One of the problems that French startups face, in comparison to their British counterparts, is their ability to develop and reach a critical size, notably to expand abroad. According to a study ‘Expand in Europe’ by Ernst & Young, realised in 2008 in collaboration with the business school ESCP-EAP (now ESCP Europe), the number of small companies in France is larger than in the UK (82,910 against 71,398 respectively).
So far, everything is fine as it shows that French entrepreneurial dynamics are healthy. It is, however, the number of medium-sized companies that constitutes the tricky point of the study. In 2008, the UK had more than 6,000 medium-sized companies (7.5% of all enterprises), while France had just above 3,400 medium-sized companies (3.9% of the total). This pattern is seen again with large and very large businesses; and it partly explains why France is missing 1 or 2 extra points of growth, which would allow France to catch up with the five largest country in term of GDP.
What are the reasons for this gap?
French business owners (but also Spanish and Italians) say that they are « suffering from a lack of gratitude and favourable legal and cultural environment in comparison to their British and German counterparts. This is an issue because medium-sized businesses are the drivers of the economy. Of course, this is not the only reason for the lack of French medium-sized businesses. France also has the highest rate of social contribution for the employers: 29.7% against 9.7% for the UK (in percentage of the labour cost). Regarding the labour cost per country, the UK is slightly higher but only by a few points (35.8% against 31.4% for France).
The Ernst & Young study could be linked to an article on French startups from the Think tank iFRAP, which, although it dates back to 2006, is still relevant. This article highlights the fact that there are not enough French businesses that get through the startup phase. Addressing this issue however would allow France to gain an extra 1 to 1.5% in the GDP growth and reduce the unemployment rate.
Moving from a small to a medium-size business requires important changes, such as hiring more experienced, hence more expensive, executives. This increases the exposure to financial risks. In addition, profitability of French businesses is on average lower by a third in comparison to British and German businesses, largely because of higher tax rates and other contributions. Because of these pressures, French entrepreneurs tend to give up before the business can expand significantly or be sold to a larger business. It is therefore important to create better conditions for French businesses to grow. One possibility would be to reduce the delay of payment from the public « sphere » to the businesses and to reduce taxes and other contributions. We also need to facilitate access to funding: There are around 40,000 business angel networks in the UK, against only 4,000 in France (a new law implemented in 2007 has probably reduced the gap); in the UK the average investment is of 170,000 Euros, against 70,000 Euros in France. French startups would also benefit from a more varied source of funding which would allow innovative and daring projects stand out from the crowd.
There is no need to be pessimistic, though. French businesses have nothing to envy to their foreign counterparts in term of efficiency. They just need to have a more favourable environment for their growth. According to the iFRAP, in a special report in 2005 which compare Britain to France, a poll indicated that one over four French wanted to create their own business. The number is equivalent on the over side of The Channel but British people are twice as likely to take their chances: 465,000 business are created annually against 225,000 in France, which has a population of same size. Finally, a study from the Group pH, commissioned by the iFRAP in 2003, concludes that the number of British startups is twice as important as in France. The results can be seen in the unemployment rate.
So, you know what you have to do.