Usefulness of the article: This article explores a new short- and medium-term industrial policy strategy: the development of industrial free zones. The article follows on from a first part that analyzed the evolution of industrial policy in France and the arguments fueling the debate on industrial sovereignty.
Abstract:
- Structural reforms at the industry level are needed, and the recovery plan presents an opportunity to activate certain levers.
- New strategies capable of supporting industrial competitiveness in France could be considered, while ensuring the autonomy of local authorities;
- The urban free zone (ZFUs) and industrial territory initiatives appear to be in line with this objective. However, these measures have certain limitations (lack of a more robust investment environment in ZFUs, lack of more efficient taxation, lack of coordination, etc.).
- The development of an industrial free zone model could represent a viable strategy, serving as an extension of existing initiatives towards the territorialization of industrial policy.
- The creation of a mechanism with the potential to generate positive externalities and sufficient resources to offset its own costs would be key to ensuring the sustainability and longevity of the model.
This article is the second in a series of two articles on industrial sovereignty. The first article, entitled » Industrial sovereignty: should we be concerned? » , explored the issues currently fueling the debate on industrial sovereignty. This article proposes avenues for reflection and short- and medium-term strategies to strengthen industrial sovereignty in France.
In terms of industrial policy, it would be advisable to consider strategies capable of meeting the needs of industry without neglecting the environment, innovation, and territorial balance. Measures that would increase the degree of dynamism (in terms of activity and employment) and autonomy of local authorities could be considered, while supporting economic recovery and industrial competitiveness in France. To this end, the urban free zone (ZFU) and industrial territory initiatives appear to be in line with this objective.
However, these initiatives pave the way for a new, more ambitious strategy: the development of industrial free zones. This new model could represent a viable strategy, serving as an extension of existing initiatives towards the territorialization of industrial policy.
1. The ZFU and Industrial Territories schemes
In 1997, the French government implemented the urban free zone (ZFU) scheme as part of the urban regeneration pact. Through income tax exemptions, this scheme aimed to promote economic development and encourage businesses to set up in these so-called « sensitive » areas, characterized in particular by high unemployment rates. Today, there are 100 ZFUs in France, including seven in the overseas departments (two zones in Guadeloupe, French Guiana, and Réunion, and one zone in Martinique).
Although the initiative has had a lasting impact on economic activity, ensuring a 75% increase in the number of businesses and jobs compared to what would have been the case without the tax subsidies, these positive results are mitigated by a number of inefficiencies:
- First, the scheme is ineffective for part of its target audience, namely companies that already existed in these areas before the subsidies began (no effect on the survival rate, employment, or economic health of these companies).
- A second source of inefficiency stems from the types of companies most encouraged to develop in these areas thanks to tax breaks: service companies. These companies are less likely to stimulate local economic activity, as they operate mainly outside the ZFUs.
- A third factor relates to the disincentives companies face when setting up in these areas: difficulties in hiring local workers with the required skills, low market potential in low-income neighborhoods, poor accessibility for non-local employees, and higher crime rates. (For more details on the evaluation of ZFUs, see Appendix A.1 at the end of the article).
Analysis of these factors could therefore dissuade some public policy makers from pursuing such a model. Nevertheless, the evaluation of ZFUs should not overshadow the potential of the scheme, which would benefit from a few adjustments to achieve a more significant degree of effectiveness. To this end, a more robust investment environment would be needed, comparable to that developed within the Territories of Industry initiative.
Launched at the end of 2018 at the National Industry Council, the national « Territoires d’industrie » program is a strategy known as « industrial reconquest by the territories. » Led by the regions in conjunction with inter-municipal authorities, the scheme aims to provide enhanced support in order to revitalize industry and reduce territorial divides. Comprising 148 territories and 500 inter-municipal communities, the program focuses on four major challenges: attracting, recruiting, innovating, and simplifying (Figure 1). The program will also receive more than €1.3 billion in funding until 2022, primarily dedicated to financing a « basket of services » provided by the State and its operators to develop actions that address the program’s four major challenges (ANCT, 2020).
