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Story originally appeared on Bloomberg.

Yahoo Blockage Shows Conflicts in France Inc.’s Digital Ambition

Dailymotion SA, a YouTube competitor, has come to symbolize all the contradictions in France Inc.

After years of watching French startups snapped up by foreigners, the government last week put its foot down when Yahoo! Inc. (YHOO) sought to take control of the video site. Using the state’s shareholding in Dailymotion owner France Telecom SA, Industry Minister Arnaud Montebourg ruled that the “strategic” company, one of the few with technology to rival Google Inc. (GOOG)’s Youtube, couldn’t be sold to the U.S. group.

The move has sparked debate over everything from the state’s heavy hand and what it will mean for foreign investment to the inability of French startups to catapult their ideas on to the world stage. Montebourg’s action has divided the finance ministry, brought him support from unlikely quarters in the opposition and drawn the ire of entrepreneurs, laying bare the conflict within France on the role of the state in business.

“The moral of this story is that if you’re an entrepreneur and want to have control over your destiny, best keep away from state funding, especially in France,” Pierre Chappaz, former head of Yahoo Europe and founder of price-comparison website Kelkoo, which he sold to the U.S. company about a decade ago, wrote on his blog yesterday.

The hullabaloo coincides with President Francois Hollande’s efforts to attract foreign investors as he struggles to stem record-high joblessness amid a deepening economic slump. The European Commission forecasts a 0.1 percent contraction of the French economy this year.

‘Catastrophic Message’

“It’s hard to talk to foreign investors when your ministers are telling them ‘Go home, we want to live in autarky’,” Pierre Kosciusko-Morizet, founder and chief executive officer of Priceminister, a French rival to EBay Inc. sold to Japan’s Rakuten Inc. in 2010, was quoted as saying by website Rue89. “We’re sending a catastrophic message.”

Montebourg has ruffled feathers before. In November, the minister sparked a furor by calling for the nationalization of a troubled local unit of ArcelorMittal, which the world’s largest steelmaker was looking to shut down. In February, Montebourg got into a war of words with Titan International Inc. Chairman Maurice Taylor, who turned down a proposal to buy a tire plant that Goodyear Tire & Rubber Co. is closing in France.

Montebourg defended himself on Dailymotion, saying France is opposed to Yahoo’s plan to buy 75 percent of the video site, with an option for 100 percent, preferring a 50-50 partnership. He was watching out for French strategic interests, he said.

‘Unfounded Concerns’

“The French appreciate it when the state intervenes when it can,” he said on France 2 television last week.

He denied his actions might drive investors away. “The concerns of foreign investors are unfounded,” he said in an interview. “We are very happy to work with our American friends.”

While Finance Minister Pierre Moscovici distanced himself from the decision, Montebourg’s defenders put it down to a learning process in an increasingly global digital world.

“There’s massive growth potential in digital innovation,” said Yves Gassot, who heads Montpellier, France-based technology researcher Idate Digiworld. “France, like other European governments, is slowly learning how to tap into it, through trial and error.”

France, which has elite math and science universities and produces the highest number of graduates in these fields in the European Union, has struggled to come up with a winning formula to spawn the next technology giant to take on the likes of Google, Apple Inc. (AAPL) or Facebook Inc.

‘French and Dead’

The record shows that most of France’s successful entrepreneurs in the past decade have chosen to sell their businesses to foreign investors. Germany’s SAP AG in 2007 acquired Business Objects for 4.8 billion euros ($6.3 billion).

Axel Springer AG bought web portal Aufeminin.com that same year, and real estate ads website SeLoger.com in 2010. Dating site Meetic (MEET) was acquired by the U.S.’s Match.com in 2011.

Priceminister has tripled its sales and doubled the number of employees since it was sold to Rakuten, CEO Kosciusko-Morizet said.

“Joining a global group saved us,” said Kosciusko-Morizet, who also helped create Isai, a French fund that invests in local startups. “Had we stayed French, we’d be dead.”

A similar search for a global footprint led France Telecom, 26.94 percent owned by the French government, to talk to Yahoo.

Dailymotion’s Journey

France Telecom bought its initial 49 percent stake in Dailymotion in 2011 for 58.8 million euros, and boosted the holding to 100 percent in January this year for 61 million euros more, according to its annual earnings report.

With the talks with Yahoo failing, France Telecom (FTE), which intends to keep a stake in Dailymotion, has resumed its search for a partner for the site.

Dailymotion, created in 2005 by Frenchmen Benjamin Bejbaum and Olivier Poitrey, gets 112 million unique visitors per month according to its website, a 10th of the number for YouTube.

Yahoo had planned to invest massively in video technology, which would have benefitted Dailymotion, Dailymotion CEO Cedric Tournay said in an interview in Le Monde.

“Our roots are French, a majority of our teams too...but it’s about more than just France,” Tournay said. “We live in a global environment in which we have, for the good of our companies, to make choices that maximize our chances of success over the long term.”

‘Entrepreneurial Adventure’

For France, keeping prized assets in French hands isn’t new. Former President Nicolas Sarkozy in 2009 created the Fonds Strategique d’Investissement, or FSI, a sovereign fund charged with investing in “strategic” companies.

The FSI had a stake in Dailymotion, which it sold to France Telecom in January.

Sarkozy’s former adviser, Henri Guaino, last week expressed support for Montebourg’s stance, saying the minister’s intervention protects the country’s interests.

France Telecom CEO Stephane Richard was less supportive. French daily Les Echos cited him as saying that Dailymotion is a unit of France Telecom, “and not of the state. It’s the group, its management and its board that are managing the dossier.”

Rather than buy stakes, the government should be focused on creating an environment that’s conducive to technological innovation, Idate Digiworld’s Gassot said.

France’s private equity association Afic last year said the lack of capital available to finance small and medium sized companies had become an “emergency”.

The amount of private equity capital raised in 2012 in France was 5 billion euros, compared with 6.5 billion euros the previous year, according to Afic data.

“The solution isn’t necessarily to be obsessed with turning local startups into global brands,” Gassot said. “Maybe you’ll have a series of smaller companies, maybe they’ll be sold off. The important thing is to make sure the money is reinvested here so the next generation of young engineers also gets a chance at the entrepreneurial adventure.”