Innovation specific developments in Germany

In order to assess the economic contribution of innovations, the literature distinguishes between several indicators and nomenclatures. Enterprises are classified as innovation active in the case they conduct research and development but without necessarily resulting in the introduction of new products, services or processes. Enterprises are also classified as so-called innovators in the case they launch or introduce:

a new or improved product, service or process; a marketing method;

an organisation method.

Enterprises which just modify existing products, services or processes are classified as so-called moderniser. Furthermore, the literature distinguishes between the so-called input, throughput and output indicators. The expenses for research and development are the most important input measure. Innovation efforts could result in the registration of patents or any other kind of proprietary rights, internal research routines and the employment of scientific staff. These variables are regarded as possible outcomes of innovation activities even though their registration is very difficult and does not show the final research success. Basically, these variables are neither regarded as necessary nor sufficient conditions for successful product launches. This means that not every patent is necessarily resulting in a product launch and not every product launch is based on a registered patent. Therefore, these variables are classified as the so-called throughput indicators. They do not allow for conclusions regarding enterprises' innovation intensity on the one hand or the innovation success on the other hand (Maaß and Führmann 2012). The final success of R&D is expressed by the revenue proportion of new or significantly improved products and services. The success of process innovations on the other hand is expressed by their contribution in the reduction of costs per unit. In the case that process innovations are introduced for quality improvements of products and services, their success is expressed by their contribution in additional revenues (Rammer et al. 2014).

The literature review shows that the innovation statistics have obvious limitations. Even though several research institutions in Germany are concerned with innovation research, an all- encompassing basic statistic is completely missing. Most of the research studies are limited to particular industry branches and enterprise sizes, and thus their results are not representative for

the entire economy. In addition, the research studies are based on self-assessments of the participating enterprises and hence on their knowledge regarding the application of innovation definitions. This supports the assumption that the statistics might be biased (Maaß and Führmann 2012).

In order to realise a basic understanding regarding the innovation ability of Germany’s economy, the subsequent clarifications are based on the research study from Rammer et al. (2014). This longitudinal examination is carried out on behalf of Germany’s department for education and research. The results are representative for the population of enterprises with more than five employees in selected industry branches. The study distinguishes between the so-called research- intensive industry with the chemical, the pharmaceutical, the electronics, the mechanical engineering and the automotive industry. Furthermore, the additional industries are in the fields of energy and water utility, mining and recycling. On the other hand, the study distinguishes between knowledge-based services from publishers, the film industry, IT companies, public relation agencies, tax, and the legal and management consulting firms. Finally, the study considers basic services from wholesalers, logistic firms, employment agencies and security companies. The agriculture, the fishing, the forestry, the construction industry, the retail, the educational service, the health care, the culture and the public sector are not considered in the examination. Nevertheless, the study delivers a comprehensive time series analysis regarding research and development in Germany’s most important industry sectors (Rammer et al. 2014).

The subsequent table three shows that there are significant differences in the research and development activity of enterprises in Germany. The classification as continuously research active requires research and development divisions in the enterprise or at least R&D staff resources in order to ensure permanent research. Research data show that the proportion of continuously research active entrepreneurs is increasing in relation to the company size. This proportion is overall bigger in the industry than in the service sector and biggest on the level of industry firms with more than 1,000 employees.

The research and development activity in 2012

Number of employees Continuously Occasionally

Industry sector 5 – 49 12% 13% 50 – 249 33% 16% 250 – 999 61% 12% 1,000 < 83% 5% Service sector 5 – 49 7% 7% 50 – 249 10% 6% 250 – 999 16% 9% 1,000 < 37% 7% Total 11% 9%

Table 3 The research and development activity in 2012; extrapolations for the population of enterprises in Germany with more than five employees (derived from Rammer et al. 2014, p. 15)

This research strategy is associated with comparatively smaller innovation expenditures of the SMEs for current and fixed assets, and for internal and external research and development. The proportion of expenditures is rising on the level of the bigger-sized enterprises (see subsequent table four) as does their proportion on continuously research (see table three). In addition, bigger-sized enterprises enter more often into research cooperation, both in the industry and in the service sector (see table five). Research cooperation is regarded as stimulating in the research process. Cooperating partners benefit from scale effects so that research efforts could finally be expanded (Dömötör 2011). This explains, inter alia, why public research funding is focused on the intensification of research cooperation, in particular on the level of the SMEs. This issue is discussed in greater detail in section 4.5.

The innovation expenditures' proportion on revenues in 20121)

Number of employees Industry sector Service sector

5 – 49 2.4% 1.0%

50 – 249 2.2% 0.8%

250 – 999 2.1% 0.7%

1,000 < 6.2% 1.7%

Total 2.7%

1) Including expenses for current and fixed assets, internal and external R&D.

