France: Selected Issues Paper
Author:
International Monetary Fund. European Dept.
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Publication Date:
05 Aug 2013
eISBN:
9781484389133
Language:
English
Keywords:
ISCR; CR; potential GDP; France; spending; company performance; firm size; EFIGE survey data; high-tech enterprise; medium-to-large firm; Export performance; Manufacturing; Competition
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This Selected Issues paper examines external developments and competitiveness in France. Over the past decade, the current account has deteriorated from a surplus of 1.2 percent of GDP in 2002 to a deficit of about 2.3 percent in 2012, as France lost ground in goods trade and services recorded just a slight increase in global market shares. The slight improvement of the trade deficit seen in 2012 may suggest a change in trend, although it is still too early to determine. Past deterioration in export performance points to competitiveness weaknesses, rooted in significant rigidities in labor and product markets.

Abstract

This Selected Issues paper examines external developments and competitiveness in France. Over the past decade, the current account has deteriorated from a surplus of 1.2 percent of GDP in 2002 to a deficit of about 2.3 percent in 2012, as France lost ground in goods trade and services recorded just a slight increase in global market shares. The slight improvement of the trade deficit seen in 2012 may suggest a change in trend, although it is still too early to determine. Past deterioration in export performance points to competitiveness weaknesses, rooted in significant rigidities in labor and product markets.

French Firms and Globalization1

This note (i) reviews trends in exports and investment at the sector level leading to the introduction of the euro and post-euro and their bearing on the near-term outlook; (ii) analyzes the potential drivers of France’s expanding industrial capacity during 2003 to 2011 (profitability, sales, and leverage); (iii) discusses challenges to French industrial firms’ competitiveness, including non-cost (regulatory) factors, low average efficiency2, high dependence on external financing, and insufficient research; and (iv) discusses industrial firms’ performance during the 2007 to 2009 financial crisis.

A. Export and Investment Trends

1. Export performance has deteriorated since the introduction of the euro (Figure 1). This is due to worsening competitiveness and profitability by the export-oriented sectors (see below). Uncompetitive jobs in the manufacturing sector which accounts for the bulk of export growth are vanishing: 400,000 have been lost in the past five years. While Germany has lost about a fifth of its share of world exports, France has lost nearly 40 percent of its share since the euro was launched.3 The share of the manufacturing sector in GDP is the lowest among Eurozone countries: around 10 percent of GDP in the first quarter of 2013. A historically resilient domestic demand growth has been insufficient to offset the low contribution of net exports, and the average annual real GDP growth (moving average over a past seven-year period to net out business cycle effects) has trended down since 2000, reaching 0.75 percent in 2012, its lowest level in five decades.

Figure 1.
Figure 1.

Investment Expansion. France

Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A004

uA04fig01

Gross Value Added in Manufacturing

(Percent of GDP, constant prices)

Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A004

Source: Haver Analytics.
uA04fig02

Real GDP Growth

(in percent)

Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A004

Sources: Haver/INSEE.1/ Past 7 years, moving average.

2. The ratio of fixed investment to GDP in France is high by EU standards. During the trough of the last pre-euro investment cycle in 1997, it was 17 percent of GDP; in 2012, it was 20 percent (Figure 1). This surge of over 3 percentage points represents new capital expenditures of over €187 billion, broadly equivalent to the nominal GDP of Greece or Finland. Growth in investment occurred despite lower profitability. French NFCs’ profitability (measured by return on assets) fell during the 2008-09 crisis and failed to rebound strongly post-crisis—in contrast to Germany, where NFCs experienced only a temporary set-back during 2008 to 2009 and where profitability in 2011 exceeded pre-crisis levels. Profit margins (gross operating profit-to-turnover) meanwhile are low compared to other major European countries, and also failed to rebound post-crisis.

uA04fig03

Return on Assets 1/

(In percent)

Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A004

Source: BACH database.1/ Net operating profit to total assets ratio.
uA04fig04

Profit Margins 1/

(In percent)

Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A004

Source: BACH database.1/ Gross operating profit to turnover ratio.

3. The post-Euro capacity expansion was directed mainly to non-tradable goods. Investment in construction was the biggest driver, accounting for 58 percent of investment growth since 2003 (Figure 1). Investment in capital goods, transport equipment, and other industrial goods accounted for 16 percent. Investment in information and communication and other market services accounted for over a quarter of investment growth during 2003 to 2012 (26 percent). While investment in construction resumed strong growth in 2011 and 2012 after two consecutive years of contraction, investment in industrial goods remains depressed after a cyclical rebound in 2010 and 2011 came to an abrupt halt last year. Relative to GDP, investment in industrial goods was marginally lower in 2012 at 4.8 percent than during the pre-euro trough in 1997 (4.9 percent).

4. The biggest share of export growth during the same period—about 78 percent—came from industrial goods (Figure 1). Export performance has rebounded strongly post-crisis, but without a corresponding increase in investment in capital goods and other industrial goods. The contraction in investment in industrial goods in 2012 is worrisome for external performance if it persists over time, as it would imply a lack of needed upgrade and modernization of equipment and capital. Moreover, a recent survey by INSEE showed that French businesses in manufacturing expect to cut investment by 4 percent in 2013, while in January 2013 they expected to keep investment at the same level as in 2012.4 The next section examines the drivers of capacity expansion in industry at the sector level (including profitability, sales revenue, and leverage) with the aim of shedding light on the factors that may influence the near-term outlook for industry-led investment and, by extension, industrial employment, export growth, and competitiveness.5

B. Capacity Expansion in Industry and Profit Margins

5. Capacity expansion in industry has occurred despite most French industrial corporations operating under tight profit margins. Even though capacity in industry has not expanded as much as in services or construction since 2003, it has kept up pace with GDP up until last year, whereas industrial profit margins have been falling over the same period (Figure 2). The resilience of industrial firms’ investment is difficult to reconcile with lower returns on sales.

