France's economic fabric more concentrated than it seemed New definition and new categories of enterprises

The new definition of the enterprise in France, introduced by Decree no. 2008-1354 of December 18, 2008, offers a more realistic vision of the breakdown of production by enterprise size and activity sector (box 1). Previously, a legally-oriented approach prevailed, whereby the enterprise was equated with the legal unit (unincorporated or incorporated business). Since the 2008 decree, the enterprise has been defined on economic criteria. Its boundaries can exceed those of the legal unit and encompass several units, when these are interlinked within enterprise groups.

In practice, many group affiliates and subsidiaries are units lacking in autonomy or even, sometimes, substance. They have been formed as a result of takeovers or for internal reasons and strictly management-related objectives. Their only significance resides in their interaction with other group entities. Examples include firms that perform specific phases of the production process or are set up to manage an enterprise group's entire workforce. Others, instead, report production activity even with zero employees. These affiliates and subsidiaries are now treated as an integral part of the groups to which they report.

Applying an initial approach to the new definition, and considering each group as a single enterprise (box 1), France had 2.69 million enterprises operating in non-farm market sectors in 2009. Of the total, 2.65 million consisted of a single legal unit each, and 44,000 comprised several units (table 1). Of the latter, 36,000 were French-controlled groups and 8,000 were controlled by foreign groups.

The new definition of the enterprise reveals the extreme duality of France's economic fabric, attributable to the importance of enterprise groups. In formal terms, groups account for only 2% of enterprises and 6% of legal units in France. Yet they employ 64% of payroll workers, including 50% in French-owned groups and 14% in foreign-owned groups. Similarly, enterprise groups produce 70% of total value added by the business sector (excluding the financial sector, which is not accurately measured by accounting-based value added).

The 2008 Decree defines four sizes of enterprises on the basis of workforce size, sales (turnover), and total assets. The concentration of the economic fabric is visible in this classification as well. In 2009, 2.56 million French enterprises of the non-farm market sectors, or 95% of the total, were micro-enterprises. They employed 19% of all payroll workers. At the opposite end, 217 large enterprises employed 31% of payroll workers. In the size categories in between, jobs were rather evenly distributed: some 131,000 small and medium-sized enterprises (SMEs, understood here as excluding micro-enterprises) and 4,600 intermediate-sized enterprises (ISEs) employed 28% and 23% of payroll workers respectively (table 1).

Before the 2008 Decree, economic concentration was usually measured by the economic weight of legal units in different workforce-size categories. With legal units of the financial sector now excluded—as their accounting aggregates are not comparable with those of other sectors—the official number of legal units in 2009 came to 2.76 million. Only a hundred or so exceeded the threshold of 5,000 employees that defines large enterprises. They employed 14% of all payroll workers (chart). When intra-group links are factored in, and with the addition of the sales and total-assets criteria, the concentration is far higher. The number of large enterprises rises to approximately 200. They employ 28% of payroll workers in the scope of coverage. Their economic weight is twice that of legal units with 5,000+ employees. They generate 33% of value added in the scope of coverage (17% of GDP), more than twice that of legal units of comparable workforce size. In 2006, they concentrated 62% of domestic research and development expenditure, versus 37% for legal units of comparable workforce size. Large enterprises represent an even larger share of balance-sheet variables. They alone account for 62% of fixed assets, versus 21% for legal units of 5,000+ employees.

Symmetrically, the weight of the other three enterprise categories is less significant, relative to legal units in the same workforce-size category. For most aggregates, the steepest decline in weight concerns SMEs. The reason is that a significant proportion of legal units of their size (10-249 employees) consists of affiliates and subsidiaries of groups in a larger size category (ISE or large enterprise), which are now amalgamated with those groups under the new criteria (chart).

The new definition of the enterprise also changes the perception of the weight of each sector (box 2). Large industrial groups comprise many affiliates and subsidiaries in their core businesses. However, they also often set up separate affiliates and subsidiaries to perform sales/marketing or support functions, classified in the service sector. The inclusion of these units in the manufacturing sector increases the manufacturing workforce by 8%. This translates into a 2-point increase in the share of manufacturing in total non-farm and non-financial employment (table 2). The impact on value added is greater, with a 4-point increase. The explanation is that service-sector affiliates and subsidiaries of industrial groups often generate higher profit margins. Some of these units are set up to invoice production, while others perform highly skilled functions such as head-office activities, financing, and research. The same mechanism adds one point to the share of the construction industry in value added, whereas its share in employment is virtually unchanged.

The refocusing on manufacturing and construction is even more visible for certain aggregates that are particularly affected by spin-offs to affiliates and subsidiaries, such as net assets. Most groups have affiliates and subsidiaries classified under specialized activities (scientific and technical) or administrative and support services (notably including head offices). The legal units classified in these sectors hold 30% of net assets, but entities in this category that are full-fledged enterprises hold only 8%. Likewise, while legal units hold 11% of net assets, real-estate firms hold only 6%. Conversely, manufacturing enterprises hold 43% of net assets, whereas manufacturing legal units under the former definition held only 25%.

France's leading exporters consist of large enterprises and ISEs. In the non-farm and non-financial market sector, 186 large enterprises (out of 193) and 3,300 ISEs (out of 4,405) accounted for 49% and 33% of total exports respectively in 2009; 43,000 SMEs accounted for 13%, and 285,000 micro-enterprises for only 5% (chart). More than 80% of micro-enterprises are engaged in retailing and personal services, so some of their sales may have been to foreign tourists. When exports invoiced by service-sector affiliates and subsidiaries of manufacturing groups are included in the groups' accounts, the share of manufacturing in total exports rises from 57% to 64% (table 2). Conversely, while legal units in the wholesale/retail sector account for 23% of total exports, their share falls to 17% if we consider "pure" wholesale/retail enterprises excluding affiliates and subsidiaries of groups in other sectors. Sixty-eight large manufacturing enterprises alone generate 36% of the total economy's export sales; 1,500 manufacturing ISEs account for another 22%.

The changes entailed by the new definition of the enterprise are structural—i.e., long-term—in nature. The shift in the sectoral breakdown toward manufacturing and construction, as well as the highly uneven impact on each variable, had already been established for the years 2004 and 2007, with orders of magnitude comparable to those of 2009. Likewise, the shares of the different enterprise categories in the economy and their sectoral composition display very little change over time (references). The new approach does not call into question the broad trends—such as the expansion of the tertiary sector—or international comparisons.