Table 4 The innovation expenditures' proportion on revenues in 2012; extrapolations for the population of enterprises in Germany with more than five employees (derived from Rammer et al. 2014, p. 16)

The research and development cooperation in 2012

Number of employees Industry sector Service sector

5 – 49 18% 13%

50 – 249 34% 21%

250 – 999 57% 25%

1,000 < 88% 62%

Total 18%

Table 5 The research and development cooperation in 2012; extrapolations for the population of enterprises in Germany with more than five employees (derived from Rammer et al. 2014, p. 19)

The statistic in the subsequent table six initially shows the proportion of innovation active enterprises in Germany. Innovation activities in that respect refer to every type of research effort during 2010, 2011 and 2012, irrespective of whether this effort was resulting in a product or process innovation. The information regarding the proportion of product innovators considers product innovations in the type of product inventions, product imitations and product improvements. This shows the rather comprehensive application of the term innovation. Process innovations are process implementations, either new or improved within the enterprise itself in order to reduce the costs per unit or for quality improvements of products and services. Innovations are considered in the statistic, in the case that an enterprise has introduced a product or process innovation at least at one occasion during 2010, 2011 and 2012. Table six shows that the proportion of innovation active enterprises and the proportion of product and process innovators is significantly increasing in relation to the company size. The proportions of the

bigger-sized enterprises differ significantly from the proportions of the smallest enterprises. Rammer et al. (2014) calculate a proportion of 51% innovation active enterprises and a proportion of approx. 38% product and process innovators in Germany for 2012. The application of continuously research, the scope of research cooperation and the amount of R&D expenses of the bigger-sized enterprises is associated with their larger proportions on both product and process innovations. This research strategy is also resulting in their significantly larger innovation success. This success proportion is increasing in relation to the company size with the exception of the service sector in which the smallest enterprises are obviously very successful. Nevertheless, the more detailed interpretation shows that from the total revenue proportions of 12.6% only 2.9% are associated with market innovations and approx. 9.8% with imitations. This means that approx. 78% of these revenue proportions are associated with product imitations. The revenue proportions of imitations are the biggest on the level of enterprises with five to 49 employees and both in the industry and the service sector (see table seven and Rammer et al. 2014, p. 17).

The innovation statistics for the industry and service sector in 2012

Number of employees Innovation activities Product innovators Process innovators

Industry sector 5 – 49 53% 34% 22% 50 – 249 72% 50% 39% 250 – 999 83% 68% 57% 1,000 < 95% 87% 83% Service sector 5 – 49 46% 25% 18% 50 – 249 47% 27% 27% 250 – 999 62% 35% 44% 1,000 < 79% 61% 68% Total 51% 30% 22%

Table 6 The innovation statistics for the industry and service sector in 2012; extrapolations for the population of enterprises in Germany with more than five employees

The innovation success in the industry and service sector in 2012

Number of employees Product innovations Process innovations

Revenue proportions Proportion on cost Revenue proportion of

reductions quality improvements

Industry sector 5 – 49 7.5% 1.1% 1.1% 50 – 249 9.2% 1.8% 1.4% 250 – 999 10.7% 2.8% 1.4% 1,000 < 27.4% 4.8% 2.4% Service sector 5 – 49 6.0% 1.9% 0.9% 50 – 249 4.7% 1.1% 0.8% 250 – 999 3.8% 3.2% 0.7% 1,000 < 9.6% 4.4% 2.6% Total 12.6% 3.3% 1.7%

Table 7 The innovation success in the industry and service sector in 2012; extrapolations for the population of enterprises in Germany with more than five employees

(derived from Rammer et al. 2014, p. 17)

Moreover, the subsequent table eight shows that the gross domestic expenditures on research and development increased without any interruption since the millennium turn. This applies for the absolute values and relative to Germany’s GDP. The more detailed view, however, shows that the increase was not as large in the first half of the decade in comparison to the second half. In that respect, the GDERD increased by approx. 7% and thus by approx. 3.7 billion euros between 2001 and 2005, whereas these expenditures increased by approx. 19% and thus by approx. 11.1 billion euros between 2006 and 2010.

The gross domestic expenditures on research and development1)

Year Total GDERD in BEUR GDERD proportion on GDP

2000 50.83 2.40% 2001 52.24 2.40% 2002 53.55 2.43% 2003 54.73 2.47% 2004 55.10 2.43% 2005 55.93 2.43% 2006 58.97 2.47% 2007 61.50 2.45% 2008 66.59 2.60% 2009 67.08 2.73% 2010 70.01 2.72% 2011 75.57 2.80% 2012 79.11 2.88%

1) Including expenditures from public and private organisations, and the private economy. Table 8 The gross domestic expenditures on research and development (derived from table 1.1.1 on

www.datenportal.bmbf.de, accessed August 2015)

