May 2007
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She Should Know
France's Minister of Foreign
Trade Offers Insights into a New France by ADAM BRUNS, Site Selection Managing Editor,
adam.bruns bounce@conway.com
"The French public have to be more accepting of the need for reform."
Is the 35-hour work week on its way out under newly elected President of the Republic of France Nicolas Sarkozy? How will France's immigrant work force evolve? Will protectionism fade and freer trade arise? Which other changes for multinational business might be in the offing under this 52-year-old leader who is half derided and half praised as "Sarko the American"?
Those projects included the new 600-job GlaxoSmithKline vaccine production plant in Saint-Amand-les-Eaux (a Site Selection Top Deal of 2006), a 300-job FedEx hub expansion at Roissy-CDG and Modern Engineering's new 165-job automotive technical excellence center at Saint Jean de Bonnefonds, near Saint-Etienne, in the Rhône Alpes region. Nevertheless, the country's economy lags behind that of its EU neighbors, growing at 2 percent in 2006, and its unemployment rate is still a high 8.8 percent. Which country led all comers in French job creation and retention in 2006? The U.S., accounting for 23.8 percent of that job total, having created 9,500 jobs in France in 2006. According to French officials, the U.S. is the leading foreign investor in France, with total corporate investments valued at US$171 billion supporting almost 550,000 French jobs, while France is the second-largest investor in the U.S., with corporate investments valued at $43.9 billion supporting almost 600,000 American jobs. Approximately $1 billion in commercial transactions take place between France and the U.S. every business day. Never Indifferent
So, where's the rub?
Lagarde likes to quote a passage from Alexis de Tocqueville's 1850 work L'Ancien Régime et la Révolution [The Old Regime and the Revolution]: "Considered by itself, [ France] seems to me more extraordinary than any event in its history. Has there ever been any other [nation] on earth which was so full of contrasts and extreme actions, prompted by emotion rather than by principles; [...]; the most brilliant and dangerous nation in Europe and the one best suited to become an object of admiration, hatred, pity or terror but never of indifference?" "The images you see are not always flattering about my country," Lagarde told her Atlanta audience. "It is quite a challenge to present to you that yes, it is an open, engaging, engaged, innovative country, very much part of globalization." But the former synchronized swimmer likes challenges, and began this one with a countdown:
"Six ... five ... four ... three ... two ... one," she said. "Six is our rank as an economic power. Five is our rank as an exporter of goods, and four as an exporter of services. Three is our rank as a destination for foreign direct investment. Two is our rank in exporting agricultural products and for productivity, right after Norway, within the OECD countries. And one is for our rank as a tourist destination. "France can actually be a paradise for investors," she said, admitting that it has to overcome cliches about the French that include not only positive things like its gastronomy and savoir vivre, but qualities like arrogance, a "nostalgia for past glory, a tendency to patronize and sympathy for not working too hard or too long," Lagarde said to titters in the audience. But the coiner of the phrase "slow food and fast trains" aimed to storm those barricades of preconception with a fusillade of facts, beginning with the country's portrayal as a protectionist, closed economy. "France is definitively open when you look at the reality of numbers," she said, "and is determined to continue being so. That is part of the policy I've advocated and executed over the past two years." A major initiative from Lagarde has focused on getting more of the country's small and medium sized enterprises (SMEs) to export, whereas barely 5 percent did so. But raking in 58 billion euros in FDI in 2006 was "not bad" either, she said. Why did all of that FDI arrive? It wasn't just the wine and food. "It's clear it's an ecosystem that causes people to join," said Lagarde. "When I talk to people, they say the same thing: France is right in the center of the most prosperous market in the world, with 48 million inhabitants. Second, it has one of the best infrastructure systems in the world — roads, airports, motorways, facilities to transport people, capital and goods. Third is a comment by those who have invested about the productivity of the manpower, skills of people on the ground. And fourth, which even to me is a surprise, is the quality of the labor climate. France is often portrayed as that country where things are working when they're not on strike. But by OECD calculation, the number of strike days is 25 percent lower in the private sector than in the U.S. Transportation is not as wonderful as the private sector. And five, setting up a business is extremely easy and fast, and we work hard to achieve that." Speaking to not-so-rosy themes resonant with Sarkozy's campaign, Lagarde said there is still a lot to be done in reforming the nation's labor code and redefining employment relationships.
