A Time of Structural Change for Baden-Württemberg

The new state government has been elected and is now preparing to take office. The structural change in the economy, which has picked up considerable pace as a result of the pandemic, will pose a major challenge for policymakers. Dealing with these challenges will determine whether Germany will be able to ensure prosperity in times of change.

Germany’s economic strength relies on innovative companies that are able to compete on the global stage. The firms of the automobile industry deserve special attention in this regard, who account for almost 30 per cent of Germany’s innovation expenditure. The mechanical engineering sector comes in second with a share of ten per cent. Many of these companies are based in Baden-Württemberg. It comes therefore as little surprise that four out of six German regions listed in a ranking of the most innovative regions in Europe are located in Baden-Württemberg.

The digital transformation, which has received a major boost due to the coronavirus crisis, and the challenge of combatting climate change have led to a structural change that has hit the automobile and the mechanical engineering sectors particularly hard. Automation will significantly change the task profiles of about half of the employees in these industries. The transition to electromobility comes with negative consequences for both value creation and employment. The German economy is preparing for this structural change. For instance, the automobile industry has increased its annual innovation budget by around 50 per cent over the past ten years. Even though these developments are part of a global phenomenon and many of the relevant framework conditions are set by politicians in Brussels or Berlin, it is up to Baden-Württemberg to take an active role in facilitating and shaping this structural change.

Education policy plays a central role in this regard. Skills shortage is the most frequently cited reason when companies are asked why they have not carried out innovative projects. Approximately 44 per cent of companies that engage in innovation activities said they experience staff shortages. Business have also called for encouraging entrepreneurial spirit among (university) graduates and improving digital education in schools. There has also been a lot of progress: The number of students enrolled in STEM subjects in Baden-Württemberg has risen by 50 per cent in the past 15 years, and Baden-Württemberg is the state with the greatest number of professorships in the area of artificial intelligence.

The second area in need of improvement is digital infrastructure, the shortcomings of which have once again been brought to light by the COVID-19 crisis. This is true for the field of broadband expansion, but also for digitalisation, public administration and the healthcare sector. Baden-Württemberg currently ranks in the lower midfield when it comes to citizen access to e-government services. Innovative economies also need an innovative (and digitalised) public sector. The use of smart technologies like intelligent toll systems or the large-scale provision of public sector data, for instance in the area of local transport, can provide important impulses and help attract and retain businesses that innovate and implement new applications in Baden-Württemberg.

The third aspect concerns diversification. In addition to the current focus on the automotive and mechanical engineering industries, other sectors should be given greater attention in order to prevent Baden-Württemberg from becoming even more dependent on individual industries.  This means setting up a framework that promotes innovation activity in the service sector and among innovative start-ups, including those of the cultural and creative industries. The healthcare sector, the third largest sector in terms of exports, still has much untapped potential. Expanding networks between businesses, research and healthcare provision through initiatives like ‘Forum Gesundheitsstandort Baden-Württemberg’ are crucial for this.

Baden-Württemberg is in a very good position to tackle the structural change. With its four universities of excellence, established collaborations between businesses and research institutions and thanks to the fact that about 25 per cent of the most successful German SMEs are based here, Baden-Württemberg fulfills important prerequisites to ensure a successful transformation. We cannot afford to rest on our accomplishments – structural change does not stop at state borders.