French Investment Flows Double in 2005

UNCLAS SECTION 01 OF 02 PARIS 001129

SIPDIS

PASS FEDERAL RESERVE
PASS CEA
STATE FOR EB and EUR/WE
TREASURY FOR DO/IM
TREASURY ALSO FOR DO/IMB AND DO/E WDINKELACKER
USDOC FOR 4212/MAC/EUR/OEURA

E.O. 12958: N/A
TAGS: EFIN ECON PGOV FR
SUBJECT: French Investment Flows Double in 2005

Refs: (A) 05 PARIS 7771

(B) PARIS 755


1. SUMMARY. Based on preliminary data, direct investment
flows both to/from France doubled in 2005. French companies
continued to invest twice as much abroad than foreign
companies invested in France. France plans to intensify
economic relations with countries with high investment
potential, namely, the United States, Japan, India, China
and Russia, and introduce measures to improve its own
investment climate. END SUMMARY

Direct Investment Inflows and Outflows Rebounded in 2005
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2. Based on Bank of France's balance of payments data, both
French direct investment abroad and foreign direct
investment (FDI) in France rebounded in 2005 after
decreasing in the previous four years. French direct
investment outflows more than doubled to 79.7 billion euros
in 2005, from 38.3 billion euros in 2004. Lafarge, the
world leader in construction materials; Suez, a large
industrial and services group; and Saint-Gobain, a materials
mega group, were major contributors to the increase in
investment abroad. Similarly, FDI inflows doubled to 38.3
billion euros in 2005, from 19.6 billion euros in 2004.
2004 was a year marked by a number of public exchange offers
that resulted in disinvestments. In 2005, France benefited
from the worldwide recovery in merger and acquisition
activity. It should be noted that BOP data is preliminary;
in its May 2006 annual review, the French Agency for
International Investment ("Agence Francaise pour les
Investissements Internationaux" - AFII) will provide more
details on the largest projects that were completed in 2005.
The Bank of France will provide comprehensive data on 2005
investment flows in September 2006.

Investment Authority Argues France is an Open Economy
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3. Clara Gaymard, the head of AFII, welcomed the FDI
rebound. She emphasized that France is "an open economy",
which has remained among the top five recipients of FDI in
the last few years. Quizzed about the impacts of unrest in
suburbs on foreign investment (ref A) and about a recent
apparent example of protectionism (the Arcelor affair, ref
B),she argued that the best proof that the French economy
is not protectionist is that about 900 French companies
(worth 350 billion USD) were purchased by foreign investors
in the last five years. She mentioned "a paradox", despite
French efforts to eliminate obstacles to FDI (citing
professional tax, tax on high incomes, or the 35-hour work
week) and to implement reforms (pensions),investors still
have a "distorted image" of France. Too many people think
that France is not developing enough new technologies, and
fear that France has a social and economic model that is out
of control. In recent statements, she reaffirmed that
improving France's attractiveness was increasingly becoming
a government priority. In December 2005 for example, she
indicated that 10 new measures would be adopted by March
2006 to improve France's economic attractiveness. AFII
usually focuses on "attractiveness", which is a different
concept than competitiveness, which concentrates on
empirical evidence provided by international capital and
investment flows, and moves of highly skilled managers and
workers into France.

Government Intensifies Economic Relations with Promising
Economies
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4. The government plans to intensify economic relations
with five countries with high investment potential, namely
the United States, Japan, India, China and Russia. During
her second visit to India in December 2005, Gaymard
personally invited Indian companies to continue to invest in
France. Significantly, AFII had no office in India until
2004, but now joins other countries in recognizing the
potential in the region. In a February visit to India and
Thailand, President Chirac took a group of 40 businessmen to
improve investment and economic relations. France is only
the 12th largest foreign investor in India, well behind the
United States, the U.K., Germany, the Netherlands, Japan and
South Korea, and the 7th largest foreign investor in
Thailand. On February 22, Foreign Trade Minister Christine
Lagarde visited Japan to encourage Japanese investment in
France, and helped arrange meetings between executives. A
social security bilateral agreement to avoid double taxation
of executives has been ratified by the Japanese government,
but still has to be passed by the French Parliament.
President Chirac plans to return to China in September 2006
to develop economic ties with that country. Around 100
Chinese businesses have established in France, accounting
for a total investment of about 60 million dollars. An
association of Chinese businesses in France is expected to
be created in the first quarter of 2006.

Comment
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5. Although the strong growth in investment flows is good
news, the fact that French direct investment outflows still
were double the FDI flows to France will not reassure those
who are concerned about French companies moving jobs
overseas. France's future success in both investing further
abroad and attracting foreign direct investment at home will
heavily depend on maintaining or improving its international
competitiveness. Measures the government might announce in
March may improve France's attractiveness, but probably not
its general competitiveness, since no major reform projects
are in the pipeline.
HOFMANN