Tea and technology in Paris

The tech-savvy French found Carol Negiar's Paris teashop on the Internet.

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PARIS (FORTUNE Small Business) -- At first glance, Carol Negiar resembles many other U.S. indie retailers. She graduated from the entrepreneurship program at the University of California at Davis and worked for a few large banks before launching a store devoted to her passion, Japanese tea. Seven years later the store is profitable, and many customers discover it online.

"Without the Internet," Negiar admits, "I would have gone out of business."

Nothing unusual about any of that - except that Negiar built her store in Paris.

Small-business success in France might sound like an oxymoron. This is, after all, the land of high taxes, lengthy strikes, and the mandated 35-hour workweek. Opposition to deregulation and other pro-business reforms is widespread and entrenched.

Yet behind the scenes, Internet-based businesses are thriving, taking advantage of cheap bandwidth and engineering talent. A significant number of Parisian tech startups are taking on Silicon Valley - and U.S. entrepreneurs such as Negiar are finding their niche.

Negiar has more customers than she can handle in her teashop in the Eighth Arrondissement. Europe's open borders help: Bloggers as far away as Italy and Germany have given her positive reviews.

"Paris is where everyone comes to shop," she says. Some of her customers spend 1,000 euros in a single order. And the notorious 35-hour workweek is a boon for Negiar - it means her French customers have time aplenty to seek her out.

The total number of startups in France has risen by more than a quarter in the past ten years, and that growth shows no signs of slowing down. The volume of e-commerce transactions is increasing by 40% a year. Meanwhile, the French government offers tax breaks to companies that spend 15% of their budget on R&D, and interest-free three-year government loans of 500,000 euros are commonplace.

"There is a huge wealth of subsidies here that U.S. entrepreneurs can take advantage of," says Benoit Bergeret, 45, who runs technology startups in San Francisco and Paris.

France's Internet infrastructure is years ahead of that in the U.S. A company called Free.fr has installed speedy 1.25-gigabit optical fiber to reach homes throughout Paris - and access is just 30 euros a month.

"There's optical fiber all over the place," says Rodrigo Sepulveda, 37, a Chilean entrepreneur who started a successful online video service, Vpod.tv, in Paris. "It's so fast you can run a business from home." (Provided you obtain the necessary licenses, of course.) Another small Parisian online video service, Dailymotion, has 35 million users, second only to YouTube.

Thanks to France's strong tradition of science education, there's no shortage of talented software engineers. Entrepreneurs with Silicon Valley experience report that crack coders can be hired for much less in the City of Light.

"Compared to the Valley, they're half-price," says Jean-Baptiste Rudelle, CEO of Criteo, an online advertising service.

The government has drilled many loopholes into the 35-hour workweek in recent years, so workers' desks are not deserted at 5 P.M. Startup employees tend to stay late into the evening. Visit Netvibes (a provider of customized home pages and one of Paris's most successful tech companies) at 8 P.M., and it looks just like any Silicon Valley startup - 30 hip twenty-somethings in a single room, staring at screens and talking to customers in the U.S.

"Everyone's working on San Francisco time," says Netvibes founder Tariq Krim, a former Sun Microsystems (JAVA, Fortune 500) employee and Silicon Valley journalist.

Krim moved back to Paris to found his company. Most of his partners and customers are on the West Coast, and Netvibes competes with Google (GOOG, Fortune 500)'s similar home page service, iGoogle. But the distance doesn't matter to Krim, thanks to low-cost Internet phone services such as eBay's (EBAY, Fortune 500) Skype.

"France isn't a place to outsource to," he says. "But it's a great place to build a high-quality team."

Plenty of challenges remain. Engineering and science may be strong in France, but sales and marketing talent is far more developed in the U.S. For American entrepreneurs, that represents an opportunity.

Lucie-Anne Radimsky and Colette Ballou moved here to found a PR agency that now represents tech startups. They were stunned by how easy the move was, and how little red tape they encountered. France's liberal expensing rules came as a particularly happy surprise. Want to write off a crate of red wine and a Chanel business suit? FISC - the French IRS - is happy to oblige.

As Negiar says of her tea store, "I can't see myself doing this in the U.S."