Help Wanted: New Strategies Are Necessary to Increase Entrepreneurship in France

The past few years have been challenging for the global economy. Instability has been high, economic growth has stagnated, and employment opportunities for youth in particular have suffered. Global economic players such as the U.S., the U.K., China, and Germany have been mastering the challenges of the economic downturn resiliently. With an ongoing fragility in the economic markets and stagnating growth rates, however, even historically strong global players such as France are facing increasingly serious structural problems, raising questions about whether one of the continent’s largest and most sophisticated economies may become the next sick man of Europe.

For many years now, France has lagged behind other European economies — such as Germany, Switzerland, and Norway — in terms of its per capita GDP (US$35,500 in 2012). By many accounts, France is already moored in malaise. Unemployment is at its highest point since the current record-keeping system began in 1996 (11% at the end of July 2013), and job creation has been on a downward trajectory. Until the 1990s, France was among Europe’s leading economies; by 2010 it had dropped to 11th among the EU-15, ranking higher than only the struggling Southern European countries, such as Spain and Greece. Low labor-force participation and sluggish productivity growth are the main drivers. France’s participation rate has largely stagnated over recent decades, while the participation rate for the EU-15 as a whole has trended upward since 1996. By 2010, the participation gap between France and the EU average had reached two percentage points. Along with the European periphery, France’s labor productivity has fallen by 30% in relation to Germany’s.

Enter the Entrepreneurs

France is home to many successful companies. However, two alarming trends suggest that a revised strategic orientation needs to be adopted to increase entrepreneurship: (1) an entrepreneurial environment with respect to infrastructure and administrative provisions that impedes the creation of small businesses dedicated to solving the problems of today and tomorrow, and (2) a cultural and political environment that does not sufficiently reward and encourage the entrepreneurial spirit.

“There are so many ways that our politicians could facilitate the foundations of young start-ups and they don’t even need to be creative. Examples exist just across the border such as in Belgium,” journalist Mike Butcher argued in an October 2012 article, “How France’s Government Screwed Its Entrepreneurs So Hard They Became Pigeons.”

State aid, in particular, enables the government to share some of the risks that are inherent with starting a business. For instance, a system of credits for research and development (Crédit d’Impôt Recherche) allows businesses to offset 30% of their research and development expenses. There are also multiple forms of state funding, including the Banque Publique d’Investissement (Public Investment Bank or BPI), by which enterprises can access interest-free loans. In addition, the Fonds National pour la Société Numérique (FSN) is a government-backed fund that provides financing for profitable projects in the digital space. Furthermore, entrepreneurs can take advantage of a special créateur d’entreprise status, allowing founders to claim an unemployment benefit. For example, one can work full-time on his/her startup while minimizing salary costs for up to 15 months.

Two alarming trends suggest that a revised strategic orientation needs to be adopted to increase entrepreneurship.

These initiatives have led to several success stories within the French start-up space, including that of Xavier Niel, the billionaire founder of broadband supplier Iliad and the country’s best-known entrepreneur. Additional examples include Marc Simoncini, founder of the dating agency Meetic, and Daniel Marhely, founder of the music-streaming company Deezer, which aims to rival Spotify.

Despite these measures, France lags behind other developed nations in terms of fostering entrepreneurship. In particular, according to the Global Entrepreneurship Monitor 2012, the entrepreneurial ecosystem in France ranks behind that of the U.S., Canada, Australia, the U.K., and Germany. In addition, newly created enterprises in France comprise less than 9% of existing businesses, which is lower than the 12% and 11% found in Germany and the U.K., respectively. Not only are fewer businesses being created in France, but it is also more difficult for companies there to grow. For instance, 93% of enterprises in France have fewer than nine employees, compared to 85% in Germany.

The numerous obstacles currently faced by French entrepreneurs are well-documented: high corporate taxes relative to other developed countries, administrative and judicial difficulties, limited sources of early-stage funding, and labor-market hurdles. François Bordes, the founder of MyCO2, cites the rigidity of the labor market — including the high social charges incurred per employee and the costly measures that make it difficult to fire employees — as one of the greatest hindrances for many startups seeking to expand.

According to Croissance Plus, an organization that studies growing businesses, 75% of surveyed entrepreneurs would increase hiring if social charges were decreased, while 59% would increase their workforce if firing practices were less stringent for firms. Romain Niccoli, co-founder and CTO of Criteo, also believes that a cultural shift is needed. While becoming the next Steve Jobs or Mark Zuckerberg is seen as an attractive career ambition for graduates in San Francisco or London, the entrepreneurial route is often regarded in a negative light in France, where entrepreneurs are perceived as not having succeeded in the recruiting process.

