1.1 United, Divided, Reunited—A Short History of Germany
In the centuries following the rule of Charlemagne (800–814), countries such as France, Spain, England, and Habsburg Austria developed into centralized states. In contrast, the so-called Holy Roman Empire of German Nation became increasingly fragmented because rulers had to “buy” the loyalty of kings, princes, and dukes within the empire. Between the emergence of Martin Luther’s critique of the Church in Rome (1517) and the Thirty Years’ War (1618–1648), many German states, mostly in the North and Center, adopted the new Protestant faith while others, more Southern and Western parts of Germany, remained Catholic (Cantoni 2012).Footnote 1 Religious tensions erupted in a civil war and devastated many of the German states. When the Treaty of Westphalia ended the Thirty Years’ War in 1648, the area that we know as Germany today was comprised of hundreds of sovereign kingdoms, principalities, and dukedoms.
This fragmentation lasted until the (second) German Empire was established in 1871 (Falck et al. 2011; Chickering 2014) by the Prussian chancellor Otto von Bismarck. The immediate years after the formation of Germany are historically remembered as the Gründerzeit (start-up boom/founding era), as the country went through a process of economic expansion, quickly followed by the first wave of bankruptcies known as the Gründerkrach (Uebele and Ritschl 2009; Burhop 2011). Germany integrated and industrialized rapidly until World War I. But Germany inherited a distinct regional variation that left traces to this day (Tipton 1976; Gutberlet 2014).Footnote 2
The Great War imposed an enormous burden in lives lost and resources wasted. Due to the massive reparation payments imposed in the Versailles Treaty, Germany had a hard time recovering (Broadberry and Harrison 2005).Footnote 3 Hyperinflation left a lasting imprint on the German psyche in 1923 and the economic situation worsened after a few years of economic stability in the mid-1920s. The crash of 1929 and the following Great Depression led to massive unemployment, to the breakdown of leading banks in 1931 (James 1981; Kopper 2011), and fueled the rise of the Nazi movement. The economic system of the Nazi regime that seized power in 1933 was based on autarky (self-sufficiency) and the pursuit of central planning principles (Barkai 1988). Their policy strengthened a trend toward concentration and cartelization of the economy that was already observable since the late nineteenth century (Reckendrees 2003). In a time of slumping (export) demand, the fiscal expansion caused by the Nazi rearmament and public infrastructure worked and resulted in economic recovery and much needed employment, whereas autarky kept Germany relatively isolated from further shocks from abroad.
World War II led, however, to a total destruction of the German economy in the 1940s and fueled a second hyperinflation. Upon defeat, Germany was occupied by the Allied Powers (USA
, France, and Soviet Union) and lost one-third of its territory in the East to Poland and Russia. In 1949, the country was split into two separate states, namely the Federal Republic of Germany (FRG or West Germany
), which became a Western-style market economy, and the German Democratic Republic (GDR or East Germany
), a Soviet-style centrally planned economy. The Iron Curtain divided Germany for more than 40 years and the two German states evolved in distinctly different directions.
The economy of West Germany prospered in the 1950s and early 1960s, a period referred to as economic miracle (Wirtschaftswunder). East Germany, meanwhile, had to cope with a massive loss of economic activity as businesses relocated assets and activities, while some 1.3 million, mostly educated and entrepreneurial, people fled to West Germany (e.g., Hefele 1998; Falck et al. 2013) from 1950 until the Berlin Wall was erected in 1961. The East German economy also had to cope with massive war reparations to the Soviet Union which amounted to about 23% of the pre-war gross national product (Lieberman 1996). The West-German economy instead benefitted from the Marshall plan and global monetary stability under the Bretton Woods system, security assurances under the NATO-treaty, and trade liberalization under GATT.
Trends in entrepreneurship also diverged strongly. In the aftermath of the oil price shock of 1973, West Germany developed from a managed to a more entrepreneurial society, with self-employment rising to 10–12% in 1989. In East Germany, in contrast, there were several waves of expropriation driving down the rate of self-employment to 1.8% at the time of reunification (Wyrwich 2012).