Figure 1. Scope of the Industrial Territories (2020)
Source: ANCT 2020
In 2020, due to the health crisis, the Industrial Territories were called upon to review their action plans established in 2019, to adapt them to the economic situation and take into account regional recovery plans. The program was thus placed at the heart of the « France Relance » plan presented by the government in September 2020, benefiting from an additional budget of €400 million between now and 2022 from the » Fund for Accelerating Industrial Investment in the Territories »[ii]. This fund aims to finance the most structuring industrial projects for the regions (the creation and expansion of sites, modernization, new equipment, etc.)[iii].
Despite the strong potential of the Industrial Territories, it has some limitations. First, the scheme lacked prior communication withthe territories and neglected regional strategies already in place before its arrival. Furthermore, the initiative does not offer a solution to the issue of taxation in the industrial sector, lacking real coordination between the state and the regions in the search for a more efficient tax system. (For more details on the limitations of the Industrial Territories, see Appendix A.2 at the end of the article).
The ZFU and industrial territory models thus reveal their limitations. Nevertheless, their potential should not be overlooked. A new industrial policy strategy could thus be designed to address certain vulnerabilities in the mechanisms already in place.
2. Going further: an industrial free zone model
The literature highlights the economic advantages of free zones, which are seen as effective industrial policy instruments. Although this mechanism is generally associated with a development strategy widely adopted by emerging and developing economies, it has also demonstrated its ability to generate positive results in developed economies (United States, United Kingdom, France).
The development of an industrial free zone model could serve as an extension of the ZFU and industrial territory initiatives, with the proposed adaptations addressing the limitations of both mechanisms. One proposal would be to maintain the 148 industrial territories, making the necessary adjustments, but also to gradually integrate these adaptations into the existing ZFUs.
The new model could thus be based on certain basic pillars, which could be inspired by the challenges facing industrial territories, adjusting on a case-by-case basis to the specific needs of each region. It could also target the three priorities of the recovery plan, based on ecological transition, competitiveness and innovation, and social and territorial cohesion (Ministry of Economy, Finance and Recovery, 2020).
A first pillar would involve consultation between the State and local authorities to ensure dialogue and coordination of the various measures adopted. It would analyze and determine the needs of each territory and clarify the roles and responsibilities of each actor involved. For example, while local authorities could determine the types of projects and priority areas according to their capacities and needs, the State could be responsible for coordination between territories, ensuring balance and compliance with the objectives previously established by the basic pillars. This council could also adjust the boundaries of each zone, if necessary, in conjunction with existing ZFUs (urban free zones) and industrial territories, and would be supported by specialists, particularly in the industrial field.
A second pillar would concern the development of a more efficient and autonomous tax system, focused mainly on the industrial sector, a key feature of these « industrial free zones. » This taxation system should include the targeting of specific tax exemptions and the selection of potential priority activities and projects to be developed in each region. This selection should take into account local capacities and the potential for job creation and economic revitalization, thereby addressing the obstacles identified with the ZFUs.
For example, this targeting could focus on developing domestic production in certain priority sectors such as pharmaceuticals and medical materials, thereby strengthening resilience and ensuring self-sufficiency in healthcare. It could also target sectors with strong export potential and those where France has comparative advantages (automotive, chemicals, mechanics—including aeronautics, electricity, agri-food, etc.), as well as pro-environment and innovation projects (related to the fifth pillar).
In addition, another idea to be developed would be to possibly reduce or eliminate certain production taxes perceived as « inefficient (in particular the social solidarity contribution for companies (C3S) and the contribution on the added value of companies (CVAE), and/or even property taxes, replacing them with a new and single contribution, known as the « industrial free zone contribution. » This would be applied on the basis of corporate profits, as a kind of local corporate tax, collected directly by the zone and its local authority.
