Germany’s appetite for innovation is facing new challenges: Bureaucracy and a lack of capital are hampering growth despite record levels of investment in research and development. What nonetheless ensures the location’s future viability – and where are the greatest opportunities and risks?
German industry is financing more research and development than ever before: a recent briefing by the Statistisches Bundesamt (German Statistical Office) reckons that German companies, along with higher education institutions and research institutions invested 129.7 billion euros in new ideas in 2023 – a rise of 7 per cent compared to 2022. The impetus is mostly borne by industry, which at 88.7 billion euros once again provided the lion’s share. This means that Germany is not only continuing to uphold its position at the very forefront of the innovation league in Europe, but is also for the sixth time in a row exceeding the EU target of investing three per cent of GDP in research and development. Yet how sustainable is this trend and from where will the most significant impetus for the location’s future viability emerge?
It appears at first glance that Germany has no need for concern regarding its industry and economy: even the published by the Federation of German Industries (BDI), management consultancy Roland Berger, the Fraunhofer Institute for Systems and Innovation Research (Fraunhofer ISI) and the Leibniz Centre for European Economic Research puts the Federal Republic in a solid 12th place compared with 35 national economies. However, four years ago it was sufficient for 4th place. What has happened in the interim?
Quantity rather than quality: Germany’s strengths and weaknesses in an innovation comparison
It’s initially worth taking a closer look at the results of the innovation indicator – they require a differentiated categorisation. ‘Two years ago we changed our methodology by removing some soft indicators from the innovation indicator and placing greater reliance on the hard facts’, explains Dr Rainer Frietsch, head of the . ‘We’ve also included the key technologies and sustainability to create two new pillars for the evaluation. Based on this premise, Germany would have been ranked 10th in 2020.’ Which is not necessarily a regression. On the contrary, Germany retains the same index value that it has had for years, it’s just that other countries are more dynamic and have overtaken the Federal Republic. These include countries such as Denmark, Switzerland and Singapore, which pool their resources differently and for instance only focus on certain technologies in which they are very innovative. ‘Germany is conversely good across the board, but not exceptional in any field. We are after all still currently in the lead among the major economies“, says Frietsch.
Experts also emphasise that this result offers a solid basis for further innovation potential – provided the right course is set. Germany, according to expert Frietsch, urgently needs to become more efficient in its innovation. Bureaucracy in particular, with all its excesses, often retards both research and business.
Growth in the start-up scene despite difficult underlying conditions
Germany is nevertheless in a fundamentally good starting position to further increase its innovative edge. ‘We have a strong research base, excellent higher education institutions and an efficient industrial infrastructure’ asserts Peggy Zimmermann, managing director of the . ‘These fundamentals are also reflected in current developments within the start-up scene: start-up activity in Germany is stable and growth-oriented despite the tense economic situation. A recent report entitled conducted by the German Start-ups Association reckons that a total of 2,766 start-ups were founded in 2024 – an increase of 11 per cent compared with the previous year.
A lack of capital and overt bureaucracy are jeopardising growth
Further efforts are needed to make the German economy permanently resilient in the face of disruptive developments. It would in particular be promising to provide start-ups with more targeted support in the decisive scaling phase – because this is where the greatest growth potential for start-ups originates. ‘For many years there has been a lack of patient capital for commercialisation, especially in the deep tech sector’, explains Dr Carsten Wehmeyer, spokesperson for Digitisation and Innovation at the BDI. The larger the investment sums and the longer the path to market maturity, the more cautious many potential investors become. Peggy Zimmermann agrees with this: ‘In the early phase, many teams benefit from good mentoring, start-up funding, access to labs or co-working spaces.’ Yet there is often a lack of follow-up funding once these programmes finish. ‘The bureaucracy is simultaneously a real stumbling block” she adds: ‘Start-up processes take too long, many administrative services are not digitised and applying for subsidies is often opaque and resource-intensive.’ However, there is a good basis. The new German government’s coalition agreement promises to make it possible to establish a company within 24 hours by means of a digital one-stop-shop – which would be genuine progress.
What companies need most, however, is reliability and planning certainty. ‘Businesses lose trust when funding programmes are suddenly terminated or curtailed’, says Zimmermann. Instead, the up-and-coming entrepreneurs are leaving. ‘It’s already not uncommon for start-ups to launch abroad because the uncertainty and bureaucratic hurdles are so high in Germany’, explains Wehmeyer. ‘I feel that this lack of dynamism is currently our greatest weakness. On the other hand, Germany has excellent universities and companies that are in demand worldwide. We need to exploit this potential.’
Cultural differences are shaping the climate for innovation
Given all the statistics and international comparisons, it’s often overlooked that German innovation policy is shaped not only by structural but also by cultural peculiarities. ‘Germany traditionally relies on the careful, sustainable development of companies, so that they become solid and reliable partners in the long-term’, says Frietsch. It is conversely common for start-ups in the USA to be sold to large corporations at a profit after a few years – combined with a significantly higher willingness to take risks. Research and development in Germany is often more strictly regulated than on the liberal markets in the USA or Asia. An example is the new , which for instance strictly prohibits Chinese-style social scoring and severely restricts real-time biometric identification. ‘These rules reflect our European values, but sometimes inhibit innovation’, Frietsch admits.
That’s why there is extensive debate in Germany about how much regulation is necessary and expedient. Albeit the fact that this debate is being conducted with such intensity is also a sign of a vibrant innovation culture: it indicates that social progress in Germany is not left to chance, but should be designed in a responsible manner.