Business start-ups: Huge Slump in East German Construction and Trade Sectors

In the year 2000, the number of start-up businesses in East Germany fell considerably by 3.5 percentage points compared to the previous year. Meanwhile, in West Germany, the number of start-ups remained stable, staying at the same level as the previous two years.

These are the findings of a current study on start-up activity in Germany carried out by the Centre for European Economic Research (ZEW) in Mannheim.

Responsible for the drop in the number of East German start-ups are the recent developments in the construction and trade sectors. In these branches at least 9 per cent fewer firms were founded in 2000 than in the preceding year. In West Germany, the number of start-ups in the construction sector remained stable, while the number of business start-ups in the trade sector fell by five per cent.

However, the picture is not as bleak in other sectors as it is in construction and trade. For example, in East Germany, the number of new start-ups rose in the consumer service sector (hospitality, healthcare, personal services such as laundry services or hairdressers) in particular. Meanwhile, in West Germany, it was above all business-related service providers (such as software providers, engineering firms, advertising agencies and cleaning companies) that in 2000 really saw a start-up boom which has been going strong since 1998.

One consequence of the declining number of East German start-ups is that the start-up intensity rate, i.e. the absolute number of start-ups per 10,000 people of working age, has decreased considerably and in the year 2000 fell below the West German rate for the very first time. In 2000, there were 46.7 new business start-ups per 10,000 people of working age in East Germany, whereas in West Germany there were 48.4. This development is particularly alarming given the lower business density, i.e. the number of businesses per 10,000 people, in East Germany. The low level of dynamism among business start-ups will slow down any further expansion in the number of businesses in East Germany. Given that the rate of insolvency (number of business insolvencies per 10,000 people) in East Germany has for many years been higher than that in West Germany, the current business gap is not expected to close any time soon.

Contact

Prof. Dr. Dirk Engel, E-mail: engel@zew.de

Dr. Helmut Fryges, Phone: (49) 0621/1235-189, E-mail: fryges@zew.de