Large Companies Continue to Innovate Despite Economic Slowdown

A company's innovativeness is crucial for the international competitiveness of the German economy. Providing companies with sufficient financial support to improve or develop new products, services, manufacturing techniques or process technologies, thus also plays a major role in securing jobs.

The current report on Germany's innovation performance, recently published by the Centre for European Economic Research (ZEW), seems to undermine concerns about a possible decrease in corporate innovation expenditure as a result of the difficult economic situation. Instead, 2002 saw a considerable surge in innovation spending in the German economy, which companies expect to see last until 2004 - albeit in weakened form.

In 2002, innovation expenditures in the manufacturing industry reached a new high of almost EUR 68 billion. In 2000, total expenditure amounted to only EUR 60 billion. According to companies in this economic sector, innovation spending will continue to rise throughout 2003 and 2004. This increase, however, which should occur at a nominal rate of two per cent, will be much less considerable than increases witnessed in 2002.

With spending amounting to EUR 17 billion, business-related service providers (IT/telecommunications, technical services, consulting, banks/insurance providers) also invested more than ever in innovation in 2002. Whilst firms expect to see a further slight increase in the innovation budget in 2003, it is expected that this will fall again in 2004.

Distributive service providers (wholesalers and retailers, vehicle repair businesses, transport service providers as well as real estate, housing and rental services) kept their innovation spending at a largely constant level of EUR 9 billion. For 2003, however, they forecast an increase to around EUR 10 billion. This will be predominantly driven by increased innovation in the transport industry. In 2004, firms are expected to maintain the level of innovation achieved thus far.

In all three key economic sectors, export-oriented industries recorded the greatest innovation budget increases over the past years. The innovation efforts among industries focussed on the domestic market, however, have shown long-term stagnation. This may to a certain extent, explain why any initial joy at the news of companies' rising innovation expenditures, is quickly dampened by the fact that this spending is largely made by large firms with more than 500 employees. The proportion of small and medium-sized companies (SMEs), however, which engaged in innovation in 2002, has once again fallen in comparison to the previous year. A reversal of the trend is not yet in sight. This weakens innovation across the German economy. In the manufacturing industry, the proportion of businesses considered to be innovative was only 58 per cent in 2002. In the case of business-related service providers, this figure decreased even further to 50 per cent. Only slightly more than a third of distributive service providers successfully implemented innovations.

One reason for the varying trends in the innovation budgets of SMEs and large companies is the financing situation. Innovation projects are considered to be investments which have a highly uncertain revenue outcome. It is thus often difficult to gain external funding for such projects and as a result, companies therefore tend to finance such innovations from their own cash flow. It appears that the economic slowdown has significantly limited the financial leeway for innovative projects among numerous SMEs, which usually have rather small profit margins. In contrast, large companies tend to have larger profit margins and were thus able to set aside more funds for innovative projects. Such firms were most likely motivated by the opportunity to gain and secure market shares by immediately launching new products or processes following the economic recovery.

Contact

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