Big companies lose out as France merges its two main innovation agencies

Image courtesy A2I

The French industrial innovation agency A2I had a brief but dramatic existence. Created two years ago by former president Jacques Chirac to bolster innovation among large French companies, it has now been officially merged with Oseo, the public agency backing start-ups. That means €1 billion more to finance innovative small companies.

At first sight, this move may look like further revenge by President Nicolas Sarkozy against his predecessor and mentor Jacques Chirac. But the grounds for the merger are more likely to lie in Brussels rather than in French politicking.

A2I was announced in January 2005 with great fanfare, and for some, overweening ambition. One stated aim was to create a French–German counterpart to the giant US search engine company Google. The agency was the brainchild of the former CEO of glass maker Saint Gobain, Jean-Louis Beffat – its mission: to concentrate public research funding on big programmes led by large companies.

The hope was to correct the dramatic under investment in R&D by France’s so called national industrial champions. Not only is public R&D funding in France under the average of OECD countries at 2.16 per cent of GDP, versus the 2.26 per cent OECD average, but the share of private financing is significantly lower too, at 50 per cent versus the 61 per cent OECD average (which rises to 67 per cent in the US).

To them that have…

With a budget of €2 billion over two years, A2I was intended to have a major impact on commercially driven research projects in France. But after its official launch in July 2005, critics began to knock it as a stolid institution that was handing out public subsidy to mature and solid businesses, rather than an innovation machine.

In one telling example, the two companies behind the development of the Qaero internet search engine, Exalead and Thomson Multimedia, were granted €90 million to develop multimedia functions. But the two were unable to find a German partner for this branded French-German partnership. And while they were talking administrative structures and grants, both Youtube and the venture-financed French start-up Dailymotion overtook Qaero’s plan to introduce a video search function.

And, if some of the 16 projects, A2I intended to finance looked futuristic, most of them lacked the bold strategy and vision outlined by the French Ministry of Finance when it created the agency.

What to make for example, at a time when all electric appliance makers are branding their products as electricity efficient, of allocating Schneider Electric €88 million over five years to develop power-saving components? Or of giving car maker Peugeot-Citroen €96 million for a programme to develop a new hybrid diesel vehicle that had been announced many years before?

If it looks like a subsidy…

When a financing mechanism has the colour and smell of a subsidy, the European Commission may finally come to the conclusion that it is a subsidy. In any case, the Commission has to approve public funding of over €10 million for an individual project, leading it to investigate all 16 of A2I’s projects, which had a combined price tag of €900 million.

Six projects have been approved, but the €96 million granted for Peugeot’s hybrid diesel car has been placed under “deeper investigation”. The Commission said it thinks it likely that as the second largest automobile manufacturer in Europe, the company would have undertaken the project anyway, even in the absence of a state subsidy, given that other car makers have announced similar projects.

Against this background, dissolving A2I into Oseo might be a happy ending. Instead of subsidising companies with multi-billion revenues, and potentially distorting competition, A2I will become part of an agency (itself the product of merging various bodies) that is involved in supporting small, innovative start-up in France.

Only half of the A2I budget has been committed as yet. That means Oseo inherits €1 billion of new funding to add to its annual budget of €600 million.

A third of the A2I fund will go to Oseo Innovation, a unit of the agency that supports start-ups through seed funding and the early stages of commercialisation. Another third is going to Oseo-Garantie, a fund that guarantees lending to SMEs by banks. The remainder will be devoted to a new fund that will co-finance research projects launched by mid-size companies.

Those projects will bring smaller companies or academic labs into partnership with medium sized companies that are leaders in their fields.

Most projects will have to be under €0 million. As a consolation, large companies were offered an extension of R&D tax credits (a mechanism known as credit d’impot). This should help them put A2I, and its protectionist if not clientelist philosophy, out of their minds.