Pushing On Creating the New Captains of Industry

Germany needs a new golden era for business, like the age of entrepreneurs that spurred economic growth in the 19th century, says the author.
German business is anxiously awaiting a new golden age.

In many ways it is the best of times.

The German economy held up well in 2015. The number of people in employment  grew steadily, up to 43.4 million as of October — nearly 3 million more than the fall of  2007, a year before the financial crisis.

The state is also shouldering the high cost of caring for a million immigrants, without incurring new debt. The “Mittelstand” — the many family-run, private businesses that are the backbone of Germany’s economy — are admired worldwide.

But this is not the time for complacency, and it is important we ask ourselves: Just how sustainable is Germany’s enviable economic position?

Tomorrow’s prosperity will depend on whether companies remain competitive, and create new markets developed through innovation. And one important driver to all this is starting new companies.

But the number of companies being founded in Germany is steadily sinking. Since the year 2000, it has fallen some 30 percent.

Tomorrow’s prosperity will depend on whether companies remain competitive, and create new markets developed through innovation. And one important driver is starting new companies.

Of course not every fledgling company will revolutionize an industry. But it is worrying that there are so few new enterprises in sectors where innovation plays a key role. In the field of cutting-edge technologies, the number of companies being launched has dropped nearly 40 percent since the turn of the millennium. In information and communications services, the number has fallen by half.

Universities and other public research institutions provide important impetus for innovation, and promote new companies to exploit scientific findings. In 2000, there were some 3,000 such spin-offs out of research per year. But since 2012, it has been fewer than 1,900 a year.

Can existing companies balance this decline? Many German firms have achieved considerable success through innovation and becoming highly specialized. But a divide is opening up in the spending for innovation.

While major companies in Germany have pushed such spending up by around 6 percent in recent years, the important small and mid-sized companies are falling behind: Their spending on innovation is even dropping relative to sales.

What are the reasons for this declining drive for innovation?

Demographics play an important role. Most of company founders are between the ages of 35 and 45. In the year 2000, there were 14.8 million people in this age group in Germany. In 2015, it was only 11 million — about 25 percent less.

Another obstacle is a lack of risk capital. It is far more difficult for company founders in Germany to finance innovative investments than, say, in the United States.

This disadvantage admittedly has existed for many years, and can hardly explain the decline in startups. But it is paradoxical: How can a country with so much savings as Germany mobilize so little capital for founding companies?

Influencing demographic development is difficult. Although the current influx of refugees is bringing young people to Germany, it remains to be seen whether there are many company founders and innovators among them.

Highly qualified skilled workers, professionals and entrepreneurs should be allowed to immigrate to Germany. In fact, prevailing law provides for businessmen from all over the world, who want to invest in Germany, to be granted right of residence. Up until 2012, the minimum investment sum was €250,000, or about $275,000. This barrier to entry has been removed, but the amount of new investment is still low.

What can lawmakers do?

The Expert Commission on Research and Innovation has long advocated tax regulations on writing off losses to be more innovation-friendly. It has also called for changing financial market regulations so more venture capital will be made available. And existing subsidy programs should be systematically evaluated to determine how they can be improved.

But the government is too hesitant in acting, and instead rests on past laurels. The decline in company startups, and stagnating spending on innovation by the Mittelstand, should be a wake-up call.

Just over a century ago, ambitious men created companies that have become the titans of industry today. We need a new era for people to do the same today.

The author is president of the Centre for European Economic Research. To contact him: [email protected]