A common view of the British cinema is that it has been lying in hospital for so long that even if the doctors by some miracle pronounced it fit, it would find it difficult to get up and walk. This idea, very largely inspired by homegrown pessimists, is not one shared by those abroad. How could it be when British films, actors and technicians keep on winning Oscar nominations, prizes at film festivals and even box-office success round the world?

It may be a boring conclusion, but perhaps the answer is neither the pessimists' black nor the optimists' white but a pale shade of grey, made a little darker by an economic situation that affects every film-producing country in the world.

It is extremely difficult to finance British films at the moment and there are undoubtedly a good many producers wandering around London thinking about giving up the uneven struggle to keep their offices open. Nor have the Government's policies, intended to aid matters, always borne fruit. Some of them, indeed, have simply made matters worse by swallowing so much up into what some people think is the bureaucratic wasteland of the Film Council.

Then there is the undeniable fact that if a British film is financed and shot, the distribution and exhibition system in the UK is so dominated by Hollywood product that a fair crack of the whip for home product is very rare. Even established and highly praised directors like Stephen Frears, Ken Loach, Mike Leigh and Michael Winterbottom could legitimately complain that their films have insufficient exposure in British cinemas and, perhaps through the lack of the kind of publicity your average Hollywood production expects, don't do the business they could. Others who have far less recognition, either at home or abroad, have an even harder task. A good many British films over the last twelve months or so have made so little at the box-office that the figures look deeply depressing for their makers.

Filmmakers Ken Loach (left) and Stephen Frears

Yet, despite all this and many other struggles, what we call the British film industry persists in producing each year the kind of notable successes most countries, including France (which is always regarded as a model of enlightenment) would envy. Where are the French commercial equivalents of Four Weddings and a Funeral, Trainspotting, The Full Monty or Bend It Like Beckham, let alone the Bond films? When did the French produce the winners of three major Festivals within the space of a year or so, like Bloody Sunday (Berlin Golden Bear 2002), The Magdalene Sisters (Venice Golden Lion 2002) and In This World (Berlin Golden Bear 2003)? To these can certainly be added Stephen Frears' Dirty Pretty Things, Ken Loach's Sweet Sixteen and Mike Leigh's All Or Nothing.

In This World (director: Michael Winterbottom)

This is not to suggest that British film-making is necessarily in a healthier state than that of France, which doesn't have the fortune of the English language to sell in America and often has to watch as Americans buy up the ideas behind French films in order to make Hollywood versions of them. But it does show that the English patient isn't dead yet and is likely to remain alive for some time to come. There are great hopes, for instance, of Calendar Girls, which was only shown in the market at Cannes.

The relatively new UK Film Council, attacked by some whatever it does, certainly deserves close scrutiny. It will get less of it now with the untimely death of Alexander Walker, long-time critic of the Evening Standard, who was its inflexible opponent. But it is beginning to understand that its initial idea of going for more commercial films isn't as wise a policy as simply backing, or co-producing, the best quality it can find. Trying to make films which will attract large audiences is quite as dangerous, and often as frustrating, as attempting to make movies critics and art house audiences will admire. You simply have, as both financier and producer, to identify talent and back it.

The trick is to know what that talent is capable of. An intriguing young film-maker like Lynne Ramsay, for instance, whose Morvern Callar took little money at the box-office but was awarded the International Film Critics' Association award for the most promising director of the year, has to be nurtured in a different way to those who are determined to break through to a larger public. So has a more experienced director like Terence Davies, who makes far too few films but none of them other than distinctive.

Director Lynne Ramsay

The past year, however, did seem to prove not that too few British films were made but that too many got the go-ahead. Too many screenplays seemed slack and unfinished with the result that too many films had no appeal either to the art market or to broader audiences. But at a disappointing Cannes this year, two British films, neither in competition, made their mark. Roger Michell and Hanif Kureishi's The Mother, which had a marvellous performance in the central role from Anne Reid, was given an ovation at the Directors' Fortnight and David Mackenzie's Young Adam, graced by Tilda Swinton and Ewan McGregor, was a stylish second film in the Certain Regard section. In neither case was the necessity felt to have an American star to bolster its success nor American money to help its financing.

This is, of course, a world in which it is often difficult to know from which nationality a film legitimately hails, since co-production is almost always the order of the day. What would Loach, Leigh or Greenaway do without it? But the fact remains that Britain is lucky enough to possess enough good directors, actors and technicians to make much of the rest of the world be distinctly envious. The problem is finding the stories to engage audiences used largely to Hollywood product, with its huge resources and bankable stars or to attract a seemingly declining market for what are termed art movies.

Many British films seem to fall uncomfortably between the two. But this is certainly not a phenomenon limited to the UK. Despite the advantage British films possess in being able to appeal to the American market, Europe suffers exactly the same troubles. The British problem, as in other areas, is to make our minds up as to whether we look across the Atlantic or across the Channel. Whether we are indeed part of Europe as far as film is concerned or a somewhat poor relation of America. When we've decided that conundrum we may find a policy that will better sustain an "industry" which contains so much talent that, in an ideal world, it shouldn't need sustaining at all.

Derek Malcolm
Derek Malcolm was chief film critic of The Guardian from 1971 to 2000 and Director of the London Film Festival 1984-86. Since 1991 he has been President of FIPRESCI, the International Film Critics Association.