Marc-Olivier Strauss-Kahn on "Financing investment in innovation in the euro area and France", EEE Aug 30 2017

1. Financing investment in innovation
in the euro area and France
Marc-Olivier Strauss-Kahn, Director General, Banque de France *
ENTRETIENS ENSEIGNANTS – ENTREPRISES, École polytechnique - Saclay, 30/8/17
1. Facts
2. Causes
3. Solutions
4. Role of public authorities
* This document does not reflect the position of the Banque de France or the Eurosystem

2. 14
16
18
20
22
24
EA savings EA investment
US savings US investment
10
11
11
12
12
13
13
14
10
11
11
12
12
13
13
14
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
France
Euro area
USA
Ratio of productive investment to value added,
Total economy (%, values)
1. Facts: Productive investment in EA < US
Shortfall in total investment & in productive investment (% GDP)
% of GDP
Source: IMF - WEO
2Sources: Eurostat, BEA, Board of the Federal Reserve System
In the US & EA, investment/GDP ratio
remains below pre-crisis levels.
In the EA, savings surplus could be
put to better use within the area.
Unlike the US, the EA and FR have
not seen a big enough recovery in
productive investment (excluding
construction)/GDP

3. 1… No direct measure of innovation financing
3
June 2017 (Apr. if < 3 years old) Outstanding
loans
(€ bn)
All firms 916.0
SMEs 385.6
Firms < 3 years old 94.7
Outstanding loans to French-
resident companies
Source: BdF
Private and public R&D (2014, % of GDP)
Total R&D in France in 2014: 2.24%
of GDP (2/3 private, 1/3 public)
 France << Germany and US

4. 80%
17%
3%
expected demand uncertainty other
Determinants of SHORT-TERM
investment: advanced economies
M. Bussière, L. Ferrara, J. Milovich, “Explaining the recent
slump in investment: the role of expected demand and
uncertainty’, Banque de France WP No 571, September 2015
EIB survey: investment & investment finance, 2016
4
Uncertainty
Availability of finance
Transport infrastructure
Business regulations
Labor market regulations
Digital infrastructure
Energy costs
Qualified labor
Demand (products/services)
Barriers to LONG-TERM investment in
Europe
2. Causes: ST, uncertainty and insufficient demand
Contrib. to slowdown in business investment, panel
of 22 advanced economies, 1996-2014

5. Banque de France: Q4 2016 data
Higher risk and longer-term return on innovative projects imply that
equity financing is more suitable than debt
5
2… Long term: risk-taking vs insufficient equity capital
Innovate
more
Take
more risks
More equity
financing
64
81
67
128
71
60
75
45
0
20
40
60
80
100
120
140
160
180
France United Kingdom Euro area (excl.
Germany)
United States
Equity Debt
NFC liabilities: net equity capital and financial debt,
% of GDP

6. * Large listed companies (see Mazet-Sonilhac & Mésonnier (2016), “The cost of equity for large non-financial
companies … ”, Bulletin, Banque de France and post on France dated end September 2017.
Change in CoE of EA Non Financial Corporates (2006-2017) *
Risk-free rate has fallen by ≈ 400 bp
relative to pre-crisis levels
CoE (return demanded by investors
to compensate for risk) has fallen
to a much smaller extent (≈ 100 bp)
The difference is the risk premium
which has risen by 600-900 bp, and
is dragging on investment
(Yet in France, since 2016, RoE > CoE
for large firms while inv. rebounded)
6
2… Cost of equity (CoE) ↓ vs risk premium↑
Sources: Bloomberg, ECB and BdF
calculations
0
2
4
6
8
10
12
14
16
CoE (with Buybacks, Eurostoxx 600)
CoE (without Buybacks, Eurostoxx 600)
Risk-free rate
Risk premium = CoE – Risk-free rate

7. France: predominance of tax credit for
research, but limited impact
(Bozio, Irac, Py, 2014)
Germany: no tax credit for research, but
high tech strategy, role of Investment Bank
& university/business collaboration
7
3. Financing solutions: Public money can only do so much
Countries with highest levels of public
support ≠ those with most private R&D
investment

8. 0
200
400
600
800
1000
1200
1400
1600
+46%
+36%
<400
< €0.4bn
Debt
Equity
< €0.6bn
NFC liabilities
€ bn
Crowdlending
Crowdequity
New opportunities for financing innovation:
- Direct/fast link with individual and institutional investors (e.g. Lendix)
- Fund-raising: loans (crowdlending) or equity investment (crowdequity)
3… Scope/limits of private financing
Very dynamic market:
- FR: No.2 market in Europe after UK
- 86 platforms in France in 2016
But this ‘niche’ segment is not
without drawbacks
Limits:
- ex ante selection of projects
- ex post moral hazard, lack of
monitoring
Need to increase SMEs’ access to
financing 2016 national accounts, Crowdfunding Observatory
8

9. Need for regulation that is stable, reliable and agile in order to:
- Exploit the opportunities offered by FinTechs
- Mitigate risks (operational, cyber, macro-financial, …)
- Protect investors (information, understanding of risks …).
BdF approach: ‘SoundBox’ as opposed to ‘SandBox’
- Rather than complete freedom in a ‘safe space’ (sandbox) => how to choose/exit?
- Regulation that is proportionate to risks
- Support and guidance for market participants: ACPR/AMF FinTech Innovation Unit
since mid-2016, over 100 actors
Regulation: an engine of growth for market participants
- Trust: key success factor for a model based on relational capital
4. Role of public authorities: Banque de France, regulator
9

10. At the national level
- Reduce rigidities in the labor & product markets
- Eliminate tax distortions (tax deductible interest on loans: ↑ debt & ↓ equity)
At the European level
- Juncker Plan: cooperation between private/public investors, and strategic LT projects
- Financing Union for Investment and Innovation offering a range of financing products
10
4… other useful reforms
More
regulation
Less
regulation
2.6
1.1
2.7
1.2
2.7
1.2
2.7
1.2
0
1
2
3
France 3 best OECD countries
1998 2003
2008 2013
Labor Market
Composite indicator of regulation
Source: OECD, 2013
2.4
1.5
1.8
1.2
1.5
1.1
1.5
1.0
0
1
2
3
France 3 best OECD countries
1998 2003
2008 2013
Products Markets
Composite indicator of regulation