Despite its lack of natural resources, Germany possesses “innovative power” that helps it become a global economic model, aiming for prosperity, job creation, and a transition to a low-carbon economy. Innovation in production processes introduces new methods to reduce production times, costs, and increase product efficiency. With heightened competitiveness and exploration of new markets that bring profits to German products, there is a greater incentive to allocate resources to reach more advanced stages of innovation.
Given the increasing role of innovation in the growth of the German economy, many governmental institutions and economic entities have focused on studying the country’s innovative power and optimizing its use. Among the most notable studies is a report prepared by the German Economic Institute in cooperation with the German National Library of Economics, titled “Distribution of Economic Powers in German Regions” in 2023. This report focused on the disparity in the use of innovative power across different German regions and the indicators used to measure this power, as well as proposals for addressing innovation gaps.
Innovation Gaps and Their Indicators:
The report from the German Economic Institute highlighted noticeable geographic differences in all indicators of innovative power in the country, such as research and development (R&D) density, employment structures capable of keeping up with innovation and technology, and the success of patents. Southern economic regions like Baden-Württemberg and Bavaria lead significantly in innovation, while the positive exception in the generally weaker innovation of Eastern Germany is the economic region of Jena.
The report noted that innovation disparities are also evident when dividing Germany geographically into rural and urban areas. The gap has widened over time due to the limited financial resources available in rural areas to intensify R&D activities or attract and employ innovation-related workers, coupled with notable technological and industrial delays in those areas. The report held the state responsible for widening this gap, as it reduced investments in R&D from 6.9% in 2000 to 3.2% today, and failed to provide strong incentives for private economic entities to bridge this gap in R&D and other indicators of innovative power. The report listed five main indicators used to measure the level of innovation in German regions, which are as follows:
Investment in Research and Development (R&D): This refers to the research efforts to transform scientific knowledge into new practical methods for improving and developing production and industrial processes. According to the German Economic Institute, increasing global competitive pressure on Germany and Europe as a whole has been a key driver for focusing on R&D investments to ensure innovation and competitiveness. As a practical application, the “Europe 2020” growth strategy aimed to increase investments by both the state and the economic sector in R&D in all European countries to at least 3% of the average GDP by 2020.
It is worth noting that the average spending on R&D as a percentage of GDP in Europe reached 2.3% in 2020, meaning the desired goal was not achieved for Europe as a whole under the growth strategy. However, looking at Germany alone, it hit the target in 2019 with investments of 3.2% in the aforementioned field. The driving force behind this spending was the industrial sector, especially the automotive, chemical, pharmaceutical industries, and mechanical engineering, as well as information and communication technology. This has pushed Germany to set a goal of increasing spending to 3.5% by 2025.
The report indicated a significant gap in the share of German states in R&D investments, with urban areas spending far more than rural areas and their associated projects. This is attributed to the presence of many large R&D companies and universities in urban regions.
Qualified Workforce for Innovation: The report emphasized the importance of a qualified workforce for innovation, particularly in fields such as mathematics, computer science, technology, and natural sciences, as these professionals engage in R&D, patent filing, and assist start-ups. The report noted that the number of qualified workers for innovation-related jobs in Germany reached 1.4 million in 2019, a 25% increase compared to 2014. Overall, the percentage of the workforce qualified for innovation represents 4.2% of the total workforce in Germany.
When comparing the geographical concentration of this qualified workforce, it decreases as one moves from the south to the north and from the west to the east. It is also less dense in rural areas compared to urban ones. In general, Berlin achieved remarkable growth in the concentration of qualified workers due to the growth of the digital industry and the establishment of companies related to innovative industries.
Technology-Oriented Start-Ups: According to the German Economic Center, start-ups play a significant role in economic growth and innovation, as they are responsible for creating new technology-oriented services and products. There was an upward trend in the establishment of such companies, but the outbreak of COVID-19 in 2020 negatively impacted this trend. However, the number of start-ups increased after the crisis, though it has not yet returned to pre-pandemic levels. When examining the distribution of start-ups across German states, the report points to a gap between urban and rural areas, though it is smaller compared to the gap in R&D and qualified workforce indicators.
Readiness for Smart Industry: Innovation, according to the report, is increasingly characterized by digital transformation and reliance on technology. One of the key industrial models currently used is “Industry 4.0,” which aims to create an advanced digital network between the four key factors of industrial activity: products, production processes, logistics, and target customers. According to statistics, only 10% of German establishments have the necessary resources to implement the “Industry 4.0” model. In terms of geographical distribution, there is a significant gap in favor of Western Germany compared to the East and urban areas compared to rural ones.
Patents: These are one of the most important indicators of innovation in industry, as they represent the desired outcome of innovation by facilitating industrial processes. Regarding the regions that produce the most patents, there is a gap in favor of the South and West, but it is not large due to Germany’s focus on providing patent registration offices in various regions, not just industrial ones. The leading southern states in this area are Baden-Württemberg and Bavaria, which record 321 and 236 patent applications, respectively, for every 100,000 employees subject to social insurance contributions.
Entry Points for Innovation Power Reform
The report addressed the weaknesses related to the use of innovative power in Germany, and then proposed measures to reform it, which include:
Increasing Investment in Research and Development: The report noted that two-thirds of German regions have fallen short of the target of investing 2% of the total economic added value in research and development. It also mentioned that the tax incentives provided by the state for private sector investment in research and development are weak. Therefore, it is necessary to increase the allocation of funds in this area, distribute them fairly among regions, and expand the base of beneficiaries of tax incentives.
Developing a Qualified Workforce for Innovation: The report points out that while Germany’s workforce has grown due to immigration and longer employee retention, the proportion of workers in innovation-related fields is still not high enough to optimize the use of innovation. This issue can be turned into an advantage by facilitating immigrants’ access to schools and universities in these fields, and by attracting qualified workers from outside Germany through various incentives and simplified bureaucratic procedures.
Stimulating Startups: The report highlights that the rate of technology-oriented startups in Germany is on a long-term decline. Since such companies are the primary drivers of patents, the state should incentivize universities to integrate entrepreneurship into their educational content, support its practical application, and assist students financially and technically in launching startups.
Enhancing Planning Capabilities: Given that the most important factor in improving industrial readiness is the use of the internet and digital transformation, the state must provide an adequate infrastructure for high-speed internet, especially for commercial use. Since Germany has previously failed to invest properly in this area due to a lack of planning capabilities, centers should be established for planning and providing appropriate infrastructure, as well as for repairing and maintaining existing facilities.
Encouraging Patents: The ratification of the Unified Patent Court decision is a positive step toward boosting patent activity. It is, therefore, necessary to expand the number of specialized patent inspectors to maintain the quality of submitted patents, and to provide all necessary means to encourage innovators to register their patents.
Source: Maike Haag, Hanno Kempermann, Enno Kohlisch & Oliver Koppel, Die Innovationskraft der deutschen Regionen, Econstor & German Economic Institute, July 2023.