Figure 2.
Figure 2.

Profit Margins: Industrial Sectors

(in percent)

Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A004

Source: Banque de France (BACH database); and IMF staff calculations.

6. We have attempted to shed light on the investment behavior of French industrial firms with an analysis of 26 industrial sectors covering the energy sector plus manufacturing. The results provide potentially important insights into the investment behavior of French industrial corporations. Profit margins (defined as operating profits over revenue from sales) of manufacturing firms have been trending down and averaged about 5-6 percent over the past ten years. Profit margins in the energy sector are stronger (about double) those of manufacturing firms, but have also been falling during 2003 to 2011. Across manufacturing sectors, the automotive, coking and refining, and computer and electronic product industries face the lowest margins (Figure 3). Strong margins in the leather industry and footwear, and among manufacture of beverages and pharmaceutical companies may help explain the capacity build-up in those sectors.6

Figure 3.
Figure 3.

French Industrial Firms: Profit Margins

Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A004

Sources: Banque de France (BACH database) and IMF staff calculations.Notes: A blue box represents an increase in operating margins over the period 2003 to 2011, while a red box represents a decrease. The minimum (maximum) value over the period is denoted by a triangle (diamond).

7. We attempt to gain a clearer picture of the dynamics underlying the relationship between profitability and capital expenditure by looking at the correlations between change in tangible fixed assets and the following variables:

  • Profitability growth

  • Profit margins (average gross operating profits-to-sales ratio)

  • Change in profit margins (net change in average gross operating profits-to-sales ratio)

  • Sales revenue (turnover)

  • Liabilities (average liabilities-to-assets ratio) and

  • Change in liabilities (net change in liabilities-to-assets ratio), where “liabilities” is defined as all financial liabilities including, but not limited to, borrowings.

8. Bivariate regression results and scatter plot charts of these relationships from 2003 to 2011 are shown in Figure 4. Some key observations arise from the analysis:

  • Profitability growth (change in profits) and the change in profit margins show a negative relationship with capital expenditure growth, suggesting that firms which experienced worsening profit margins were still able to increase capacity.

  • The average profit margin has a strong positive influence on investment growth.

  • Sales revenue growth (change in turnover) shows very little correlation with capital expenditure growth and does not appear to be a major driver of France’s industrial capacity expansion.

  • High financial liabilities do not seem either to be a constraining factor in investment activities. The analysis shows that investment behavior is little influenced by debt levels.

  • Net change in liabilities is supposed to have a negative correlation with capital expenditure growth, but our analysis finds only a weak (negative) relationship.

Figure 4.
Figure 4.

France: Industrial Firm Investment, 2003 vs. 2011

Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A004

Sources : Banque de France (BACH database); and IMF staff calculations.

9. These observations point to low profitability as a key constraint for French industrial firms attempting to grow business scale. Faced with low margins, firms have limited ability to self-finance investment. The impact on investment in aggregate has been offset partly, however, by continued access to external financing which enabled firms to increase capacity even as they faced falling margins. The pattern of firms’ behavior also suggests that neither the level of financial liabilities nor their change over time has much influence on investment growth. This finding implies that current debt levels are not constraining access to finance by being perceived as too high. Despite recent increases, average indebtedness of the non-financial corporate sector remains moderate compared to other major advanced countries.7

10. The declining trend in average profit margins over time masks important differences across firms; it is too early, however, to identify an impact of different profit trends on investment behavior. A closer look at the profitability patterns over time shows that, while most firms have faced falling margins (including both large and small firms, and highly indebted vs. less indebted firms), some companies have succeeded in raising profitability since 2008. Those include firms which have (i) contained staff costs and (ii) incurred lower debt servicing costs (Figure 5). Since the improved profitability of this subset of industrial firms (with lower than average wage costs and interest burden8) is recent, it may be too early yet to identify its impact on investment behavior. Figure 5 shows the investment (in percent of total balance sheet) for the subset of firms above, and there is no evidence yet that their recently improved profitability has resulted in higher investment. Going forward, however, those firms appear well positioned to increase capacity in response to an upswing in demand.

Figure 5.
Figure 5.

French Manufacturing Firms: Average Gross Profit Margins

(in percent)

Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A004

Source: Banque de France (BACH database); and IMF staff calculations.