The biggest challenge after reunification was the integration of the economic structures of the former East Germany into the market economy system (Hall and Ludwig 1995; Burda and Hunt 2001). There was a massive surge in start-up activity in the early 1990s and the self-employment rate in the former East Germany approached the Western level around the year 2005. At the same time, almost none of the Eastern companies that existed in 1989 were still active in the market in 2000 (Fritsch et al. 2014). Despite this massive transition and rapid convergence in self-employment, striking economic differences between both parts of the country remain until today. After a period of converging productivity levels in the first years after transition, a productivity gap of 30% still persists since the late 1990s. Massive migration and brain drain to Western Germany came to a halt only recently, and the legacy of the socialist past continues to affect people’s inclinations, attitudes, principles, and behavior.Footnote 4 This legacy will last but perhaps not all of it is necessarily a barrier to growth and prosperity (former East Germany has, for example, higher female participation rates and smaller gender gaps in wages and incomes).
In conclusion, both the North-East, South-West divide between Protestants and Catholics in the seventeenth and the East-West divide between socialists and capitalists in the twentieth century are important to understand the fractionalization and regional heterogeneity of Germany today. Germany’s federal political structure accommodates and consolidates this heterogeneity and helps explain the decentralized character of its entrepreneurial ecosystem(s). These deep-rooted institutional features are manifest in the institutions that govern the flow of knowledge, finance, and labor to existing and new firms alike. We discuss these in the sections below.
1.2 Institutions for Knowledge Creation and Diffusion
The institutions that govern the generation and flow of knowledge to businesses in general and to entrepreneurial ventures in particular are founded in the educational system and the institutions doing basic and applied research. The system for registering and commercially exploiting knowledge then also deserves special mention.
The first medieval universities emerged in Germany after the end of the Papal Schism in 1386 with the University of Heidelberg opening in the very same year (Cantoni and Yuchtman 2014). The political fragmentation of Germany at the time implied that a lot of universities were set up in smaller cities which are not necessarily big economic or administrative agglomerations today. Examples, apart from Heidelberg, are the universities in Rostock (1419), Greifswald (1456), and Tübingen (1477), but also the University in Marburg (1527), which was the first Protestant university in the world, and the University of Jena (1558). There were several further universities founded before the onset of industrialization where, like all “medieval” universities, their curriculum consisted of Greek and Latin classics and was focused on the study of the Bible. The art of reading, writing, rhetoric, and logic were important fields while ability and utility played a minor role. Universities’ traditional tasks were to collect, codify, and teach general knowledge (Carlsson et al. 2009), not to develop any new or useful knowledge.
As a response to the rapid growth of the demand for scientific research and education (Carlsson et al. 2009; Drucker 1998) in the nineteenth century, Germany also saw a wave of universities founded with a technical focus and the adjustment of curricula in already existing universities. The first higher education institutions with a technical focus in Germany were founded in Karlsruhe and Dresden in the early nineteenth century, while the first natural science faculty opened at the University of Tübingen in 1863. Furthermore, there were several technical colleges, known as Polytechnische Hochschulen that were upgraded into technical universities around the year 1900. The main political force behind this process was the German Association of Engineers (Verband Deutscher Ingenieure, VDI
).Footnote 5 All technical colleges that became technical universities were located in the capital cities of the federal states (König 2006; Manegold 1989). Again, the federal tradition of Germany implied that such universities were established in smaller cities and not necessarily in places that are the largest agglomerations today. In 1900, there were technical universities in Berlin and Munich but also in Karlsruhe, Dresden, Hannover, Stuttgart, Aachen, Darmstadt, and Braunschweig.
Today, there are many more technical universities in Germany. They represent a specific type of higher education institution that has relatively strong links to (often local) industry. Recent empirical evidence suggests that the entrepreneurial capacity of technical universities is not necessarily higher than that of “classical” universities (Goethner and Wyrwich 2019). But places close to, or even hosting, a technical university that was already present in the year 1900 have a higher level of entrepreneurship in high-tech industries (Audretsch and Lehmann 2005a, b; Fritsch and Wyrwich 2018). As many universities were founded in smaller places, this partly explains why in Germany these smaller places (e.g.,
rural Baden-Württemberg) prosper today, even though they lack the agglomeration advantages that are found to be supportive for entrepreneurship and innovation in countries such as the USA (Glaeser 2011).
