This entry is an excerpt from the OECD’s International Compendium of Entrepreneurship Policies (2020), which contains 16 case studies from 12 OECD countries. The Compendium examines the rationale for entrepreneurship policy, presents a typology of policy approaches and highlights principles for policy success. Case studies span policies for regulations and taxation, entrepreneurship education and training, advice and coaching, access to finance, internationalization, innovation, and holistic packages for ecosystem building. (OECD Publishing, Paris, https://doi.org/10.1787/338f1873-en.)
The case study highlighted in this entry explored how a set of tax exemptions in France have supported existing and new businesses.
This is a national program targeting areas at the local level, operating in disadvantaged urban areas.
Companies starting up or creating jobs in disadvantaged neighbourhoods of 10,000 or more inhabitants (ZFU-TE areas) benefit from temporary exemptions from taxes on profit. The exemption is total (100%) for the first five years and decreases progressively afterwards, going down to 60% for the sixth year, 40% for the seventh year and 20% for the eighth year of activity in a ZFU-TE.
The programme is open to all companies with 0 to 50 employees and a turnover under EUR 10 million, regardless of legal form. Some sectors (car manufacturing and shipbuilding, textile fibre manufacturing, steel, road freight, furniture leasing and rental of non-professional buildings, agriculture, and construction and sales) are excluded from the programme.
Former Office of the Commissioner General for Territorial Equality (Commissariat Général à l’Égalité des Territoires), now the national Agency for Territorial Cohesion, a state agency responding to the Ministry of Territorial Cohesion and Relations with Local Authorities (Ministère de la Cohésion des Territoires et des Relations avec les Collectivités Territoriales).
To be eligible, companies with two or more employees must fulfil either one of these conditions:
Staff residing in the ZFU-TE or the corresponding QPV must make up at least 50% of staff on either permanent contracts or short-term contracts of more than 12 months, or
Staff residing in the ZFU-TE or the corresponding QPV must make up at least 50% of all staff recruited since the move in the ZFU-TE on either permanent contracts or short-term contracts of more than 12 months.
The programme started in 1997. New zones were added in 2004 and 2006. The programme in its current form is in place since 2015 and applies to firms settling in Zones Franches Urbaines (ZFUs) until 2020.
The first systematic evaluation of the programme was commissioned by the government in 2009 (Briant, Lafourcade and Schmutz, 2015). Several evaluations of the ZFU programmes were conducted over the years, using KPIs measuring employment, wages and business creation. KPIs included:
- Number of firms created in ZFUs as compared with control groups
- Number of firms relocations
- Number of jobs created
- Cost of job created
Overall the various evaluations conducted find that ZFUs were successful in attracting existing and new businesses which went on to create jobs. However, they also suggest an important displacement effect. A significant portion of firms settling in ZFUs were relocating, affecting the location of jobs but not necessarily creating new ones. Job creations were also concentrated in low-wage job categories. Some evaluations also suggest that the effect of ZFUs tapered down over time. Moreover, effects varied from one ZFU to another, with ZFUs starting off with relatively better characteristics (notably the level of connections with neighbouring areas) benefitting disproportionately from the measure (Lafourcade and Mayneris, 2018) with the exception of wage levels, which were slightly higher for more isolated ZFUs (Briant, Lafourcade and Schmutz, 2015).
Specific evaluation results include the following:
A 2008 evaluation of 41 ZFUs found a 15% increase in employment in the zones and a 24% increase in the number of firms, among which one-third were new and two-thirds were relocated (Rathelot and Sillard, 2008). The evaluation estimated that each job created costed between EUR 11 000 and EUR 73 000 in 2019 current prices (Chaudhary and Potter, 2019). The job creation was concentrated in the first year.
A 2013 evaluation found a 25% increase in firm births and a doubling of relocations. It also found a positive impact on the number of jobs and hours worked, but the effect was only significant in the first year (Givord, Rathelot and Sillard, 2013). A 2017 evaluation found a 27% increase in the probability that a firm will set up in the ZFU rather than the non-ZFU part of a municipality. The study also found a 24% increase in employment, with the rise being more pronounced in low-wage jobs (Mayer, Mayneris and Py, 2017).
Givord et al. (2018) estimated that after 2002, the flow of new enterprise to first generation ZFU no longer creates net employment but only offsets establishment closures in the areas. Explanations include a possible low competitiveness of participant firms leading them to fail at the end of the exemption period. Another explanation is the raise of mainstream (i.e. not geographically limited) tax exemptions on low income jobs during the 1990s and early 2000s, undermining the attractiveness of ZFUs.
The ZFU-TE (formerly ZFU until 2015) faced a number of challenges and evolved over time. Beyond the displacement effects discussed above, challenges included avoiding a mailbox effect, whereby firms open a small office in the designated area to benefit from the tax rebates but without creating significant new activity. This was addressed through conditioning advantages to local employment clauses for firms with employees.
Another challenge for the programme was to make sure that the jobs created benefit residents of the area (Lafourcade and Mayneris, 2018). With this objective, the condition on creating local jobs was strengthened over time. In 1997, firms needed to make 20% of their new hires from local residents. In 2002, this share was brought up to 33%. It was set to 50%, the current rate, in 2012 (Givord and Trevien, 2012). Moreover, a subsidy for firms hiring workers from QPVs (emplois francs) was also introduced. The programme was tested as a pilot in 2018-19 and extended to all QPVs in January 2020 (French Government, 2020).
Another issue faced by the programme was the complexity of the zoning system. The Court of Audit (Cour des Comptes) estimated that simplifying zone definition would help target the most vulnerable areas more effectively (Cour des Comptes, 2012). This was done through a 2014 law (Loi de programmation pour la ville et la cohésion urbaine) (French Government, 2014). The law also reduced the scope of the tax exemptions and its duration, thereby reducing the budget for the programme (Ministère de la Cohésion des Territoires et des Relations avec les Collectivités Territoriales, 2019) but also its attractiveness (Lafourcade and Mayneris, 2018). Before 2015, new and small firms operating in a ZFU-TE benefited from longer and more generous exemptions on local business taxes, corporate income taxes and property taxes. The exemption was total for 5 years and gradually reduced to 20% in year 13 and 14. A partial exemption on social contributions on labour was also granted for five years, conditional on having one-third of staff residing in the urban development priority area (Chaudhary and Potter, 2019).
Lessons for other ecosystems:
The ZFU-TE scheme is a long-standing programme, which is well-evaluated. Evaluations find a significant positive effect on employment and enterprise creation but limited in scope and over time. The programme is perceived as efficient by policymakers, in spite of its aforementioned limitations. Based on the evaluations of the scheme, the following lessons can be drawn for the development of similar programmes:
The amount of tax and social security exemptions/reductions should be determined in relation to other existing general exemptions and reductions. One of the limitations identified by evaluations of the ZFUs is that the incentive gave a relatively modest advantage to firms settling in ZFUs when compared to place-blind incentives.
This type of enterprise zone policy should be combined with other interventions to improve connections to spatially isolated neighbourhood and address other challenges, as the impacts of the programme varied for neighbourhoods with different characteristics.
The evaluation of enterprise zones should be designed to identify a range of mechanisms to generate impact, as enterprise zone schemes affect the local economy in a variety of ways. Evaluations with a narrow focus may overlook some channels (Chaudhary and Potter, 2019). It is also important to design evaluation frameworks to compare treated neighbourhoods to comparable ones, as the targeted areas are traditionally at a disadvantage for firm and job creation so comparing them with national averages may lead to underestimating the impact of the programme.