France; new regime takes steps to improve sluggish economy; U.S. high-tech equipment continues to be competitive - Business Outlook Abroad

Business America, Oct 27, 1986

FRANCE The french economy has experienced three years of policy-induced slow growth aimed at reducing inflation and a large current account deficit. By the end of 1985, this approach had produced sharply lower inflation and a current account in slight surplus, but only at the expense of a decline in households' purchasing power through most of the period and high unemployment. The Chirac government, in power since March 1986, has shifted the policy emphasis to stimulating growth and employment by improving the domestic investment climate. The new government has begun its program by dismantling foreign exchange controls, removing price controls, lowering domestic interest rates, and easing restrictions on laying off workers. In addition, it is continuing to deregulate the French financial market and starting to privatize 65 banks, insurance firms, and industrial companies, most of which had been nationalized by the previous government.

Although the French economic outlook is brighter now than it has been for a number of years, various structural problems continue to troube the French economy. As a result, trade competitiveness is weak, and unemployment is likely to get slightly worse before it gets better.

In 1985, real GDP grew sluggishly at an annual rate of slightly over 1 percent. However, lower oil prices, stronger world demand, and an improved investment climate suggest that growth will be stronger in 1986. Although GDP stagnated in the first quarter of the year, more encouraging second-quarter statistics support the view that French GDP growth will exceed 2 percent in 1986.

A number of key sectors in France's economy are dependent on foreign sources for industrial products, technology, and basic raw materials. As such, France is committed to the concept of free trade and is a vigorous supporter of the GATT. However, in order to foster the development of certain industries such as electronics, aerospace, nuclear power generation and weaponry, France continues to subsidize these industries notwithstanding challenges to certain subsidies by the EC Commission. However, to remain competitive, and in an effort to encourage the necessary restructuring in the transition from smokestack to light industries, France has reduced or removed many of the subsidies to such industries as shipbuilding and coal mining. The funds are "recycled" to retrain and relocate redundant workers.

The Chirac government has placed high expectations on expanded exports to help the French balance of payments, and at the same time incite French businesses to make new investments. The level of investment remains disappointingly low, but proposed new measures to lower corporate income taxes and to liberalize labor-shedding regulations are expected to help reverse this trend.

U. S. investment in France has been dropping over the last four years for which figures are available. In current dollars, the investment went from a high of $9.1 billion at the end of 1981 to $7.8 billion in 1982, to $6.9 billion in 1983, and to $6.5 billion in 1984. However, the United States remains by far France's most important foreign investor, followed by Switzerland, West Germany, the United Kingdom, the Netherlands, Italy, Sweden, and Japan.

American business executives apprehensive about the investment climate in France during the early socialist years, have discovered that the French government has continued to encourage new foreign investment in France in a double-barreled effort to combat growing unemployment (about 10.5 percent) and attract high-technology industries. This liberalization, which began under the socialists, is expected to continue under the new government.

Foreign investment applications are reviewed, carefully, but the procedure is administratively streamlined. For investments permission is automatic in 30 days if not challenged. In 1984, approximately 75 percent of all requests for foreign investment were processed in less than 10 days.

Measures aimed at encouraging foreign investments, especially industrial, cover such items as tax incentives, capital incentives, special investment loans, other assisted loans, state capital-subordinated loans and local assistance, which includes the sale of land at low cost and lease with option to buy. This latter can cover from 50 to 100 percent of cost. Training subsidies are also available, and can cover up to 80 percent of the cost of training new workers and supervisory personnel.

The most attractive terms, including the lower interest rates, are granted for financing investments which create new jobs, maintain existing ones, or improve working conditions; increase exports outside the EC; improve manufacturing efficiency (automated machines or manufacturing processes); develop new products or manufacturing processes; and/or conserve energy and economize on the use of raw materials. Firms meeting one of these criteria are eligible for a long-term loan, generally 12 years, at an interest rate which this year decreased to 8.75 percent from the earlier rate of 9.25.