Number of Start-Ups in R&D-Intensive Industries Falls to Alarmingly Low Level
Research
18.09.2019
In 2018, the number of start-ups in Germany decreased considerably compared to the levels recorded the previous year. This is the strongest decline since 2014, corresponding to a drop of almost four per cent (see graph). The roughly 155,000 start-ups in 2018 is 6,000 fewer than in 2017 and almost 60,000 fewer than ten years ago. But especially alarming is the fact that the number of start-ups in R&D-intensive manufacturing industries has been strongly decreasing. These are the results of an analysis carried out by the ZEW – Leibniz Centre for European Economic Research in Mannheim for the publication “Junge Unternehmen” (“Young Companies”), published in collaboration with the credit bureau Creditreform. This analysis was based on recent figures from the Mannheim Enterprise Panel (MEP) conducted by ZEW.
The decrease in the number of start-ups in 2018 can be explained, on the one hand, by the good situation on the labour market, which has meant favourable employment opportunities and therefore no great pressure to make the switch to self-employment. On the other hand, the number of potential founders for start-ups has already been declining for several years because of the age groups with the highest number of founders constantly shrinking.
ZEW’s calculations, however, show that the decline in the number of start-ups does not affect all sectors of the German economy equally. For example, the drop in start-up activity in the retail sector is particularly high, at ten per cent. This could be due to fears of an economic slowdown, which would have a direct impact on business opportunities in the trade sector via declines in demand; or the increasingly untenable global trading conditions, which, should they continue, would have rather gloomy prospects for start-ups focusing on foreign trade (imports and exports).
“The clear decline in the number of start-ups in the industrial sectors and in particular in the R&D-intensive manufacturing industries is definitely cause for concern,” says Dr. Georg Licht, head of the ZEW Research Department for “Economics of Innovation and Industrial Dynamics”. “In contrast to trade, the sharp decrease in the number of start-ups in the R&D-intensive sectors of cutting-edge technology and higher-value technology can hardly be explained by the conditions of the general economic situation and the global trade environment.” The start-ups in the R&D-intensive industry in particular often show a higher degree of specialisation and are therefore naturally faced with a smaller competitive environment, which should actually make them more resilient to the collapse of aggregate demand. Nevertheless, only slightly more than 1,100 companies were founded in 2018 – a full 15 per cent fewer than in the previous year for the R&D-intensive industrial sectors.
Unsatisfactory development of start-ups in R&D-intensive industries
“True, a drop in start-up activity in R&D-intensive industries is not an indicator of a national economy’s declining innovative strength per se. A large part of innovation activity in Germany takes place within established companies. The indicator says a lot, however, about the competitive environment these established companies find themselves in,” explains ZEW economist Dr. Johannes Bersch, who carried out the calculations for start-up activity. Many new technology fields were first introduced to the market via start-ups and only afterwards found their way into established companies either by their technology being bought up or the start-up itself acquired by those companies. Unless the German innovation system develops fundamentally towards an even stronger role for established companies, the development of R&D-intensive start-ups will remain unsatisfactory in light of the German economy’s global competitiveness.
In contrast to the manufacturing, construction, and trade sectors, start-up activity in the service sectors remains near constant compared with previous years, possibly due to its relatively weaker integration into global markets. In the case of technology-oriented services, increasing digitalisation as well as the importance of start-ups in general are likely to play a decisive role in the current market environment.
