Industrial Dynamics and Productivity Development in Germany – Stronger Promotion of Low-Tech Sectors Needed

For years, a decline in productivity growth and a slowdown in industrial dynamics have been clearly visible in almost all sectors in Germany. Policymakers fear that this will have long-term effects on economic growth and employment. What is needed are significantly stronger business and productivity dynamics. But how can this be achieved? Especially companies in the low-tech sector are important drivers of productivity growth. So far, however, they have not been given enough attention by policymakers, as a recent study by ZEW Mannheim on behalf of the Bertelsmann Stiftung shows.

Using data from the Mannheim Enterprise Panel (MUP), the Mannheim Innovation Panel (MIP) and the IAB/ZEW Startup Panel, the study examines how industrial dynamics through market entries and exits affect the productivity of firms that are already established in the market. It can be seen that business dynamics in all sectors have steadily weakened since 2005. Business start-ups are continuously declining, as are firm closures: Whereas in 2005 there were 205,978 start-ups in the sectors analysed, by 2019 the number of start-ups had fallen to 132,855. Firm exits fell from 168,289 to 105,882 in the same period – with the exception of IT firms and businesses located in the Berlin region.

As the study shows, the impact of business dynamics on the productivity of established companies differs by sector and after the introduction of new technologies. The driving force behind the productivity of high-tech companies is the crowding out of unsuccessful companies. In contrast, structural changes through additional business dynamics that go beyond mere crowding out of firms do not have a significant impact on the productivity of established firms. “In high-tech sectors, intellectual property rights and R&D capacities are the most important drivers of competition. Innovative technologies pose a challenge to existing technologies and lead to less innovative firms exiting the market and making room for more technologically advanced firms,” Dr. Johannes Bersch, researcher at ZEW Mannheim and co-author of the study, explains the results.

The situation is different for companies in the low-tech sector, i.e. without large research and development (R&D) expenditures. There, high company fluctuation causes the largest increases in productivity in established companies. This is achieved not through cut-throat and replacement competition for intellectual property rights, high R&D spending and cutting-edge technologies as in the high-tech sector, but rather through the adoption of technologies. “The adoption of technologies in low-tech sectors leads to greater competition, as more companies can participate in market competition even without intellectual property rights and R&D resources,” says ZEW researcher and study author Nadine Hahn. Thus, productivity dynamics are not driven by the mere crowding out of firms, but by more firms entering (and later exiting) the market than in high-tech sectors. This eventually leads to fluctuations in the number of businesses, which ultimately drives productivity dynamics.

Entrepreneurship policy in Germany has focused very strongly on the high-tech sector in recent years. The study authors therefore call for the creation of framework conditions and incentives for start-ups on a broader scale – and not only in the high-tech sector. This ranges from lowering the barriers to market entry by reducing administrative burdens to providing more support for companies with a low technological standard and helping population groups that have been reluctant to start their own businesses.