C. The Erosion of Competitiveness: Evidence from Enterprise-Level Data

11. The manufacturing sector’s competitiveness gap is long-standing and pre-dates the crisis. This section relies on internationally comparable and harmonized enterprise-level EFIGE survey data to assess differences in international competitiveness both within France and between France and other major European countries.9 By measuring the entire range of international activities of firms, the EFIGE data provide a richer picture of a country’s external or international competitiveness, overcoming the limits of standard competitiveness measures (e.g., unit labor costs) by allowing for heterogeneity in firm performance and by allowing the identification of a full set of features which make firms internationally competitive. Notwithstanding the usual limitations of survey data (e.g., reliance on self-reporting and interpretation by respondents of the questions and data availability only for a single point in time), the EFIGE dataset currently provides the most comprehensive and publicly available set of indicators (both quantitative and qualitative) of European firms’ innovation and international activities pre-crisis and during the crisis. Altomonte, et al. (2012) find that international exposure is positively correlated with firm performance measured by its TFP level, hence we focus on TFP as our preferred measure of competitiveness. The comparatively low productivity of French manufacturing firms prior to the crisis is reflected in low TFP relative to other major EU countries (Figure 6 and Appendix Table 1). The TFP level (or efficiency, measured in log) on average for firms sampled in the EFIGE survey during 2001 to 2007 was -0.1, compared to 0.2 in Germany and 0.1 in the U.K. Italian firms had the lowest TFP levels during the same period (at around -0.2).10 Both French and German firms showed resilience during the crisis compared to their peers in the U.K. or Italy, which experienced a comparatively large TFP contraction in 2008-09 relative to 2001–07, but average TFP in France in 2008–09 was still lower than in Germany.

Figure 6.
Figure 6.

Total Factor Productivity

Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A004

Source: EFIGE Suvery.

12. Low competitiveness in turn has led to export weakness. Based on export share (measured by the ratio of exports to turnover), French firms are the least internationally active among the EU4. The average export share in 2008 (at the time the EFIGE survey was conducted) was 29½ percent, 1¾ percentage points below Germany and 6¼ percentage points below Italy.

13. Investment has also been lagging. The firm-level evidence suggests that French manufacturing firms invest less than their counterparts in the EU4, with investment ratios (investment-to-turnover ratio) averaging 8¼ percent compared to almost 12 percent for German firms and close to 9 percent for Italian and UK ones. The weakness of export growth and the resulting perception of a lack of demand (see below) may have contributed to the low investment levels.

14. Weak ability to export and investment by tradable sectors are symptoms of a “competitiveness gap” and can be traced down to several inter-related factors. Competitiveness in this study is looked at through three different lenses: (i) investment ratio (investment/turnover); (ii) export share (exports/turnover); and (iii) the level of TFP, a measure of the efficiency with which firms utilize resources (capital and labor). The latter is our preferred measure of competitiveness as investment and exports also reflect sector and cyclical effects. A competitiveness “gap” is indicated by the distance between France and the best EU4 performer (Germany) in terms of TFP levels.11 France’s competitiveness gap as so defined is larger than that of the UK and smaller than that of Italy (Figure 6). Based on this paper’s results, two sets of factors appear to be the root cause of the competitiveness problems, including (1) some key characteristics of French NFCs which constrain their international activities and (2) the broader operating environment, including the regulatory framework and other country-specific, structural, factors. As relates to (1), the main findings of the analysis can be summarized as follows:

  • First, a size effect (high proportion of very small firms) seems to hinder competitiveness—broadly defined as the capacity to innovate and expand operations abroad. Almost three-quarters of firms surveyed are under 49 employees in France, compared to less than two-thirds in Germany. Given the plethora of firms with less than 50 employees, the median firm size is 27, similar to Italy (26), but lower than in the U.K. (29) and Germany (35). In a related vein, a comparatively large share (13¾ percent) of French enterprises feel that their scale of production is not adequate (compared to less than 8 percent for their German peers). Econometric results confirm that size is a significant determinant of ability to engage in export activities both directly and through the indirect impact on efficiency (TFP). The threshold for significantly higher export orientation seems to be 200 employees based on the regression findings, and 500 employees in the case of TFP implying that the medium-to-large firms (over 200 employees) are more likely to export and the largest firms (with over 500 employees) are statistically and significantly more efficient than the other firm categories ceteris paribus;12 by contrast, size appears to make no significant difference across French firms for investment activities.

  • Second, a relative lack of innovation is also a key obstacle to competitiveness. The overall level of research and development (R&D) and innovation (revenue from innovative products sale) in France’s manufacturing sector is lower than in EU4 peers. While French firms in some industries (e.g., high tech industries) have a relatively high research intensity compared, for example, to their German peers, the average R&D investment is lower than in Germany, reflecting in part differences in industrial structure between the two countries.13 The low level of R&D activities in turn appears as a key determinant of both export orientation and investment activity.

  • Third, firms are more dependent on external finance than EU4 peers, both for investment and R&D activities,14 and control by large owners is somewhat less than in Germany15; our results suggest that both of these characteristics (the ability to self-finance investment and ownership concentration) are statistically and significantly related to export capacity (both directly and via the indirect positive effect on TFP).

  • Fourth, while both French and German firms receive generous financial incentives in comparison to EU4 peers (around one fifth of NFCs report benefiting from financial incentives provided by the public sector in both countries compared to 9 percent in the U.K. and 14 percent in Italy), France’s manufacturing sector (similar to Italy) benefits from tax incentives to a larger extent than the U.K. or Germany (around 23 percent of NFCs in France and Italy report benefiting from tax incentives, more than twice the share reported in the U.K. or Germany); findings from the regression analysis suggest that financial and tax incentives support the ability to engage in international activities ceteris paribus, however they have no significant effect on TFP and only financial incentives have an effect on investment, thus the channel through which such incentives raise the ability to export remains unclear.

