Improving the capacity to innovate in Germany

Key indicators show Germany belonging to the countries in the OECD with strong innovation activity even though some weakening in Germany's position relative to other OECD countries has occurred recently. While the redirection of resources towards unification-related spending as well as low economic growth have contributed to this development, more fundamental structural issues have also played a role. Germany has benefited less than other high-performing countries from the surge in new technologies, such as ICT and biotechnology, as innovation activities continue to focus on sectors, such as machinery and automobiles, in which Germany has a long record of strong export performance.

Some features of the regulation of capital, product and labour markets are hampering the supply of risk capital, the creation of new firms and the reallocation of labour. In addition, firms are finding it increasingly difficult to recruit highly qualified labour. Measures to improve the framework conditions for innovation should include removing disincentives to take risks and to provide capital to new firms and raising the efficiency of the higher education sector. Furthermore, increasing the capacity of employment to adjust to technological change, raising the scope for competition overall, as well as reducing administrative opacity, would improve the capacity of the German economy to innovate and contribute to higher potential growth.