In the twentieth century, as was the case in most developed countries, there was a massive expansion of tertiary education in Germany. Therefore, there is no region without a significant university or university of applied science with a focus on educating people for the local labor market (e.g., Jaeger and Kopper 2014).Footnote 6 Moreover, the twentieth century saw the proliferation of scientific research institutes and the emergence of networks like the Kaiser Wilhelm Society (1911), the Max Planck Society (1948), and the Fraunhofer Society (1949). Their substantial (public) resources were aimed at further developing basic research with an explicit mandate to also disseminate this knowledge to industry (Gibbons et al. 1994; Beise and Stahl 1999). These networks have now grown into important pillars of Germany’s knowledge infrastructure. As for most technical universities, however, the focus in these institutions has long been on serving the needs of large, industrial, incumbent firms. Initiatives to foster entrepreneurship at universities or research institutes did not exist until the late 1990s when the EXIST program was initiated in a few pilot universities.
The EXIST program followed a dual strategy. One building block was supporting universities in developing start-up culture at their institutions, while the other was providing direct assistance for individuals and start-up projects. In support of those activities, universities received a grant from the German Federal Ministry of Economics and Technology over a three-year period (e.g., Kulicke 2014). Although there have not yet been rigorous evaluations, the pilot in Berlin was considered a success, has gone through several revisions and extensions, and is still in operation today (Becker et al. 2011; EXIST 2019).
In conclusion, the German university and educational system mirror its regional decentralization, given that the federal states are responsible for education policy. There are also joint initiatives where the lead is at the federal level. The most famous program is the so-called excellence initiative that was initiated in 2006. Recent evidence suggests that this program was successful in concentrating excellent research. It also promoted collaborations between universities and the non-university research sector. However, it has not caused massive changes to the overall German research system (e.g., Möller et al. 2016). Moreover, a strong tradition of internships and vocational education provides German firms and entrepreneurs with a well-trained and educated workforce at the local level. In contrast to the Anglo-Saxon countries, however, the German university system faces challenges developing into research-oriented universities (Baker and Lenhardt 2008). Universities are mostly teaching-oriented and made universally accessible at low costs for students. This implies, however, that universities are tightly financed out of (state level) tax revenue and have a hard time attracting and retaining (global research) talent. As a consequence, differences in the quality of education and research between German universities are much less pronounced than in other countries such as France, the UK, or the US. A large part of top-level research takes place outside of the universities in industry and endowed research institutes such as those of the Max Planck Society.
1.2.2 The Patent System
Germany has had regional patent systems since the eighteenth century (Harhoff and Hoisl 2007). The first Central German patent office was established in 1877, some six years after Germany became a state. The Imperial Patent Office (Kaiserliches Patentamt) provided uniform protection for discoveries in the German Empire. Patents were based on uniform principles and were effective for the entire territory of the German Empire. In the first 13 years of the patent law, there were between 4,000 and 5,000 patents granted per year. This number increased to 10,000 before 1906, and around 13,000 after that of which more than 10% were long-living patents (Burhop 2010). During the separation of the country after World War II, two patenting agencies coexisted, but after reunification, Germany merged them into a single patent institution again.
There have been several changes to patent law over the last 120 years. One of the important recent reforms was the Arbeitnehmererfindergesetz in 2001, which was a Bayh–Dole Act-like change in the German patenting system to increase the commercialization of scientific research. The results of this measure, however, are rather mixed (Von Proff et al. 2012; Czarnitzki et al. 2016). Without going into detail on the issue, this can be seen as an example where transferring legal institutions to another context leads to different, perhaps unexpected, outcomes. The USA universities, for which the Bayh–Dole Act was written, operated under a different institutional setting and consequently responded very differently than those in Germany. The Arbeitnehmererfindergesetz was perhaps less effective because of the already strong practice of technology transfer from academia to the corporate sector in Germany (Grimpe and Fier 2010). To achieve more commercial exploitation of public research, reforms will have to be better tailored to the German context. The problem with such tailored approaches, however, is that intellectual property rights protection has developed into an international issue. That is not a reason for Germany not to speak out. As a leading industrial nation with a lot of intellectual property at stake, Germany’s voice in European and international negotiations governing intellectual property carries significant weight and will be heeded. It is in the interest of Germany to push for reforms that ensure a solid protection of industrial innovations but also ensures continued access to the more generic types of knowledge (e.g., gene sequencing) that industrial innovation builds upon.
