s attractiveness, France ranks second among European countries (behind the United Kingdom) in terms of job-creating investment projects, with moderate increases in labor costs and recent tax reforms enabling it to attract 16.2% of all European projects. According to the same barometer, France even ranks first for industrial projects, with notable performances in the fields of pharmaceuticals and biotechnology (29% of European FDI attracted) and chemicals and plastics (25%). France is also the leading host country for research and development activities, accounting for a quarter of all foreign R&D projects recorded in Europe.
France is also attractive to international students, ranking fourth worldwide with nearly 260,000 international students enrolled in higher education in 2017. In terms of doctoral students, France even climbs to third place. While proximity factors, including language, historical ties, geographical distance, and political agreements, have a decisive influence on students’ choices regarding international mobility, economic attractiveness also plays a role, with job prospects after graduation being a key selection criterion.
However, when we look at international rankings measuring economic attractiveness and competitiveness, France’s position varies. Weighed down by perceptions of administrative red tape, France ranks only 31st in the IMD’s World Competitiveness Yearbook, nearly half of whose composite index is based on opinion polls. The same is true for the World Economic Forum’s Global Competitiveness Index, where France’s average ranking (17th) is weighed down by administrative procedures and the regulatory environment. The World Bank’s Ease of Doing Business ranking, which measures the ease of doing business, gives France a median ranking (32nd), with good performance on several important criteria, including contract enforcement, business creation, cross-border trade, and obtaining a building permit, but lower scores in terms of property transfer.
A competitive economy focused on high value-added services
As the world’s sixth largest economy, France is also a member of the world’s second largest market, the European Union, whose free trade rules and geographical proximity give it significant market potential. In terms of domestic demand, France also benefits from a dynamic demographic, stimulated by the highest fertility rate in the EU.
In terms of education and human capital, public investment is only average for Europe, with 5.2% of GDP spent on education in 2016, including 1.4% of GDP on higher education. The assessment of the performance level of 15-year-old students (PISA survey) also places France in an average position, at a level similar to that of the United Kingdom or Sweden. Eurostat figures also place France in the upper middle range of the EU27 in terms of human resources in science and technology (HRST – people employed in science and technology and/or tertiary education graduates), which in 2019 represented more than half of the working population (52.1%).
Similarly, having devoted 2.2% of GDP to domestic R&D expenditure in 2017, France ranks above the EU28 average, but well behind countries such as Germany and Japan, which, however, have a sectoral structure that is much more focused on medium-high technology industries. When these sectoral effects are neutralized, France becomes the second-ranked OECD country in terms of R&D intensity, behind Austria. France also ranks second in the OECD in terms of public support for business R&D, both directly (grants) and indirectly (tax incentives). The Research Tax Credit (CIR), the « young innovative company » status, Bpifrance aid, and the French Tech movement are all measures to promote innovation that have been introduced in recent years. This public support aims to resolve a uniquely French imbalance, characterized by particularly high R&D spending in the public sector but a significant decline in private investment. Recent public policy choices in this direction, such as the CIR, are therefore aimed at closing this gap, with the hope that the medium-term gains in terms of attractiveness, investment, and employment will offset the cost of these measures.
The recent successes of the French tech ecosystem (the opening of the Station F startup campus, record attendance and awards at CES in Las Vegas, and fundraising of over €100 million for Voodoo, Doctolib, and ManoMano) are all rewards for these innovation efforts. Proof of this effort, according to the Kantar Public – Business France Barometer, is that 64% of foreign executives surveyed consider innovation and R&D to be major assets in France’s attractiveness compared to other European countries.
A skilled workforce and a service-oriented economy enable France to enjoy one of the highest hourly labor productivity rates in the world (€61.5 per hour on average nationally, compared to €48.6 for the EU28). However, this high productivity is offset by particularly high labor costs (€35.8 per hour on average nationally), which place France well above the European average (€27.4) in this area. The rise in labor costs has nevertheless been limited in recent years by a series of reductions in employer contributions targeting low wages, as well as by the introduction in 2015 of the tax credit for competitiveness and employment (CICE) – and by wage growth that has been fairly modest compared with our European neighbors (led by Germany). Controlled labor cost growth and increased productivity are therefore enabling France to improve its cost competitiveness.
Administrative and regulatory environment: the Achilles heel of France’s attractiveness
In terms of taxation, France stands out from other countries due to the significant share of social security contributions in compulsory levies, which finance a wide range of public services. Tax revenues in France reached a European record of 46.2% of GDP in 2017, with more than a third coming from social security contributions. In terms of labor taxation, France (quite logically) ranks first among OECD countries in terms of tax burden (taking the example of a married couple with two children and earning the average salary). Although the French government has committed to lowering the corporate tax rate to 25% in 2022, the maximum legal corporate tax rates in France (32%) are currently among the highest in the European Union. However, this high tax rate is offset by a high level of social protection, which is also a fundamental factor in the country’s attractiveness, as we will see later in this article.
In terms of administrative procedures—another area where France scores poorly in international rankings—progress has been made to modernize and streamline public administration. These efforts are particularly evident in the United Nations’ 2018 E-Government Survey, in which France ranks 9th globally for e-government overall, and 2nd for online services.
