Slaughter & Rees Report - C’est Dommage
May 13, 2013 --
The French government recently rejected an attempt by Yahoo to a buy a 75 percent stake in a company called Dailymotion. The government did not resort to the usual tactic of citing national-security concerns as a reason to reject the acquisition — Dailymotion is the French equivalent of YouTube — but rather explicitly commercial ones: “Yahoo is a company that went through health troubles,” said the country’s industry minister, “and we don't want to give a French nugget in strong health to a company that would swallow it and will do we don't know exactly what with it.”
This Dailymotion commotion offers two important policy lessons, one time-tested and one newer.
The time-tested lesson is the risks in government ownership of for-profit companies. Dailymotion is owned by France Telecom, which is 27 percent owned by the government. When business decisions are subjected to political considerations that may favor political constituencies over maximizing economic opportunity and growth, the economy tends to suffer.
The newer lesson is how difficult it is for countries to stimulate growth of output and jobs in the wake of the world financial crisis. France today, like many countries in the European Union (and elsewhere), is desperate for more employment. Last year French GDP grew by just 0.2 percent. The country’s jobless rate is 10.8 percent; among people under 25, it is 25.4 percent. And, like it or not, France has little room for fiscal stimulus. It already has the highest level of government spending in the eurozone, at 57 percent of GDP, and it has not been stoking its animal spirits with recent efforts to boost the top marginal income tax rate to 75 percent.
What France does have lots of room for — were it to provide the proper policy environment — is inward foreign direct investment and all the related benefits of new ideas, new capital, and new jobs. While every foreign investment is different, studies repeatedly show that companies acquired or established by foreign multinationals subsequently tend to show faster growth in jobs, wages, investment and productivity. Indeed, even the French government acknowledges that over the past 10 years, the 6,500 new foreign investments in France created 300,000 jobs.
Past need not be prologue, however. One of the hallmarks of the global economy is that capital goes where it is well treated. And France today faces more intense competition to attract investment, not just from other European countries but from throughout the world. While France has been more successful in attracting investment in recent years, with inbound foreign direct investment rising from $30.6 billion in 2010 to $58.9 billion in 2012, it is still down from a high of $98 billion as recently as 2007. And the country maintains a “sometimes reflexive opposition to foreign investment,” as the U.S. State Department put it in a report last year on the country.
France offers many potential advantages to foreign investors: its size and strategic location in the EU, its well-educated and highly-productive workforce, its baguettes. And many successful companies, like Total and AXA, were started in France and call it home. The arbitrary nature of the Yahoo rejection, however, shows that poor policy can trump many advantages. For the workers of France, above all others, c’est dommage.
Articles © 2013 Matthew Slaughter and Matthew Rees. All rights reserved.
Publication © 2013 Trustees of Dartmouth College. All rights reserved.
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