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Recent developments in innovation policy in the Federal German Republic
European Management lottrnal Volutne @ European Mmtagement Jottrnni 1987 1SSN 0263-2373 $3.00
5 No
3
Recent Developments in Innovation Policy the Federal German Republic*
in
Jacques Liouville CESAG,
University
Since about 1960, the industrialised countries have intervened to encourage the development of the technologies having a high growth potential. The governments of OECD countries in particular have admitted that the pursuit of economic growth and the creation of new jobs depend upon the adaptation of industrial structures and innovation. Long before 1970 the West German government considered it to be clear that state intervention to help the industries of the future to grow, was a more constructive way to develop the economy, than to prop up declining ones. In spite of unquestionable results, the manner in which the State promotes innovation in West Germany has recently undergone drastic changes.
of Strasbourg
Organization
of Innovation
Policy
Before 1983
At the beginning of the last decade, an important change took place in West Germany. The SPD (Sozial Demokratische Partei) succeeded the Liberals, which led to profound changes in the way innovation was to be stimulated. Innovation had traditionally been thought to result from a combination of luck and market incentives. Therefore, technology policy was only aimed at the industries with the highest growth potential. The centrepiece of the new policy was therefore the creation of a Ministry of Research and Technology (BMFT) which was to develop those programmes in any area considered to have future potential.
Finally, despite the relativity of the available indicators to evaluate the policies of innovation, the third part attempts to extract the main points in order that we might be able to decide how effective these new economic stimulants have been.
In order to fulfil the scientific or technological aim which the authorities had in mind, the specialists in the area concerned were brought together to develop cooperation between the research and industry, and for which the government was to supply the financial and organizational means. So as to be able to take advantage of the grants available, companies were to put forward projects which conformed to the guidelines laid down by the authorities. When a project was accepted, the BMFT contributed to the expenditure, in general to a Ievel of 50 percent.
* Translated from Chroniques de la SEDERS, No. 11 Novembre 1986. The author +hanks J. Ray for his assistance with translation
In addition to direct promotion, indirect measures also existed, such as a reduction in tax when a firm had realized investments in R & D, and help in the financing of employing research staff, both to begin from 1979. But this type of grant was in limited supply. In 1976 for example, the sum set aside for it
The first part of this article aims essentially at explaining the bases of the new trends. The second part is devoted to studying the changes and will aim at presenting the advantages and disadvantages of the policy of innovation promotion.
RECENT
DEVELOPMENTS
IN INNOVATION
was about 15 times less than that channelled into direct incentives, as illustrated in Table 1 below.’ Table 1 Amounts released for promoting innovation the civil sector in FRG from 1975 to 1978 (figures millions DM) Direct promotion (1) 1975 1976 1977 1978
Indirect promotion (11)
1,886
149
1,574 1,660
106 154
1,962
141
Proportion
IN THE
FEDERAL
1: 1: 1: 1:
of the Planned Innovation
12.6 14.8 10.8 13.9
Forschung,
Policy
in
Few industries have taken advantages of public impulses. First, it had been noted that government stimulation of growth in specific fields was leading to the neglect of whole areas of the economy, contrary to the initial aim. This situation arose because the task of identifying industries of the future was entrusted to researchers belonging to public institutions. Now the situation which arose most frequently was where researchers took inspiration from each other. In practice the result was that state resources were concentrated on a small number of areas. Accordingly a thorough study of the way in which resources intended to encourage innovation were allocated, enabled the establishment of the fact that funds were channeled mainly into the development of a single industry, Aerospace (1). Another problem of past innovation policy stems from the way in which projects to be supported are selected. As a rule the criterion chosen to distinguish between projects which firms had proposed was limited to prestige. This led to a situation where funds were being concentrated on large firms, which found it easier to put forward large scale projects than did small and medium sized firms (SME).
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167
industry and create 50 percent of the turnover generated by the manufacturing sector: An inconsistency was therefore seen between. the way in which the bureaucracy assigned grants for innovation and the need to strengthen the manufacturing sector, dominated by the SME’s. This inconsistency is all the more significant, given that large German firms seem less efficient than SME’s where R & D is concerned (2). The steps taken by the BMFT didn’t result in technological transfers between Research and Industry. The most serious attack against the former system of support for innovation was focussed against the lack of creativity among the researchers and the implications of this where the transfer of their work to industry was concerned. Given that the political structure had imposed the main objectives on the teams responsible for the scientific projects, this would have led to a lack of responsible behaviour in the teams. The researchers would have restricted themselves to comply with the wishes of government and to further the escalation of the “costs-foreseen utility” phenomenon to their benefit. Assured of a regular and increasing supply of funds, the teams would have become averse to taking risks and would have assessed themselves with a comparison based on international standards, instead of directing their work to more desirable results. It is in this way that the lack of originality within public research institutions would have prevented an increase in transfers of knowledge between themselves and industry. This would have called into question the position of the FRG in the context of the international technological environment. For example from OECD 18 percent, percent in science-based decades are FRG.
in the exports of high technology goods countries, FRG represents no more than whereas this proportion exceeded 22 1964. These facts illustrate that the industries generated over the last two not amongst the most dynamic in the
The Basis of the New Innovation This tendency to privilege the big firms was accentuated by the fact that they are better adapted to a development within the structure of the policy than are SME’s. However in West Germany as country, the SME’s are the heart dynamics. The German SME’s employees) employ two thirds of
GERMAN
II/I
Source: Faktenbericht 1986 zum Bundesbericht ed. BMFT, Bonn, May 1986. The Limitations West Germany
in in
POLICY
in every OECD of the industrial (less than 1000 the workforce in
Policy
The assistance which has been received in the development of new technologies is not in question, but the Liberals returned to power in 1983 consider that the effects of indirect measures must be greater than those of direct intervention. A concept of this sort means that governments are going to resolve to act directly, only to promote’
168
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activities of prime importance for the future of the German economy, and for which market conditions do not allow firms to take on heavy commitments, but which could in the long run call into question their degree of international competitiveness. Now that this principle has been set out, aid aims to be available to all firms operating within a given sector, once it has been approved. Bringing all firms of a given sector together into competition must make research seem more attractive, and discourage the support for routine research which was possible when the awarding of projects put forward by the BMFT was limited to only a few companies. In addition firms must be encouraged to invest a part of their own capital in the projects. Public funds must not be set aside to cover possible losses. The fact that risks are taken by private concerns is a guarantee that economic interest exists in research, and withdrawal from a project already in progress by a private investor must be seen to indicate poor prospects in the field of research, and should lead to it being abandoned. The Main Steps Taken since 1983 to Encourage Innovation in FRG (3) The reduction of public resources directed towards large fi rms Whereas in 1982 the large firms received three quarters of the funds distributed within the framework of the planned programmes, this proportion should be gradually reduced to under 50 percent. A major factor justifying this choice is the result of an analysis of the structure of expenses in R & D. The SME’s which invest in R & D devoted to it a greater proportion of their turnover, than did the large firms: In 1983, 7.5 percent was invested by those employing less than 100 people, compared with 2 percent invested by those employing between 1000 and 10,000 people, as shown in Table 2.
