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The following OECD assessment and recommendations summarise chapter 3 of the Economic Survey of France published on 28 April 2009.
Heavy social charges are detrimental to innovation and business growth
Because the employment rate is low, the contributions needed to finance Social Security are high, and they add considerably to the tax burden on business, which hampers innovation and thus firms competitiveness. In spite of their well targeted sectoral and geographic specialisation and favourable relative price and cost trends, French exporters have been losing market share since early this decade, with a steadily worsening trade balance. In particular, the technological innovation content of French products seems to be declining, while the search for lower costs has no doubt driven several large firms to shift part of their production offshore. With the appearance of highly export oriented emerging market economies on the world scene, firms in the more advanced countries must constantly innovate, upgrade their product quality and burnish their brand names in order to preserve existing markets and conquer new ones. While French firms have on the whole succeeded in remaining fairly price competitive, this has been done to some extent at the expense of their margins. Lacking the means to invest, they have been obliged to sustain their competitiveness by restructuring, i.e. shedding workers and abandoning the least profitable activities, rather than looking to technological innovation and product differentiation for productivity gains. In this context, apart from horizontal policies to bolster French competitiveness (such as support for R&D), the authorities have introduced a number of measures to encourage firms to look for international opportunities and to assist them in export markets. Targeted sectoral policies that could distort resource allocation between the tradeables and non tradeables sectors should be avoided. The best way to restore competitiveness is to reduce the fiscal, social and administrative burdens that are hobbling business growth, and more broadly to take action on the main determinants of productivity, in particular research, innovation and SME growth.
The governance of public research has been improved
A number of significant reforms have been launched recently to breathe new life into public research by increasing its funding, but also by strengthening its organisation and governance. Creation of the Research and Higher Education Evaluation Agency (AERES) has laid the foundation for evaluating universities and research laboratories more systematically against criteria such as publications and patents. It is important that this principle be reinforced. Indeed, the recent decision to upgrade university career profiles is an opportunity to raise the performance bar for the entire teaching research profession. The reform underway at the CNRS, designed to enhance its co operation with universities and other national research organisations, is a welcome step and should also help improve the productivity of public research. As well, the newly created National Research Agency should be supported and its role expanded inasmuch as it promotes project oriented public research, which will make for a more balanced allocation of resources in comparison with a situation where funds are awarded essentially on an institutional basis.
The universities need still more autonomy
France is in fact the leader among G7 countries for the share of higher education institutions in the total number of patents filed by inventors living in the country, but few of them are actually brought to market. The spillover effects of public research could be enhanced by creating technology transfer and licensing offices in the universities, as a useful supplement to the “business incubators” policy. Finally, the “Universities Freedom and Responsibility Act” has laid the initial groundwork for autonomy in the French universities, which should boost the quality and efficiency of higher education. Notwithstanding the many helpful measures taken to date, however, the effort to reinforce university autonomy should be pursued further, particularly in the areas of budgeting and hiring and remuneration of personnel. This goal would be well served by allowing the universities greater freedom to select incoming students and to set tuition fees. Higher fees should be paired with an expansion of the system of students loans recently introduced.
Government funding should target the most successful “competitiveness clusters”, and the new research tax credit mechanism needs to be assessed
When it comes to public financing of investment in innovation, there are several issues at stake. Various studies of the clusters policy have highlighted the useful role that such policies can play in forging closer linkages between scientific research and industry, especially by co ordinating multi disciplinary research around specific economic and financial challenges (health, environment, etc.). But the potential pitfalls should not be overlooked: these include the difficulty of having the State pick winners in the context of rapidly evolving, globalised markets; the temptation to spread funds too thinly; and the danger that the authorities will be captured by firms with a large stake in the programme. To minimise these risks, it is essential that government financing for competitiveness clusters be made conditional upon results, and funding should be terminated for those that miss their pre established performance goals. For clusters that prove successful, it would be better over the longer run to gradually replace public subsidies with private financing, recognising that a mix of funding sources is especially critical for sparking innovative activities. As to the other major tool of public support for private research, the research tax credit, it is true that the 2008 reform simplified its use considerably and increased its visibility, but at the same time it made it one of the most generous incentives anywhere in the OECD. It will be important, therefore, to monitor its impact closely so as to measure its effectiveness in terms of increasing research effort.
The taxes that weigh most heavily on jobs and investment should be cut and targeted measures for business restructured
One of the main obstacles to business growth is the burden of various levies, foremost of which being social security contributions, the taxe professionnelle and the tax on wages. Because they tax production factors directly, levies of this kind penalise investment and growth. It is therefore important that the government’s recent commitment to make permanent the suspension of the taxe professionnelle in 2010 be implemented, preferably as part of a more comprehensive overhaul of local taxation that would raise the taxe foncière (property tax) and possibly share VAT proceeds. Moreover, even if the effective corporate tax rate is not particularly high by international standards, the gap vis à vis the statutory rate is very wide, thanks to the many exemptions and deductions that narrow the tax base. Apart from reducing the distortions that multiple exemptions inevitably produce, lowering the statutory rate while broadening the tax base would render the tax system more transparent, thereby easing the administrative burden, and make France a more attractive location for investment. A thorough restructuring of targeted support for businesses could help finance a reduction in the tax burden on the productive apparatus as a whole.
Figure 3. Market shares by value and volume in world exports of goods and services
Average annual growth rate, 2000-07
Source: OECD, Economic Outlook No. 84 database.
How to obtain this publication
The complete edition of the Economic Survey of France is available from:
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.
For further information please contact the French Desk at the OECD Economics Department at email@example.com.
The OECD Secretariat's report was prepared by Alain de Serres and Rafal Kierzenkowski under the supervision of Peter Jarrett. Research assistance was provided by Patrizio Sicari.