A Reform Strategy for Germany

In this chapter, we outline a reform strategy to promote a more 1 entrepreneurial society in Germany. Germany has developed a successful model 2 of capitalism in which high productivity growth is driven by on-the-job learning and 3 firm-specific skill accumulation. The economy is rooted in a strong and regionally 4 All authors acknowledge financial support from the European Union’s Horizon 2020 research and innovation program under grant agreement No 649378. László Szerb and Balázs Páger also acknowledge support from the National Scientific Research Fund of Hungary (OTKA/NKFI grant no. 120289 titled as Entrepreneurship and Competitiveness investigations in Hungary based on the Global Entrepreneurship Monitor surveys 2017–2019). Mikael Stenkula also gratefully acknowledges financial support from Jan Wallanders och Tom Hedelius stiftelse and from the Marianne and Marcus Wallenberg Foundation. M. Sanders (B) · E. Terragno Bogliaccini Utrecht School of Economics, Utrecht University, Utrecht, The Netherlands e-mail: m.w.j.l.sanders@uu.nl E. Terragno Bogliaccini e-mail: e.m.terragnobogliaccini@uu.nl M. Stenkula Research Institute of Industrial Economics, Stockholm, Sweden e-mail: mikael.stenkula@ifn.se M. Fritsch Friedrich Schiller University of Jena, Jena, Germany e-mail: m.fritsch@uni-jena.de A. M. Herrmann Copernicus Institute of Sustainable Development, Utrecht University, Utrecht, The Netherlands e-mail: A.M.Herrmann@uu.nl G. Latifi TUM School of Management, Technical University of Munich, Munich, Germany e-mail: gresa.latifi@tum.de B. Páger · L. Szerb Department of Management Science, University of Pécs, Pécs, Hungary e-mail: pagerb@rkk.hu L. Szerb e-mail: szerb.laszlo@ktk.pte.hu © The Author(s) 2020 M. Sanders et al. (eds.), The Entrepreneurial Society, International Studies in Entrepreneurship 44, https://doi.org/10.1007/978-3-662-61007-7_7 165 469272_1_En_7_Chapter TYPESET DISK LE CP Disp.:27/2/2020 Pages: 204 Layout: T1-Standard U N C O R R E C T E D P R O O F 166 M. Sanders et al. embedded Mittelstand, which supports an export-oriented industry mainly based on 5 incremental innovations, but which is less conducive to more radical innovation. We, 6 therefore, suggest a reform agenda for Germany that encourages more entrepreneurial 7 experimentation with the aim of facilitating radical innovation, both in incumbent 8 and new firms. Germany’s entrepreneurial talent should be encouraged to take on 9 more risk, the education system could promote initiative, creativity and a willingness 10 to experiment, and a more equal playing field between dependent employment and 11 self-employment/employer could be created. 12

The main aim of the initiatives to upgrade technical colleges was to overcome the lower social status of engineers as compared to university graduates. Moreover, upgrading technical colleges to technical universities was regarded an important means for improving the education of engineers (König 2006 in Germany these smaller places (e.g., rural Baden-Württemberg) prosper today, even 147 though they lack the agglomeration advantages that are found to be supportive for 148 entrepreneurship and innovation in countries such as the USA (Glaeser 2011).

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In the twentieth century, as was the case in most developed countries, there was 150 a massive expansion of tertiary education in Germany. Therefore, there is no region 151 without a significant university or university of applied science with a focus on edu-152 cating people for the local labor market (e.g., Jaeger and Kopper 2014). 6  were aimed at further developing basic research with an explicit mandate to also 157 disseminate this knowledge to industry (Gibbons et al. 1994;Beise and Stahl 1999). 158 These networks have now grown into important pillars of Germany's knowledge 159 infrastructure. As for most technical universities, however, the focus in these institu- 160 tions has long been on serving the needs of large, industrial, incumbent firms. Initia-161 tives to foster entrepreneurship at universities or research institutes did not exist until 162 the late 1990s when the EXIST program was initiated in a few pilot universities.

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The EXIST program followed a dual strategy. One building block was support-

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In conclusion, the German university and educational system mirror its regional 172 decentralization, given that the federal states are responsible for education policy.

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There are also joint initiatives where the lead is at the federal level. The most famous 174 program is the so-called excellence initiative that was initiated in 2006. Recent evi-175 dence suggests that this program was successful in concentrating excellent research.

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It also promoted collaborations between universities and the non-university research 177 sector. However, it has not caused massive changes to the overall German research however, that universities are tightly financed out of (state level) tax revenue and 185 have a hard time attracting and retaining (global research) talent. As a consequence, 186 differences in the quality of education and research between German universities are 187 6 A university of applied sciences (UAS), also known as a vocational university or Fachhochschule, is an institution of higher education that grants professional degrees and is generally more focused on vocational education and applied research. Germany has had regional patent systems since the eighteenth century (Harhoff 192 and Hoisl 2007). The first Central German patent office was established in 1877, 193 some six years after Germany became a state. The Imperial Patent Office  liches Patentamt) provided uniform protection for discoveries in the German Empire.