"He's a man of action, who wants to get things done, who is driven. France has many politicians with a lot of good ideas, but very few with the passion to act on them. He has real passion."
"Flexibility in hiring is something we need to arrive at one way or another," she said. "The second area that needs reforming is the general tax system — it's more complicated and cumbersome than it needs to be. There have been reforms, but there is more to be done. Third, [we need] a clear reform and change of attitude when it comes to the bureaucratic environment within which business operates." Lagarde said reforms are good when they go unnoticed, and pointed to social security and pension reform and working hours as two areas where the process already has begun. "Clearly the 35 hours brought about by a previous socialist government has not helped the attractiveness, productivity and general culture of French society," she said. "Without tackling it head on, it has such resonance. We're tackling it through 'diversion,' if you will. We brought about some flexibility by freeing up conditions by which some companies can use overtime, made it easier, without restrictions, and reducing cost. From the 36th to 42nd hour per week, the cost of overtime is cheaper than in the U.S." She also mentioned three tax reforms meant to remove barriers to innovation and wealth generation: No taxpayer can pay cumulative taxes equal to more than 60 percent of an income; income taxes in general have been simplified into four brackets, with a maximum marginal income tax rate of 40 percent; and a professional tax has been capped to that it does not apply to massive investment nor to labor intensive activities. Asked in a post-speech interview what she is hearing from corporate decision-makers about the effects of the reforms implemented in 2006 on their likelihood for investing in expansion in France, Lagarde told Site Selection, "Most of them want more. The business community is pleased with the reforms, but clearly they want more reforms to take place, and this is what we're offering with Mr. Sarkozy."  In a Flat World,
In addressing innovation and subsidies, Lagarde said "protected" is a "word I don't like." She pointed to the recent successful landing in the U.S. of the Airbus A380 as a proud moment for France, despite the "bashing of Airbus" over its management and restructuring. And she said France is very focused on research and cluster support in such areas as energy (offering the ITER thermonuclear energy project as an example), IT and nanotechnology ("the French household has one of the highest proportions of broadband connection in the world") and biotech.
Innovation is the Only Safety Net She pointed to the country's university infrastructure, as well as its ties to U.S. universities, exemplified by a new program involving the Georgia Institute of Technology in Atlanta and its campus in the city of Metz in the Lorraine region. The country's National Research Agency had a budget of more than $1 billion in 2006 to finance upstream research, and France's Industrial Innovation Agency had an equal-sized budget to assist business in large technology programs. Finally, the country's cluster development program has more than $2 billion in tax breaks, reduced charges and kickoff grants that it is allotting to 66 different clusters. "Having visited a third of the 66 clusters, I'm pleased to say it's an initiative that has worked," Lagarde said. "We've invested the money in the right hands, or rather in the right brains." In her interview, she pointed in particular to the country's logistics and perfume clusters, the latter being a case where "if you bring about the right level of technology to a sector regarded as heritage from the past, you can develop expertise that is parallel to none." She also pointed to the particular development and research focus of the country's Grands Ecoles, France's equivalent of the Ivy League, but on a smaller scale. The innovation question is an open one, given conclusions drawn by 2006 Nobel Prize-winning economist Edmund S. Phelps in a March 2007 Wall Street Journal article claiming that France and its fellow Continental nations lack an essential economic "dynamism." "Germany, Italy and France appear to possess less dynamism than do the U.S. and the others," he wrote. "Far fewer firms break into the top ranks in the former. And fewer employees are reported to have jobs with extensive freedom in decision-making, which is essential at companies engaged in novel, thus creative, activity." To the question of protecting its agricultural products (she is rumored to be slated for an agricultural post in the Sarkozy administration), Lagarde pointed to the country's EU membership and its dedication to the Doha Round, which is intended to help developing countries move up the development scale, partly via trade.