In 1980 however, only 10 percent of companies employing less than 500 people carried out their R & D activities in the FRG. This statistic is leading the authorities to increase the subsidy directed to the SME’s. It is for this reason that although their expenses in R & D only represent 13 percent of the total R & D expenditures in the German economy, the SME’s employing less than 500 people in 1985, received more than double this percentage: 29 percent of the public funds dedicated to the policy of innovation. The West German government in this way placed more than one billion DM in 1985 as well as in 1986 at the disposal of the SME’s employing less than 500 people, to give a stimulus to innovation. The subsidies should help more than 10,000 SME’s in 1986. It must be noted that the increase in the amounts dedicated to the SME’s was considerable in the BMFT budget between 1984 and 1986: There was an increase of about 45 percent, with the global budget showing at the same time an increase of about 10 percent from 6.7 billions DM in 1984 to 7.4 billions DM in 1986. With the total expenses of the research activities reaching the amount of 5 billion DM in 1985, the conclusion to be drawn from the statistics above is that SME’s finance 80 percent of the R & D expenditure with their own money. Now in German industry as a whole, 88 percent of the civil R & D costs are covered by the firms themselves. One can observe therefore that SME’s take greater advantage of the grants than do other firms. Increasing the indirect grants A study of the BMFT showed that potential for innovation within the SME’s is limited first of all to the adoption of new technology production equipment. Therefore the indirect measures are directed at the investment and the human factor (4). The subsidies are based upon three essential elements. 0 Extension of R 0 D equipment A special redemption of 40 percent on the costs (incurred by the firm
Table 2 The turnover devoted in R & D (in percentage terms) by the German firms which execute operations in R & D Less than 100 employees
From 100 to 499 employees
From 500 to 999 employees
From 1000 to 9999 employes
Over 10,000 employees
7.5
3.2
2.1
2.0
3.7
Source: BMFT (the figures are for the year 1983)
RECENT
DEVELOPMENTS
IN INNOVATION
for itself) of purchasing or manufacturing research equipment has been set up. Costs of infrastructire are subsidized to the rate of 15 percent. This redemption aims at counterbalancing the rapid obsolescence of R & D equipment. increasing the number of researchers employed in which has existed since industry This measure, l
1979, has been extended. It aims at granting financial aid to those SME’s which employ people in R & D. The aid covers 40 percent of the gross wage during the first five years and 25 percent for the sixth year, with a limit of 120,000 DM per firm per year. Where allocation of resources is concerned we can distinguish two types of firm. First, those employing less than 500 people, for whom the subsidy covers 55 percent of the suppIementary scientific staff wage costs, during a period of 15 months. The maximum which can be allocated to a firm is 250,000 DM a year. The second category concerns the firms employing between 500 and 1000 people and with an annual turnover of less than 200 million DM. In this case 45 percent of the wage costs are covered during a period of 12 months, with an upper limit of 200,000 DM per firm. More and more firms are taking advantage of the opportunities available at this level, with the number of assisted companies having more than doubled between 1979 and 1984: 4500 subisidies granted in 1979, compared with 10,200 in 1984. A new type of promotion, specific indirect aid This new instrument of government innovation policy has been widely accepted by the public it was aimed at, the SME’s. This results from the clarity of the aidallocation criteria, from the simplification of the subsidy application procedure, and from the high probability of the proposal being approved.
l
The specific indirect aid aims at allowing new technology to spread within the production fabric microelectronics, manufacturing technology and biotechnology. The results have been positive, since the smallest firms (less than 200 employees) have received nearly half the subsidies. Although only the results of the “microelectronics” programme are known at present, it seems that this type of stimulation has had a significant effect in the About 40 percent of the spreading of innovation. firms concerned by the specific indirect grants had not installed a method of production requiring this form of technology before receiving the subsidies.
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169
Another favourable aspect of this promotion also lies in the fact that in addition to the installation of new technologies, the subsidies allowed the firms, in most cases, to create lasting connections with some research centres (public or private), consultancy firms, computer companies and so on. The new trend seems to be firm, the amounts assigned to indirect promotion having doubled between 1982 and 1986; from 780 million DM to 1.5 billion DM today. When seen as a proportion the resources devoted to direct stimulation are plainly on the decline. Whereas the ratio of direct to indirect subsidy was 4.7 in 1982, it fell to 2.5 in 1984. lntens$cation of transfersfiom researchto industry and of cooperafionat the researchlevel
Although all firms do not have at their disposal R & D teams sufficiently large to be aware of the different technological developments which affect their environment, several solutions to this problem are available. 0 Carrying out joint research So as to remain at the forefront of technical progress, firms of a given sector often encounter and share similar problems. In order to carry out a joint study of research questions of common interest, some industrial research institutions appeared as far back as 1949. In 1954 they formed a federation (AIF) which today embraces 93 research institutions representing 32 industrial sectors. In 1985 the State paid the AIF a total amount of 135 million DM, which increased its financial resources by 55 percent. The same year its own resources were 240 million DM. 0 Financing external researchto make up fir the lack of capacity in R & D Although some research can be
carried out at branch level, others with specific characteristics can only take place in one particular firm. Often, especially in the case of the SME’s, they do not have sufficient means themselves to solve the specialised problems with which they are faced. The barriers which traditionally separate Research and Industry do not encourage the firms in question to conclude agreements with research institutes to deal with the needs which appear, and can cause a technological delay. In order to reawaken the Authorities have financing of research This sort of help is
interest for external research, since 1978 contributed to the entrusted to a third person. spreading and the number of
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LIOUVILLE
Table 3 Financial aids for external research in FRG
number of new projects supported number of projects in progress amount of subsidies in millions DM
1978
1980
1982
1983
156
556
628
785
1402
(1)
124
798
1213
1470
2323
(1)
0.5
7.8
13.0
1984
13.1
21.2
1985
41.0
(1) not published Source: BMFT projects supported between 1.983 and nearly doubled, as shown in Table 3.
of firms being set up that techniques. But when the have invested some money article, they are often short reach the marketing stage.
