Business Start-ups in Germany – The End of the Boom

In 2005, the number of business start-ups in Germany substantially decreased. Compared to the previous year it dropped by approximately 8 per cent. The decrease in the trade and manufacturing sector was particularly high. The number of corporate service provider start-ups fell slightly less, the rate of decrease has still been on a relatively high level. At minus 4 per cent, the decline in consumer-oriented service provider start-ups was the lowest, compared to the previous year. These are the findings of the recent ZEW Gründungsreport, a biannual examination of firm foundation activities in Germany conducted by the Centre for European Economic Research (ZEW) in Mannheim.

The figures that are now available verify a first significant decrease following the two consecutive strong increases of start-up numbers in 2003 and 2004. At minus 17 per cent, start-up activities in Eastern Germany fell more than three times as much as in Western Germany with minus 5 per cent. In 2005, the start-up intensity (the number of new firms per 10,000 employable persons) reached a total of 48.4, compared to 52.5 in 2004. This equals about 252,000 economically active business start-ups in 2005.

Similar to the significant growth of start-up numbers in 2003 and 2004, the decrease in 2005 was influenced by labour-market policies. The introduction of a business start-up subsidy for unemployed people (the so-called "Ich-AG" allowance) on 1 January 2003 was mainly responsible for the considerable increase in the number of start-ups over the following two years. By the end of 2004, the opportunity to draw on these allowances got restricted.  The development of a business plan, which then had to be approved, became an admission requirement and the group of people eligible to receiving funding was reduced. All these measures led to the fact that in 2005, approximately 50 per cent fewer people received the allowances than in 2004 – still this figure corresponds to more than 90,000 people.

A closer examination of the 2005 decrease in newly founded firms suggests that all major branches are affected. The start-up activities in the trading sector, manufacturing industry and corporate service sector declined considerably, in Eastern Germany as well as in Western Germany. Solely the number of new firms in the consumer-oriented service sector in Western Germany remained largely unchanged, whereas in the eastern part of the country the number of start-ups substantially dropped. The total decrease of the start-up activity in Eastern Germany is more than three times as high as in Western Germany.

The most significant decline in start-up numbers was recorded in the trading sector. Compared to the previous year, the start-up rate of this branch fell by 11 per cent. Within the trading sector, the specialised retail sale of food and wholesale trade marked the highest decrease. Other retail sub-branches also recorded a substantially smaller number of store openings than in 2004. This particularly includes textile trade, retail sale of flowers as well as the specialised retail sale of photo products and computers.

At approximately 10 per cent, the decrease of start-ups in the manufacturing industry was slightly smaller than in the trading industry, compared to the previous year. However, the difference between Western Germany (minus 6 per cent) and the eastern part of the country (minus 21 per cent) is considerably high. The founding activity in the manufacturing industry is mainly determined by the development of the construction sector which is representing three quarters of the newly founded firms in the entire branch. The construction sector recorded a decrease of 10 per cent in Western and 25 per cent in Eastern Germany. A very dynamic development can be observed regarding energy production which is in absolute terms the smallest subsector of the manufacturing industry. There, the number of business start-ups has doubled since 2003, reaching a total of about 1,800. This is mainly due to the increasing number of entrepreneurs operating in biogas production.

In comparison with 2004, the start-up rate in the corporate service sector dropped by 6 per cent. The decrease was particularly strong in technology-oriented sectors such as software development, processing services or services for office machines. Contrary to the overall trend, the founding activity of management consultancies grew by 6 per cent. Following the increases of 2003 and 2004, the number of new firms in this subsector kept increasing in 2005. Displaying an increase of 15 per cent, the number of architectural and engineering offices is growing at an even stronger rate.

In 2005, the consumer-oriented service sector recorded the smallest decrease of start-up activities, compared to 2004. Whereas the number of new services dropped only slightly in Western Germany (minus 2 per cent), the decrease in the eastern part of Germany was much more substantial (minus 13 per cent). In comparison with the previous year, start-ups in the hotel sector and restaurant industry significantly declined. This was also the case for many other service providers such as hairdressers. However, there also were some increases – contrary to the overall trend. The number of new firms in the residential economy, for instance, grew substantially.

Contact

Dr. Georg Metzger, E-mail: metzger@zew.de  

Dr. Diana Heger, E-mail: heger@zew.de