Dynamics and Challenges of Innovation in Germany

The economy of the Federal Republic of Germany, labeled a ‘growth miracle’ in the 1950s, emerged as the growth engine of Europe throughout the 1960s and 1970s. Despite the slowdown of growth rates during the 1980s, it remained Europe’s strongest and most innovative economy (Harhoff, 2008), making its unique brand of a ‘social market economy’ a role model, combining technological innovativeness, international openness, and industrial competitiveness with an extensive welfare system. Since the 1990s and 2000s, however, the various challenges posed by economic globalization, technological change, locational competition, demographic pressures, persistent mass unemployment, and the fiscal burdens of reunification with East Germany have exercised a pressure for institutional reform. Indeed, current German policy discourse is preoccupied with the need for infusing more entrepreneurial drive into the economy at large, in line with the formation of a knowledge-based economy. This reform orientation also affects the debate on innovation: the primary task is the restructuring of Germany’s innovation system in the direction of an entrepreneurial approach that combines institutional flexibility in the research and educational systems with promotion of entrepreneurship in both start-ups and established firms, while providing adequate risk capital and manpower. Thus, innovation in Germany is a reflection of more extensive institutional changes which are transforming Germany’s postwar coordinated ‘social market economy’ into an institutional hybrid whose shape is not yet clear—apart from becoming decidedly more entrepreneurial.