1984 has
These aids are aimed at the SME’s and the level of the subsidies depends on their size: 40 percent of the total amount of the contract is for the ones whose turnover is less than 50 million DM and 30 percent for the ones whose turnover varies between 50 and 500 million DM.
Consequently, beyond the subsidies which can be granted for the period which runs from the setting up of the firm, until the launching of the prototypes, loans with preferential interest rates are offered for financing equipment and introducing products to ihe market.
Even subsidiaries of big companies can now claim these subsidies. This last increase is a direct result of the work done by the Wissenschaftszentrum Berlin. A team of this centre emphasized that among the innovatory SME’s in West Germany, the most efficient were the ones which worked in cooperation with large firms. l
From 1983 to 1985 more than 250 firms which were set up were subsidised for an amount of 81 million DM and the loans reached 7 million DM. For firms who have not been clause is being Government’s small ones) as
increasing the qualifications of the industrial staff in R
& D However, spreading out the R & D structure of firms is not enough to warrant the increase in results for industrial research. An unbroken stream of new knowledge in the firms is also necessary. With this aim a programme encourages the temporary transfer of research staff from industry into the research institutes and the universities. Helped by high level scientists, these people aim to complement and extend the R & D work of their firms. This programme has produced 170 contracts in 1984 and 1985. However, it is important to note that until now 70 percent of the contracts signed have been for the transfer of research staff mainly to the universities. This procedure of secondment of the industrial staff to the public research institutes also aims at allowing both a link between the world of research and the world of industry and at least the outlines of an agreement of cooperation between these entities during the period of secondment which can last up to three years.
are based on these new firms, usually new ones, to help with the finished of capital to expand and
have recently entered the market and able to control their growth phase, a considered that would reserve the right to issue orders to firms (even far as they are innovation-oriented.
Moreover, facing the difficulty which relatively new firms meet when hying to raise their own capital, and to help the creation of firms with “capital-risk”, a new regulated market has been introduced on the Stock Exchange. Developing the circulation of technical information in the firms During recent years an infrastructure has
l
been set up which divides West Germany into a very distinct grid pattern, in the hope that this will encourage the consulting for innovation (5). But the working of this infrastructure is linked to the provision of scientific and technical information. For the production and distribution of information with a specialized character (data banks), the federal government pledged 125 million DM in 1985. The present aim is to increase the use of modern information technology in the SME’s, which are still not very receptive to these new media.
0 Setting up firms with a technological basis Even if
West Germany is deficient in firms orientated twoards future technology, there is certainly no lack
l
Beyond to cooperate,
Coordinating the research of the firms
frame
of the
encouragement
the the
RECENT
DEVELOPMENTS
IN INNOVATION
authorities are striving to have the research institutes and the firms work together on certain topics. This process leads to the reduction of selectivity and the number of small projects, while at the same time increasing efficiency. For example 2823 projects were supported in 1982 and 2622 in 1984, which indicates a drop of 7.2 percent. So some German electronic firms together with some users launched a joint project to perfect a new component without causing any effects by the firms at the level of the competition. In the same way, as part of the federal programme Fertigungstechnik (manufacturing techniques), firms must agree to cooperate in order to have the advantage of the BMFT subsidies. During the period from 1979 to 1983 for example, nearly 500 firms were induced to work together on some joint projects. The average number of partners for a research project was about three. This system of joint research, mostly carried out under the system of direct subsidies, in 1984 produced 1372 individual grants amalgamated into 165 joint research projects. During the same year, 88 percent of the amount granted for joint research projects was channelled into industry. Elsewhere, nearly 60 percent of the amount devoted to the federal projects for industrial research has been allocated to work carried out jointly by firms. The direct subsidies, generally being situated at a higher level than that at which competition takes place, mean that when a project succeeds, the results obtained by collaboration have to be taken to the marketing stage by the firm alone. This hopefully prevents competition. Diagnosis
of the new trends
Reduction of thefinnncinl research
dependence of industrial
The interest in industrial R & D has been increased. By the end of the 1970’s, industry was contributing 60 percent of the expenses of R & D carried out in West Germany. The part which was financed by the firms themselves at this level was less than 80 percent, the difference coming from the subsidies. In comparison, 1985 was more than just a record year for industry financed research, as the degree of financial autonomy had never been so high: 82 percent of the total for research and 88 percent for civil R & D as shown in Table 4. The new policy has made an undeniable impact on the budget devoted to R & D by the firms. Not only
POLICY
IN THE
FEDERAL
GERMAN
REPUBLIC
Table 4 Distribution of the R & D budget Comparison 1977-1985
171
in FRG:
1977
1985
R & D expenses in FRG (I)
27.3 billion DM
52 billion DM
expenses financed by industry (II)
16.7 billion DM
38 billion DM
Proportion “II/I”, in percentage
61.2
73.1
R & D self financing by industry, in percentage
77
82
Source: BMFT is industry setting more and more money aside for research but it is becoming more able to cover its own expenses without having to depend on subsidies. Improving
Germnn competitiveness
Japan should lose some of its comparative advantage. An increasing part of government funds are being focused on spreading new technologies in the industrial field. It seems obvious therefore that the German economy will benefit from a revival of productivity. In this way, there should be an increase of competitiveness towards Japan. In fact, the German experts consider that in the international environment, German firms are dominated by Japan in the areas where productivity is a deciding factor for competition, and by the USA in the ones where the degree of innovation is the factor which discriminates betwen the competitors (6). Even if the handicap of productivity could be reduced, the experts are however slightly more reserved about what improvements they can expect from the new policy about innovation. Is the chronic deficit in the technological bahznce redzlcing at all? Estimates of the effects of R & D on innovation are not well known and there is no method at present which can produce accurate results for this subject. This was acknowledged in the proceedings of the conference on quantitative studies of R & D in industry in 1983. This fact was noted particularly in the paper by B.H. Hale, 2. Griliches and J. Hausman, which was carried out using econometric methods to try to estimate the time elapsed between R & D expenditure and the first application for a patent (7).