1.3 Development of Financial Institutions
The financial system in Germany is characterized by a complex network of financial intermediaries and a, rather dominant, three-pillar banking sector. The three sets of banks comprise the private banking sector (publicly traded and held banks like Deutsche Bank and Commerzbank), the mutual or cooperative credit unions (Genossenschaften), and the system of public banks consisting of local savings-and-loan banks (Sparkassen) and the federal state banks (Landesbanken), respectively. The federal state banks fulfill wholesale banking services to the savings-and-loan banks, such as taking the role of regional clearing houses for liquidity and transfer liquidity from those banks with an excess liquidity to members with less. Hence, these financial institutions already have a system of joint liability like in a banking union (Hackethal 2004).Footnote 7
Again, this situation has evolved historically. The roots of the German banking system can be traced to the Fugger family in Renaissance Augsburg (1367). The oldest, still operating bank in Germany is the Berenberg Bank founded in 1590. The fine-grained network of local banks in Germany today has its origins in the late eighteenth century (Allen and Gale 2000; Kindleberger 2015). During the nineteenth century, savings banks spread across the country. They played a decisive role in financing the industrialization of Germany. The first credit unions originated in the mid-nineteenth century. The focus of these cooperatives was on traders, shop owners, and artisans or they were set up in rural areas to serve the needs of agrarian communities. Credit cooperatives were widespread in nineteenth-century Germany and by 1914 the ca. 19,000 credit cooperatives had issued around 7% of all banking liabilities. Guinanne (2001) explains their success from their ability to make use of superior information and their capacity to impose cheap but effective sanctions on potential defaulters. These characteristics presumably permitted credit unions to lend to clients to whom commercial banks typically did not provide credits and also to develop loan terms closer to the needs of the borrowers (Flögel 2018; Flögel and Gärtner 2018).
Today, there are still 423 savings banks and 1,116 cooperative credit unions. Savings banks and credit unions typically foster close and long-term relationships with their local clients, particularly the small and medium-sized companies in which they often have seats on the corporate supervisory board (Herrmann 2020). The savings banks and cooperative banks provide about two-thirds of all lending to Mittelstand companies and 43% of lending to all companies and households (Audretsch and Lehmann 2016). Therefore, savings banks and credit unions are an important building block for the success of the German Mittelstand.Footnote 8 When it comes to innovative new start-ups, however, banks are typically more hesitant to invest. Innovative start-ups, also in Germany, have to rely on venture capital to finance capital-intensive high-risk projects. Empirical evidence shows that the market for venture capital in Germany is functioning relatively well (Fritsch and Schilder 2008, 2012). It remains much smaller in size and scope than in the Anglo-Saxon world, but this is arguably not a supply but a demand issue (Herrmann 2020).Footnote 9
The German financial system, with its many small and locally well-connected banks serving many SMEs across the country, has coevolved with the German economy. It serves the needs of the decentralized, export-oriented, and industrial economy of organically growing medium-sized industrial firms and Mittelstand. Typically, thanks to their cooperation on corporate governance boards, such firms have long-standing relationships with their banks that use the relationship and trust as collateral and security for credit.
In conclusion, despite some important challenges in flagship banks like the Deutsche Bank and the Commerzbank, the German financial system remains quite decentralized and still has a significant share of small-scale relationship banking. Thereby, it can finance incremental innovation in existing firms but is perhaps a less favorable environment for more radical innovation by new entrants as it supplies little capital in the form of equity to newcomers. The financial system thus consolidates Germany’s conservatism, while underpinning its competitive strength in high-quality incremental innovation.
1.4 Labor Institutions
The labor force in Germany is generally well trained and very productive, justifying high wage incomes while maintaining a strong international competitive position. Strong vocational education combined with on-the-job training promotes the accumulation of firm-specific human capital in Germany’s small and medium-sized high-tech industrial sector (Herrmann 2020). Consensus-oriented labor relations support moderate wage growth while firm-specific human capital investments yield high productivity growth (e.g., Soskice 1990). German export-oriented firms thus remain competitive in global markets with high quality, high value-added products and services. But this peace and high level of investment are based on generous social security and stringent labor protection. It is important to realize that these institutions have long historical roots and coevolved with the German economy into highly complementary and interconnecting institutions that support its traditional competitive strength.
