In a series of six articles, Science|Business looks at how the G20’s $200 billion of innovation stimulus money will be spent.This week, Germany.
The move followed some intense lobbying and recommendations from the Expert Forum on Research and Innovation (EFI), an independent commission established in 2007 to advise the German government on its innovation policy. In its bi-yearly report delivered in March and in a letter to Chancellor Merkel, the EFI criticised the government’s lack of focus on innovation in its financial aid packages and made specific recommendations. Among other things, it called for a reform of the German education system to allow institutions of higher learning more independence, the adoption of more flexible immigration policies, improved support for technology transfer, and tax credits for companies that conduct R&D.
“Our tax system does a poor job of creating incentives for innovation, and the educational system needs improvement quickly,” says Dietmar Harhoff, Director of the Institute for Innovation Research, Technology Management and Entrepreneurship at the Ludwig-Maximilians-University in Munich, and chairman of the EFI.
Early efforts neglected innovation
The German government has approved two stimulus packages since the onset of the financial crisis. The first package, approved by Parliament in October 2008, was directed at helping troubled banks. It made available a €480 billion stabilisation fund as collateral for interbank lending and approved an additional €80 billion in direct loans to the banks, which it expects to be paid back.
In January, the German Parliament approved a second aid package – the largest in the Federal Republic’s history – that foresees investments of €50 billion over two years. The package includes around €17 billion in public investment for renovating schools, institutes of higher educations, roads and other public buildings. €10 million will go towards municipal investments and €4 million into project finance. State governments will contribute €3.3 billion to the package.
The marginal tax rate was lowered from 15 to 14 per cent, and rules for creating temporary jobs simplified. The package also granted subsidies to encourage purchases of environmentally friendly cars and paid a “car-scrappage” premium for those who brought back older, polluting models. The aid package also established a credit and guarantee fund worth up to €100 billion to give loans to struggling industries, with special write-downs extended to SMEs. The package also approved €3 billion for renovating and updating buildings, aimed at cutting CO2 emissions between 2009 and 2011.
Meanwhile, extra aid packages to save crisis- ridden companies have also been approved. To many, it seems as if the government has merely been throwing money at the most dire situations without a well-thought plan behind it. Headlines have been dominated by last-ditch efforts to save companies such as car manufacturer Opel, retail chain Karstadt and mail-order catalogue Quelle (both belonging to insolvent conglomerate Arcandor).
Criticism, but support too
“This is not the best approach. It’s not helping to rearrange the economy for the future,” says Reinhard Pruegl, Junior-Professor and Chair of Innovation, Technology and Entrepreneurship at Zeppelin University in Friedrichshafen, Germany.
And, though Vice Chancellor Frank-Walter Steinmeier praised the second aid package as a successful mix of investment and measures to stimulate jobs and innovation, for EFI it was not enough. “We were critical of the way in which support was funnelled into the economy,” says Harhoff of the early efforts.
With the June decision to keep supporting innovation programmes in spite of the economic crisis, however, it looks as if the government is moving in the right direction. Harhoff is particularly pleased that all the political parties have absorbed plans for an R&D tax credit into their programmes for the election.
“The government has done a decent – not a spectacular but decent – job of making research and innovation really important topics for the election,” says Harhoff. “Now they need to stick to that.” He worries however, that with government debt accumulating, some projects could get put on the back burner. “That would be disastrous.”
Research organisations such as the DFG (German Research Foundation) and the Helmholtz Association, an association of 16 German research centres, also say they welcome the continued support for the innovation programmes.
“This decision will not only advance education and research, it will also give a lasting boost to the labour market,” said Jürgen Mlynek, President of the Helmholtz Association and current spokesman for the Alliance of German Science Organizations, in a statement in June following the announcement. “It will create tens of thousands of future-oriented jobs and open up new prospects for young scientists.”
Building on the high-tech strategy
In spite of the criticisms that the German government has done too little to address innovation, it should be acknowledged that the recent moves of the government build on three successful programmes already in place. Annette Schavan, Germany’s Minister of Education and Research, has worked hard over the past five years to push innovation and German competitiveness to the top of the political agenda, and can claim some success in doing so. Here’s a look at the three prongs of this programme, part of a High-tech Strategy initiated by the federal government in 2006 in association with state governments.
This is designed to increase student numbers at Germany’s universities. Demand for highly skilled graduates is expected to rise as the country moves towards a knowledge-based economy and as increasing numbers of people apply to study. It is also designed to raise Germany’s international profile. Originally agreeing to fund 91,300 new entrants by 2010, in June 2009 the government upped that to 275,000 slots by 2015, with €26,000 in support for each applicant. The total amount of investment is €10 billion.
This initiative is an attempt to improve the quality of German higher education and to improve the country’s reputation abroad by creating “elite universities” that compete with one another for additional funding. In 2006 and 2007 science and politics together selected a total of 85 excellence institutions and projects to receive €1,9 billion up to the end of 2012. The programme provides funding to 39 graduate schools, 37 clusters of excellence and 9 so called “institutional strategies”, better known as “elite universities”. In June, the government agreed to put another €2.7 billion into the Initiative for Excellence. It has been somewhat controversial, as critics say it creates a landscape of “have” and “have-not” universities in Germany. However, the EFI and German research organisations say they welcome further support of this initiative.
• Initiative for Research and Innovation
The Initiative for Research and Innovation has increased funding for Germany’s major science and research organisations, whose costs are shared by federal and state governments. That includes the Hermann von Helmholtz Association of National Research Centres (HGF), Max Planck Society (MPG), Fraunhofer Society (FhG),Leibniz Science Association (Gottfried Wilhelm Leibniz Science Association, WGL), and the German Research Association (DFG).
In June, the government agreed to increase the budgets of these organisations by five percent annually, or around €5 billion, between 20011 and 2015. But the states of Brandenburg, Bremen, Mecklenburg-Vorpommern, Sachsen-Anhalt and Schleswig-Holstein will only contribute to this agreement if they can do so without increasing their own debt burdens.
It’s still too early to quantify the impact of the High-Tech Strategy on Germany’s competitiveness. It is true that the government increased annual R&D investment from about €9 billion in 2005 to €12 billion last year. The number with university degrees also has reached an all-time high, according to EFI, with about 240,000 graduating in 2007.
Still, Germany remains only in the middle range compared to other industrialised nations in terms of R&D investment as a percentage of GDP. (See pg 72 of the report) And the EFI says more must be done to meet future demand for academics in Germany and to make sure the best minds do not desert the country for better positions abroad.
Little action on the start-up front
Although the EFI has called for an improved framework for venture capital in Germany as a necessary measure for innovation, the government’s financial packages provide little concrete assistance for technology star-tups. “There has been no real impetus from the government to help companies in the seed and start-up phase,” says Michael Moritz, managing director of Hamburg-based CatCap, an early-stage consultancy.
It’s true that as part of the German government’s financial packages, the KFW Bankengruppe has been given up to €40 billion to lend to the country’s mass ranks of Mittelstand companies. But this programme is geared to already-healthy companies that are suffering from the credit crunch. Indeed, companies must show they have had profits in recent years, which hardly fits the profile of a research-intensive technology start-up.
The KFW invests in start-up companies via its ERP Start programme, providing half of the capital if matched by an outside investor. But investors in early-stage companies are becoming increasingly difficult to find in the current market environment, says Moritz. He believes the government should increase the amount that the KFW can provide to 70 per cent of the transaction. Alternatively, the government could supply the High Tech Gründerfonds, the government-backed fund that invests in early-stage companies, with additional funding. But neither proposal is seriously on the table.
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