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The most often used measurement in FRG to estimate industry’s ability for innovation is technological balance. First of all, it must be clear that the balance of the exchange of patents and licences is only a limited indicator for measuring technological gaps. On the one hand the use, for a charge, of inventions, patented or otherwise, does not constitute the only method of international transfer of technology. The export of goods and the selling of complete industrial equipment are other examples. On the other hand, the knowhow is more and more passed through the intermediary of other services training and planning including consulting, activities. In addition, the registered expenditure and revenue in West Germany caused by the exchange of patents and licences abroad primarily concern the payments between affiliated companies. The set price for the purchase and use of knowhow can consequently be influenced by fiscal measures or by exchange control. The exact extent of exchanges of technology is then difficult to determine. The above points show that even a positive evolution of the technological balance should not be acknowledged as a factor with much influence over German industry’s enthusiasm for innovation. The results now available, which only go up to 1984 do not suggest that the situation in West Germany has improved much in this field. In addition although the deficit of the technological balance towards the USA is reducing, the overall averages are disguising the individual differences of particular groups of products and especially the fact that West Germany is still having many problems in stabilising the recession in high technology products. It seems difficult to imagine a reversal of this tendency, as a result of new trends, while we know that in the USA the government policymakers determine the scientific and technical objectives, and are willing to contribute whatever finance is necessary, to achieve their intended aims. In 1985, the R & D budget in the USA was 6 times higher than that of West Germany. The efficiency with which they stimulate aid innovation in the USA is undoubtedly not at its optimum level, because the results come from stimuli given to the military sector, and only the repercussions of these are passed on to the civil sector. Nevertheless,
according
to R. Nelson,
a well-known
expert on technological policy, the actions of the US government in the USA have secured an efficient feed-back which has encouraged the ability to innovate in the non military sector (8). Nelson believes that the method of promoting innovation that the US has chosen should not be drastically changed in the near future. Finally we agree with B. Gahlen that regrettably the FRG does not yet apply a true industrial policy. The areas in which the BMFT can intervene are too small when compared to the myriad of factors which all have an effect on innovation (9). When beginning activities in the field of innovation, the entrepreneurs can, for example, opt for an aid to marketing new products and processes, as opposed to a direct subsidy. Support for the development of strategies is often forgotten by the Authorities themselves, who want to promote innovation, even at a time when the firms need to reduce the risks linked wth a choice of specific logical developments while faced with competition.
Conclusion The alteration of government promotion of innovation in West Germany took place as part of a general policy statement centred around the reduction of government intervention and the greater priority of the market to influence the economy. The first effect at the technological policy level was a decrease in the part played by planned public research in West Germany, and subsequently a similar reduction in the direct financing of specific R & D activities. In fact, it was noticed that the direct intervention included the risk of supporting technologies with narrow markets (large computers, for example), by concentrating resources on big firms, while at the same time neglecting the pioneers preparing to enter the market. From 1974 to 1983, billion DM as part ment to innovation, resources available
five firms received more than 8 of the plan for direct encouragei.e. more than one third of the at this level.
The Authorities, having promotion to the sectors and which lie beyond investors, now hope that the best return
decided to restrict direct which represent high risks, the capacities of private direct promotion will give
This movement should be permitted opposition which existed previously
to avoid between
the the
RECENT
development of future technology use of its results in industry.
DEVELOPMENTS
IN INNOVATION
and the lack of
As the SME’s are traditionally considered to be the most innovatory firms, and these measures concern them most, it is possible that the change of direction wil cause an increase in the performance of German industry up to 1990, when hopefully the effects of widespread innovation will be seen. However, the new policy is not free from problems. The major one seems to be that it must produce a regulatory effect on economic activity at the same time as focussing on the progress of high technology. At last, new means of promotion will be explored, knowing for example that conditions for maximum efficiency of innovation policies are not the same in SME’s as they are in large firms (lo), or even the same as different branches and subsidiares, as we have seen recently in the engineering industry (11). References 1. Black, A.P. industrial Policy in W. Germany Policy in search of a goal? Wissenschaftszentrum Berlin, IIM/IP No. 19, 1984. 2. Bornsen, O., H.H. Glisman, E.J. Horn, “Der Technologietransfer zwischen den USA und der BRD,” Kieler Studiedn No. 192, ed. J.C.B. Mohr, Tubineen. 1985.
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3. The steps connected with the bare field of scientific research are not reported here. See on this point, BMET, Faktenbericht 1986 zum Bundesbericht Forschung, Bonn, May 1986. 4. Faktenbericht 2986. 5. Liouville, J. “Innovation - The Pilot Project System in the FRG,” European Management lournal, Vol. 3, No. 1, Spring 1985. Basil Blackwell, Oxford. 6. Fraunhofer Institut fur Systemtechnik und Innovationsforschung (ISI), Zndustrielle Forschungs und Technologiefoerderung - Diskussion theoretischer Ansaetze und ihrer empirischen Evidenz, Karlsruhe, Nov. 1985. 7. Hall, B.H., Z. Griliches, J.A. Hausman, “Patents and R & D: Searching for a lag structure,” Proceedings of the Conferenceon Quantitative Studies of R & D in Industry, ENSAE, Paris, 9110 September 1983. 8. Nelson, R. Government and Technical Progress- A Cross Industry Analysis, Pergamon Press, Oxford, 1982. 9. Gahlen, B. “Strukturpolitik fur die 80er Jahre,” Discussions papers, IlMIlP 8414, Wissenschaftszentrum Berlin, February 1984. 10. Acs, Z.J., et D.B. Audretsch, The Determinants of innovation in Large and Small Firms, Wissenschaftszentrum Berlin, IIM/IP No. 18, 1986. 11. Liouville, J. with S. Urban and S. Vendemini, L’industrie mecanique allemande: Adaptation au changement 1970/1985, Study carried out for the SESSI, Paris, 1986.
