Germany as a Location for Industry – Discussion Focussed on Elite Universities Must not Distract from Necessary Innovation Campaign

Germany is at the risk of losing its status as an international location for research and innovation. For several years, Germany has been unable to keep pace with international dynamics of expanding innovation. Political parties are therefore currently debating a long overdue innovation campaign aimed at boosting Germany’s position as a location for industry. Such a campaign will inevitably see public spending increase into the billions.

In their Weimar Directives, the SPD (Social Democratic Party of Germany) demands increases in public spending on research and innovation by three per cent of GDP by 2010. According to calculations of the Mannheim Centre for European Economic Research (ZEW), an increase in public spending on research and development (R&D) of approximately six per cent per year is required in order to achieve this. This calculation is based on a rate of real economic growth of two per cent – a rate of growth which is significantly higher than that achieved in the nineties. If growth continues at the same rate which it has been at over the past ten years, one per cent, public spending on R&D will have to be increased by almost five per cent a year. Alone this financial dimension indicates the extent to which those wishing to implement such an innovation campaign must assert its benefits.

Until now, public discussion has focussed on the innovation efforts of elite universities. This has simply been a distraction, however, from the real challenge – strengthening Germany's broader innovation policy. Studies carried out by ZEW indicate that Germany has been lagging behind other countries in terms of innovation for some years. If steps are not taken to counteract this, Germany's future as a location for research and innovation could be permanently damaged.

In order to reverse this trend, public spending must be directed towards R&D, on a national, as well as on a regional level. In view of the dire state of public spending, efforts taken last year to reform labour markets and social security policy, must be pursued further. The newly emerging debate as to how to promote research and innovation must not mean an end to these other policies, but must foreground the benefits of such reforms. Precise distinctions need not be made in the debate concerning the reduction of subsidies; public funding of companies' R&D activities is simply another form of subsidy.

Discussion about what is required in order to improve Germany’s position as a centre for innovation has not resulted in anything new. The aim to increase Germany’s R&D spending to three per cent of GDP was already set as a target in the coalition agreement in autumn 2002. Despite this, progress is yet to have been made. In fact, since 2001, R&D intensity in Germany has been stagnating. The decline in public spending on R&D means that Germany is now further away from achieving this three per cent goal than it was in the early eighties. Measured in terms of GDP, public spending on R&D has indeed been decreasing since the 1980s. The modest growth in spending on R&D, witnessed since 1998, has not led to significant changes in the downward trend. The slight rise in the percentage of GDP being spent on R&D since the nineties has been achieved thanks to the economy, not political policy.

Unlike Germany, other countries have adjusted their priorities in the last few years in order to favour public investment in research and innovation. Since 1998, private spending on R&D in Germany has increased by nearly one percent. Compared to the early nineties, this is an encouraging trend. In international comparison, however, this development is still rather restrained. Even countries facing similar fiscal problems as Germany (e.g. France, Japan) have significantly increased their R&D spending in the last few years. In France, public spending on R&D, adjusted for price changes, has increased by 3.5 per cent since 1998. In Japan, spending on R&D has increased by five per cent. In Great Britain and in the US, R&D investments have increased by five and six per cent respectively since 1998. These figures do not even reflect the falls in tax revenue seen as a result of taxation policies implemented to promote businesses research and development activities. Indeed, tax reliefs have been implemented and further expanded in Japan, Great Britain and in France. The extent to which elite universities will be able to help Germany remain competitive in the international market for the best and most profitable innovation ideas in the coming years, is somewhat limited. Rather than focussing on universities’ contributions, therefore, a broader innovation campaign is necessary.

Contact

Dr Christian Rammer, Phone: +49(0)621/1235-184, E-mail: rammer@zew.de

Dr Georg Licht, Phone: +49(0)621/1235-177, E-mail: licht@zew.de