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Germany - RIO Country Report

RIO Country Report Germany 2015

The annual RIO Country Report offers an analysis of the R&I system in Germany, including relevant policies and funding, with particular focus on topics critical for EU policies. The report identifies the main challenges of the German research and innovation system and assesses the policy response. 

R&I Challenges
Counteracting the emerging trend of declining innovation activities in SMEs
Challenge description: 

Innovation in SMEs is a central part of all major R&I strategies and Germany’s SME sector is highly developed and a fundamental pillar of the national innovation system. This is evidenced by high shares of SMEs innovating in-house and SMEs introducing product, process, marketing and organisational innovations. In terms of innovation outcomes, firms in Germany generated 13% of their sales from innovative products and services in 2012. This number is higher than the EU-28 average (11.9%).

However, this share has been declining when compared with 17.4% in 2008 and 15.5% in 2010. The EU Innovation Scoreboard 2015 also registered a downward trend for SME innovation indicators with fewer SMEs creating product or process innovations (-3.1%) as well as marketing or organisational innovations (-5.4%) compared to the previous year. This is particularly true for sales of new-to-market and new-to-firm innovations as share of turnover for which a downward trend has been registered over the past ten years. The decline registered for 2014 was -5.5%. The expert commission advising the German government on matters of research and innovation (EFI Commission) also points to a decline in innovation intensity in SMEs, i.e. the percentage of a company’s turnover that is spent on innovation, which almost halved from 2.7% in 1995 to 1.6% in 2012. Over the same period, innovation intensity in large German corporations rose from 3.0 to 4.5%. One of the drivers of this decline seems to be the lower overall level of innovation expenditure by those SMEs that only conduct research occasionally. Expenditure by SMEs that are continuously engaged in R&D has remained stable over the years. Moreover, trends in German corporate employment relevant to innovation show that, on average, the percentage of highly qualified engineers and scientists among the staff of small businesses (<100 employees) fell slightly from approximately 2.7 to 2.6% between 1999 and 2010. During the same period, the percentage of highly qualified staff rose slightly (from 3.8 to 4.2%) in medium sized companies (100 to 500 employees) and strongly (from 6.0 to 7.1%) in large companies (>500 employees). Knowledge intensification in the economy was thus concentrated mainly in large corporations.

Policy Response: 

The reasons for the drop in the above mentioned indicators have yet to be identified and more research is required into cause and effect relationships before policies can be adjusted or refined.

Policy assessment: 

This trend deserves high priority and political attention and more research into its underlying causes. Possible causes of the comparatively weak expenditure by SMEs include the decline in new business startups in the last few years – which may partly be an initial effect of demographic change - and the worsened situation for financing R&D activities in the wake of the financial and economic crisis. Another possible explanation is that the effects of skilled-labour shortages are much stronger for SMEs than for large corporations.

There is certainly no lack of attention to innovation in SMEs from the part of the policy maker but even though much has been done to create innovation friendly framework conditions, especially for SMEs, there have been calls to the German government to generally pursue a bolder innovation policy and to rise its target for R&D intensity to 3.5% of GDP.

Improve framework conditions for and supply of venture capital
Challenge description: 

The venture capital market in Germany is consistently and significantly smaller than in comparable countries and has been declining as a share of GDP over the past decade. The restricted availability of venture capital has been identified as a limiting factor for growth in high tech manufacturing and knowledge intensive services, which are fields that Germany seeks to develop. 20% of entrepreneurs in Germany reported difficulties in financing in 2014 which is relatively high in terms of historical comparison. In 2013 the venture capital market in Germany was 0.04% of GDP, down from 0.05% in 2012. The same year, other innovation leader EU member states, such as Denmark (0.1%), Finland (0.08%) and Sweden (0.08%) had significantly larger venture capital markets. The same is true for other large European economies such as UK (0.12%) and France (0.08%).

In 2013, 174 concepts have received seed financing in Germany (€43.6m), 494 firms secured start-up financing (€355.4m) and 174 firms received later stage financing (€257.6m). Comparatively more firms in Germany receive seed financing (21% of venture capital financed firms and 7% of venture capital provided) compared with Europe (13% of venture capital financed firms and 3% of venture capital provided). Conversely, later stage venture capital financing is less pronounced in Germany (21% of venture capital financed firms and 39% of venture capital provided) when compared with Europe as a whole (29% of venture capital financed firms and 43% of venture capital provided.

There are a number of framework conditions which may limit the size of the market for venture capital in Germany, such as restrictive rules for how carried forward deficits (‘Verlustvortrag’) are treated in taxation or the value-added tax on funds management services make fund management comparatively costly. In contrast to many other countries, institutional investors, such as pension funds, that could serve as anchor investors are missing in Germany.