5 No
3
Recent Developments in Innovation Policy the Federal German Republic*
in
Jacques Liouville CESAG,
University
Since about 1960, the industrialised countries have intervened to encourage the development of the technologies having a high growth potential. The governments of OECD countries in particular have admitted that the pursuit of economic growth and the creation of new jobs depend upon the adaptation of industrial structures and innovation. Long before 1970 the West German government considered it to be clear that state intervention to help the industries of the future to grow, was a more constructive way to develop the economy, than to prop up declining ones. In spite of unquestionable results, the manner in which the State promotes innovation in West Germany has recently undergone drastic changes.
of Strasbourg
Organization
of Innovation
Policy
Before 1983
At the beginning of the last decade, an important change took place in West Germany. The SPD (Sozial Demokratische Partei) succeeded the Liberals, which led to profound changes in the way innovation was to be stimulated. Innovation had traditionally been thought to result from a combination of luck and market incentives. Therefore, technology policy was only aimed at the industries with the highest growth potential. The centrepiece of the new policy was therefore the creation of a Ministry of Research and Technology (BMFT) which was to develop those programmes in any area considered to have future potential.
Finally, despite the relativity of the available indicators to evaluate the policies of innovation, the third part attempts to extract the main points in order that we might be able to decide how effective these new economic stimulants have been.
In order to fulfil the scientific or technological aim which the authorities had in mind, the specialists in the area concerned were brought together to develop cooperation between the research and industry, and for which the government was to supply the financial and organizational means. So as to be able to take advantage of the grants available, companies were to put forward projects which conformed to the guidelines laid down by the authorities. When a project was accepted, the BMFT contributed to the expenditure, in general to a Ievel of 50 percent.
* Translated from Chroniques de la SEDERS, No. 11 Novembre 1986. The author +hanks J. Ray for his assistance with translation
In addition to direct promotion, indirect measures also existed, such as a reduction in tax when a firm had realized investments in R & D, and help in the financing of employing research staff, both to begin from 1979. But this type of grant was in limited supply. In 1976 for example, the sum set aside for it
The first part of this article aims essentially at explaining the bases of the new trends. The second part is devoted to studying the changes and will aim at presenting the advantages and disadvantages of the policy of innovation promotion.
RECENT
DEVELOPMENTS
IN INNOVATION
was about 15 times less than that channelled into direct incentives, as illustrated in Table 1 below.’ Table 1 Amounts released for promoting innovation the civil sector in FRG from 1975 to 1978 (figures millions DM) Direct promotion (1) 1975 1976 1977 1978
Indirect promotion (11)
1,886
149
1,574 1,660
106 154
1,962
141
Proportion
IN THE
FEDERAL
1: 1: 1: 1:
of the Planned Innovation
12.6 14.8 10.8 13.9
Forschung,
Policy
in
Few industries have taken advantages of public impulses. First, it had been noted that government stimulation of growth in specific fields was leading to the neglect of whole areas of the economy, contrary to the initial aim. This situation arose because the task of identifying industries of the future was entrusted to researchers belonging to public institutions. Now the situation which arose most frequently was where researchers took inspiration from each other. In practice the result was that state resources were concentrated on a small number of areas. Accordingly a thorough study of the way in which resources intended to encourage innovation were allocated, enabled the establishment of the fact that funds were channeled mainly into the development of a single industry, Aerospace (1). Another problem of past innovation policy stems from the way in which projects to be supported are selected. As a rule the criterion chosen to distinguish between projects which firms had proposed was limited to prestige. This led to a situation where funds were being concentrated on large firms, which found it easier to put forward large scale projects than did small and medium sized firms (SME).
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industry and create 50 percent of the turnover generated by the manufacturing sector: An inconsistency was therefore seen between. the way in which the bureaucracy assigned grants for innovation and the need to strengthen the manufacturing sector, dominated by the SME’s. This inconsistency is all the more significant, given that large German firms seem less efficient than SME’s where R & D is concerned (2). The steps taken by the BMFT didn’t result in technological transfers between Research and Industry. The most serious attack against the former system of support for innovation was focussed against the lack of creativity among the researchers and the implications of this where the transfer of their work to industry was concerned. Given that the political structure had imposed the main objectives on the teams responsible for the scientific projects, this would have led to a lack of responsible behaviour in the teams. The researchers would have restricted themselves to comply with the wishes of government and to further the escalation of the “costs-foreseen utility” phenomenon to their benefit. Assured of a regular and increasing supply of funds, the teams would have become averse to taking risks and would have assessed themselves with a comparison based on international standards, instead of directing their work to more desirable results. It is in this way that the lack of originality within public research institutions would have prevented an increase in transfers of knowledge between themselves and industry. This would have called into question the position of the FRG in the context of the international technological environment. For example from OECD 18 percent, percent in science-based decades are FRG.
in the exports of high technology goods countries, FRG represents no more than whereas this proportion exceeded 22 1964. These facts illustrate that the industries generated over the last two not amongst the most dynamic in the
The Basis of the New Innovation This tendency to privilege the big firms was accentuated by the fact that they are better adapted to a development within the structure of the policy than are SME’s. However in West Germany as country, the SME’s are the heart dynamics. The German SME’s employees) employ two thirds of
GERMAN
II/I
Source: Faktenbericht 1986 zum Bundesbericht ed. BMFT, Bonn, May 1986. The Limitations West Germany
in in
POLICY
in every OECD of the industrial (less than 1000 the workforce in
Policy
The assistance which has been received in the development of new technologies is not in question, but the Liberals returned to power in 1983 consider that the effects of indirect measures must be greater than those of direct intervention. A concept of this sort means that governments are going to resolve to act directly, only to promote’
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activities of prime importance for the future of the German economy, and for which market conditions do not allow firms to take on heavy commitments, but which could in the long run call into question their degree of international competitiveness. Now that this principle has been set out, aid aims to be available to all firms operating within a given sector, once it has been approved. Bringing all firms of a given sector together into competition must make research seem more attractive, and discourage the support for routine research which was possible when the awarding of projects put forward by the BMFT was limited to only a few companies. In addition firms must be encouraged to invest a part of their own capital in the projects. Public funds must not be set aside to cover possible losses. The fact that risks are taken by private concerns is a guarantee that economic interest exists in research, and withdrawal from a project already in progress by a private investor must be seen to indicate poor prospects in the field of research, and should lead to it being abandoned. The Main Steps Taken since 1983 to Encourage Innovation in FRG (3) The reduction of public resources directed towards large fi rms Whereas in 1982 the large firms received three quarters of the funds distributed within the framework of the planned programmes, this proportion should be gradually reduced to under 50 percent. A major factor justifying this choice is the result of an analysis of the structure of expenses in R & D. The SME’s which invest in R & D devoted to it a greater proportion of their turnover, than did the large firms: In 1983, 7.5 percent was invested by those employing less than 100 people, compared with 2 percent invested by those employing between 1000 and 10,000 people, as shown in Table 2.
