Innovation Expenditure in the German Economy Reaches New Record High

German businesses slightly increased their expenditure on innovation in 2016, pushing innovation spending to a new record high. German companies spent a total of 158.8 billion euros on innovation projects, which corresponds to a two per cent increase compared to the previous year (2015: 157.4 billion euros) and represents the highest level ever recorded. In 2017 and 2018, many companies are planning to further intensify their investment in innovation. Both large enterprises and small and medium-sized enterprises (SMEs) increased their expenditure on innovation in 2016. During the same observation period, however, there was a decrease in the share of the companies carrying out research and development (R&D) projects.

These are the main findings of a recent survey on the innovation behaviour of German businesses carried out by the Centre for European Economic Research (ZEW) in Mannheim on behalf of the Federal Ministry of Education and Research. Since 1993 the survey has been carried out in collaboration with the infas Institute for Applied Social Sciences and the Fraunhofer Institute for Systems and Innovation Research (ISI). The survey is the German contribution to the European Community Innovation Survey.

For the first time in many years, the share of enterprises introducing innovations increased in 2016. The “rate of innovators” – the share of businesses that have implemented product or process innovations – climbed from 35.2 per cent to 36.1 per cent. “This rise is solely due to an increase in innovation activities in the industrial sector,” explains Professor Bettina Peters, deputy head of the ZEW Research Department “Economics of Innovation and Industrial Dynamics”.

Comparing the level of innovation spending in the individual sectors, the automotive industry is once again the leader of the pack with 52.4 billion euros. Although innovation expenditure in this sector was only slightly higher than in the previous year, in 2016 the automotive industry accounted for one third of total innovation expenditure in Germany and more than half of total innovation spending in the industrial sector. In addition, the metal industry, the mechanical engineering sector and the plastics processing industry also increased their innovation budgets. In the electrical, chemical and pharmaceutical industries, innovation expenditure remained largely unchanged compared to the levels recorded the previous year. Meanwhile, the service sector increased spending on innovation at an above-average rate of 3.9 per cent in 2016. The industrial sector experienced a 1.5 per cent increase in innovation expenditure.

Large enterprises invest more heavily in innovation

In 2017 German companies expect spending on innovations to increase moderately by 1.1 per cent to 160.5 billion euros. For 2018, firms are planning to further scale up their expenditure on innovation to 170.0 billion euros (a 5.9 per cent increase). With an increase of 2.1 per cent, large enterprises increased their innovation spending to a greater extent than SMEs (1.6 per cent increase) in 2016. It is, however, notable that SMEs are planning to reduce their innovation budgets by nine per cent in 2017, and predict no more than small increases in 2018. Large enterprises on the other hand, are pursuing a more expansive strategy. In 2017 and 2018, they expect innovation expenditure to grow by three per cent and seven per cent, respectively. “If these companies put their budget plans into practice, the majority of innovation expenditure will be shifted to large enterprises,” says Bettina Peters.

At the same time, the number of companies conducting R&D projects decreased, falling from 20.0 per cent to 17.4 per cent. SMEs in particular have reduced their R&D activities. “Since R&D is crucial for a firm’s competitiveness, this is not a desirable development. The planned tax support for R&D proposed by the Grand Coalition, which will most likely form the next German government, has come just at the right time,” says Peters.

SMEs need additional incentives to innovate

Federal Minister for Research Johanna Wanka commented on the results of the innovation survey: “The results illustrate just how important it is to offer diverse incentives for research and innovation to small and medium-sized enterprises. This is the goal of our Ten-Point-Programme entitled ‘Priority for SMEs’ (‘Vorfahrt für den Mittelstand’), which aims to encourage more businesses to intensify their innovation efforts. Good innovation policy needs to be matched by project funding schemes as well as R&D tax credits to promote research funding. These are two complementary pillars.”

In 2016 the “innovation intensity” – the share of total turnover of the German economy spent on innovation – remained at a very high level of three per cent, with neither large enterprises nor SMEs recording any changes. With an innovation intensity of 4.7 per cent, companies in Germany’s industrial sector set a new record and are thus well ahead of the service sector (1.3 per cent). The highest innovation intensity of 10.7 per cent was found in the electrical industry, closely followed by the automotive industry (9.8 per cent), the chemical and pharmaceutical industries (7.8 per cent), technical service providers (7.5 per cent) and the mechanical engineering sector (6.2 per cent).

In 2016, the share of innovative companies receiving government funding for their innovation projects (including R&D projects) reached a level of 16.5 per cent, equivalent to just over 21,000 businesses. Large enterprises (28 per cent) received more funding than innovation-intensive SMEs (15.9 per cent). In 2012, the share of companies that received public funding for innovation projects hit a record level of 18 per cent and has since been decreasing at a slow pace.

For more information please contact

Prof. Dr. Bettina Peters, Phone +49(0)621/1235-174 bettina.peters@zew.de