By Krystle Wong

Oscar Wilde famously said: good men, when they die, go to Paris. Under Sarkozy, you could say that good companies go to Paris when they want to die.

Sarkozy’s recent talk on taxing internet companies and anti-immigration have all the signs of killing innovation in its cradle. Ironic, given all his rhetoric on “la France forte” and emulating the German model.

Taxing internet giants an alarming signal to other firms

Twitter co-founder Jack Dorsey recently stopped by the Elysée to have a chat with Monsieur le Président about innovative internet technology and the like. Nicolas Sarkozy urged Twitter to follow other internet companies and base their European operations in France.

The problem? Not long before he was to meet Dorsey, Sarkozy told Le Point that global internet giants like Twitter, Facebook and Google should be taxed.

“It is unacceptable that they have a turnover of several billion euros in France without paying tax,” said Sarkozy. He even added that France should consider taxing online advertising revenues, a proposal which was rejected by lawmakers last year, who feared it would hit small local companies more than large multinational firms.

Google was moved to indignation. “The Internet offers a wonderful opportunity to generate growth and jobs in France,” said a spokesman in a retaliatory statement to Sarkozy. According to a report by McKinsey, internet companies contributed 60 billion euros to the French economy in 2009 and could create 450 000 jobs by 2015.

“This positive contribution would have a better chance of coming about in an environment that is supportive of the web in France and of investment in the sector. Public policy should support this,” the spokesman said.

Sarkozy’s policies are throwing salt over fertile ground. A tax on internet giants could be easily borne by them, but it sends an alarming signal to other internet companies thinking about settling in France. The virtual nature of internet business and EU mobility laws allow such firms quite a bit of flexibility in choosing where to locate their operations. A tax on giants is a tax on success, a signal for burgeoning startups to flee.

If France really wants to become the European base for more internet companies and to live up to its goal of emulating the German model, it needs to attract innovation, not deter it.

Immigration crackdown will set back SMEs, hinder innovation

Firms are going to find it more difficult to hire top foreign talent if Sarkozy has his way vis-à-vis immigration. The conservative President has started to ramp up the anti-immigrant rhetoric to win far-right voters away from the xenophobic National Front candidate Marine Le Pen. His attacks on immigration have earned him the headline “Nicolas Le Pen” in the Wall Street Journal.

Saying there were now “too many foreigners” in the country, he told a TV audience he would cut the number of immigrants admitted to France by half if he were re-elected to a second term. Shortly after, he told a huge rally in a stadium near Paris that he would pull France out of the EU’s borderless Schengen zone unless Brussels reformed to clamp down on illegal immigration. This is a policy that delivers a real double whammy: less illegals or less French jobs for everyone. That’s great for French jobseekers, terrible for French innovation.

Making it difficult to hire foreign workers is not a real obstacle for large firms which often have the resources to hire whoever they want. But it will adversely affect small-to-medium entreprises (SMEs) who want to tap into a foreign talent pool. Internet startups and other new innovative groups belong to this category of firms which require the best talent they can get.

France needs to keep such companies alive because they are the ones who drive innovation. Big firms like Google may have the money and talent to push out new innovative products every year, but: first, they are not French; second, firms which reach a certain size become monopolistic, focusing on price competition and product differentiation instead of pushing new and innovative products.

Interior Minister Claude Guéant has also tightened the screws on foreign workers, issuing the controversial Circulaire Guéant last May which limits the number of work permits to foreign graduates. Keeping “French” jobs for the French works, to some extent, like positive discrimination. It skews the signals in the job market, pushing companies to hire employees not based on whether they are the most qualified, but on their nationality.

I once spoke to a director of a London-based internet company who said she had struggled to hire foreign employees over the length of a year. She had designed basic quantitative and scenario tests for shortlisted candidates applying for a position as technical operations manager. Although the top performers on the test were Indian, Thai and Chinese, she was forced to hire a British national who had scored in the median quartile.

This is exactly the type of situation French SMEs are also going to face. With Sarkozy cracking down on immigration, such firms will be hindered from hiring based on top talent, holding them back from innovating and developing as quickly as they could.

Uncompetitive social policies

France is famously known for its expensive social policies which have set the country back in terms of competitiveness and innovation. A report in 2011 said France has one of the highest social costs of labour borne by employers in the eurozone.  For every 100 euros paid to a worker, French employers have to bear up to 50.3 euros. It has clung to its 35-hour work week and let its minimum wage increase steadily over the years. French labour laws make it nearly impossible to fire employees, thus hindering firms from replacing them with better-suited or better-qualified candidates.

“La France forte” has held its own so far by compensating in pricing for what it lacks in quality, but the country’s competitiveness has long faced issues. A ballooning trade deficit (70 billion euros in end-2011), a lacklustre industrial sector and a lack of innovation in French firms are all cited by Sarkozy and Socialist candidiate François Hollande as problems they plan to tackle if they win the elections.

Hypocrisy or schizophrenia? However you look at it, Sarkozy’s ideas to reform France and make it more competitive belies the conservative President’s true instinct for digging a grave for innovation.