MittelstandsMonitor 2009: German Economy in Recession – Downward Trend also Affects Small and Medium-Sized Enterprises

The recession hit German small and medium-sized enterprises (SMEs) in the course of 2008, especially during the second half of the year. However, internationally orientated large companies, in particular from the industrial sector, have been more severely affected by the crisis so far. The business climate of small and medium-sized enterprises deteriorated rapidly and significantly in the course of 2008 because of the global economic downturn, which had already started in the middle of the year and considerably intensified due to the financial crisis.

At the end of 2008, the business expectations of small and medium-sized enterprises reached a new historical low. In comparison, their willingness to invest and their employment plans were only moderately affected. Many companies probably try to prevent their production units from becoming obsolete and want to keep scarce skilled professionals during the crisis in order to be prepared for the next economic upturn. These are the findings of the MittelstandsMonitor 2009. The annual report is conducted by the KfW Bankengruppe in cooperation with Creditreform, IfM Bonn, RWI Essen and ZEW Mannheim. Furthermore, the MittelstandsMonitors 2009 focuses on the start-up and the liquidation intensity, as well as on microfinance of business start-ups in Germany, the dynamics of innovation behaviour and patent activities of medium sized enterprises.

Current economic downturn has not affected start-ups and liquidation yet

Since 2005, the number of start-ups in Germany has been diminishing. Preliminary calculations indicate an even lower start-up intensity (number of start-ups per 10,000 employable persons) in 2008. This downward trend is closely related to the very good economic situation experienced until the middle of 2008. Due to this favourableeconomic climate the number of dependent employment relationships increased and unemployment was reduced. These developments led to a reduction in the number of start-ups induced by the push-effect of unemployment. In 2009, the financial and economic crisis will presumably have noticeable effects on start-ups. Especially start-ups by previously unemployed people are to be expected.

As in 2006 the liquidation rate (number of company closures per 1,000 companies) and the rate of insolvency decreased in 2007 due to the good economic development. For the year 2008, no reversal of this trend can be seen. However, Prof. Helmut Rödl, vice-chairman of the supervisory board at the Creditreform AG, emphasises: “If the downturn significantly affects the economy in 2009, the number of company closures will rise.” The balance of start-ups and liquidations has been regressive since 2004. In 2007, the surplus in start-ups remained positive but the IfM Bonn estimates that it will turn out to be negative for the first time since many years in 2008.

Microfinancing business of start-ups plays a role in Germany

The great majority of founders who acquire funds from external investors require small-scale funds. According to an EU definition founders, who require small-scale funds of up to 25.000 EUR fall into the category of “microfinancing customers”. In 2007, nearly 200,000 founders acquired funds from external investors in the category of microfinancing. This equals a funding volume of around 1 billion EUR. Founders often encounter increased obstacles when trying to acquire small-scale funds from external investors. “Therefore, the existence of a suitable and sufficient supply in the microfinance segment is not only in developing countries but also in Germany of central significance”, says Dr. Norbert Irsch, chief economist of KfW Bankengruppe and adds: “As a consequence of the economic downturn and the number of start-ups induced by the push-effect of unemployment, microfinancing could gain additional relevance.”

Companies that have been in business longer remain innovative in spite of lower R&D activity

The share of enterprises conducting research and development (R&D) and generating innovations in the form of new products and processes have moved in opposite directions during the last 10 years in Germany. Judging by the current trend, the percentage of enterprises with continuous R&D activities has increased moderately, while the fraction of innovators is declining. The innovative activities of small and medium-sized enterprises as a whole have developed not as well as those of big enterprises.

The analyses of SMEs indicate the share of enterprises conducting R&D in the R&D-intensive industries of the manufacturing industry tends to decrease with growing enterprise age. The same is valid for the percentage of enterprises that create innovations, especially when they introduce products new to the market. “When companies have been in business longer, the increasingly focus on the gradual improvement of their products and manufacturing processes”, explains ZEW President Professor Wolfgang Franz. “Frequently, they further develop existing products according to wishes of their customers and they can profit from their many years of experience.”

Patent activities of small and medium-sized enterprises not only in the high-tech sectors

About 20 % of all registered patents in Germany originate from SMEs. This rather small percentage, compared to the turnover- or employment rate of SMEs, has two reasons: On the one hand, this is the result of the fact that only a small share of SMEs actively conducts research activities. On the other hand, SMEs are more likely than big enterprises to try and keep their invention a secret from others instead of protecting it by having it patented.

An analysis of patent activities in the technical textile industry and the sector of nanotechnology indicates that SMEs in both areas are an important contributor to innovation activity in a complementary relation to big enterprises. The central message of this analysis for politicians is that new technologies can also be developed in non-high-tech sectors such as the traditional economic sectors.

MittelstandsMonitor

The MittelstandsMonitor has been jointly published since 2003 by the information service provider Creditreform and the research institutes IfM Bonn, RWI Essen and ZEW Mannheim and unites the exclusive and complementary databases of all institutes to a comprehensive empirical basis. Due to the special expertise of the cooperating partners, the MittelstandsMonitor is an extensive annual report on cyclical and structural issues relating to small and medium-sized enterprises in Germany. The joint report aims at providing the public with comprehensive information on the situation and perspectives of SMEs.

For further information please contact

Dr. Michaela Niefert, Phone: +49/621/1235-171, E-mail: niefert@zew.de