The aim would be to enable the elimination of production taxes already targeted by the government, without threatening territorial autonomy or severing a link perceived as essential between businesses and territories. In addition, the impact of this measure would avoid the distortions associated with double taxation and the » cascade effects » caused by turnover-based taxes such as the C3S. Furthermore, it would ease the tax burden on companies with low profits, such as those in difficulty or those in the process of expanding through new investments.
The third, fourth, fifth, and sixth pillars would be inspired by the four challenges facing industrial regions (which could thus benefit from existing infrastructure and budgets).
The third pillar would therefore concern the management of these territories, guaranteed by the regions in conjunction with inter-municipal authorities, providing the necessary foundations and support in terms of infrastructure and project support.
The fourth pillar would concern the development of training and recruitment programs (which could be mainly aimed at young workers). This would guarantee employers a supply of labor suited to their needs while allowing local workers to benefit from the advantages in terms of job creation. As one of the major challenges facing industrial areas, the financing of this pillar could benefit from the already established budget of €1.3 billion dedicated to the « basket of services » for industrial areas. It could also exploit the tax benefits of ZFUs (urban free zones).
The fifth pillar would be to guarantee effective support for businesses in their transition to innovation (digital and ecological transition). Businesses would be encouraged to pursue this transition through targeted exemptions and subsidies for pro-environmental projects that benefit the digital transition and disruptive innovation (link to the second pillar).
The sixth pillar would concern the simplification and acceleration of administrative procedures in these areas. (ANCT, 2020; Banque des Territoires, 2020).
Figure 2 provides an overview of these basic pillars.
Figure 2. Basic pillars of the Industrial Free Zone model
It is important to note that the effectiveness of the model would depend on the coordination between the main actors: states and local authorities. It would also depend on a clear definition of the roles of each party involved in the development of the basic pillars.
Furthermore, the financing of exemptions should not be overlooked. It would require a budget from the state dedicated to the implementation and development of the scheme. To this end, in the short and medium term, part of the financial targeting of the recovery plan, as well as the missions and resources of the new High Commission for Planning, could be dedicated to this type of scheme. In addition, it could also count on the support of the Caisse des Dépôts as the Bank of the Territories, which has already demonstrated its commitment to industrial development within the territories (for example, the financing of the Territoires d’Industrie).
In the long term, an evaluation of the performance of this new mechanism should be carried out in order to assess the model’s effectiveness and the viability of its sustainability. A long-term sustainable free zone model is one that is capable of generating enough economic activity and employment to be self-financing, with the creation of value and new tax bases (Cavalcanti Teixeira, 2020).
Another important point concerns the regulation of competition policy within the European Union. To avoid being banned under state aid mechanisms, the scheme should initially be dedicated to very small enterprises (VSEs), small and medium-sized enterprises (SMEs), and medium-sized enterprises (MSEs). However, in the long term, this limitation could discourage some companies from developing. Therefore, for greater effectiveness, large companies in priority sectors (health, sectors with strong export potential and comparative advantages, etc.) should not be excluded. In a second phase, it would be appropriate for such a model to be considered at the European level.
Conclusion
Ultimately, a new strategy could emerge from the combination of an urban free zone model and an industrial territory model. However, the State and local authorities should take on the role of genuine « incentive shareholders, » capable of designing an efficient and robust investment environment and tax incentives.
The creation of a system with real potential to generate positive externalities and sufficient resources to offset its own costs would be key to ensuring the sustainability and longevity of the model.
APPENDICES
A.1 Evaluation of the Urban Free Zone scheme
Givord et al. (2011)and Trevien et al. (2012), in their empirical studies evaluating ZFUs, demonstrate a certain degree of effectiveness of the scheme during its early years. The exemptions are said to have enabled the establishment of 9,700 to 12,200 businesses, creating 41,500 to 56,900 jobs between 1997 and 2002. However, from 2002 onwards, at the end of the five-year period of the first exemptions, their effects appear to have plateaued, with the increase in business start-ups being offset by more frequent closures. For the zones created in 2004, the effects on business start-ups and job creation appear to have been much more modest. Furthermore, nearly half of these new establishments would in fact correspond to transfers of existing activities outside the ZFUs. According to INSEE, the number of business relocations to ZFUs was 2.5 times higher than it would have been without the tax exemptions, while the number of genuine business start-ups was twice as high as it would have been otherwise.