  • Fifth, France’s manufacturing industries seem to have less market power than EU4 peers. A higher proportion of French firms (41¾ percent) report being price-takers (i.e., face prices fixed by the market) compared to shares of 32¼ to 39¼ percent in the other EU4 countries). The lack of market power statistically does not seem to constrain capacity to export or investment; however we find that firms lacking pricing power curtailed investment plans more severely during the crisis.

  • Lastly, the manufacturing sector’s reliance on offshore production (i.e., the extent of activities carried out through foreign direct investment (FDI) in either offshore affiliates or foreign controlled firms, and the production activities through contracts or agreements with foreign local firms) does not seem noticeably different from that of EU4 peers except the U.K., where there is greater use of production through FDI and contracts or agreements with foreign local firms than in the other countries. Econometrically, reliance on production abroad does not seem to be a significant factor contributing to differences in competitiveness across French firms.

uA04fig05

Industrial Firms

percent of firms, number of employees

Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A004

Source: EFIGE Survey.

15. French firms are also at a disadvantage compared to European peers due to a less favorable operating environment and an orientation toward lower-growth export markets (Figure 7).

Figure 7.
Figure 7.

Factors Preventing Growth: Industrial Firms

(in percent of all firms surveyed)

Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A004

Source: EFIGE Survey

  • Nearly half of firms surveyed consider that legislative and bureaucratic restrictions prevent their growth and 40 percent feel that labor market regulations restrict growth. By contrast, less than 10 percent of German and U.K. firms consider legal and bureaucratic regulations as an obstacle to growth and less than 5 percent mention labor market regulation as a factor preventing growth.

  • A majority (59 percent) of French companies report facing lack of demand. This in turn partly reflects the traditional orientation of exports toward “old” markets and difficulty of expanding in “new” markets. Over 55 percent of exports in 2012 were directed toward slower growth markets (including Europe, US, and Japan) and only 13 percent toward faster growing emerging countries.

uA04fig06

Average Real GDP Growth 2000-2011

Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A004

Sources: IMF; WEO and DOT.

16. The next section presents stylized facts and regression results on the factors underlying French firms’ ability to grow, innovate, and expand in new markets. The survey responses refer to the period 2007 to 2009, although some questions describe changes that took place in 2009 compared to 2008. The latter allow us to explore whether characteristics that affect firm performance during “tranquil” times also makes them more or less resilient during “crisis” times. The survey results are summarized in Appendix Table 1. In the case of France, Appendix Table 1 shows the break-down of survey responses by size (measured by both workforce and turnover), sector (high-tech, traditional, specialized, and economies of scale industries), and export intensity. For the comparator countries, only averages are shown due to space constraints.16 The next section presents the results of detailed analysis of the French survey data (about 3,000 individual firm observations), as well as cross-section regression results for the same sample.17

Firm Characteristics

17. Firm size appears to constrain export performance by hampering the ability to compete in economies of scale and high-tech products. Size (measured both by workforce and revenue) appears positively correlated with international activities measured by the export share. While large firms (turnover of more than €250 million) export almost half of their turnover on average, small firms (turnover under €1 million) export only 27 percent. There also seems to be a size threshold for participation in economies of scale and high-tech industries, possibly because of high fixed costs associated with these activities. Since those industries are also the most export-oriented, this could be an important channel through which size affects export performance.

18. In aggregate, size also seems to hinder innovation. Research and development (R&D) activities in the French manufacturing sector appear to be carried out at both ends of the spectrum, i.e. by the smallest and the largest firms. The smallest firms (less than 50 employees) invest around 7 percent of their turnover in R&D (compared to 7¾ percent for the companies with 500+ employees) and they also derive a relatively high share of revenue from innovative products (20½ percent vs. around 21 percent for the firms with 500 employees or more). On average, however, French firms lag behind EU4 peers in terms of both innovation indicators, suggesting that a high level of innovation by the ends of the distribution is insufficient to offset weak performance by the “middle”.

Figure #8.
Figure #8.

France Firm Peer Comparison

(Germany =100)

Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A004

Source: EFIGE Survey.

19. Investment activity by contrast bears no obvious relation to size. The larger companies, more prevalent in export-oriented industries (export share above one-third), in aggregate invest relatively less of their revenue (around 7½ percent or 1 percentage point less than the smaller, more domestically-oriented, firms). However, the sector breakdown shows that amongst the export-oriented (economies of scale and high-tech) industries dominated by large firms, the economies of scale industries have relatively high investment ratios of 8½ percent on average compared to only 7 percent for the high-tech industries; similarly, among the less export-oriented (traditional and specialized) industries where small firms are more prevalent, the traditional industries have relatively high investment rates of 9 percent on average compared to 7 percent for specialized industries.

20. TFP—our preferred measure of competitiveness—shows a strong correlation with size, as well as with export performance. The size threshold for better TFP outcomes suggested by the decomposition in Figure 6 appears to be relatively high (500 employees or turnover above €250 million). By sector, the high-tech enterprises stand-out as the best performers, while traditional industries are the least efficient, and the TFP performance of specialized and economies of scale industries is broadly similar (and lackluster). The decomposition by export share shows that firms exporting over one-third of revenue (and especially those exporting over two-thirds of revenue) enjoyed on average better TFP outcomes, possibly because of higher exposure to competition and/or foreign knowledge transfer, as the rate of foreign ownership is higher amongst exporting firms. The direction of causality, however, is unclear as higher TFP firms are also more likely to be able to expand internationally.18

21. Size also bears a positive correlation with the ability to self-finance capacity expansion. The smallest firms (those that employ 50 employees or less, or have turnover below €10 million) are the most reliant on external financing for investments, suggesting that they do not generate enough resources internally to fund their growth. This dependence on external finance in turn appears to constrain their growth. Over 15 percent of small enterprises (under 50 employees) report that their scale of production is not adequate compared to around 10 percent for the other categories.

