Innovation in Germany - In Germany, Large Businesses Innovate Most

Each year, the German economy spends more money on innovation than it did in the preceding twelve months. But most of that money stems from large enterprises with more than 500 employees. ZEW economist Christian Rammer explains why this is so and its effects on competiveness.

Christian Rammer is deputy head of ZEW's research unit Industrial Economics and International Management. His research focuses on innovation in firms and technology transfer. Christian Rammer also directs ZEW's annual innovation survey, the Mannheim Innovation Panel, which is the German contribution to the Community Innovation Surveys of the EU. He is active in numerous research and consultation projects, both in Germany and abroad.

From 1995 until today, large companies have been responsible for 93% of growth in overall expenditures on innovation. Does this mean that small and medium-sized enterpises (SMEs) have missed the boat?

For the hundreds of thousands of SMEs in Germany as a whole, the answer is yes, even though many of them are very innovative and successful. The problem is that the group’s average innovation intensity – the share of revenue that goes to innovation expenditure – sank from 2.7 per cent in 1995 to 1.6 per cent today. Large companies, by contrast, increased their innovation intensity in that period from 3 per cent to 4.5 per cent.

What are the causes for the lower innovation level of SMEs in Germany?

First, one must remember that the group of SMEs is not static. Smaller but very dynamic companies that spend a lot on innovation can quickly move into the group of large companies, whereas large companies that spend declining amounts on innovation, or that forgo investment altogether, often shrink into the group of SMEs. Second, SMEs have been increasingly shy when it comes to infrastructure investments in the past decade, partly because loans are hard to come by. Third, competition from abroad has increased in many sectors, driving down prices. This has kept many SMEs out of the innovation game, since lower margins mean less money for investment. And in view of the strong price competition, they see little chance of successfully positioning themselves with new products on the market.

How does the disproportionate number of large companies investing in innovation affect the competitiveness of the German economy?

The danger is that less innovation will occur in emerging fields and markets. These markets start out small, indistinct, and unpredictable. This makes them unattractive for large companies, because they are unable to do what they do best: produce in large quantities and provide reliable standardized solutions. But many of the truly new innovations – in biotechnology or in many areas of environmental technology, for instance – started small and were propelled by small companies. The big players don’t usually enter the game until markets have consolidated and a certain sales volume has been reached. An innovative SME sector is necessary so that new markets continue to develop. And large companies profit from this too. Despite the declining innovation expenditures of SMEs, Germany is not doing poorly. In 2012, around 31,500 SMEs carried out continuous research and development in search of new markets and solutions. And around a fourth of SMEs in Europe that conduct research can be found in Germany.

Investing more in innovation is one thing. But can companies translate research into marketable products or services, or into improved processes? Are there differences between large companies and SMEs on this score?

Companies in Germany are very good at getting returns on their innovation investments. In 2012, innovation expenditures amounted to 137 billion euros, while revenue from new products totalled almost 650 billion. But here, too, large companies come out on top, receiving 77 per cent of new product revenue, and this share has increased markedly in recent years.