The study points out that while the first wave of ZFUs may have had a lasting impact on activity, ensuring a 75% increase in the number of businesses and jobs compared to what would have prevailed without tax subsidies, several arguments mitigate these positive results. While existing businesses benefit from tax reductions similar to those enjoyed by newly established businesses, ZFUs have no impact on employment in existing businesses. The higher level of employment compared to what would have prevailed in the absence of the ZFU policy seems to be linked solely to the location of the new businesses. Givord et al. (2011)suggest that the scheme was ineffective for part of its target, namely businesses that were located in « treated areas » before the start of the treatment. For these businesses, no effect on survival rates, employment, or economic health was observed. This evidence clearly calls into question the relevance of granting eligibility to pre-existing businesses. It would therefore be necessary to study which types of exemptions would be most appropriate for each type of company (for example, measures such as tax exemptions or hiring credits could extend the effectiveness of the scheme to pre-existing businesses).
Furthermore, this positive impact on employment tends to weaken significantly after the first five-year period of tax exemption, as the influx of new businesses into ZFUs does not lead to a significant increase in employment. This can be explained by the types of activities that are most encouraged to develop in these areas, thanks to tax breaks. The impact of ZFUs varies greatly between sectors, with the effect of exemptions being considerable for service companies. These companies are less likely to encourage local economic activity, as they operate mainly outside ZFUs (Trevien et al., 2012). Targeting the manufacturing sector could therefore be considered.
Finally, if companies located in these areas, which encounter difficulties in hiring local workers with the required skills, decide not to set up there, this highlights the fact that tax exemption policies alone are not enough to solve unemployment problems in targeted regions. The development of training and recruitment programs is essential. In addition, certain characteristics of struggling urban areas, such as low market potential in low-income neighborhoods, poor accessibility for non-local employees, and higher crime rates, are also factors that can discourage certain companies from setting up in these areas.
A.2 Industrial Territories: limitations
The industrial territories initiative certainly has great potential to bring about positive externalities and ensure real dynamism within these territories. However, despite the recent nature of the scheme and the lack of empirical evaluation studies, it is already the subject of criticism. Some local elected officials have expressed regret at the lack of prior communication with the territories and the « surprise » nature of its implementation, which they say neglected the redrawing of territories and the regional mechanisms and strategies already in place before its arrival (Banque des Territoires, 2019).
Furthermore, the initiative does not offer a solution to the issue of taxation in the industrial sector. In 2020, the government announced a reduction in certain production taxes (the corporate value-added contribution (CVAE), the corporate property tax (CFE) and the territorial economic contribution (CET) for local authorities) of around €20 billion over two years. However, for local elected officials, this measure represents the disappearance of an essential link between businesses and local areas. This link would enable businesses to demand services and infrastructure for their activities and would encourage local authorities to welcome new businesses. Even though the government has committed to compensating for the financial loss incurred by local authorities, the measure could compromise their fiscal autonomy followingthe abolition of their local taxes and their power to set their own rates.
In response, some local elected officials have criticized the fact that the abolition of these production taxes will affect local taxes and not state taxes such as the corporate social solidarity contribution (C3S). This production tax, which is based on turnover, is considered one of the greatest sources of distortion(particularly « cascade effects »).
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[i]100% exemption from corporate income tax (IS) or income tax (industrial and commercial profits – BIC; non-commercial profits – BNC) for 5 years; 60% exemption in the 6th year; 40% exemption in the 7th year; 20% exemption in the eighth year. Companies, regardless of their legal status and tax regime, located in urban free zones – entrepreneurial territories (ZFU-TE), may benefit from the exemption if they have: 1) Industrial, commercial, craft or liberal activity; 2) Physical presence; 3) A maximum of 50 employees; 4) A maximum annual turnover of €10 million; 5) Whose capital and voting rights must not be held by more than 25% by companies with more than 250 employees and whose annual turnover excluding tax exceeds €50 million or whose total annual balance sheet exceeds €43 million (DILA – Prime Minister, 2021).