"All exports from the least developed countries can come into the EU at zero tariffs, zero quota," she said. "Agricultural exports come with no restrictions. The EU takes in 80 percent of agricultural exports from less developed countries — more than all the other OECD countries put together. That's not enough, clearly. To actually support development, we need to add aid for trade, in addition to just lowering or removing the barriers. There is the initiative of 0.75 percent of GDP set up by (then-United Nations Secretary-General) Kofi Annan, but approaching 0.45 percent of our GDP in France is certainly progress. If it could be matched by other countries," she added meaningfully, "it would be extremely nice." "You will say when it comes to letting U.S. farmers export, we're not so keen," she said. "But U.S. authorities are also quite keen on making sure U.S. agriculture continues to prosper." She said that particular relationship is in a bind "simply because we are in agreement that agriculture — food — will be important. With 9 billion people in 2050, where water will be a rare resource, it's clear that food will also be a rare resource. That's why so many countries are keen to secure an agricultural business that can continue to sustain development and feed their populations." In fact, she said, French and U.S. citizens generally share the same attitudes and fears about globalization, and who it's going to swallow up. However the similarities may not be so close: A 2005 University of Maryland study found that half the French citizens polled did not think a free-market economy was the best system. Part of Lagarde's mission is to chip away at that mountain of opinion. In an interview after her speech, she said of globalization, "We all need to appreciate not only the drawbacks — redundancy, movement of facilities — but also the opportunities for impact — access to new markets, opportunities to optimize costs, the clear focus that we need to put on research and innovation." "The whole challenge as we see it is to bring about globalization that will benefit society at large," she said in concluding her remarks. "More sustainable, more equitable, more responsible. Not necessarily running around in our four-wheel drive cars, not spending on moving around, but sharing finite resources. We also think about what is equitable, what is fair in terms of trade. Being responsible falls on each of us as consumers, shareholders and employers, based on good information and good employment practices." Questions and Answers
One immediate consequence of globalization is knocking at the EU's door today, as officials debate whether Turkey ought to be admitted to the European Union. Sarkozy has said he's not so sure it should, but Lagarde offered a more nuanced view.
"As a matter of principle, having Turkey join the EU in some shape or form would be a terrific demonstration that a Muslim country run by a clerical organization and government can actually form a bridge between traditional Europe, which is based on Christianity, and the Muslim world," she said. "I happen to very much like that country and respect the culture and history of that part of the world. I'm not certain personally, and citizens will have to examine whether joining the EU, with what it means in terms of abandoning identity, is compatible with a very strong sense of national identity and pride. Abandoning national sovereiqnty is not like an FTA [free trade agreement], it's a lot more than that." A KPMG consultant in the audience remarked that the European Commission has been successful in maintaining a relatively level playing field, perhaps more so than in the U.S. "Quite a few businesses are not so keen on the competition policies of the EC," said Lagarde, but she repeated its charge to destroy cartels and to reduce the negative consequences of abuse of dominant positions. "What will be interesting to watch will be the level of cooperation between EU and U.S. authorities," she said. "There already is a connection between anti-trust authorities within Europe, bringing about a level of harmony in terms of doctrine and decisions. We always remember the bad ones, where authorities have diverged, but there are hundreds of decisions rendered on similar grounds as a result of cooperation. On the regulatory side, it's interesting to watch as well, in changes just by the markets themselves. The merger between Euronext and the NYSE will bring financial authorities to compare notes, with better equality between shareholders and the same general principles. We hope it will not be more rigorous and harmful to business, but will bring in integrity and fairness to business practices without being too heavy." "Today in France and Italy there has been substantial outward mobility of young people to countries where tax rates and social benefits are lower. When France was adding benefits upon benefits to its welfare state, it was supposed that the labor force in France had nowhere else to go. That appears to be no longer so. Still, most working-age people have ties to their country that are difficult to break."
Finally, a French expatriate in the audience asked a question that many U.S. parents and businesspeople are asking about their own territories: "What do you say to a young adult in France who studied science, who wants to go into biotech, when he sees that five Nobel prizes have been given to American citizens, and when he hears that tax is a maximum of 60 percent in France, when it is much lower in the U.S.? What do you do to make him stay?" Lagarde said her sons are in that category. But her answer had professional as well as personal resonance. "Life does not revolve around a tax break or rate," she said. "Having been taxed for six years in Chicago and coming back to France, there's not that big a difference — about 10 percent — and I wasn't in the lowest bracket. A purely tax-driven decision is going to be a bad decision. On the Nobel Prize issue, it's very much a matter of research having been encouraged for much longer, and the pool of talent being much larger in the U.S. And it's a focus on R&D, on faculty, on encouraging research at the right level. It's a mix that is extremely conducive to research. Maybe I will tell my son to go to the U.S., study for a while, do some R&D, but come back. This is what is happening with the Indian community, the Chinese community. There is a bit of a brain drain at the moment, tempted by London, Georgia Tech and others. But there are people who come back." The question, she said in reference to the then-looming election, is how to create an environment conducive to that kind of homecoming.
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