The Innovation Economy: France

The €731 million to be directly invested in research through France’s economic stimulus plan looks modest. That is because the crisis strikes in the middle of an ambitious reform. And instead of derailing it, the crisis is giving the government leverage to accelerate it.

€400 million for new highways, €300 million for new TGV railway lines, €340 million to build 100,000 low-cost apartments, €620 million to construct jails and renovate 70 monuments and more than 50 cathedrals: on the face of it, the €26 billion stimulus plan adopted by the French government last winter to finance 1,000 infrastructure projects would have pleased King Louis XIV’s finance minister, Jean-Baptiste Colbert.

But what may seem at the core of the French economic tradition of state dirigisme is hiding fundamental change and complementary initiatives. The innovation side of the stimulus plan reveals a more subtle role for the French state in research policy than the poster children of state-driven technology projects, the TGV and Ariane rocket.  

It is true that, obsessed with France’s declining competitiveness, President Nicolas Sarkozy’s stimulus plan emphasises grand investments, rather than consumption. It puts research and Higher Education infrastructures, as well as private spending in R&D, as priorities. These are receiving almost a fifth (€4.5 billion) of the stimulus money.

The Ministry of Research estimates that the budget for Higher Education and research will increase 26 per cent in 2009 instead of 6.5 per cent (or €1.8 billion) as announced prior to the introduction of the stimulus plan.

For the most part, that is because €3.8 billion of R&D tax credits will be reimbursed one year earlier. That leaves €731 million of net new money for public research and higher education. Of this, €286 million will be spent on research programs in nanosciences, cleantech and defence technologies, €46 million for large research infrastructures, €20 million for scientific equipment, €47 million for student housing and €398 million for modernisation, construction and new equipment for university buildings.

It is clear that most of this “new” spending was already in the pipeline. But this does not mean the French government has merely relabelled them under a stimulus sticker. “You have to understand that the reform of our system was in the making when the crisis struck”, explains Alain Pompidou, former Director of the European Patent Organisation and current President of the French Academy of Technologies.  In other words, the government is using the political momentum provided by the crisis to accelerate and increase ongoing reforms.

Since 2005, France has engaged in a profound modernisation of its research system, in order to boost technology transfer, innovation and jobs. The process started with the creation of the agency ANR (Agence Nationale de la Recherche) that allocates grants on a competitive basis, and of the AERES (Research and Higher Education Evaluation Agency) that now has the monopoly on evaluating the quality of research. “That is a sea change because those competences used to be the privileges of integrated public research organisations such as CNRS or INSERM,” explains innovation economist Jean-Luc Gaffard at the OFCE (Centre de Recherche en Economie).

The reform was accompanied with the creation of the “Competitiveness Poles” that gather public research institutions and small and big private companies in specialised local high-tech clusters. “With those, for the first time in its history, the French state is not funding projects of its choosing but public-private partnerships,” says Gaffard. According to Pompidou those reforms have already shaken the institutions, with, for example, “43 per cent of the patents of CNRS being licensed instead of 25 per cent three years ago”.

Last but not least, at the beginning of 2008 came reform of the universities, giving their presidents and boards partial autonomy. This was accompanied by the “Plan Campus”, a €3 billion special budget, from the proceeds of sales of shares in the national electric utility EDF, to modernise university buildings.

To be understood, the investment that the French economic stimulus plan will make in research and innovation has to be put in the context of this evolving environment. For example, prior to the plan, 40 lecture theatres were to be renewed, now it is 70. The number of libraries that will be renewed or built has doubled to 16. Locally, this will have a huge impact. Strasbourg and Brest, for example, are going to have entirely new university libraries. Paris’s medical faculties are being upgraded. Also, specific infrastructures such as the Soleil Synchrotron in Saclay, or the radioactive ions source (Ganiol) in Caen are benefiting from the new money. Finally, €40 million is to be spent to build demonstrators for new clean energy technologies.

Although they predate the stimulus plan, R&D tax credits remain a central piece of the French government’s innovation strategy. By advancing reimbursements by 12 months, it is hopes to capitalise on a virtuous dynamic. Between 1994 and 2004, companies were receiving €465 million each year through this tax break. It doubled in 2005 to reach €1.5 billion and €3 billion in 2008 for 8,000 companies. The increase came because the thresholds were raised, with 30 per cent of R&D spending under a ceiling of €100 million now reimbursed, 5 per cent above. With foreign companies such as Microsoft and the Chinese firm Satir taking advantage of this tax break, France was noticing prior the crisis that private R&D spending had started to climb above the current 1 per cent of GDP. The stimulus is designed to accelerate that shift.

Also, the government can say it is investing in research infrastructures, but not increasing salaries for civil servants, because those reforms were already in place. Starting next September, time spent as a post doc prior to holding a faculty position in a public university will be counted in determining length of service. This will mean better salaries for young professors. Also, pay scales have been revised so that instead of waiting three years to move up the scale, researchers will move up in two.

With all that in place, the government is betting that France will emerge from the crisis stronger. During the crisis, it is mainly using its existing social system to weather it.

Still, not everybody agrees that the plan’s emphasis on public research infrastructures is the right choice. The IT companies trade association Digital Renaissance has been particularly vocal in criticising Sarkozy’s strategy. As a result, at the beginning of June, Prime Minister Francois Fillon came up with new funding of €750 million over 3 years to extend the fibre optic network to “the last mile” to provide broadband to the home. Also, he launched a €30 million tender for projects and public procurement in the field of serious games (video games used by companies to educate their employees in e-learning modules). €20 million is also going to be invested in Web 2.0 solutions for cyber administration.

“With this in mind, the directors of the 17 Competitiveness Poles have reminded the government that they have been forgotten by the recovery plan,” said Philippe Lefebvre at the observatory of the Competitiveness Poles at Ecoles des Mines, Paris. They have now presented their own recovery plan. This asks for €600 million to finance existing public-private research projects, €200 million to create industrial demonstrators and €100 million to launch new projects. They claim companies will match this €900 million public funding with a €4.8 billion investment in R&D carried out in the Competitiveness Poles.

That may be true, but it will have to await the outcome of the national research and innovation strategy, a dialogue with the research community, due to be completed this summer. By then, “other priorities might emerge,” said Pompidou.

Also with a deficit reaching 6 per cent of GDP this year, any new spending will be hard to justify. However, the idea has been floated of a national loan to raise €80 to €100 billion at the beginning of next year. The government has made clear that the proceeds of such loan would be invested in some kind of green “New Deal” and in research and education. That is a risky bet if future innovation does not create enough wealth to pay back the debt. But the French government has come to the conclusion there are no other options on the table.