[ii] Given the pace of projects, which is higher than anticipated, this €400 million envelope should be fully committed by the end of 2021. In fact, 620 industrial projects in this program have already been pre-identified for a provisional amount of €411 million in subsidies. These projects will represent investments estimated at more than €2.3 billion and the creation of more than 13,350 jobs.
[iii] At the third general meeting of the 148 industrial territories in December 2020, an initial assessment was made: 253 industrial projects havealready been supported by « France Relance ». The total investment for these first 253 selected projects amounts to €1.4 billion and aims to create more than 5,000 jobs. Ninety percent of the projects involve SMEs and mid-cap companies, and 69% are located in areas considered « fragile » (priority neighborhoods under urban policy, rural revitalization areas, etc.)..
[iv]In the early 1960s, Heller and Kauffman (1963) had already begun to discuss the importance of tax exemptions in industry and their potential for value creation. By the late 1980s, Freitas Pinto (1987) was already leading the debate on the creation of special economic zones at the turn of the century. Rodrik and Aiginger (2020) point out that East Asian countries (notably South Korea, China, and Taiwan) have successfully combined planning with market forces. These countries prioritize sectors perceived as strategic and define the technologies to be developed. Companies that follow these strategies obtain access to credit, subsidies, and tax exemptions through specific industrial policy mechanisms such as free trade zones. Other studies, such as Cling et al. (2005), Farole (2011), Siroën and Yucer (2014), Cavalcanti Teixeira (2013; 2014; 2020), among others, have also highlighted the socioeconomic effectiveness of free trade zone schemes.
[v] Although the literature on the impact of free trade zones in developed economies remains limited, some studies attest to the potential of these models in certain countries such as the United States, the United Kingdom, and France. Ham et al. (2011) and Busso et al. (2013) analyzed the North American programs « State Enterprise Zones (ENTZs), » « Federal Empowerment Zones (EMPZs), » and « Federal Enterprise Community (ENTC), » indicating positive and significant effects on local employment rates and wages, as well as a decrease in poverty rates.In addition, in 2019, the British government announced the creation of up to 10 Free Ports across the United Kingdom. These specific free zones, located near major freight hubs, are expected to attract several hundred million pounds of investment and create tens of thousands of jobs. In the post-Brexit context, this strategy could ensure that the UK remains at the center of freight channels, particularly from the US to the European Union (British Ports Association, 2021). Furthermore, the potential of French Urban Free Zones to create jobs and increase activity levels is also highlighted by Givord et al. (2011) and Trevien et al. (2012).
[vi] For more details on the government’s reduction of production taxes and the link between businesses and territories, see Appendix A.2 at the end of the article.
[vii] The territorialization of industrial policy would thus respond to the specific characteristics of each country and territory of the Union. Genuine policy coordination between European territories could be designed to strengthen competitiveness and industrial sovereignty in Europe. To this end, the model could incorporate new post-COVID-19 European industrial policy initiatives as part of discussions on economic recovery and strengthening the resilience of EU countries (European Parliament, 2020; FNAU, 2020; Ledroit, 2020; 2021).
[viii]According to INSEE, the estimated impact on the number of service companies in the region peaked at 1.5 in 2001, meaning that the observed level of these companies in the area is 4.6 higher than the counterfactual level. On the other hand, the estimated impact on retail trade is much lower, reaching only 0.43 at its highest level. This means that the number of retail businesses is 50% higher than its counterfactual level.
[ix] Despite the government’s proposal to reduce this tax burden on production, there is still a lack of genuine coordination and dialogue between the state and the territories in the design of a more efficient tax system.
