ZEW Study on Germany's Technological Performance - German Economy Must Adapt to New Competitors in International Technological Competition

The world economy is currently experiencing a phase of rapid change, also in the field of the development, production and exchange of technological goods. Asiatic countries such as India, South Korea, Taiwan, Singapore and China have, since the mid 1990s, worked very hard to catch up with Western industrial nations in research and development (R&D) as well as in innovation.

With the development of their R&D capacity combined with investments in higher education, they have created the conditions for the transition from imitative innovations to original innovations. German companies must, therefore, reckon with an increased number of competitors in global technology in the future from the Asiatic emerging countries such as India and particularly China. These are the findings of an analysis of global technological competition as part of the extensive study on “Germany’s technological performance” which a consortium of institutes has conducted under the lead management of the Centre for European Economic Research (ZEW) on behalf of the German Federal Ministry of Education and Research.

China’s share, for example, in worldwide R&D expenditure has risen from 4 per cent in 1996 to 11 per cent in 2004. China’s R&D expenditure, calculated as purchasing power parity, was almost double that of Germany in 2004 and the number of people working in R&D is around 2.5 times greater. These efforts are now bearing fruit. An increasing number of scientific publications is being compiled in the Asiatic emerging countries. With view to the product range offered on international markets there is, on the other hand, hardly any evidence, until now, of the clear increase in investments in R&D. It is, nevertheless, only a matter of time until success will be seen also here.

Until now, Germany has largely benefited from the high demand from the emerging countries, particularly from China as it induced the export-driven boom. Germany’s specialisation in “sophisticated consumer goods”, for example engine and automobile construction, perfectly corresponded to demand from the emerging countries. Germany’s import demand also benefited from the more intensive worldwide competition in high end technology (particularly information and communications technology), brought about by the offer of these countries, and the price reductions of these goods which were a result of this. These increased opportunities in the international reorganisation of the value creation chain in conjunction with minor labour cost increases in Germany, with product innovations and particularly with cost cutting process innovations, created benefits in the international price competition. The path of growth on which the German economy currently finds itself, resulted from this.

What effect does the emergence of new R&D competitors, particularly in Asia but also in Central and South America as well as in Central and Eastern Europe, have in the long-term on the R&D location of Germany? With regards to the division of labour in research it is less the fundamental and applied research which will be effected by the addition of new competitors – which is comparably important in Germany – but more so the market-orientated experimental development. Additionally, the extent to which German industries or companies will be affected also depends on what level regional separation is possible between the production and the research locations. As long as innovation and production are dependent on high quality local services and system competence in the value creation chain, for example in machine and automobile construction, a migration of research and production will occur only to a limited extent.

A second aspect is the extent to which the R&D and innovation processes can be broken down. The easier this is, the easier it is to tap into the benefits of an international R&D labour division with the emerging countries. High value services such as R&D are increasingly easier to modularise with the increasing performance of the information and communication technology, they become “tradable”. This increases the pressure to be permanently innovative.

The German economy cannot compete with the up-and-coming emerging countries on the costs side, only on the innovation side. This requires greater efforts; in addition to this, the development of international labour division in R&D also puts pressure on the specialisation profile of highly-developed national economies. In some areas a continued loss of jobs in the R&D intensive industry is unavoidable. Increased specialisation in the initial phases of the innovation value creation chains which require high quality services, not only in R&D, should ease the necessary adjustment processes.

Contact

Jürgen Egeln, Phone: +49/621/1235-176, E-mail: egeln@zew.de