The situation worsened following decisions enacted by the French government. The fall 2012 announcement that capital-gains taxes would increase from 32% to 60% for investors and entrepreneurs led to a furious and viral online campaign by French entrepreneurs, who called themselves les Pigeons. In May 2013, Arnaud Montebourg, the Minister of Industrial Renewal, vetoed Yahoo’s acquisition of DailyMotion, sending yet another negative signal to entrepreneurs dreaming of cashing out to foreign acquirers. In addition, the proposed reduction in the auto-entrepreneur status, a low-tax and low-bureaucracy category created by former President Nicolas Sarkozy in 2012, gave rise to another movement of entrepreneurs called les Poussins, or “the baby birds.” This second uprising of entrepreneurs against the government has further reinforced the image that France is not a friendly environment for start-ups.

Over the past five years, many other countries around the globe have made substantial progress in launching and implementing programs to drive entrepreneurial activity, and their respective economies have benefited considerably from employment growth and productivity gains. Based on France’s cultural, economic, and political starting positions and interviews with several of the country’s foremost entrepreneurs, a roadmap of five key initiatives can be established that has the potential to launch the revival of entrepreneurs in France. These initiatives are focused around fostering educational programs, reinforcing a favorable administrative and legal support network, improving funding sources, advancing cultural-change and mindset programs, and ensuring a beneficial tax system and incentives.

Outside France, numerous corporations play an active role in promoting entrepreneurship in schools, offering conferences and courses that help students develop the required skill-set.

Fostering Educational Programs and Skill-building

Fostering entrepreneurship through educational programs is key to developing young and well-connected entrepreneurs. “One day, one entrepreneur, one student” is a recent French program that encourages students to spend time working with entrepreneurs. This is a favorable starting point to further reinforce the involvement of teachers, parents, and local businesses in developing and implementing these programs across the country. Moreover, HEC, one of the most prestigious business schools in France, has begun to create its own incubator programs to promote entrepreneurship at the college level.

At the same time, while progress has recently been made in France to introduce programs, such as those mentioned above, to foster entrepreneurial attitudes and build the skills of young people, there are still substantial opportunities to expand the curricula and involve the local business community in education. Numerous initiatives drawn from economies worldwide can serve as a basis for action. In the U.S. and Canada, for example, Junior Achievement targets middle- and high-school students; the organization is dedicated to educating these students about workforce readiness, entrepreneurship, and financial literacy through hands-on, experiential programs. Moreover, the Italian employers’ federation, Confindustria, interacts with schools and universities; it has established two-month courses on entrepreneurship skills for young people.

Outside France, numerous corporations play an active role in promoting entrepreneurship in schools, offering conferences and courses that help students develop the required skill-sets. In addition, entrepreneurship is appearing in more school curricula. The subject is discussed at tertiary institutions and is beginning to be included at the secondary level as well. Canada, for example, increased its number of entrepreneurial courses by 22% from 2004 to 2009, and high schools in the U.S. began offering elective courses on entrepreneurship in 1999. “Autovision,” launched by Volkswagen in Germany, is just one outstanding example of close cooperation between a corporation and local municipalities to inspire and provide infrastructure for young entrepreneurs. Mentorships for entrepreneurs and young people seeking to set up their own businesses have been particularly lacking in France.

In addition, Bordes highlights the current number of software programming positions that need to be filled as one example of the mismatches between employees’ skills and employers’ needs. Hence, educational programs that put more emphasis on programming skills and professional retraining programs may help close the skill gap and boost the employment rate.

Reinforcing a Legal Support Network

France needs to do more to create a favorable administrative and legal environment for entrepreneurs. Bordes details how valuable time and resources are spent filling out cumbersome paperwork to meet the government’s administrative requirements, at times requiring multiple iterations, which could be better spent on more productive activities. A new legal entity, created specifically for entrepreneurs, that reduces the administrative burden and reporting requirements, would lower the up-front and on-going costs for a start-up that is already constrained by limited resources. Facilitating the visa process for high-potential entrepreneurs would also increase the availability of qualified human capital and diversify the talent pool to help spur innovation.

At the moment, the government appears to be taking steps in the right direction, including the “simplification shock” announced in July 2013 by French President François Hollande. The purpose of the “shock” is to simplify the complicated bureaucratic process for French businesses, thus reducing the amount of expensive and complex paperwork for small companies. The French government has also adopted the open-data movement by giving the general populace access to large amounts of public data. Thomas Inglebert, a co-founder of VroomVroom.fr, was able to leverage these large datasets to help applicants by increasing the transparency of success rates for driving schools in France. VroomVroom.fr was ultimately named one of the winners of the Dataconnexions 2013 tournament, which enabled the founders to meet with Fleur Pellerin, the appointed Minister Delegate with responsibility for small and medium enterprises, innovation, and the digital economy.