22. A concentrated ownership structure is more commonly found in the export-oriented firms. Survey results indicate a positive correlation between the presence of large shareholders and export ratios, but ownership concentration (a larger controlling stake by the first shareholder) shows no clear relation with size. Ownership concentration may improve company performance (measured by TFP or other indicators of firm value such as Tobin’s Q) and so ability to export by contributing to the solution of agency problems in large companies and/or by enabling owners to implement value-maximizing changes in small or medium-sized companies.19

23. Owner-identity may influence the link between large owners and firm performance. Pedersen and Thomsen (2003) find that in a continental European setting where ownership concentration is high and minority investor protection is low, ownership concentration has a positive effect on firm value only when the largest owner is a financial institution or another corporation. There is no effect of ownership concentration on firm value when the owner is a family or a single individual, and a negative effect when the largest owner is a government organization. The results for our sample can be summarized as follows:

  • Corporate ownership is more prevalent in France than in the other EU4 and is the preferred ownership form for high-tech enterprises. Almost 30 percent of firms compared to 10-13 percent in the other countries are owned by either an industrial or a holding firm. Within France, corporate ownership is dominant among high-tech firms (44 percent) and exporting firms (42-50 percent). Corporate ownership is also high in the economies of scale and specialized industries (37 percent), and less common in traditional industries (22 percent).

  • The rate of financial ownership is low, at around 1 percent, similar to the U.K. and Germany, and higher than Italy (0.3 percent). Similar to corporate ownership, financial ownership is a more common occurrence for high-tech enterprises and exporting firms (2-3 percent of NFCs in those sectors report being owned by a bank or other financial institution).

  • Foreign ownership at 11¾ percent is similar to the U.K. level and high compared to Germany (6¾ percent) and Italy (5¼ percent). Rates of foreign ownership for very small firms are only about half the average level. By contrast, the foreign-ownership rate is nearly 40 percent amongst the export-oriented companies (exporting two-thirds or more of revenue).

  • Government ownership is limited to 0.9 percent of firms surveyed, and appears largely confined to stakes in the largest firms as well as high-tech small and medium sized enterprises (SMEs).

  • Family ownership is less common than in Germany (where nearly 60 percent of NFCs are family-owned, compared to around 42 percent in France and the other EU4). Family ownership characterizes firms with 50 employees or less (47.5 percent report being owned by an individual or group of individuals, compared to 30 percent or less for the other categories), many of them in the traditional, less export-oriented, industries (46 percent of family-owned firms).

  • The survey results also suggest that smaller firms are more likely to be headed by the individual owner or a member of his family, rather than a manager appointed from within the firm or recruited externally.

24. Several characteristics of the workforce set French manufacturing firms apart from their EU4 peers:

  • The human capital level in terms of education levels is comparatively high with 18 percent of firms employing university graduates (the highest among the EU4); within France, the smallest and largest firms appear to be the most intensive in human capital (measured by tertiary education); by contrast, medium-sized companies employ a lower proportion of university graduates (consistent with their relatively low level of innovation as discussed above); French export-oriented firms are also relatively human-capital intensive;

  • French NFCs provide comparatively less on-the-job human capital, with a participation rate in formal training programs of 21½ percent, higher than Italy (12½ percent) but lower than in the U.K. or Germany (both around 25 percent); within France, larger firms are more likely to enroll employees in formal training programs;

  • The use of employees on fixed-term contracts is more extensive than in Germany or Italy, although less so than in the U.K., and shows no clear relation with size; reliance on fixed-term contracts tends to be somewhat higher in traditional and economies of scale industries, and shows no clear relation with either firm size or export orientation.

Factors Constraining Growth

25. Smaller firms seem disproportionately affected by the regulatory environment and also report facing higher financial constraints than larger firms. Over 40 percent of the smaller firms (with less than 50 employees or turnover below €10 million) report labor market regulations and legislative or bureaucratic restrictions as factors preventing growth, compared to 30 percent or less of the larger firms. A majority of smaller firms (52 percent of firms with less than 50 employees) also perceive that their growth is hampered by financial constraints, compared to only one-fifth of the largest firms (employing 500 or more employees).

26. The smallest SMEs also lack managerial and organizational know-how. Nearly a quarter of the smaller enterprises (with less than 50 employees or turnover below €10 million) consider this factor as preventing their growth, compared to 12½ percent of the largest firms (employing 500 or more employees).

27. Financial constraints and lack of managerial resources are considered much less constraining by exporting firms (deriving over two-thirds of revenue from exports), perhaps due to the fact that these firms also tend to be larger and/or professionally managed. Labor market regulations are also perceived by fewer exporting firms (30½ percent) as a constraining factor, possibly due to a relatively high share of foreign-owned firms in the export sector; however, legislative and bureaucratic restrictions appear to be an important constraining factor for all firms irrespective of their export or domestic orientation. Only 16 percent of the exporting firms (deriving over two-thirds of revenue from exports) report lack of management or organizational resources as a factor preventing growth compared to about a quarter for the other firms.

What are the Key Drivers of Firm-Level Performance?