Despite these obvious efforts to boost the innovation activity in Germany’s economy, Rammer et al. (2014) calculate a decreasing proportion of product and process innovators from 47% in 2008 to 38% in 2012. This proportion of product and process innovators was largest in the IT, the telecommunication, the chemical, the pharmaceutical and the mechanical engineering sectors with proportions of each at least 70% in 2012. Moreover, approx. 44% of the enterprises implemented a marketing and/or organisation innovation in 2012. These so-called non- technological innovations are considered in the international innovation statistics since 2005. This kind of innovations are marketing and organisation procedures which are implemented by the respective enterprise for the first time. Rammer et al. (2014) mention that the proportions of marketing and organisation innovators decreased significantly between 2010 and 2012. In 2012, the amount of research expenses in the selected industry branches resulted in approx. 137.3 billion euros. A proportion of approx. 64% belongs to the chemical, the pharmaceutical, the electronics, the automotive and the mechanical engineering sectors. The expenses in these industry branches increased significantly between 2008 and 2012, but remained stable in the other industry sectors of the study. On the other hand, the statistic shows that approx. 105 billion euros and thus a proportion of 76% of the expenses refer to enterprises with more than 500 employees in 2012. Approx. 24.2 billion euros and thus a proportion of approx. 18% refer to

enterprises with less than 250 employees and the remaining proportion of 6% refer to enterprises between 250 and 499 employees. According to a company-size based perspective, the research expenses were decreasing on every enterprise-size level during the initial phase of the crisis. Subsequently, the research expenses were increasing from approx. 80 billion euros in 2010 to 105 billion euros in 2012. Thus, the expenses increased by approx. 31% on the level of the bigger-sized enterprises with more than 500 employees. On the other hand, the expenses remained quite stable each on the level of the enterprises with less than 500 and less than 250 employees (Rammer et al. 2014).

Beside the decline of the product, process, marketing and organisation innovators in Germany between 2008 and 2012, the revenue proportions of product innovations, which include innovations, improvements and imitations, decreased in every industry branch of the study during the initial phase of the crisis too. This proportion recovered in 2010 and 2011, but fell back again in 2012. The same development applies for the proportion of revenue increases due to quality improvements. The contribution of process innovations for the reduction of costs per unit ran volatile but overall tended to decrease during 2008 and 2012 with the exception of the basic service sector. On that level, these proportions slightly increased (Rammer et al. 2014).

Thus, the innovation activity in Germany’s economy seemed to be hampered and the further development somewhat one-sided. The assumption of routines in order to transform knowledge into economical success might apply for particular industry branches and enterprise sizes but not for the entire economy. The past development shows that the pure increase of the capital stock in order to produce additional knowledge did not automatically result in an improved knowledge transfer nor in an increase of success proportions. Consequently, the application of the neoclassical assumptions is limited. This supports Schumpeter’s conclusions (see section 2.6.1) that the transformation of knowledge requires entrepreneurial activity, not only by innovative entrepreneurs in the innovation system, but also from the existing enterprises in the economic circle. According to the research findings of Rammer et al. (2014), this means that in particular SMEs have to intensify their research efforts.

If only 11% of enterprises with more than five employees in the selected industry sectors carry out research and development continuously and approx. 9% of the enterprises occasionally, the vast majority of enterprises would not be research active at all. This applies in particular for SMEs in the industry sector with less than 250 employees and the service sector with less than

1,000 employees (see table three). In addition, the research data show that the majority of product innovators are concentrated in specific industry branches and employment classes. Approx. 94% of the research expenses refer to enterprises with more than 500 employees, which increased these amounts during 2010 to 2012 significantly. This means that the research contribution is overall concentrated and thus the innovation potential of the economy is not completely exhausted. This applies in particular regarding the specific type of innovation. In that respect, data show that the majority of revenues in the context of the transformation of innovations were based on product imitations. This underlines the earlier assumption of Welsch (2005) who argues that the innovation activity in Germany would be associated with the improvement of products and processes rather than the development of radical innovations. Therefore, Germany would belong to the group of fast followers with a high productivity and a successful diffusion of new applications in the important industry sectors. On the other hand, Welsch (2005) points out that Germany obviously would not be able to develop new markets and industry sectors. In that context, the structural change into high-technology areas would be too slow (Welsch 2005).

Schumpeter (1987) argues that the entrepreneur requires either credit or equity in order to implement new factor resources. Banks are operating between the owners of factor resources and the entrepreneurs. By receiving credits from banks, the innovative entrepreneur is able to buy the required resources for the further combination and their market introduction. This explains the central meaning of the capital and the credit market which are concerned with the redirection of factor resources into new applications. The process of economic growth does not only require factor resources but, moreover, enterprise founding and innovative entrepreneurs. In that respect, Röpke and Stiller (2006) argue that capital requires the connection to innovation and new knowledge requires the implementation in new factor combinations. Hence, if these requirements are not fulfilled, both the capital flow and the development of new knowledge would be meaningless. Therefore, the subsequent section is concerned with the application of financing measures for SME and innovation financing. In that respect, the clarifications are focused on public funding, capital market financing, equity financing and bank financing.