German companies invest less in innovations

Federal Research Minister Bettina Stark-Watzinger (FDP) expressed concern about the decline in innovation spending. Nevertheless, Germany is “still a country of innovation”. In addition, “there are signs of a trend reversal,” she told the Handelsblatt.

For 2021, the companies had planned an increase of 2.1 percent for innovation spending. According to ZEW, however, it is unclear whether companies will have increased their research spending in 2021. “The uncertainty has never been so great.”

With the slump in innovation spending, a general downward trend continued in 2020, which had already begun in 2019 with the slowing economy. “There is a clear dichotomy in the sectors: All IT areas have grown. But the classic high-tech sectors such as vehicle construction, mechanical engineering and electronics have made significant savings in terms of innovations,” says ZEW expert Rammer, summarizing the results of the innovation panel (see graphic).

The industry cut its innovation budget by almost five percent

While the industrial sector reduced its innovation budget by almost five percent, innovation expenditure in the service sector remained at the 2019 level. However, since the industrial sector has significantly higher innovation expenditure at 127 billion euros than the service sector at almost 44 billion, it has a decisive influence on overall economic development.

The slump is exacerbated by the fact that companies saved less on ongoing projects, but above all reduced “innovation investments” by a tenth. These include, in particular, the costs of ramping up production and selling new products.

“This can have a negative impact because companies then need longer to meet demand that increases after the crisis,” warns Rammer, “because it often takes a year before new products can be brought to market.”

Fading innovations cost growth

The German Economic Institute (IW) warns that the consequences of declining or even too little innovation could be dramatic. Because Germany “is facing a huge challenge, since demographic change, decarbonization and digitization as well as deglobalization tendencies work simultaneously and mutually and endanger the business model of German companies,” says the IW innovation expert Axel Plünnecke.

>> Read here how the rise of China, but also home-made problems, are damaging Germany as an innovative nation

The last innovation indicator published by the Federation of German Industries (BDI) immediately before the corona crisis had already identified a growing gap to the world leaders. Germany was still in fourth place there. “But while others are rushing away, we are treading water compared to our competitors,” warned the BDI President at the time, Dieter Kempf. The gap to the frontrunners Switzerland, Singapore and Belgium had grown steadily. This means that “a downward trend in German innovation dynamics has continued since 2014”.

The experts are unsure as to why R&D spending in Germany has fallen so sharply. Of course, there was the 4.6 percent slump in gross domestic product in 2020, followed by minus 2.8 percent last year and massive uncertainty about where things are headed.

>> Read here which nations are in the fast lane when it comes to innovation

In some cases, the falling sales also put pressure on liquidity: According to a survey by KfW, at least around a third of medium-sized companies complained about problems here in 2020.

Lack of money does not seem to be the main problem. German companies are currently hoarding more liquidity than ever before: almost 700 billion euros, according to calculations by the international law firm Freshfields. The money melts away, however, because it earns interest on the bank accounts at an average of minus 4.6 percent, taking inflation into account.

Nevertheless: In other countries, the economy slumped much more severely in 2020 than in Germany, but research spending there did not fall as sharply.

ZEW researcher Rammer assumes that short-time work, a German specialty, has definitely contributed to the decline in innovation. In addition, the home office quota in this country was above average.

And it is “especially the creative processes that do not work or work less well in the pandemic via zoom – and so that new ideas do not even arise, the companies tell us,” says Rammer. Cooperation with external partners, such as universities, has also become much more difficult.

Minister worries about middle class

The Federal Research Minister is particularly alarmed by the news from small and medium-sized enterprises: “I am concerned about the small and medium-sized enterprises (SMEs) that are planning to spend less. They need relief so they don’t run out of breath,” said Stark-Watzinger.

According to the ZEW panel, SMEs, which have long been a problem child of German innovation policy, increased their innovation expenditures slightly in 2020 – unlike large companies – from a low level in 2020. For the following years, however, they were already planning extraordinarily heavy cuts of six and eight percent in early summer 2021. The ZEW writes that “the pandemic seems to be leaving stronger and longer-lasting marks on SMEs”. The large companies, on the other hand, calculate with a plus of around three percent each.

In order to strengthen the innovative power of the many smaller companies, the federal government introduced tax research funding in 2020 after decades of debate, which can be applied for since April 2021. Because of the pandemic, it was increased again, so that a bonus of up to one million euros a year is now enticing.

IW expert Plünnecke calls for the framework conditions for innovative strength to be further improved in view of the poor figures. To this end, the federal government should, for example, “improve the scope of funding and access to the research allowance in order to leverage corporate research spending”. In addition, as planned in the coalition agreement, the technology transfer from the universities to the economy must be improved quickly and significantly.

In any case, the research minister promises the “start of a decade of innovation” with “great leaps and breakthroughs”. However, it is completely unclear whether innovation spending in 2021 will actually increase again as hoped. Because the ZEW had surveyed around 32,000 companies for the annual panel in spring and summer 2021, when the world was still hoping for an early end to the pandemic.

Nevertheless, unlike in normal years, a high proportion of more than 13 percent could not or did not want to provide any information about the innovation plans. For 2022, almost a fifth did not dare to make an assessment.

“Even during the euro crisis in 2009, the phase of high uncertainty only lasted half a year, now it’s been two years,” says innovation expert Rammer. Many innovations are also aimed “at the huge Chinese market – but now nobody knows whether the country will possibly seal itself off completely for years to come. Perhaps the Olympics will provide the first clues here.”

>> In an interview with the new liberal research minister, read how Bettina Stark-Watzinger wants to ensure that research findings turn into prosperity more quickly

So that the knowledge from research reaches companies more quickly, “we will give the agency for leap innovations more freedom, found the German Agency for Transfer and Innovation (Dati) and promote spin-offs,” promises Stark-Watzinger. “We can no longer afford to let this potential go untapped.”

In addition to better technology transfer, the traffic light government must “above all improve the digital infrastructure,” says researcher Plünnecke. In the IW surveys, broadband expansion and stable Internet are right at the top of the list of demands of innovative companies in rural areas.

In second place, ahead of financial aid for research and development, is the desire to finally eliminate the bottlenecks in digital skills – and to ensure that more specialists in the natural sciences and technical fields are trained or recruited from abroad.

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