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Not Quite an Innovation Nation

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  • Why it matters

    Why it matters

    Germany has been ranked 12th in the Global Innovation Index, which compares 141 countries to determine how innovative they are. It has moved up one place compared with last year.

  • Facts

    Facts

    • While Germany invests 2.85 percent of its economic output in research, there are concerns that the ideas end up being used by companies abroad.
    • The German government wants to promote funding for start-ups, with state-owned development bank KfW planning to make an additional €1 billion available as collateral for loans.
    • One area in which Germany performed well was in terms of access to information and communication technology, where it ranked fifth in the index.
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Germany might be a land of inventors where patents are registered, but creative business is taking place elsewhere. California’s Silicon Valley is regarded as the creative center of the world – not Stuttgart, Hamburg or Berlin.

This view has now been backed up by the Global Innovation Index, in which scientists from Cornell University in the United States, the French business school INSEAD and the World Intellectual Property Organization (WIPO) compare 141 countries.

The good news is that Germany, the world’s fourth-largest economy and Europe’s largest, has moved up one place since the last test. The bad news is that it is still in only 12th position. Switzerland, the United Kingdom, Sweden, the Netherlands and the United States are all much more innovative.

The index takes into account 79 criteria including the amount spent on research, the number of patents registered, availability of fast Internet connections, political regulation and the cost of setting up a company.

Countries that fared particularly well include the United Kingdom, which saw barely any reduction in investment in research and development even during the recession, and where universities attach a lot of importance to partnerships between scientists and investors.

Sweden has been scoring well for years in almost all rankings of Europe’s most innovative locations, and invests well over 3 percent of GDP in research and development, more than any other member of the EU.

Switzerland offers political and economic stability, excellent universities, top-notch infrastructure and a flexible employment market, and has come top in the World Economic Forum’s index of the most competitive countries for the sixth consecutive year.

It is unlikely to be much consolation that China and Japan, two of Germany’s biggest competitors on the global market, fared even worse than Germany, said innovation expert Kai Engel from management consultancy A.T. Kearney, which offers advice on the index. “We should always compare ourselves self-critically with the best and continually challenge our own position.”

The lack of a start-up culture is not the only reason why Germany is not in the premier league of innovators.

A lot more needs to be done in order to establish a start-up culture like in the United States. There are 92 other countries where it is easier to set up a business than in Germany. Fewer than two in every 1,000 people in Germany have founded a company, putting it in only 59th place worldwide.

The German government has at least recognized the need to catch up. State-owned development bank KfW announced on Thursday that it plans to make available an additional €1 billion as collateral for loans. The money will come from the investment fund set up by European Commission president Jean-Claude Juncker.

The aim is to boost lending to start-ups. Although they usually need only small amounts, they can often offer little in the way of collateral. To break down banks’ reluctance to lend to these customers, KfW will assume 80 percent of the risk as part of its “Start-up Money” program. It is hoped that this additional €1 billion will benefit more than 20,000 young companies.

German finance minister Wolfgang Schäuble, a member of the Christian Democratic Union (CDU), has also started to show more support for company founders, albeit reluctantly. Handelsblatt has learned from government sources that he now plans to ensure that capital gains on the sale of free float shares are not taxed. “Anyone who provides venture capital and acquires a stake in start-ups must be able to be certain from the beginning that any capital gains will be tax-free,” a source in his ministry said, adding that the bill for the new law on start-ups was being revised.

The source went on to say that it would be a “challenging task” to organize this in a way that provides legal certainty. The European Commission in particular has reservations. However, some of Germany’s federal states are also calling for tax advantages for holdings of less than 10 percent to be scrapped. On Wednesday the cabinet agreed on the key points of a new law on venture capital. In contrast to the previous plans, there will now be “no new charges”.

The lack of a start-up culture is not the only reason why Germany is not in the premier league of innovators. While Germany has nothing to be ashamed about when it comes to expenditure on research, which amounts to 2.85 percent of economic output, Mr. Engel said that it is often others who end up making products based on Germany’s good ideas.

The Fraunhofer Society developed digital compression, he pointed out, but Asian companies brought MP3 players onto the market. In addition, he believes that the government often lacks vision regarding future technological developments.

Even the much-lauded innovativeness of small and medium-sized enterprises leaves a lot to be desired, according to consultancy A.T. Kearney. Examples that are often cited, such as agricultural machinery manufacturer Claas or sensor specialist Sick, are now practically corporations, with sales running into the billions. On the other hand, small companies with up to 250 employees often have no strategy for quickly turning ideas into market-ready products, the consultancy says.

Lutz Goebel, head of the association of family businesses, rejects this criticism of his colleagues. “There are lots of examples of smaller and medium-sized family companies that are often well ahead in terms of the development of new products and technologies.”

He highlighted the example of Akemi, a chemical company based in Nuremberg and employing just under 100 staff, which invests up to 15 percent of its sales in research and each year brings at least 20 new adhesive and filler products to market maturity. However, he admitted that not every innovation in the SME sector results in a patent application.

What is surprising is that Germany performs relatively well in the innovation index with regard to access to information and communication technology, coming in fifth place, even if it does not make as much use of these technologies as it could. While other countries have a long-established broadband network providing blanket coverage, Germany’s fiber optic cables often used to end just beyond the city limits of the major metropolises, Mr. Engel said.

He offered an illustrative example of what this means for innovation: when suppliers wanted to exchange research data with German automotive group Daimler, it was often quicker to burn it onto a CD and take it to Daimler’s head office by car than to try to send it via a slow copper connection.

 

Daniel Delhaes, Dana Heide and Frank Specht cover politics from Handelsblatt’s Berlin office. To contact the authors: delhaes@handelsblatt.com, heide@handelsblatt.com, specht@handelsblatt.com

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