In 1980 however, only 10 percent of companies employing less than 500 people carried out their R & D activities in the FRG. This statistic is leading the authorities to increase the subsidy directed to the SME’s. It is for this reason that although their expenses in R & D only represent 13 percent of the total R & D expenditures in the German economy, the SME’s employing less than 500 people in 1985, received more than double this percentage: 29 percent of the public funds dedicated to the policy of innovation. The West German government in this way placed more than one billion DM in 1985 as well as in 1986 at the disposal of the SME’s employing less than 500 people, to give a stimulus to innovation. The subsidies should help more than 10,000 SME’s in 1986. It must be noted that the increase in the amounts dedicated to the SME’s was considerable in the BMFT budget between 1984 and 1986: There was an increase of about 45 percent, with the global budget showing at the same time an increase of about 10 percent from 6.7 billions DM in 1984 to 7.4 billions DM in 1986. With the total expenses of the research activities reaching the amount of 5 billion DM in 1985, the conclusion to be drawn from the statistics above is that SME’s finance 80 percent of the R & D expenditure with their own money. Now in German industry as a whole, 88 percent of the civil R & D costs are covered by the firms themselves. One can observe therefore that SME’s take greater advantage of the grants than do other firms. Increasing the indirect grants A study of the BMFT showed that potential for innovation within the SME’s is limited first of all to the adoption of new technology production equipment. Therefore the indirect measures are directed at the investment and the human factor (4). The subsidies are based upon three essential elements. 0 Extension of R 0 D equipment A special redemption of 40 percent on the costs (incurred by the firm
Table 2 The turnover devoted in R & D (in percentage terms) by the German firms which execute operations in R & D Less than 100 employees
From 100 to 499 employees
From 500 to 999 employees
From 1000 to 9999 employes
Over 10,000 employees
7.5
3.2
2.1
2.0
3.7
Source: BMFT (the figures are for the year 1983)
RECENT
DEVELOPMENTS
IN INNOVATION
for itself) of purchasing or manufacturing research equipment has been set up. Costs of infrastructire are subsidized to the rate of 15 percent. This redemption aims at counterbalancing the rapid obsolescence of R & D equipment. increasing the number of researchers employed in which has existed since industry This measure, l
1979, has been extended. It aims at granting financial aid to those SME’s which employ people in R & D. The aid covers 40 percent of the gross wage during the first five years and 25 percent for the sixth year, with a limit of 120,000 DM per firm per year. Where allocation of resources is concerned we can distinguish two types of firm. First, those employing less than 500 people, for whom the subsidy covers 55 percent of the suppIementary scientific staff wage costs, during a period of 15 months. The maximum which can be allocated to a firm is 250,000 DM a year. The second category concerns the firms employing between 500 and 1000 people and with an annual turnover of less than 200 million DM. In this case 45 percent of the wage costs are covered during a period of 12 months, with an upper limit of 200,000 DM per firm. More and more firms are taking advantage of the opportunities available at this level, with the number of assisted companies having more than doubled between 1979 and 1984: 4500 subisidies granted in 1979, compared with 10,200 in 1984. A new type of promotion, specific indirect aid This new instrument of government innovation policy has been widely accepted by the public it was aimed at, the SME’s. This results from the clarity of the aidallocation criteria, from the simplification of the subsidy application procedure, and from the high probability of the proposal being approved.
l
The specific indirect aid aims at allowing new technology to spread within the production fabric microelectronics, manufacturing technology and biotechnology. The results have been positive, since the smallest firms (less than 200 employees) have received nearly half the subsidies. Although only the results of the “microelectronics” programme are known at present, it seems that this type of stimulation has had a significant effect in the About 40 percent of the spreading of innovation. firms concerned by the specific indirect grants had not installed a method of production requiring this form of technology before receiving the subsidies.
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Another favourable aspect of this promotion also lies in the fact that in addition to the installation of new technologies, the subsidies allowed the firms, in most cases, to create lasting connections with some research centres (public or private), consultancy firms, computer companies and so on. The new trend seems to be firm, the amounts assigned to indirect promotion having doubled between 1982 and 1986; from 780 million DM to 1.5 billion DM today. When seen as a proportion the resources devoted to direct stimulation are plainly on the decline. Whereas the ratio of direct to indirect subsidy was 4.7 in 1982, it fell to 2.5 in 1984. lntens$cation of transfersfiom researchto industry and of cooperafionat the researchlevel
Although all firms do not have at their disposal R & D teams sufficiently large to be aware of the different technological developments which affect their environment, several solutions to this problem are available. 0 Carrying out joint research So as to remain at the forefront of technical progress, firms of a given sector often encounter and share similar problems. In order to carry out a joint study of research questions of common interest, some industrial research institutions appeared as far back as 1949. In 1954 they formed a federation (AIF) which today embraces 93 research institutions representing 32 industrial sectors. In 1985 the State paid the AIF a total amount of 135 million DM, which increased its financial resources by 55 percent. The same year its own resources were 240 million DM. 0 Financing external researchto make up fir the lack of capacity in R & D Although some research can be
carried out at branch level, others with specific characteristics can only take place in one particular firm. Often, especially in the case of the SME’s, they do not have sufficient means themselves to solve the specialised problems with which they are faced. The barriers which traditionally separate Research and Industry do not encourage the firms in question to conclude agreements with research institutes to deal with the needs which appear, and can cause a technological delay. In order to reawaken the Authorities have financing of research This sort of help is
interest for external research, since 1978 contributed to the entrusted to a third person. spreading and the number of
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Table 3 Financial aids for external research in FRG
number of new projects supported number of projects in progress amount of subsidies in millions DM
1978
1980
1982
1983
156
556
628
785
1402
(1)
124
798
1213
1470
2323
(1)
0.5
7.8
13.0
1984
13.1
21.2
1985
41.0
(1) not published Source: BMFT projects supported between 1.983 and nearly doubled, as shown in Table 3.
of firms being set up that techniques. But when the have invested some money article, they are often short reach the marketing stage.
