By Catherine Bremer and Nicholas Vinocur
PARIS (Reuters) - While French President Francois Hollande is at pains to repair his fraught relations with business, his industry minister has other ideas - or so many entrepreneurs and even some government colleagues believe.
Proudly protectionist Arnaud Montebourg, who is also Minister for Industrial Renewal, is showing a heavy-handed hostility to foreign and domestic firms just when France needs investment, his critics say.
In his defense, the tousle-haired opponent of globalization says he is saving jobs, rewarding the many and targeting only a few - that happen to include the boss of the world's biggest steelmaker and a French car giant.
"I pinned medals on hundreds of companies and I criticized two. Why Mittal and Peugeot? Because they did daft things," Montebourg told Reuters after presiding at a recent prize giving for entrepreneurs, noting that Peugeot's loans are guaranteed by French taxpayers.
Hollande's problem is that while his popularity is near rock bottom, poll ratings are somewhat higher for 50-year-old Montebourg, a man who seems to have his sights set on the top job one day.
This, along with Montebourg's strong support on the left of the ruling Socialist Party, is complicating Hollande's efforts to impose cabinet discipline and ensure his government shows a consistent face to business leaders.
Hollande recently invited 300 of them to the Elysee Palace and told them he was easing capital gains taxes for entrepreneurs. The president, who vilified high finance during his 2012 election campaign, said he now understood that encouraging entrepreneurship was the way to restore growth to the recession-bound French economy.
The next day, though, news broke that Montebourg had aborted a deal for Yahoo to take a majority stake in video-sharing website Dailymotion, which the French firm was counting on to spur its overseas growth.
Mid-meeting, Montebourg barked at the finance chief of France Telecom, Dailymotion's owner and itself 27 percent state-owned, that he would not let him hand over the "French nugget", according to a senior corporate source involved in the takeover.
The message entrepreneurs heard was: if you're lucky enough that your years of toil create a successful business, don't count on being allowed to use a foreign partner to go global.
"The deal was all but done. We'd worked on it for months. Then Montebourg blew a fuse," said the source, who believes the episode will scare start-up firms away from forming partnerships with groups in which the state holds a stake.
"The same week the government tried to help entrepreneurs it shot itself in the foot by showing it is interventionist and anti-business. It was a red flag for start-ups."
Government sources say Montebourg, a loquacious former lawyer and grandson of an Algerian butcher, is proving problematic in his role as the public face of Hollande's industrial policy.
Yet Hollande believes that Montebourg would be more dangerous outside the government where he could attract left-wingers to an opposition movement, they say. The government insiders describe him as a necessary nuisance who may help to keep left-wing voters behind Hollande as the president pushes for economic reforms that were not in his election manifesto.
"Of course it bothers us. It's irritating for people who work here. But what matters is that we can get things done," said a source at the finance ministry, where friction is rife between Montebourg and other ministers in the building.
Finance Minister Pierre Moscovici, who has a sixth-floor office overlooking the River Seine, was not consulted before Montebourg, who works on the third floor, stamped on the Dailymotion deal. On the fourth floor, digital economy minister Fleur Pellerin, a darling of the dotcom industry, was irate.
Yet few people think Montebourg will be ditched soon. The ministry source said the election defeat earlier this year of Italian prime minister Mario Monti, who had been popular with investors for his painful economic reforms, showed that ordinary voters had to be kept happy.
"If we keep Montebourg, it's purely political. Investors adored Monti yet he polled 10 percent. As long as we explain all this to foreign investors - and we do - we're OK," he said. "Where I think Montebourg does have a cost is with the message he sends to entrepreneurs, and that is a worry."
Officials figures present a mixed picture. While broad foreign direct investment, including reinvested earnings and intercompany loans, climbed 52 percent in 2012, an Ernst & Young study on European attractiveness found the number of foreign projects that set up sites fell 13 percent from 2011.
The rate of creation of French start-ups over the past 12 months is down 2.2 percent from the previous 12 months.
Montebourg mesmerized many with attacks on cheap Chinese imports as one of six candidates in the Socialist Party's 2011 presidential primary. Defending those "crushed by the economy" and promising to part-nationalize banks, he came in third with 17 percent of the first-round party vote.
He had already written books demonizing free trade and co-founded a movement seeking a greater say for citizens in public affairs and a more powerful parliament under a new constitution.
Today, charged with delivering Hollande's promise to pull French industry out of the doldrums, he has played more to his fans than foreign investors.
His least controversial project is "Say Oui to France" - a campaign to persuade businesses to bring home production they have moved overseas. So far this year, five firms have done so, on top of 13 last year.
Otherwise, he is most visible racing from one troubled factory to another battling closures, lending him the unwitting air of a Grim Reaper and sometimes leading to outbursts that appeared to embarrass his bosses.
Moscovici and Prime Minister Jean-Marc Ayrault had to smoothe things over when Montebourg insulted Lakshmi Mittal, chief of steel giant ArcelorMittal, over plans to shut two French furnaces and sparred with a U.S. tire tycoon.
His portrayal of Mittal as a villain spawned a video game called "Kill Mittal" where players can battle the Indian businessman, portrayed as a giant robot, to keep the plant open.
Montebourg also rounded on the British-based Economist magazine after it described France as being in a state of denial, calling it the comic of London's financial center.
Mocking the friction within the government, TV host and Tweeter Bernard Pivot invented the verb "to montebourg", meaning to contradict one's boss.
Montebourg brushes this off and says what's important is that he has saved 65,031 out of 76,809 threatened jobs in cases when he has intervened.
Talking to Reuters in late May, Montebourg scoffed at the idea he is anti-business. Mittal and Peugeot - which he has criticized for paying out dividends while benefitting from state support - had deserved "public reprimands", he said.
People who know Montebourg say his habit of turning up the rhetoric near TV cameras is all about his designs on the presidency. "Arnaud is unable to put that ambition to rest," said Thierry Mandon, a Socialist lawmaker close to him for 20 years.
Rene Beaumont, a conservative senator who once lost a lower house seat to Montebourg, said he was all about publicity.
"As he's said himself when he's come out with an insulting remark or stoked up a crowd with untruthful statements: 'the key thing is to speak, whether it's right or wrong, I don't care'."
After the Dailymotion affair, Foreign Minister Laurent Fabius, a former Socialist premier and finance minister, called for heads to roll, saying the finance ministry needed one boss.
Yet people who know Hollande say that for all of his reform efforts, deep down he shares many of Montebourg's convictions and is loath to lose him.
This is perhaps as much for practical as ideological reasons. A recent BVA opinion poll rated Montebourg as the second most-popular government minister, with 32 percent support, after crime-busting Interior Minister Manuel Valls.
By contrast, Hollande's own ratings have fallen faster than those of any other modern French president in his first year, standing at around 25 percent in recent surveys.
"Hollande's biggest concern is to keep the left united and so he'll keep Montebourg inside as long as he can," said a top communications executive who has advised government ministers.
"The problem is that Montebourg's impact on France's image abroad has a real cost in terms of foreign investment. Hollande is looking at domestic opinion polls when he should also be looking at opinion in the rest of the world."
(Editing by Mark John and David Stamp)