By Christian Hellwig
Be it Microsoft, Facebook, Google, Apple or the latest additions to the start-up elite such as Snapchat, Slack, Pinterest, Buzzfeed or Flipkart: the USA is the world’s uncontested champion of (information) technological change.
However, the European Union, and particularly Germany have sought to step up their game to close the still huge gap with the US. Indeed, implementing and managing digitization has formed a cornerstone of European and German policy-making.
Yet, this does not hide fact that leading German companies still lag behind in creating digitalized services. Moreover, despite the ‘Digital Agenda’, the German government is struggling to provide the necessary domestic infrastructure, Investment and legal-political frameworks necessary for a future start-up landscape that is competitive with the USA.
Government funding such as the German Accelerator program can only be the beginning of a state-induced policy change. This initiative, promoted by the German Ministry for Economic Affairs, annually selects top-tier German start-ups to cooperate with leading US firms in New York and California.
Despite these efforts, Germany is suffering from key structural deficiencies that need to be addressed in order for it to stand a chance against US competition. Firstly, the overall opportunities for state-funding are still limited. Secondly, the country’s tax system is too complicated, with excessive red tape hampering business creation. Ultimately, these issues deter young German professionals.
To date, there are only two significant German tech players on the rise: SoundCloud and Rocket Internet – both in Berlin. Berlin itself has evolved to become Germany’s start-up capital centred around Silicon Allee. However, this success is not due to a sophisticated marketing policy emphasizing said location. Instead, Berlin capitalizes on its unique cosmopolitan reputation, very low living costs, and above all, its alternative business and lifestyle culture.
Not only Berlin, but also Munich (Isar valley), Hamburg (Elbe river valley) have seen emerging clusters of vibrant tech firms: the IT-Cluster Rhine-Main-Neckar, the Medical Valley in the Erlangen region (Bavaria), Silicon Saxony in Dresden, or the Solar Valley in Thalheim. Despite this, the transmission belt between high-tech industry, start-up founders and potential investors requires considerable improvements.
Why Germany could build the next Silicon Valley
Germany is blessed with abundant human capital stemming from its excellent educational system. Additionally, even if one does not hold EU or EEA (European Economic Area) citizenship, university education remains free for everyone. In this respect, Germany is highly competitive in attracting talent from all over the world, a fact confirmed by the Times Higher Education World Reputation Ranking listing six German universities amongst the world’s top 100.
Education aside, Germany maintains a very high standard of living. In Mercer’s annual quality of living survey Munich, Düsseldorf and Frankfurt rank among the top 10, with Berlin and Hamburg in the top 20. Moreover, German firms occupy leading roles in their respective business branches. German industry leaders include Volkswagen, BMW, Daimler-Mercedes, Audi, BASF, Siemens, Allianz, Bosch, Adidas, SAP, and Metro.
Nevertheless, the mentioned corporations, and in particular medium-sized firms have recently seen decreases in innovation and research investment. Conversely, Germany has ranked third (2013/14) in terms of global venture capital investment in tech start-ups.
Rising FDI as the driving force behind a thriving start-up scene?
The Euro is expected to continue its fall at least until 2016. Germany, as the continent’s leading economy, is well placed to profit from this trend. US star investors such as Bill Gross and Warren Buffett have hailed the European Central Bank’s (ECB) policy as ushering in a new era of foreign direct investment (FDI) in the Eurozone. Similarly, Bill Gates‘ strategic investment with a leading German biotech firm might come at the right time and create important spill-over effects for other industries.
The low-interest policy by the ECB is highly attractive to investors as they have to pay back less USD when repaying their credits, with rates of return also potentially reaching unprecedented levels. This trend might even increase if the Euro reaches parity (predicted by 2017) with the dollar.
However, without a doubt FDI must be channelled in the right directions so that upcoming start-ups can also secure a stake. For instance, Warren Buffett’s investment policy specifically targets family companies which constitute the famous Mittelstand – the medium-sized companies forming the backbone of Germany’s prestigious economy. Simultaneously, as FDI increases so will national capital flight from the Eurozone, as the impact of zero percent interest rates and plummeting Euro are felt.
Germany must make better use of its potential
While brain drain is commonly associated with developing nations, Germany is also suffering from skyrocketing emigration rates, driving the young and well trained to the USA, UK, Switzerland, and Austria.
Over the decades, Silicon Valley has massively profited from this influx of German engineers, researchers, entrepreneurs and venture capitalists. These days, German engineering graduates from the RWTH Aachen or the Technical University Munich in particular are in high demand and are being employed in record numbers by Californian tech companies. Furthermore, many Germans have founded their own, highly specialized companies – so-called hidden champions – in the Valley.
This demand for talent puts Germany and the USA in direct competition. Consequently, the German government has launched a programme to lure its German human capital back to the homeland.
Lastly, Germany differs from the US in one key aspect. German society ostracizes failure, thus placing a heavy toll on young entrepreneurs. Investments often necessitate individual courage and failure is a part of the learning process. Yet, individuals who have had to file for insolvency in Germany, are not granted a second chance. This is a key impediment for Germany, although attitudes are slowly shifting.
If German society and politics succeed in changing this detrimental mindset while avoiding what critics call a glorification of failure, Europe’s biggest economy will be on a promising trajectory. Moreover, if Germany is able to retain its highly educated workforce at home while channelling FDI in the right directions, it can capitalize on a creative economy that has talent, technology and tolerance in abundance.
Christian Hellwig is a German economic theorist and macroeconomist who did research in the field of global games.
This article was published on Global Risk Insights.
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