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German industry is spending more money on research and development than ever before

Press Release of July 29, 2015

Manufacturing companies increased their expenditures by more than a fifth between 2010 and 2013 – research-intensive and large companies primarily responsible for the increase – development more dynamic in Germany than in other European countries

In 2013, industrial companies in Germany spent a total of 57.2 billion EUR on research and development (R&D). This corresponds to an increase of 22 percent over the year 2010, as evidenced by a new study conducted by the German Institute for Economic Research (DIW Berlin) based on data from the Federal Statistical Office. The R&D intensity – that is, the ratio of research and development expenditure to the gross value added – has also increased, just as the number of employees in this sector has increased. During the financial and economic crisis of 2008 and 2009, the companies reduced their R&D expenditures, but then expanded more rapidly in the post-crisis years between 2010 and 2013 (by an annual average of 6.8 percent) than they had in the pre-crisis years between 2004 and 2008 (by an annual average of 4.3 percent). However, this was also due to the fact that the companies first had to catch up to their pre-crisis levels after the crisis-induced slump. Between 2008 and 2013, R&D expenditures increased by an average of 3.2 percent every year. “As far as spending on research and development is concerned, German industry is generally headed in the right direction,“ says Alexander Eickelpasch, a research associate in the Firms and Markets Department at DIW Berlin. “However, we must not ignore the fact that it is primarily the large companies and the already research-intensive industries that are spending more on research and development, while small and medium-sized companies have not increased their investment in R&D by that much. Although this is causing the upswing of industry research to lose breadth, it is also worth noting that not every company needs to conduct research to be successful in the market.”

German Institute for Economic Research (DIW Berlin)

The German Institute for Economic Research (DIW Berlin) is one of the leading economic research institutions in Germany. Its core mandates are applied economic research and economic policy advice as well as provision of research infrastructure. As an independent non-profit institution, DIW Berlin is committed to serving the common good. The institute was founded in 1925 as Institut für Konjunkturforschung (Institute for economic cycle research). Since 1982, the Research Infrastructure SOEP (German Socio-Economic Panel Study), a long-term study, is affiliated to DIW Berlin. The institute has been headquartered in Berlin since its founding. As a member of the Leibniz Society, DIW Berlin is predominantly publicly funded.

Share of state grants in research spending has begun to decline again

The research-intensive economic sectors – including the chemical industry, the pharmaceutical industry, the automotive industry, mechanical engineering, and electrical engineering – increased their R&D expenditures between 2010 and 2013 by an annual average of 7.2 percent, considerably more than before the crisis (from 2004 to 2008: 3.7 percent) and also considerably more than the manufacturing sector as a whole. The less research-intensive industries, however, increased their spending on research and development last year by only 2.5 percent; from 2004 to 2008, it was still at 11.4 percent. While the larger companies (250 or more employees) have significantly increased their R&D expenditures, the small and medium-sized companies (between 20 and 249 employees) have put the brakes on spending. One possible reason: The aid intensity – that is, the proportion of state subsidies in companies’ R&D expenditures – has recently fallen again in the case of small and medium-sized businesses, in particular, after the federal government had already vigorously expanded the delivery volume under the second economic stimulus package.

In his study, DIW economist Eickelpasch investigated other factors that might be responsible for the post-crisis increase in R&D expenditures. He found that companies’ research activities are not based solely on demand for their products: In some years, production increased more sharply than did the R&D expenditures – in other years, it was the other way around. “Perhaps some companies behave countercyclically, by increasingly using their staff in production when business is booming, then sending more staff to the research departments during a sales slump in order to prepare for the next upswing,” explains Eickelpasch. It is also possible that companies basically plan their R&D activities for the long term, and cyclical factors are therefore less marked.

German industry stands up well to international competitors

The number of research-based companies did increase after the crisis, though not as sharply has it had been increasing before. In addition, the newer research-based companies invested comparatively small amounts in research and development. Nevertheless, industrial research in Germany is in a good place, according to Eickelpasch: “Compared with other European countries, German industry has come out of the crisis in better shape.” The increase in R&D expenditures was more dynamic here in Germany than in Finland, Sweden, Austria, the United Kingdom, or France. Even the U.S. recorded lower growth rates. Only South Korea and China experienced faster growth in industrial research.