1984 has
These aids are aimed at the SME’s and the level of the subsidies depends on their size: 40 percent of the total amount of the contract is for the ones whose turnover is less than 50 million DM and 30 percent for the ones whose turnover varies between 50 and 500 million DM.
Consequently, beyond the subsidies which can be granted for the period which runs from the setting up of the firm, until the launching of the prototypes, loans with preferential interest rates are offered for financing equipment and introducing products to ihe market.
Even subsidiaries of big companies can now claim these subsidies. This last increase is a direct result of the work done by the Wissenschaftszentrum Berlin. A team of this centre emphasized that among the innovatory SME’s in West Germany, the most efficient were the ones which worked in cooperation with large firms. l
From 1983 to 1985 more than 250 firms which were set up were subsidised for an amount of 81 million DM and the loans reached 7 million DM. For firms who have not been clause is being Government’s small ones) as
increasing the qualifications of the industrial staff in R
& D However, spreading out the R & D structure of firms is not enough to warrant the increase in results for industrial research. An unbroken stream of new knowledge in the firms is also necessary. With this aim a programme encourages the temporary transfer of research staff from industry into the research institutes and the universities. Helped by high level scientists, these people aim to complement and extend the R & D work of their firms. This programme has produced 170 contracts in 1984 and 1985. However, it is important to note that until now 70 percent of the contracts signed have been for the transfer of research staff mainly to the universities. This procedure of secondment of the industrial staff to the public research institutes also aims at allowing both a link between the world of research and the world of industry and at least the outlines of an agreement of cooperation between these entities during the period of secondment which can last up to three years.
are based on these new firms, usually new ones, to help with the finished of capital to expand and
have recently entered the market and able to control their growth phase, a considered that would reserve the right to issue orders to firms (even far as they are innovation-oriented.
Moreover, facing the difficulty which relatively new firms meet when hying to raise their own capital, and to help the creation of firms with “capital-risk”, a new regulated market has been introduced on the Stock Exchange. Developing the circulation of technical information in the firms During recent years an infrastructure has
l
been set up which divides West Germany into a very distinct grid pattern, in the hope that this will encourage the consulting for innovation (5). But the working of this infrastructure is linked to the provision of scientific and technical information. For the production and distribution of information with a specialized character (data banks), the federal government pledged 125 million DM in 1985. The present aim is to increase the use of modern information technology in the SME’s, which are still not very receptive to these new media.
0 Setting up firms with a technological basis Even if
West Germany is deficient in firms orientated twoards future technology, there is certainly no lack
l
Beyond to cooperate,
Coordinating the research of the firms
frame
of the
encouragement
the the
RECENT
DEVELOPMENTS
IN INNOVATION
authorities are striving to have the research institutes and the firms work together on certain topics. This process leads to the reduction of selectivity and the number of small projects, while at the same time increasing efficiency. For example 2823 projects were supported in 1982 and 2622 in 1984, which indicates a drop of 7.2 percent. So some German electronic firms together with some users launched a joint project to perfect a new component without causing any effects by the firms at the level of the competition. In the same way, as part of the federal programme Fertigungstechnik (manufacturing techniques), firms must agree to cooperate in order to have the advantage of the BMFT subsidies. During the period from 1979 to 1983 for example, nearly 500 firms were induced to work together on some joint projects. The average number of partners for a research project was about three. This system of joint research, mostly carried out under the system of direct subsidies, in 1984 produced 1372 individual grants amalgamated into 165 joint research projects. During the same year, 88 percent of the amount granted for joint research projects was channelled into industry. Elsewhere, nearly 60 percent of the amount devoted to the federal projects for industrial research has been allocated to work carried out jointly by firms. The direct subsidies, generally being situated at a higher level than that at which competition takes place, mean that when a project succeeds, the results obtained by collaboration have to be taken to the marketing stage by the firm alone. This hopefully prevents competition. Diagnosis
of the new trends
Reduction of thefinnncinl research
dependence of industrial
The interest in industrial R & D has been increased. By the end of the 1970’s, industry was contributing 60 percent of the expenses of R & D carried out in West Germany. The part which was financed by the firms themselves at this level was less than 80 percent, the difference coming from the subsidies. In comparison, 1985 was more than just a record year for industry financed research, as the degree of financial autonomy had never been so high: 82 percent of the total for research and 88 percent for civil R & D as shown in Table 4. The new policy has made an undeniable impact on the budget devoted to R & D by the firms. Not only
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Table 4 Distribution of the R & D budget Comparison 1977-1985
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in FRG:
1977
1985
R & D expenses in FRG (I)
27.3 billion DM
52 billion DM
expenses financed by industry (II)
16.7 billion DM
38 billion DM
Proportion “II/I”, in percentage
61.2
73.1
R & D self financing by industry, in percentage
77
82
Source: BMFT is industry setting more and more money aside for research but it is becoming more able to cover its own expenses without having to depend on subsidies. Improving
Germnn competitiveness
Japan should lose some of its comparative advantage. An increasing part of government funds are being focused on spreading new technologies in the industrial field. It seems obvious therefore that the German economy will benefit from a revival of productivity. In this way, there should be an increase of competitiveness towards Japan. In fact, the German experts consider that in the international environment, German firms are dominated by Japan in the areas where productivity is a deciding factor for competition, and by the USA in the ones where the degree of innovation is the factor which discriminates betwen the competitors (6). Even if the handicap of productivity could be reduced, the experts are however slightly more reserved about what improvements they can expect from the new policy about innovation. Is the chronic deficit in the technological bahznce redzlcing at all? Estimates of the effects of R & D on innovation are not well known and there is no method at present which can produce accurate results for this subject. This was acknowledged in the proceedings of the conference on quantitative studies of R & D in industry in 1983. This fact was noted particularly in the paper by B.H. Hale, 2. Griliches and J. Hausman, which was carried out using econometric methods to try to estimate the time elapsed between R & D expenditure and the first application for a patent (7).
