Germany – Mittelstand forever?

Germany dominates Europe as its largest and strongest economy. Last year, it ranked not only as Europe’s first economic power but also as fourth worldwide with a nominal GDP of $3.68 trillion, behind Japan’s $4.87 trillion.
A number of factors explain this. First, the country benefits from strong industrial activity, which last year accounted for around 23% of GDP. Sectors such as automotive manufacturing, chemicals, electrical engineering and industrial machinery have traditionally been leading the pool. With around €1.28 trillion ($1.45 trillion) of exported goods in 2017, Germany is also one of the biggest exporting countries globally.
Consisting of 16 distinct states, called länder, Germany is home to a fairly decentralised power, distributed between the federal and state governments, respectively headed by federal ministers and by the chancellor – currently Angela Merkel – who is head of state. Certain regions and cities are incidentally reputed for their specialisation in a particular field. By way of example, Munich is often called “the high-tech region”, while Frankfurt is considered a financial hub and Berlin a startup and innovation hotbed.
But most of all, Germany would most certainly not be what it is now without the precious contribution of what is often described as the engine and “backbone” of its economy – the Mittelstand. Literally translating as “medium estate”, the Mittelstand designates Germany’s 3.7 million small and medium-sized family-owned businesses that employ between 50 and 500 people each and individually generate up to €50m of annual revenues. At present, the Mittelstand is said to provide no fewer than 70% of jobs in Germany with an estimated 31 million employees, and generates 35% of the country’s corporate revenues. Could the Mittelstand be the main factor in Germany’s near-full employment?
Often praised for the quality of their management, Mittelstand companies seem to have understood the pressing need to modernise and open up to new growth avenues in the face of a changing world. As the government’s Industrie 4.0 initiative – aiming to move the nation from centralised to decentralised smart manufacturing – runs its own course, the small and medium-sized enterprises (SMEs) of the Mittelstand try to navigate their way through disruption.

University venturing

According to the German Centre for Research and Innovation, which in line with the government’s wish to internationalise science and research has established subsidiaries in Brazil, Japan, Russia, the US and India, a large number of organisations participate in the development of innovation in Germany. Among these are the technology transfer departments within scientific organisations and universities, development agencies for innovation and technology parks. SMEs, the centre says, also play an important part in creating new products and services.
To help kickstart the Mittelstand’s development in the 1940s, the Fraunhofer Society was created as a partnership between universities and companies that would ease the process of applying research. Now consisting of 72 German institutions and focused on various sectors, the society is one of Europe’s largest applied research and development institutions, with 25,000 employees and an annual research budget of €2.3bn. While the state partly backs the institutes, 70% of their funding is earned through contract work for government-sponsored projects and companies.

Max Planck Society for the Advance of Science consists of 84 institutes conducting research in the natural, life and social sciences, and humanities. Max Planck Innovation is the unit in charge of commercialising inventions and technologies coming out of the institutes. A team within the organisation also helps researchers create of business models.
Other organisations include the German Association of Innovation, Technology and Business Incubation Centres, nurturing 150 incubators, innovation, technology and business centres as well as scientific technology parks, which are now home to 5,800 companies and 46,000 employees and which claim to have contributed to the formation of 17,400 new businesses.
Helmholtz Association of German Research Centres is another innovation cluster, distributing funding from the Ministry of Education and Research to 19 autonomous research centres and evaluating their effectiveness against international standards. As part of the association, Hemholtz Institutes provide strategic partnerships between Helmholtz centres and universities within specific areas of research. Each institute can receive institutional funding of €3m to €5m a year. The group’s technology transfer department is in charge of applying research results.
Leibniz Association, which connects 89 independent research centres and focuses on social, economic and ecological issues, offers collaboration with universities through the Leibniz Science Campi program. Founders Foundation’s Borek said: “Germany has a long tradition of producing groundbreaking technology and innovation. Universities are heavily involved int research too, although as opposed to what is done in other countries they do not tend to make direct investments in spin-offs.”
Founders Foundation has developed its own initiative to collaborate with universities – Science-to-Business Lab. The program offers half-day workshops to students and researchers to help them commercialise ideas.
Institutions producing most spin-offs include the technical universities RWTH Aachen and Dresden University of Technology, and public research university Karlsruhe Institute of Technology. University of Stuttgart and Frankfurt’s Goethe University also have tech transfer offices, with the latter placing a focus on biotech. HTGF’s von Frankenberg said: “Universities are now much more open to supporting students and researchers in setting up their company. I would say you can find great deals all over Germany, as each region has its own strength, but a big focus is generally placed on high-tech and biotech.”
Among all German universities, the champion is Technical University of Munich (TUM) and its Centre for Innovation and Business Creation. More commonly known as UnternehmerTUM, the centre employs 200 people to offer incubation services and educating students on entrepreneurship and venture. It has also launched its own venture fund, Unternehmertum Venture Capital Partners backing European B2B-focused startups with tickets ranging between €500,000 and €3m.
Meanwhile, the TUMentrepreneurship project, endowed with €2.7m from the Federal Ministry for Economic Affairs and Energy, encourages the creation of spin-offs in the fields of information and communication technology, medtech, cleantech and life sciences.
Established in 2010 by private patrons and business owners, TUM University Foundation is another TUM entity set up as a non-profit organisation with a €20m endowment to attract talent and support promising young scientists. TUM claims to be helping the creation of an average of 70 companies a year and to be one of Germany’s three most active universities in the field of patents.
Overall, German universities “are advancing quite nicely”, as von Frankenberg put it. Last year, the Ministry of Education and Research announced it would award funding to 48 institutions, including 35 universities of applied sciences and 12 universities and colleges of education. The funding was to be given through the Innovative Hochschule program set up in May 2016, targeting small to medium-sized universities and institutes of technology. The program is set to provide a total of €550m by 2027 to boost technology transfer capabilities and support partnerships with local industry, with the overall effect of bolstering regional ecosystems. “But there is still some way to go,” von Frankenberg added.
Industry players agree more could be done to incentivise business creation and popularise the entrepreneurial path within schools and universities. “The issue,” said Founders Foundation’s Borek, “is that in Germany, most universities are publicly funded, which means they do not have the same financial resources as US or UK-based universities. What we have learnt through our exchanges with students is that there seems to be very little motivation for researchers to engage in business creation, as there are no substantial financial incentives for doing that.”
In a set of recommendations published in 2016, the Federation of German Industries emphasised the key role played by education in developing the ecosystem, saying “schools and universities must vigorously inform their students about the opportunities and challenges of going into business and actively encourage them to go into vocational training”.
The organisation also highlighted the necessity of introducing tax benefits for research as “an instrument to promote research and innovation in a broad and open way”. The report went on: “All large, and the majority of small, Organisation for Economic Co-operation and Development countries have such incentives – only Germany does not. It is high time that tax incentives for research are established in this country too – only then can the Mittelstand grow more strongly, and with it, the German economy.”
Extracted from a longer article looking at corporate, university and government venturing in Germany, published in this
month’s issue of Global Corporate Venturing.