1.4.1 Employment Protection
The German system of employment protection obtained its modern form during the period of the German miracle (Wirtschaftswunder) in the 1950s and 1960s in the Federal Republic of Germany. This was the golden era of the so-called Normalarbeitsverhältnis (standard employment relationship) which describes a dependent, permanent full-time job with strict dismissal protection, a full integration into status-protecting social insurance and collectively set wages at a relatively high level (Eichhorst and Marx 2011).
The West German system implied high wages for insiders but also led to underutilization of the labor force, which is reflected, for example, by low labor force participation of women and a male-breadwinner family model. Such a system comes under pressure when women push into the labor market (Esping-Andersen 2002), especially after German reunification where about 90% of all women in working age were full-time employees in the former East Germany (Maier 1993).Footnote 10 This system gave industrial producers a strong incentive to invest in productivity growth, but high wages and non-wage labor costs proved less suitable for developing a modern, labor-intensive service sector (Eichhorst and Marx 2011). Moreover, demographic changes put a heavy burden on the economy to finance the generous pension system. Reforms were deemed necessary to increase the utilization of all labor resources.
The change in the labor market structure, however, did not come along with a systematic flexibilization of the rigid Normalarbeitsverhältnis. Rather, a second-tier labor market consisting of atypical and much less protected employment (e.g., part-time work, marginal employment) emerged. Streeck (1997) argues that this pattern is explained by the German manufacturing system that is based on “diversified quality production.” This model requires labor with highly specialized skills and enables workforces—thanks to their long-standing experience within one firm—to come up with incremental innovations and improvements that translate into high-quality products and specialization in niche markets. Tight employment protection incentivizes employees to invest in the necessary firm-specific skills, which would otherwise become sunk costs in case of a job loss (Herrmann 2020).Footnote 11
In the mid-1990s, the firm size threshold for dismissal protection was raised from 5 to 10 employees (Eichhorst and Marx 2011), and Bauernschuster (2013) found a positive effect on hiring by small firms of this reform. The duality between well-protected insiders and precariously employed outsiders in the labor market, however, persists in larger firms and the new threshold still represents a penalty on employment growth.
1.4.2 Wage Bargaining
The relatively high wage costs in Germany are also institutionalized in a system of collective wage bargaining. Unions played an important role in the first decades after World War II in West Germany and wages were collectively set (Soskice 1990).Footnote 12 There was some modest flexibilization in collective bargaining (e.g., single enterprise exceptions, the introduction of working time accounts) since the 1980s. With reunification, the West-German model was extended to the East and the system remained relatively stable for standard employment contracts (Eichhorst and Marx 2011; Dustmann et al. 2014). Despite low and declining union membership, in the 2000s, still, some 60–70% of all employees were covered by collective agreements and such coverage still implied significant wage premia (Kohaut and Schnabel 2007; Burda et al. 2008; Fitzenberger et al. 2013; Kluge and Weber 2018). The contrast between marginal workers in precarious employment and the well-protected and covered insiders has increased in recent decades (Brady and Biegert 2017). Entrepreneurs have more or less equal access to the latter pool of labor, but face high wage and non-wage labor costs when recruiting from the high-quality segments. A potentially important recent development is the broadly supported introduction of a minimum wage in 2015 of at that time EUR 8.50/h (Burda 2016).Footnote 13 Its effect on the flow of labor resources to entrepreneurship is unclear and not yet empirically investigated.
1.4.3 Social Security
Social security also has a long tradition in Germany. The introduction of social insurance dates back to an initiative by von Bismarck in the 1880s, which implied the implementation of the first social security net in the world. The Compulsory Health Insurance Act of 1883 can be regarded as the starting point of this system. This was followed by the Accident Insurance Act (1884) and the Disability/Old-age Pension System Act (1891). Arguably, the build-up of a social security system enabled von Bismarck to pacify the threat of class struggle and create loyalty to the new state (Rimlinger 1968; Pflanze 2014). The German social security system around this time became a blueprint for Germany’s current health system and was a role model for many insurance systems in other countries (Abrams 2007; Weichlein 2011; Bauernschuster et al. 2019).