However, the rate of business creation for the economy as a whole, which has exceeded 9% since 2008, and one of the lowest rates of business closure among European countries (4.9% in 2017) are testament to the quality of the French administrative and regulatory environment. The ease with which businesses can access credit is also highlighted in the Banque de France’s quarterly surveys on businesses’ access to bank financing. In the latest survey, SMEs’ access to cash loans increased by 3 points compared to the first quarter of 2019, reaching an all-time high: 92% of SMEs obtained all or most of the loans they requested, as did 74% of micro-enterprises.
The Paris financial center is weathering Brexit well
Amid the uncertainty surrounding Brexit, the Paris financial center is also strengthening its appeal, both with the establishment of the European Banking Authority in La Défense and through the relocation of subsidiaries and staff from the world’s largest banks (HSBC, Bank of America, J.P. Morgan, etc.).
Proof of this enthusiasm is that Paris outperformed other European cities (led by London) in 2017 and 2018 in terms of commercial real estate transactions. France is the second-largest European country in terms of venture capital investment (0.075% of GDP in 2018) and is also among the leaders in asset management. According to Willis Towers Watson, France accounts for 7.7% of the total assets managed by the world’s 500 largest investment funds, ranking second globally behind the United States, with four asset managers in the global top 25 (AXA Group, Amundi, BNP Paribas, and Natixis Global-Ostrum AM). The Euronext financial market—which includes the Paris, Amsterdam, Brussels, Dublin, Lisbon, and Oslo markets—ranks first in Europe and sixth worldwide in terms of market capitalization.
In terms of banking, France also performs well, with four players in the European top 10 in terms of assets (BNP Paribas, Crédit Agricole, Société Générale, and BPCE), reinforcing the quality of the French universal banking model, which combines all banking and financial operations within a single institution. Although French banks appear to be better capitalized overall than their German, British, Spanish, or Italian competitors, the European Banking Authority’s latest transparency exercise nevertheless identified weaknesses inherent in French banks, particularly in terms of CET1 capital (i.e., the highest quality capital as a proportion of risk-weighted assets) and exposure to level 2 and 3 assets, which are riskier and therefore more difficult to sell in times of stress.
Above-average quality of life and equality
Overall quality of life is also an important factor in the attractiveness of a region, particularly when it comes to attracting mobile international workers to settle there. What sets France apart in this area is that this quality of life is financed by a high level of public spending.
France thus benefits from the level of social protection enjoyed by its residents in many forms (family allowances, paid leave, housing assistance, unemployment benefits, disability pensions, etc.). Public spending on social protection—covering disability, families/children, housing, social exclusion, old age, illness and healthcare, and unemployment benefits—is higher in France (31.2%) than in any other OECD country. Access to healthcare is one of France’s strengths, with very low out-of-pocket expenses for health services (an average of $450 PPP per person, the lowest amount in the OECD), reflecting a strong public financial commitment: in 2018, public health expenditure in France represented 9.3% of GDP, or 83.4% of total health expenditure. However, it is clear that the coronavirus crisis has exposed many structural weaknesses in the French healthcare system, weaknesses that require in-depth reflection on how to better staff, equip, and organize this healthcare system.
Recently implemented policies also aim to improve this situation, in particular the Strategy for Preventing and Combating Poverty, which aims to « build a 21st-century welfare state » that combats inequalities of destiny and provides real equal opportunities (equal opportunities from early childhood, guaranteed training pathways for all young people, creation of a universal basic income, etc.)..
The redistribution operated by this system also helps to reduce differences in living standards. The Gini coefficient, which measures these inequalities, stood at an average level of 0.29 in France in 2016 after redistribution, which is better than in the United Kingdom (0.35) or the United States (0.39) and equivalent to that of Germany (0.29). However, this high level of social protection does not place an excessive burden on household finances: as evidenced by the fact that the adjusted net disposable income of households (total income available to a household before deductions + cash social benefits – direct taxes) averaged $31,304 (current PPP) in 2018, placing France in fourth position within the EU behind Luxembourg, Germany, and Austria.
A widely used index for measuring quality of life and overall well-being is the Human Development Index (HDI) developed by the United Nations Development Programme (UNDP). This composite index is based on three sub-dimensions: health/longevity, education level, and standard of living. The 2018 rankings place France in 24th position among all the countries analyzed, falling into the category of countries with a « very high » index. Nevertheless, our country is slightly below the OECD average, mainly due to a lower average length of schooling (11.4 years compared to 12 years).
Conclusion
While France’s structural shortcomings are well known—taxation, labor costs, and the regulatory environment—it has undeniable advantages that enable it to stand out in terms of attractiveness: a productive economy focused on high value-added services, an above-average quality of life, a skilled workforce, and a dynamic financial center are just a few examples.
The question of attractiveness also arises in light of the structural challenges that lie ahead. In the context of climate change, and following the enthusiasm generated by COP21 in Paris, France also has strengths in terms of the green economy. As Europe’s second-largest producer of primary energy from renewable sources, with most of its electricity generated by nuclear power—and therefore largely carbon-free—France is well on its way to achieving the climate plan’s goal of carbon neutrality by 2050, with greenhouse gas emissions (per thousand inhabitants) placing our country in second place in Europe behind Sweden. As Europe’s third-largest employer in renewable energy in 2017, with 140,700 jobs (0.5% of its working population), France is also benefiting from the economic opportunities generated by green growth.
