The Pulse of the EU, Week Ending 4th of November

PARIS TO BEAT SILICON VALLEY IN HIGH TECH--MACRON'S VISION

French President Emmanuel Macron confirmed last week his determination to push forward with his electoral promise: the make of France the world’s new Silicon Valley.

French venture capital firms already began in 2013 intensifying their contribution towards developing a national flora of start-ups, encouraged by former president François Hollande. The effort seems to now be producing results. During the first nine months of 2017 the capital raised for new ventures in the country is 2 billion euros higher than that raised in Britain and Germany. Some foreign technology giants—Cisco and Facebook, among others--have also invested in small technology French companies.

Paris -- City of Light, and of tech start-ups?
(Eiffel Tower, hit by lightning, 2 June 1902 9:20 p.m.)

These good news are, however, insufficient to implement Macron’s vision of a made-in-France Silicon Valley. So his drive will focus on state-funded efforts to ensure that national technology champions can survive and grow quickly. The vehicle for this already exists, in the form of BPI France, state-owned bank, which streams cash to local venture capital firms. It is estimated that in the past four years it has poured 4 billion euros, or one-fifth of the amount consumed by start-ups during that period. BPI France’s scope encompasses, according to its CEO, more than the Hexagon: new tech ventures in Europe and the U.S. have also benefited from its assets.

Other tools in Macron’s bag are: liberalisation of visas and work permits in France for talent from third countries; reduction to 30% of the tax on capital gains for new companies; change of the national labour law as of January 2018 to enable hiring and firing of workers much easier than it is now; facilitation of establishment in France of foreign-owned start-ups; and a few other administrative incentives. France has been considered, indeed, for decades one of the world’s strongest bureaucracies for business undertakings.

There are, of course, many challenges ahead that may force Macron’s government to tune down its enthusiasm. The intended changes in the labour law are already faced with strong resistance by the unions and a large number of legislators; state funding and tax rebates will raise objections from the Parliament and EU Institutions, as France’s budget deficit exceeds the norms of the Eurozone; if the ‘carrot’ from Paris becomes too attractive for British and American start-ups, and funds, to relocate, London and Washington will retaliate with counter measures.

More challenging, however, is to fulfil Paris’s aim to create world champions—tech companies with high valuations: today’s rule of thumb is 1 billion dollars for such pearls. The goal is even more difficult to attain in a country where the state mingles with private enterprise more often than elsewhere in the West.

On the latter point, the French government has in recent weeks defended its plans referring to the example of China, where the state has been behind all major entrepreneurial successes.

But, perhaps, the most critical test will be the return on investment for venture capital firms betting on France’s talent and lifestyle charm. French funds have, over the past three years, achieved an internal rate of return of 6.3 %. This is substantially lower than the return obtained by their British counterparts (13.5%), according to a recent study by PwC with BVCA Private Equity and Venture Capital.

Critics of the Macron plan argue that the model Paris intends to use in this ambitious programme is based on the classic Silicon Valley scenario, which is already reaching, apparently, its own limitations. Moreover, the French project contemplates to implement, in a second phase, the strategy throughout the EU, a hypothesis that does not appear to have been seriously considered so far by many of the other heads of state or government of the Union.

There is also a degree of inconsistency between intent and action: while devising new approaches to lure foreign talent and investment into France and Europe, Paris orchestrates the attacks in the European courts against the global giants of the technologies industry, and is in the process to convince the other member states of the Union to impose heavy taxes on digital companies. The obvious targets are Google, Apple, Facebook, and Amazon. But, experts assert, smaller tech players will inevitably pay their own share in this intimidation campaign. Which means that many will have to seek greener pastures for their own (and their investors’) sake and prosperity.

Credit for photo: U.S. Government, NOAA.