The social insurance system underwent several reforms and extensions since the 1880s. Unemployment insurance was introduced in 1927. Finally, care insurance was set up in 1995. The current pension system is based on a reform in 1957 and follows a pay-as-you-go defined-benefit design. There are also state-supported private pension schemes. These were introduced in the early 2000s to make up for the demographic transition that implies fewer contributors in the pay-as-you-go scheme face a growing number of retired people.
A significant reform of the unemployment insurance was associated with the “Agenda 2010.” It was a shift from policies that were rather generous toward an approach with stricter job search monitoring, harsher sanctioning of unemployment provisions, and a reduction in the duration of job training. Another element of the reform was to combine the earnings-related and means-tested unemployment assistance with the social assistance (Sozialhilfe) into a new support system called Arbeitslosengeld II. This transfer can be regarded as a step toward a more universal minimum income support scheme (Eichhorst and Marx 2011). The regulation also came with new active labor market policy tools to promote start-ups by the unemployed (Ich AG/“Me Inc.”). The evidence on the success of these measures to date is mixed (Zöllner et al. 2018). While some do succeed in leaving the program and generate an income, most of these start-ups are not very innovative and have low growth potential.
1.5 Recent Entrepreneurship Policies in Germany
1.5.1 Entrepreneurship in Divided Germany: 1945–1989
Before reunification, the post-war “German model” can be described as a rather distinctive kind of capitalist economy that was governed by national social institutions yielding high international competitiveness despite high wages and low dispersion with respect to inequality of incomes and living standards (Streeck 1997). A defining feature of the German model is the existence of the Mittelstand. Audretsch and Lehmann (2016) argue that Mittelstand firms represent a sort of “main street entrepreneurship” of decades-old, family-owned firms with strong linkages and social ties to their local communities, including banks. These firms attract and retain specifically skilled employees, for example, by local apprentice programs. They also often have close ties with local banks providing them with financial resources. These ties are legally in the form of loans and credit, but long relations and trust enable firms to also approach banks for financing intrapreneurial ventures and innovative projects. Their products are successful in niche markets.
Public policy strongly promoted the German SMEs (including the Mittelstand) in the post-war period. The state-owned Kreditanstalt für Wiederaufbau (KfW
) provided finance for the development of technological capabilities of SMEs (e.g., long-term investment loans as well as working capital loans). The KfW measures can be regarded as small business but to a much lesser extent as entrepreneurship policies. Policy programs directly targeted at start-ups played a rather minor role in the policy menu in the post-war decades.
In contrast, in socialist East Germany, Mittelstand and entrepreneurship were dubbed a bourgeois anachronism (Fritsch and Wyrwich 2016, p. 263). There were many outright anti-entrepreneurship policies, such as the massive expropriation of all private industrial firms in 1972. Private business ownership was very much confined to small craft enterprises and private shops in East Germany and self-employment fell from 20.4% in 1955 to 1.8% in 1989 (Pickel 1992; Wyrwich 2012). Consequently, the Mittelstand had largely disappeared in the East by 1989 (Fritsch et al. 2014).
1.5.2 Entrepreneurship and Entrepreneurship Policy after Unification
In the 1990s, the self-employment rates were steadily increasing in West Germany, partly reflecting the increased role of service but also the fundamental shift toward a more entrepreneurial society. In East Germany, the level of self-employment converged to Western levels and reached parity around the year 2005 (Welter 2007a; Fritsch et al. 2014). Interestingly, in areas that had already a high level of entrepreneurship in the pre-socialist period, the entrepreneurial catch-up was particularly pronounced (Wyrwich 2012; Fritsch and Wyrwich 2014).
Despite convergence in the numbers, however, East German businesses tend to be much smaller, even 20 years after reunification. One reason is their comparatively low levels of productivity and much lower survival rates (Fackler 2014). There are several explanations for this weakness of East German companies, ranging from unfavorable economic framework conditions to lacking managerial and entrepreneurial skills among East German entrepreneurs (Wyrwich 2013). Furthermore, East German businesses tend to have a strong focus on regional markets and their export orientation is rather low (IWH 2010; Mattes et al. 2015).
