France Doubles Down on Dirigisme
June 30, 2014 --
This past February, French President François Hollande pledged to a group of foreign investors, “France is going to become simple—that has not always been our image abroad.” Fast-forward to April, when the U.S.-based multinational General Electric submitted an offer for the energy business of a French nuclear company, Alstom. A perfect opportunity, it would seem, to put President Hollande’s “simple” pledge into action.
Alas, simplicity did not prevail. GE had to skillfully navigate through many meetings with many government officials (including an appearance before the National Assembly) and many refinements to its initial offer. GE ultimately agreed to enter a joint venture with the French government for Alstom’s power-grid operations, wind and hydro power businesses, and steam turbines for nuclear power stations. One notable refinement: GE had to promise to create 1,000 new “high-value” jobs in France over the next three years—with financial penalties if the goal is not met. After the acquisition was approved by Alstom’s board last Saturday, France’s economy minister, Arnaud Montebourg, trumpeted the process as “an undeniable political success for the return in force of the state in the economy.” Peut-être. But political success need not mean economic success.
Just a few days after Monsieur Montebourg spoke, the United Nations Conference on Trade and Development released its authoritative annual report on global trends in foreign direct investment. FDI into France has been plunging. Annual inflows have fallen from an average of $84 billion in 2005-07 to $38.5 billion in 2011, $25 billion in 2012, and not even $5 billion in 2013. That amounts to only 0.2 percent of the country’s gross domestic product—markedly below the 1.4-percent-of-GDP average among the other 33 advanced economies that are part of the Organization for Economic Cooperation and Development.
Many factors can explain any one country’s FDI trends. But one overarching issue is always that country’s broad policy environment toward global companies. Do that country’s laws and regulations provide transparent market access? Genuine national treatment? Robust protection of intellectual property? As we noted last year, when the French government blocked an attempt by Yahoo! to buy a 75 percent stake in France’s equivalent of YouTube, a hostile public-policy environment can trump a country’s other economic advantages.
The Alstom/GE episode underscores that France is not exactly putting out the welcome mat to the world’s leading global companies. Indeed, as the Alstom episode played out, the French government issued a decree empowering the government to block acquisitions in a wide range of industries, including water and health. Monsier Montebourg rationalized the government’s intervention in the Alstom/GE tie-up thus: “It builds alliances rather than allowing France to become a giant shopping center for foreign corporations to come and prey on our companies.”
This image of global companies as rapacious predators is not uncommon. It is also at odds with a preponderance of scholarly evidence that these companies tend to be among the world’s most innovative, productive, export-intensive, and high-wage. Yes, global companies often do expand abroad through M&A transactions. And yes, such transactions often change the companies involved. But politically constraining these transactions means constraining the overall economic gains these global companies tend to bring.
France’s dirigisme matters because it is unfolding amidst a grim French economy. The country’s unemployment rate is 10.1 percent, and the national statistics bureau projects it will continue to rise. This bureau also projects that French GDP will grow in 2014 by just 0.7 percent. Policies that constrain inward FDI only aggravate economic challenges like these.
Some policy leaders in France recognize the challenges at hand. France’s central bank governor, Christian Noyer, pinpointed some of what ails France in an essay he wrote last year: “Public policies are often overly concerned with preserving the jobs of the past, at times to the detriment of future job creation.” He added that, “For the past 10 years, France has had one of the highest levels of public spending in the world. Over a certain threshold, which our country has probably crossed, any increase in public spending and debt has extremely negative effects on confidence.”
That diminished confidence has contributed to a general sense of malaise evident today in many ways. One byproduct of the weak economy: rising emigration. The Foreign Ministry revealed earlier this year that the number of French citizens living outside the country has risen by 60 percent over the past 14 years, giving rise to fears in Le Monde and elsewhere about a continued wave of les expatries. And the bleak conditions contributed to the xenophobic National Front party winning close to 25 percent of the national vote in last month’s European Parliament elections.
France had a glorious past, and today France retains many economic strengths. That said, clinging to policies of the past will ensure the country’s future is anything but glorious.
Articles © 2014 Matthew Slaughter and Matthew Rees. All rights reserved.
Publication © 2014 Trustees of Dartmouth College. All rights reserved.