28. Through regression analysis, we attempt to uncover the firm-level characteristics that impact exports, investment, and TFP performance. The basic regression framework controls for size (workforce), efficiency (TFP), export intensity, ownership concentration (share of capital held by the first shareholder), extent of self-financing of investments (share of investments financed from internal sources), and sector.20 We then augment this basic specification with other potential determinants of performance, including innovation activities (share of innovative product sales in revenue and R&D spending), financing of innovation (extent to which R&D is self-financed), human capital intensity (percent of university graduates employed and percent of employees enrolled in formal training), large owner identity, flexibility of workforce (use of fixed-term contracts), pricing power (whether the firm is a price-fixer or a price-taker), extent of production abroad (percent of production activities from foreign affiliates or controlled firms; and percent of production activities through contracts and agreements with local firms); and government incentives (dummy variables equal to 1 if the firm received financial incentives or tax incentives, respectively). All the equations are estimated on cross-sectional French NFC data and control for regional- and industry-specific effects.

29. Appendix Table 2 presents the econometric results for the main variables of interest. The findings of estimation of the basic specification emphasize the role of production scale (size) as a key characteristic impacting firm export performance and efficiency (TFP). The results also suggest that the ability to export a large share of turnover is significantly lower for NFCs with less than 200 employees, and this effect of size on export orientation seems to be over-and-beyond its indirect impact through the TFP channel. This confirms the finding in Berthou and Hugot (2012), using labor productivity rather than TFP to control for efficiency.21 Control by large owners and a higher reliance on self-financing for investments both appear to be associated with better export outcomes. Production scale and reliance on self-financing are also significant factors contributing to improved TFP outcomes, with estimated coefficients on the size dummies suggesting a threshold of 500 employees for significantly better TFP performance.22 Unlike export ratios and TFP, investment ratios seem unrelated to size, and are statistically and significantly negatively related to reliance on self-financing after controlling for size, sector and region effects, export orientation, and presence of large owners. In other words, firms that relied more on self-financing invested less, everything else equal. This finding is consistent with the higher investment ratios of industrial sectors with higher leverage and/or interest burden relative to sectors with lower dependence on external financing (see Figure 5 in Section B). Finally, the coefficient on the export share variable is positive in both the investment and TFP equations, although it is only statistically significant in the former.

30. A similar basic specification is used to investigate the impact of the 2008 to 2009 crisis on French firms (Appendix Table 3). The dependent variable for the regressions in Appendix Table 3 is the percent reduction in planned investment, exports, and workforce in 2009 relative to 2008 reported by the firms in the survey (in absolute value, and only for firms reporting a reduction; hence, the dependent variable measures the size of the fall experienced in 2009 for firms that were impacted by the crisis and the number of observations is accordingly less compared to the results in Appendix Table 2). The findings imply that more efficient firms (i.e., with higher initial TFP) experienced a smaller fall in exports and workforce while those more dependent on external financing experienced a larger reduction in investment plans. In terms of export performance, the smallest firms appear to have been hurt the most by the crisis, while no significant differences across firms due to size can be detected for employment and investment performance during the crisis. In terms of employment loss, the results suggest that export-oriented firms ceteris paribus adjusted significantly less than others.

31. Adding additional variables one by one to the basic specification in Appendix Tables 2 and 3 allows us to investigate the role of other potential determinants of competitiveness. Market power does not appear as a constraint on either export activity or efficiency, and the lack of pricing power is in fact positively associated with investment activities ceteris paribus. However, in Appendix Table 3, the lack of market power also contributes to larger cuts in planned investment during the crisis. Innovation (in line with earlier results) is positively associated with the ability to export and expand capacity, while having no significant impact on TFP. Human capital intensity (measured by education levels) is significantly and positively associated with participation in exports. Margin compression (a dummy for firms which reduced margins in the preceding year) appears to have no significant impact on competitiveness (Appendix Table 2) but did help cushion the employment loss during the crisis (Appendix Table 3). Firms that self-finance R&D activities to a greater extent also tend to have higher TFP. The reliance on offshore production appears to have no significant influence on firm performance. The investment ratio of “young” firms (i.e., operating for less than 6 years) appears superior to that of other firms, but at the cost of lower efficiency. Public support in the form of both tax and financial incentives appears positively correlated with the ability to export (although the direction of causality is unclear); and only financial (but not tax) incentives appear positively related to investment performance. Finally, management by a professional other than the main owner or a member of his family seems to be associated with better export outcomes; and firms owned by a bank or other financial institution adjusted employment comparatively less during the crisis.

D. Conclusions and Policy Implications

32. The French manufacturing sector has deep strengths, including a highly educated workforce, relatively generous public support (in terms of both tax and financial incentives), and abundant financing (at least for the larger firms which can access capital markets). This has allowed France to develop a dynamic high-tech industry, characterized by both high human capital and high export intensity. Moreover, innovation activities are not confined to the largest firms; instead, a high level of product innovation and participation in R&D activity occurs in the smallest SMEs. The very small industrial firms also tend to be relatively intensive in human capital, employing a proportion of university graduates comparable to that of the largest firms. Access to external financing has allowed firms to expand capacity despite comparatively low profit margins.