In an attempt to also support start-ups in East and West, the KfW began creating programs, such as the Eigenkapitalhilfe-Programm which consisted of subordinated capital for (young) entrepreneurs. In 2010, the Bundesministerium für Wirtschaft und Energie (BMWi) implemented INVEST—Zuschuss für Wagniskapital and the Mikromezzaninfonds-Deutschland to strengthen and develop the entrepreneurial culture of Germany. The former provides a subsidy of 20% for venture capital, whereas the latter provides specific support for unemployed persons, women, or migrants in creative industries (Audretsch et al. 2007). Bøggild et al. (2011) show that these programs yielded both an increase in competitiveness and innovativeness for subsidized start-ups as well as generated positive employment effects. Overall, BMWi-policy initiatives include the provision of information on self-employment (e.g., by participating in the Gründerwoche Deutschland), special measures to strengthen interest in entrepreneurship in the education system, and the improvement of the financing options available for innovative start-ups. Under the umbrella of the Gründerland Deutschland Initiative, the BMWi also provides an online portal to make all information available to the public and provides young ICT
entrepreneurs with means for a stay in innovative regions such as Silicon Valley under the German Accelerator program.Footnote 14
In addition to these federal initiatives, the German Länder (states) are also quite active in developing entrepreneurship promotion programs at the regional level (Welter 2007b). In East Germany, such initiatives often relied massively on European Structural Funds which were relatively generous in view of the low GDP
per capita of the East German Länder. It is noteworthy that there is a huge heterogeneity across the Länder in promoting entrepreneurship. It is particularly Bavaria in West Germany and Saxony in East Germany that developed multifaceted programs to promote innovative entrepreneurship (Fritsch et al. 2010, 2015).
Finally, at the local level, some municipalities and districts focus on the development of the entrepreneurial culture within their region. Here, the main players include business associations, chambers of commerce, economic development departments, and business development agencies. An example for local funding initiatives is the GÖBI
-fonds (Göttinger Fonds für örtliche Beschäftigungsinitiativen). Established in 1997, it constitutes one of the first cases of public–private collaboration at the regional level, where banking institutions were involved. Targeting unemployed and young entrepreneurs, the Fonds was organized in such a way that the banks would provide the funding, while the regional government would bear 50% of the default risk and (thus) would subsidize the interest rate.
Although the three levels of policy regulation aim at closely integrating their respective instruments, inconsistencies and incoherence across these levels are a real danger. For example, most state programs do not consider part-time entrepreneurship to be desirable, arguing that this type of entrepreneurship tends to contribute little to economic and employment growth, whereas at the federal level, part-time entrepreneurship is supported and recognized as a potential first step to full-time self-employment and eventual business formation.
These programs have of course been evaluated, but it is difficult to ascertain their true impact. It would also take us beyond the scope of this chapter to attempt an assessment here. At this point, we can conclude that Germany’s policy makers at various levels are clearly highly interested in promoting a more adventurous and radically innovative form of entrepreneurial venturing.
Germany’s turbulent history of division and unification had a big impact on the country, its institutions and inhabitants. After World War II, the entire country experienced an institutional reset: while informal institutions persisted, East and West Germany set off on diverging trajectories on formal institutions.
The West developed its own unique model of capitalism, with moderate wage growth, high productivity growth driven by on-the-job learning, and firm-specific skill accumulation. This supported an export-oriented industry built on the historic legacy of strongly regionally embedded Mittelstand, financed by a regionally branched bank-based financial system, also fueled by science and knowledge developed in technical universities as well as institutes.
In the East, meanwhile, the socialist doctrine led to the destruction of the Mittelstand, while massive migration to the West before the building of the Wall contributed to depriving East Germany of a significant part of its entrepreneurial talent. Importantly, the experiment with central planning failed and the East German economy collapsed, whereas the West grew into the economic powerhouse of Europe.
Now, at 30 years after reunification and in spite of enormous efforts, the socioeconomic gap between East and West Germany has still not been bridged (Canova and Ravn 2000; Lindner 2017; Mertes 2018; Verheyen 2018). Against this backdrop, it is impossible to treat Germany as a blank canvas. Hence, we suggest policies and reforms that fit its historical heritage, consider its federal character and multi-level governance, and build on Germany’s strengths in order to address weaknesses within the German entrepreneurial ecosystem. To identify these weaknesses, the next section turns to the present and examines current data.