At the moment, the government appears to be taking steps in the right direction, including the “simplification shock” announced in July 2013 by French President François Hollande.

While the BPI provides fiscal aid to small enterprises, France needs to improve and expand the funding sources available to entrepreneurs. According to Croissance Plus, 41% of surveyed French entrepreneurs do not believe the bank can fill the void created by the lack of private funds to finance growing enterprises. In addition, in 2012 the Association Française des Investisseurs pour la Croissance, the French private equity association, declared the lack of available capital to finance SMEs to be an emergency. The total amount of such capital available in France in 2012 was US$6.5 billion, less than half the US$17.6 billion available in the U.K., and a fraction of the US$126.3 billion available in the U.S.

One solution would be to mobilize capital from stable capital sources — such as life-insurance funds, institutional investors, and banks — by creating a guaranteed fund that would limit the losses of one’s investment to appease risk-adverse investors. This vehicle would limit losses to a guaranteed fixed amount (e.g., a loss of 20% of one’s investment). In an environment where strong returns are difficult to come by due to increasing regulations and challenging market conditions, allocating a portion of one’s portfolio to SMEs can represent an attractive risk reward.

Advancing Cultural-change and Mindset Programs

French culture does not place high value on being an entrepreneur. According to the French mindset, working as a civil servant or anonymously in a large company is much more prestigious. In other countries with stronger entrepreneurial spirits, creating an organization from scratch according to one’s own vision is highly respected. Delphine Bourges, a recent graduate of HEC Paris, contrasts her experience working for a start-up in France with what she observed in San Francisco during a school trip as being “markedly different; whereas entrepreneurs are often praised, and even admired, in the United States, entrepreneurship carries a negative stigma in France.”

Moreover, the general perception in France is that capitalism may not always serve society in the best way. Hence, cultural change and mindset programs centered on public campaigns and dedicated community and educational events are necessary to help facilitate the country’s general perceptions of entrepreneurship. The U.S. stands out for developing successful and relevant televised content and offering numerous awards to stimulate entrepreneurship. In addition, countries such as Canada, China, Turkey, and the U.K. broadcast reality shows focused on entrepreneurship.

Furthermore, nationwide efforts to promote entrepreneurship could focus on large-scale initiatives such as the creation of a “Year of the Entrepreneur,” with a calendar of activities that emphasize entrepreneurship and collaboration. To build a French economy that reflects the entrepreneurial spirit, substantial effort should be devoted to changing risk-averse behaviors. The U.S. has successfully established an entrepreneurial culture, where risk-taking is viewed in a positive light. Germany has also launched initiatives to raise awareness — for example, developing tailored campaigns, such as “Entrepreneurship in Germany,” that highlight the benefits of being your own boss.

Ensuring a Beneficial Tax System and Incentives

In 2013, President Hollande trimmed tax breaks and other advantages for small entrepreneurs on the basis that these benefits, introduced under former President Sarkozy, had failed to help business start-ups and were open to abuse. Despite controversies related to the previous system, called auto-entrepreneur, the recent abolition of the tax benefits is a clear signal of the status and role of start-ups in France. The previous system provided start-ups with reduced taxes based on turnover, exemption from VAT, and no business taxes for the first three years.

While France offers the best research tax credit in Europe, the government provides little support and few tax exemptions for entrepreneurs during their first year of business. Many countries have adopted dedicated incentives — such as deferred tax payments in the first year of operation or loss carry-forwards — so that future profits can compensate for initial losses as a result of capital-intensive investments in the first year.

France needs to increase its emphasis on promoting entrepreneurship, particularly due to its potential for increasing economic activity and employment within the country. As documented by various scholars in recent years, including Wharton management professor Mauro Guillén, director of the school’s Joseph H. Lauder Institute, new business-creation activities are a major driver of economic growth in the U.S. and Western Europe. This is especially important when considering the potential entrepreneurial brain drain that may result if the government does not address the key issues. Countries such as Canada, with the implementation of a visa program to attract 50,000 French entrepreneurs, and cities like London, with its earlier events to attract tech startups around the Olympics and its own hosting of the French competition, Le Web, clearly recognize the opportunity to pounce. Now is the time for France to act.

This article was written by Christian Dungl and Daniel Ng, members of the Lauder Class of 2015.

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