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The most often used measurement in FRG to estimate industry’s ability for innovation is technological balance. First of all, it must be clear that the balance of the exchange of patents and licences is only a limited indicator for measuring technological gaps. On the one hand the use, for a charge, of inventions, patented or otherwise, does not constitute the only method of international transfer of technology. The export of goods and the selling of complete industrial equipment are other examples. On the other hand, the knowhow is more and more passed through the intermediary of other services training and planning including consulting, activities. In addition, the registered expenditure and revenue in West Germany caused by the exchange of patents and licences abroad primarily concern the payments between affiliated companies. The set price for the purchase and use of knowhow can consequently be influenced by fiscal measures or by exchange control. The exact extent of exchanges of technology is then difficult to determine. The above points show that even a positive evolution of the technological balance should not be acknowledged as a factor with much influence over German industry’s enthusiasm for innovation. The results now available, which only go up to 1984 do not suggest that the situation in West Germany has improved much in this field. In addition although the deficit of the technological balance towards the USA is reducing, the overall averages are disguising the individual differences of particular groups of products and especially the fact that West Germany is still having many problems in stabilising the recession in high technology products. It seems difficult to imagine a reversal of this tendency, as a result of new trends, while we know that in the USA the government policymakers determine the scientific and technical objectives, and are willing to contribute whatever finance is necessary, to achieve their intended aims. In 1985, the R & D budget in the USA was 6 times higher than that of West Germany. The efficiency with which they stimulate aid innovation in the USA is undoubtedly not at its optimum level, because the results come from stimuli given to the military sector, and only the repercussions of these are passed on to the civil sector. Nevertheless,
according
to R. Nelson,
a well-known
expert on technological policy, the actions of the US government in the USA have secured an efficient feed-back which has encouraged the ability to innovate in the non military sector (8). Nelson believes that the method of promoting innovation that the US has chosen should not be drastically changed in the near future. Finally we agree with B. Gahlen that regrettably the FRG does not yet apply a true industrial policy. The areas in which the BMFT can intervene are too small when compared to the myriad of factors which all have an effect on innovation (9). When beginning activities in the field of innovation, the entrepreneurs can, for example, opt for an aid to marketing new products and processes, as opposed to a direct subsidy. Support for the development of strategies is often forgotten by the Authorities themselves, who want to promote innovation, even at a time when the firms need to reduce the risks linked wth a choice of specific logical developments while faced with competition.
Conclusion The alteration of government promotion of innovation in West Germany took place as part of a general policy statement centred around the reduction of government intervention and the greater priority of the market to influence the economy. The first effect at the technological policy level was a decrease in the part played by planned public research in West Germany, and subsequently a similar reduction in the direct financing of specific R & D activities. In fact, it was noticed that the direct intervention included the risk of supporting technologies with narrow markets (large computers, for example), by concentrating resources on big firms, while at the same time neglecting the pioneers preparing to enter the market. From 1974 to 1983, billion DM as part ment to innovation, resources available
five firms received more than 8 of the plan for direct encouragei.e. more than one third of the at this level.
The Authorities, having promotion to the sectors and which lie beyond investors, now hope that the best return
decided to restrict direct which represent high risks, the capacities of private direct promotion will give
This movement should be permitted opposition which existed previously
to avoid between
the the
RECENT
development of future technology use of its results in industry.
DEVELOPMENTS
IN INNOVATION
and the lack of
As the SME’s are traditionally considered to be the most innovatory firms, and these measures concern them most, it is possible that the change of direction wil cause an increase in the performance of German industry up to 1990, when hopefully the effects of widespread innovation will be seen. However, the new policy is not free from problems. The major one seems to be that it must produce a regulatory effect on economic activity at the same time as focussing on the progress of high technology. At last, new means of promotion will be explored, knowing for example that conditions for maximum efficiency of innovation policies are not the same in SME’s as they are in large firms (lo), or even the same as different branches and subsidiares, as we have seen recently in the engineering industry (11). References 1. Black, A.P. industrial Policy in W. Germany Policy in search of a goal? Wissenschaftszentrum Berlin, IIM/IP No. 19, 1984. 2. Bornsen, O., H.H. Glisman, E.J. Horn, “Der Technologietransfer zwischen den USA und der BRD,” Kieler Studiedn No. 192, ed. J.C.B. Mohr, Tubineen. 1985.
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3. The steps connected with the bare field of scientific research are not reported here. See on this point, BMET, Faktenbericht 1986 zum Bundesbericht Forschung, Bonn, May 1986. 4. Faktenbericht 2986. 5. Liouville, J. “Innovation - The Pilot Project System in the FRG,” European Management lournal, Vol. 3, No. 1, Spring 1985. Basil Blackwell, Oxford. 6. Fraunhofer Institut fur Systemtechnik und Innovationsforschung (ISI), Zndustrielle Forschungs und Technologiefoerderung - Diskussion theoretischer Ansaetze und ihrer empirischen Evidenz, Karlsruhe, Nov. 1985. 7. Hall, B.H., Z. Griliches, J.A. Hausman, “Patents and R & D: Searching for a lag structure,” Proceedings of the Conferenceon Quantitative Studies of R & D in Industry, ENSAE, Paris, 9110 September 1983. 8. Nelson, R. Government and Technical Progress- A Cross Industry Analysis, Pergamon Press, Oxford, 1982. 9. Gahlen, B. “Strukturpolitik fur die 80er Jahre,” Discussions papers, IlMIlP 8414, Wissenschaftszentrum Berlin, February 1984. 10. Acs, Z.J., et D.B. Audretsch, The Determinants of innovation in Large and Small Firms, Wissenschaftszentrum Berlin, IIM/IP No. 18, 1986. 11. Liouville, J. with S. Urban and S. Vendemini, L’industrie mecanique allemande: Adaptation au changement 1970/1985, Study carried out for the SESSI, Paris, 1986.