France has been creating businesses faster than America or Britain, but that’s not a good thing

We’ve got the permit, now what?
We’ve got the permit, now what?
Image: Reuters/Jacky Naegelen
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In the country that gave us the word “entrepreneur,” the vocation would appear to be alive and well. According to a new study on business creation, France had the fastest growth of “business births” of 35 countries between 2007 and 2011. The number of new French companies formed rose 64%, compared to 46.1% in the UK and 46.2% in the US over the same period.

This is curious, given that France has some of the highest labor costs in Europe and what many employers say is an overly rigid labor market. On the World Bank’s ranking of countries according to ease of doing business, France ranks 34th (pdf, p. 168), well below the US and the UK, which are among the top 10. Still, according to the report by the accounting firm RSM, France saw the largest increase in the total number of active businesses over the last five years of any G7 country. (When taking into account business closures, France added 562,000 in active businesses—which amounts to a compound annual growth rate of 4.5%, compared to 0.3% in the US and 0.7% in the UK.)

That growth can be attributed to a government initiative started in 2009 that lowers tax burdens on small businesses from retailers to food services—France’s “auto-entrepreneur” program. Yet it may not be all it’s cracked up to be. The program accounts for almost half of new business creation in the country, and has led to the setting up of 893,000 businesses. But they account for only about 0.23% of national output, and 90% (paywall) of these auto-entrepreneurs earn less than minimum wage. In response to criticism, the government introduced new restrictions to the program last month, such as smaller tax breaks and lower income thresholds for eligible candidates.

France’s experience also raises questions about how much entrepreneurs contribute to a country’s economy. Young companies have a lower survival rate than established ones, so they lead to more job losses, the report points out. This usually starts to happen between two and five years after a wave of businesses is created, as many of the new firms start to fold. That trend may be beginning. Data for the last quarter of 2012 show that business closures have started to outnumber openings under the program.

And the firms in France and elsewhere in Europe that have managed to stick around may not be all that healthy. “These businesses are effectively being kept alive by record low interest rates and political pressure on banks not to cut off life support by recalling loans,” RSM’s chief executive Jean Stephens told the Financial Times (paywall). Once that political will goes, expect that French entrepreneurial spirit to begin waning.