Policy Response: 

Both active approaches in which government acts as a venture capital investor and passive approaches in which the government incentivises private investors are present. Many of the policies target entrepreneurship in high-tech sectors. “INVEST – grant for venture capital” which was introduced in 2013, reduces risk for early stage investors and business angels by reimbursing 20% of equity-capital investments in young innovative enterprises under certain conditions. Uncertainty about the tax treatment of the grant led to relatively low demand and in 2014 the subsidy was exempted from taxation – also retroactively for 2013. The High-tech Start-Up Fund launched in 2005 is an investment fund for technology start-ups of the government, German government-owned development bank KfW as well as industrial partners. Its initial investment endowment in 2005 was €272m. Investments are limited to €500,000 and the fund provides access to coaches as well as venture capital investors for future investment rounds. Another tool is the ERP-Startfonds which provides early stage equity financing of up to €5m for R&D intensive firms, leveraging matching investments from private lead investors. The Federal Government also announced that it intends to launch a fund with a volume of €500m via the European Investment Fund (EIF) to finance the growth of German start-ups.

Crowdfunding (or crowd investing) is still marginal but growing. The Federal Government has therefore proposed exceptions for small crowd investments from regulatory burdens (i.e. mandatory reporting to investors and related liabilities) under certain conditions.

A law passed by the German parliament in 2008 to facilitate the transfer of carried-over losses (Law on the Modernisation of the Framework Conditions for Venture Capital and Equity Investments, MoRaKG) was rejected by the European Commission because of concerns relating to state aid and is still before the European Court of Justice. Repeated calls for higher taxes on the remuneration of fund initiators have been opposed by the Federal Government so far.

Policy assessment: 

Enhancing efforts in the fields of growth financing are essential to improve conditions for entrepreneurship in high tech sectors and knowledge-intensive services. In the context of framework conditions, unintentional consequences from regulatory changes, changes in taxation or discussed but not enacted changes should be avoided. The absence of private anchor investors has not yet been offset by public institutional investors. The lack of funding from pension funds makes it even more important that other institutional investors are active in this field. The efforts to create sizable institutional investor through EIF fund are promising.

Counteracting adverse trends in human capital availability
Challenge description: 

A lack of skilled personnel has been identified as one of the main emerging constraint facing the German R&I system. Two trends influence the human capital underlying the German R&I system. The first is rooted in an overall aging society and a large share of soon to retire scientists and engineers. Until 2030 more than half of today's highly skilled professionals without a university education will have left the workforce. Depending on the labour force participation rate, net immigration of between 346.000 and 533.000 people per year until 2050 will be needed to keep the working population stable. The decline in new business start-ups in the last few years may also be linked to the onset of first effects of demographic change. The second trend stems from a shift in the career choices of secondary school students. The German R&I system has traditionally benefitted from a labour force in which innovation is not exclusively the task of university trained scientists and engineers but is based on a specific combination of highly qualified university graduates and highly skilled workers from the dual vocational education system. While in the mid-1960s, 92% of school leavers entered into vocational training and only 8% enrolled in university education, in 2011 the share of newly enrolled university students (50.1%) and the share of newly enrolled participants in dual training (49.9%) were almost equal. Among professions for which apprenticeship supply does not meet demand are several with relevance for R&I in Germany: Technicians (-10%), electrical technician (-10%) and IT (-11%). Today, also fewer dual educated workers advance to an engineering level through further education and training.

Numbers of students in STEM subjects have been increasing over the past years but dropout rates in STEM study programmes are seen as reducing the pool of qualified scientists, with 39% of university students in maths and natural sciences not finishing their studies.

Policy Response: 

The political will for Germany to maintain its solid mix of highly skilled workers and graduates from the tertiary education system certainly exists. Removal of barriers for skilled workers to enter tertiary education as well as increased support for students who decide to switch from academic training to vocational training are targets clearly reflected in the 2014 coalition agreement of the Federal Government. Recent policy initiatives focus on increasing the attractiveness of vocational training while at the same time moving away from envisioning it as the final step of professional training and instead as a stepping stone to further, academic qualification. This is reflected in the "Promotion of Advancement through Training Act" which improves the permeability between vocational and academic education and encourages dual university careers (combining work with university education). The share of these dual careers is still small but increasing. In October 2015, the Federal Government passed a reform of the “Promotion of Advancement through Training Act” part of which is an increase in the subsistence support for professional vocational training and advance training.

The opportunities to have foreign professional qualifications recognised in Germany have improved significantly through adoption of the "Recognition Act" in 2012. The issue of drop-out rates is addressed by the extension of the Higher Education Pact which includes for the first time dedicated funds for quality improvements increasing graduation rates. Moreover the Federal Government will make available approximately € 2bn by 2020 as part of the Quality Pact for Teaching in order to enhance the quality of teaching at institutions of higher education. This joint initiative of the Federal Government and the Laender governments was launched in 2011.

Policy assessment: 

There are calls to further increase the permeability between different educational tracks and to provide young people with low educational qualifications with additional entry-level and transitional measures for accessing the vocational education system. Future goals for the German educational system could focus on an optimal mix of different types of education and flexible individual educational paths, rather than the ratio of university graduates. Policy efforts to transform vocational training into stepping stones towards further academic training appear promising as are higher intake numbers of students in STEM fields. It is also a positive sign that with the extension of the pact, teaching quality and the reduction of dropout rates among students has become an explicit goal with dedicated funding. It remains unclear to what degree these improvements will be sufficient to address the challenge.

