AIX-EN-PROVENCE, France—French entrepreneur Alexandre Mizrahi made a tough call in recent months: He pulled the plug on a new business for which he had planned to invest €2 million ($2.6 million) and hire 25 people. He feared high taxes and foreign competition would make it unprofitable.
"Honestly, at the moment, I don't see any point in investing," said the 75-year-old Mr. Mizrahi, who founded small auto-part maker Klaxcar in the 1990s. "If I were 40 years younger, I'd move abroad."
The French economy is facing a growing handicap as it struggles to create jobs and crawl out of recession: Despite low interest rates, companies and entrepreneurs are cutting back on their investments. They're delaying plans to expand existing factories, and canceling plans to build new ones.
Behind the reluctance is a difficult combination. Higher taxes and cheaper foreign competition have pushed margins for French companies down to their lowest level since 1985—reducing companies' ability to stomach risk. At the same time, French business leaders say the challenges from unpredictable tax rates and ever-changing French red tape are rising.