Production-related Service Providers in East Germany: Structural Deficits Have Negative Effects

The innovation activities of the East German services sector on the whole and specifically the production-related services sector continues to adapt to West German structures. According to a current study by the Centre for European Economic Research (ZEW) in Mannheim, East German service providers continue to have problems with finding clients for their innovative services.

In West Germany about 1.8 million people worked in the production-related services sector in 1997. This corresponds to eight per cent of all employees liable to social security contributions in the old federate states. In East Germany the number of people working in the production-related services sector amounted to about 450,000 (8.7 per cent). The knowledge-intensive business-related services sector employs about 180,000 people in East Germany and about one million in West Germany.

The strengths and weaknesses of the production-related service providers in East Germany become visible when comparing them to West Germany with regard to input and output of innovation processes. In terms of input, East German production-related service providers are characterised by a good research and capital base. They have a high share of highly qualified staff and a high R&D personnel intensity (proportion of R&D staff to total staff). However, the input side considerably benefits from public support for research and innovation. Yet, companies rather frequently face financial problems, particularly when it comes to R&D financing. In terms of output, there are substantial differences between East and West. Many East German companies have a low export ratio and have trouble selling new services as well as have problems with sales in general.

With respect to the customer structure of production-related service providers, technical including R&D service providers are closely intertwined with the industry, whereas IT service providers are rather interlinked with the remaining services sector. Both the development of a competitive industry and the further elaboration of modern service activities are thus of great importance for the economic development of East Germany. However, a positive development - particularly for production-related service providers - can probably only be achieved in the long run if some of the structural deficits still persisting in East Germany are eliminated.

Especially the small number of industrial businesses and the business size structure, which is characterised by an abundance of small and medium-sized enterprises and a lack of large enterprises, have detrimental effects. Both factors lead to a relatively weak demand for higher-quality production-related services in the East German federal states. Apart from the difficulties of production-related service providers to enter supra-regional markets, East German service providers are confronted with further problems such as a thin equity base and a limited capacity to acquire loan capital.

Contact

Prof. Dr. Dirk Czarnitzki, Phone: +49(0)621/1235-194, E-mail: czarnitzki@zew.de