33. At the same time, French firms face the challenge of adapting to globalization. The trend fall in profitability and industry-led investment are symptoms of underlying weaknesses, including low levels of innovation relative to EU4 peers, low TFP in aggregate, an adverse operating environment due in particular to restrictive laws and regulations which in turn prevent firms from expanding beyond the critical size needed to expand internationally, and high dependence on external financing for both capacity expansion and innovation activities due to low profit margins. While the provision of financial and tax incentives has helped alleviate those constraints, it is second-best to reducing the constraints themselves and the room for expanding these programs is constrained by the imperatives of fiscal consolidation. There are early indications since 2008 that industry sectors which were better able to contain staff costs and limit debt servicing costs enjoyed a rebound in profitability. Key questions going forward are (i) how long can firms rely on external finance when profit margins keep falling? (ii) will firms be able to contain staff costs and improve their ability to raise prices without losing market share, in order to improve operating margins and their self-financing capacity? and (iii) how can regulatory constraints which appear to constrain firm growth and ability to expand abroad be alleviated?

34. Current policies directed at simplifying the regulatory environment go in the right direction. The government is working to simplify relations between the state and companies and both the recent labor market agreement and the implementation in 2013-14 of a tax credit to improve cost competitiveness (a flagship recommendation of the Gallois report; see Gallois, 2012) are expected to improve profitability and French companies’ capacity to increase spending on investment when demand improves. The government’s “simplification shock” should be followed by measures to liberalize labor market and product market regulations and address inefficiencies in taxation, building on the momentum of recent reforms. Such policies that raise competitiveness across-the-board can provide fertile ground for firms to grow and expand employment past the critical thresholds for productivity levels and international activities. By allowing firms to improve profitability, they should also improve ability to self-finance innovation and investment more generally – both of which appear related to better TFP and export outcomes.

35. The benefits of directing public sector financing to SMEs to increase their potential to compete internationally are questionable. The recent increases in the ceilings on regulated savings products (Livret A and Livret de Développement Durable) are aimed at increasing the supply of financing toward public priorities including social housing and SMEs, the latter through refinancing facilities at the Banque Publique d’Investissement (BPI).23 However, according to Banque de France surveys, French SMEs do not currently face constraints on access to credit and separate (and potentially more impactful) government initiatives are underway to develop market intermediated credit, including through greater securitization of SME loans. The authorities are also considering as a part of the 2014 budget a reform of tax incentives for life insurance policies aimed at increasing the share of equity investment in SMEs and other higher-risk products. To ensure the such reforms are effective in raising SMEs’ growth potential, further developing the venture and private equity capital industry appears to be an important pre-condition, as this source of capital is still largely confined to the largest firms; such intermediaries provide not only financing, but also operational know-how and managerial coaching, which are more often cited by the smallest firms as key factors constraining growth.

Appendix 1. Tables

Table 1.

Main Results of the EFIGE Survey

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Table 1.

Main results of the EFIGE Survey (Continued)

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Table 1.

Main results of the EFIGE Survey (Continued)

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Table 1.

Main results of the EFIGE Survey (Continued)

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Table 1.

Main results of the EFIGE Survey (Continued)

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Table 1.

Main results of the EFIGE Survey (Continued)

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Table 1.

Main results of the EFIGE Survey (Continued)

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EFIGE survey is censored for firms that are larger than 500 employees, firms larger than 500 are reported as employing 500 workers. Median is used in this category as the end value of the distribution is not known.

Table 1.

Main results of the EFIGE Survey (Concluded)

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Table 2.

Investment, Exports, and Efficiency of French Firms

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Footnotes: OLS estimates; robust standard errors in brackets. Only firms that reported a reduction in the respective category. Significance level: ***: 1 percent, **: 5 percent, *: 10 percent.

Dummy categories for firm size by workforce: 1, 2, and 3 refer to 0-49, 50-199, and 200-499, repsectively. The category 500+ (deviation within is censored in the survey) is absorbed for collinearity.

Additional Control Variables added individually to the baseline specification.

Table 3.

Impact of the Crisis

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Footnotes: OLS estimates; robust standard errors in brackets. Only firms that reported a reduction in the respective category. Significance level: ***: 1 percent, **: 5 percent, *: 10 percent.

Dummy categories for firm size by workforce: 1,2, and 3 refer to 0-49, 50-199, and 200-499, repsectively. The category 500+ (deviation within is censored in the survey) is absorbed for collinearity.

Additional Control Variables added individually to the baseline specification.

References

  • Altomonte C. and T. Aquilante, 2012. “The EU-EFIGE/Bruegel/Unicredit Dataset,” Bruegel Working Paper 2012/13.

  • Altomonte C., T. Aquilante, G. I.P. Ottaviano, 2012. “The Triggers of Competitiveness,” Bruegel Blueprint 17.

  • Banque de France, 2013, “Taux d’Endettement des Agents Non Financiers : Comparaisons Internationales,” Stat Info, available at www.banque-france.fr.

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  • Berthou, A. and J. Hugot, 2012. “How Does Innovation Affect the Internationalization Pattern of Firms,” EFIGE country report: France, European Firms in a Global Economy.

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  • Bugamelli, M., R. Cristadoro, and G. Zevi, 2009. “The International Crisis and the Italian Productive System: an Analysis of Firm-Level Data,” Questioni di Economia e Finanza, Banca d’Italia.

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  • Gallois, L., 2012. “Pacte pour la Compétitivité de l’Economie Française,” Rapport au Premier Ministre.

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1

Prepared by Hélène Poirson and John McCoy (both EUR).