1. Overview of the R&I system

Germany has the largest Research and Innovation (R&I) system in Europe and the EU Innovation Union Scoreboard 2015 classifies Germany as an innovation leader member state together with Sweden, Denmark and Finland. Gross R&D expenditures (GERD) in Germany have reached €83.9b in 2014 or 2.87% of GDP, well within reach of its 3% goal. GERD in Germany amounts to almost 30% of all R&D expenditures in EU-28, while Germany accounts only for 16% of EU population and 21% of GDP.

Both the federal and the Laender governments have committed themselves to balanced budgets. Since 2012 the German budget has recorded surpluses, the strongest (0.3%) in 2014. Continued smaller surpluses (0.2%) are projected for 2015-2016. Public spending on R&I was not decreased during the years of crisis. On the contrary, it has expanded significantly (in nominal terms) since 2005, thus providing a stable and predictable framework for R&D performers. Funding was inter alia also focused on leveraging private investment. The 2015 Council Recommendations advise Germany to continue using the available fiscal potentials for increased investments in research and education.

2. Recent developments in research and innovation policy and systems

Key developments in the R&I system in 2015 included:

  • Reform of the law for temporary employment in science (‘Wissenschaftszeitvertragsgesetz’) which now ties the duration of the employment contact directly to the desired level of qualification.
  • Take over the financial responsibility for the student subsistence grants (‘BAfoeG’) by the Federal Government beginning 2015. Laender are supposed to use the newly available budgets of €1.2b annually for funding higher education.
  • New programme „Innovation for production, service and work for tomorrow" focusing on positive employment effects from digital production and services with a budget of €1b until 2020.
  • Proposal for a reform of procurement law ('Vergaberechtsmodernisierungsgesetz – VergRModG’) as part of a bureaucracy reduction initiative in 2015 ('Bürokratieentlastungsgesetz'). The law would establish innovation as part of procurement decision making.
  • Launch of a new roadmap process for research infrastructure by the Federal Ministry of Education and Research (BMBF). The process defines minimum investment costs (German share) as €50m per project (€20m in social sciences). Selected projects enter the national roadmap for research infrastructures with a timeframe until 2018.
  • New research initiative "Kopernikus-Initiative" designed to support research in storage, transport and industrial usage of energy as well as the interaction between conventional and alternative sources of energy. BMBF will provide €120m in funding until 2018 and additional €280m until 2025.
  • Launch of platform Industry 4.0 by BMBF. The platform organises interdisciplinary expert groups with members from politics, business, science and unions.
3. Public and private funding of R&I and expenditure

Public R&I in Germany benefits from a system of research in universities as well as in non-university research organisations which capture all aspects of research from basic to applied types. The latter have been benefitting from increasing budgets and stable planning conditions as part of the Pact for Research and Innovation. They provide a dynamic element to the German R&I system because of their ability to respond to changing research opportunities and requirements through internally competitive funding allocation mechanisms which distribute institutional funds from the government among their institutes and encourage competitive research initiatives. In general, funding for public R&I in Germany (also through the German Research Foundation, DFG) is becoming more competitive in nature and programme evaluations become increasingly comprehensive and institutionalised.

In terms of private R&I, budgets for R&D are increasing and have reached 1.95% of GDP in 2014. Firms in high and particularly medium-high tech manufacturing sectors, such as automotives, machinery and equipment, electric equipment, chemicals as well as pharmaceuticals, are the largest R&D investors. Eight of the 50 largest R&D investors in 2015 worldwide are headquartered in Germany.

4. Quality of science base and priorities of the European Research Area

The commitment towards further strengthening and developing ERA is explicitly part of the coalition agreement of the Federal Government coalition in which it lays out its policy priorities until 2017. Accordingly, the Federal Government has formulated an ERA strategy complemented by the BMBF’s action plan for international collaboration in 2014. The further improvement of framework conditions for research is addressed through increasing the quality of the science base for example through more structured doctoral trainings, improved employment laws as well as increased internationalisation and gender quality in research teams and grants.

5. Framework conditions for R&I and science-business cooperation

Within the innovation aspect of R&I, Germany continues to improve the conditions for entrepreneurship by supporting entrepreneurship and improving the conditions for venture capital investors. German firms participate actively in open innovation activities and knowledge markets, with specialised providers of R&D services, such as research institutes gaining importance.

6. Conclusions

The three identified challenges put forward in the executive summary are summarised in the conclusions. The chapter lists relevant policy actions, assesses their appropriateness, efficiency and effectiveness, and provides links to relevant evidence.

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Country Report file
Official publication date
Thursday, 23 June, 2016
Last update: 30/04/2017 | Top | Legal notice | Contact | Search