2

Measured by total factor productivity (TFP).

3

For more on market share loss and other indicators of erosion of France’s competitive edge, see the 2012 France staff report, available at http://www.imf.org/external/pubs/cat/longres.aspx?sk=40190.0.

4

Factors that may have contributed to the planned cutbacks in investment (despite currently low interest rates) compared to the January survey include the level of current economic activity and expectations on the pace of the recovery, higher taxes, and uncertainty on future taxes and on the outcome of the planned reform of the pension system this year, including its impact on employer contributions.

5

For a broader sector analysis of profitability and other key corporate vulnerability indicators (including also trade and construction sectors), see European Committee of Central Balance Sheet Data Offices (2013).

6

However, out of these four sectors, only the leather industry and footwear has enjoyed rising profit margins over the period. The tobacco industry (not captured in our analysis due to missing data in 2003) has also seen an increase in margins from less than 3 percent in 2004 to 35 percent in 2011. Tobacco firms only made up 0.15 percent of total industrial firm turnover in 2011.

7

The debt-to-GDP ratio of France’s NFCs was around 125 percent in 2012, compared to about 161 percent in the United States, 158 percent in Japan, and 132 percent in the euro area as a whole (Banque de France, 2013).

8

Measured by net interest expenditure as a percentage of gross operating profit.

9

This section uses firm-level EFIGE data available at http://www.bruegel.org/. EFIGE stands for “European Firms In a Global Economy: Internal policies for external competitiveness” and provides quantitative and qualitative indicators of firms’ pattern of internationalisation. Data consists of a representative sample (at the country level for the manufacturing industry) of almost 15,000 firms in seven European countries, including roughly 3,000 for Germany, Italy, and France, and slightly more than 2,000 for the U.K.

10

Since TFP is measured in log, a negative value corresponds to an average level of efficiency of resource use comprised between zero and one.

11

The finding of Germany as the competitiveness benchmark based on TFP level (average over 2001 to 2007) is consistent with other indicators such as export market share. While TFP is calculated as a residual and thus may also capture cyclical effects, the use of average TFP over a relatively long period should minimize this concern.

12

Size thresholds are identified using categorical dummy variables for firms: very small (less than 50 employees); small (50 to 200 employees); and medium (200 to 500 employees), with large firms (over 500 employees) as comparators. When the econometric results point to statistically significant differences in the coefficients.

14

During 2007-09, less than half of firms surveyed report financing their investments with internal sources. By comparison, around half of Italian firms, 57 percent of German firms, and 70 percent of U.K. firms rely on self-financing (Appendix Table 1).

15

At the industry level, ownership concentration is lower than in Germany although higher than in the U.K. or Italy. German firms appear to be tightly held with over three-quarters of capital held on average by the largest shareholder, compared to 73¼ percent for their French counterparts.

16

The detailed break-down is available from the authors upon request.

17

Previous analyses of the EFIGE dataset used pooled data across countries, controlling for country fixed effects. This approach assumes that the equation coefficients are the same across countries, which may not hold in practice due to differences in legal and institutional settings. For instance, legal rights of minority investors differ quite substantially between France and Germany (Berger and Lefèbvre, 2012), and so control by large owners (one of the explanatory variables included in the basic specification) may have different effects on firm performance in the two countries.

18

The reverse causality from TFP to export orientation is confirmed in multivariate regression results discussed further below.

19

The empirical evidence supporting this result is mostly for the U.S. and the U.K. See Pedersen (2003) for a survey.

20

The basic specification follows the approach of Bugamelli, et al. (2009), except that their leverage variable is replaced by the share of investment financed from internal sources (self-financing) since the EFIGE database does not include balance sheet data, and the workforce variable is replaced by a set of categorical dummy variables (size 1, 2, and 3) given that the EFIGE public dataset censors the employment numbers for the largest firms to prevent their identification. Our basic specification also additionally controls for ownership concentration.

21

The authors estimate export regressions on the full EFIGE sample of 7 countries, so implicitly assuming that the relationships are similar across countries.

22

For more on the triggers of competitiveness see Altomonte, et al. (2012).

23

The BPI is aimed at channeling public funds more efficiently by rearranging existing support programs for SMEs, high-growth firms, and firms with the potential to compete internationally.

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Cover IMF Staff Country Reports
France: Selected Issues Paper
Author:
International Monetary Fund. European Dept.
Volume/Issue:
Volume 2013: Issue 252
Publisher:
International Monetary Fund
ISBN:
9781484389133
ISSN:
1934-7685
Pages:
84
DOI:
https://doi.org/10.5089/9781484389133.002
Figure 1.

Investment Expansion. France

Gross Value Added in Manufacturing

(Percent of GDP, constant prices)

Real GDP Growth

(in percent)

Return on Assets 1/

(In percent)

Profit Margins 1/

(In percent)
Figure 2.

Profit Margins: Industrial Sectors

(in percent)
Figure 3.

French Industrial Firms: Profit Margins
Figure 4.

France: Industrial Firm Investment, 2003 vs. 2011
Figure 5.

French Manufacturing Firms: Average Gross Profit Margins

(in percent)
Figure 6.

Total Factor Productivity

Industrial Firms

percent of firms, number of employees
Figure 7.

Factors Preventing Growth: Industrial Firms

(in percent of all firms surveyed)

Average Real GDP Growth 2000-2011
Figure #8.

France Firm Peer Comparison

(Germany =100)