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Patents were based on uniform principles and were effective for the entire territory  The labor force in Germany is generally well trained and very productive, justifying 283 high wage incomes while maintaining a strong international competitive position.

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Strong vocational education combined with on-the-job training promotes the accu-285 mulation of firm-specific human capital in Germany's small and medium-sized high- 295 SME sector. Many firms of the Mittelstand are family entities that have been passed on within the family for several generations. 9 German entrepreneurs have been found to be reluctant to give up control rights and therefore prefer organic growth and private ownership over a heavy reliance on external equity finance. One could argue that this has also led to a regulatory framework that makes this type of investment less attractive (see, e.g., Fiedler and Hellman 2001;Franzke et al. 2003 The West-German system implied high wages for insiders but also led to under-304 utilization of the labor force, which is reflected, for example, by low labor force changes put a heavy burden on the economy to finance the generous pension system.

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Reforms were deemed necessary to increase the utilization of all labor resources.

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The change in the labor market structure, however, did not come along with a 315 systematic flexibilization of the rigid Normalarbeitsverhältnis. Rather, a second-316 tier labor market consisting of atypical and much less protected employment (e.g.,

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part-time work, marginal employment) emerged. Streeck (1997) argues that this 318 pattern is explained by the German manufacturing system that is based on "diversified 319 quality production." This model requires labor with highly specialized skills and 320 enables workforces-thanks to their long-standing experience within one firm-to 321 come up with incremental innovations and improvements that translate into high-322 quality products and specialization in niche markets. Tight employment protection 323 incentivizes employees to invest in the necessary firm-specific skills, which would 324 otherwise become sunk costs in case of a job loss (Herrmann 2020). 11

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In the mid-1990s, the firm size threshold for dismissal protection was raised from   The wage agreements are negotiated at the sector level between labor unions and employers' associations. The negotiations are at the regional level (so-called Tarifbezirk). 13 There have been sector-based minimum wages already in the 2000s. In the West-German construction sector, a minimum wage became effective in 1997.

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In an attempt to also support start-ups in East and West, the KfW began creating In addition to these federal initiatives, the German Länder (states) are also quite 447 active in developing entrepreneurship promotion programs at the regional level (Wel- To get a first impression of Germany's relative performance as an entrepreneurial 503 ecosystem, we turn to the Regional Entrepreneurship and Development Index 504 (REDI). For calculating an overall country score, we used the population weighted 505 regional REDI-scores. Out of the 24 EU countries for which we have this regional 506 data, Germany ranks seventh with 51.1 points between Finland and Austria, behind 507 Ireland, the Scandinavian countries, The Netherlands, and the UK, but ahead of 508 France and all the Southern and Central European countries ( to improve its performance, however, we need to delve a little deeper into where the 513 entrepreneurial ecosystem in Germany could be improved.

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The REDI is composed of 14 underlying pillars that together make up three on the data, one would conclude that improving the "Risk Acceptance," "Human 529 Capital," "Product Innovation," and "Process Innovation" pillars is most urgent.

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A national-level analysis, however, will hide a lot of regional heterogeneity.  The numbers are index numbers ranging from 0 (worst) to 100 (best) across all 125 European NUTS2/3 regions for 2012-2014. 16 We refer interested readers to Szerb et al. (2017)   Opportunity Perception in a low-quality institutional environment will contribute 548 little. Likewise, low Opportunity Perception in a high-quality institutional environ-549 ment is also a sign of weakness in the entrepreneurial ecosystem. To improve the 550 score on a given pillar, policies and reforms should seek to improve the weakest link 551 and then aim to increase both institutional quality and individual agency together.

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Especially because of the latter, the menu of effective interventions is not limited to 553 improving the scores on the institutional quality indices alone. The same logic is then 554 also imposed on the individual pillars that make up the three subindices: Attitudes,

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For all the Länder, we have identified those three pillars that are holding back the 557 respective Land most. We then compared the Länder and identified the most common 558 weak spots in regional ecosystems. The results, presented in

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Our interpretation of the data above reveals that in all German Länder, and the country 574 as a whole, the main bottlenecks in the entrepreneurial ecosystem are a limited will-575 ingness to take risk (Business Risk), an education system that can be improved (Edu-576 cation and Training), and a lack of radical innovation (New Products and Technology) 577 that feeds back into a low familiarity with ambitious entrepreneurship.

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To examine regulatory barriers to entrepreneurship, we conducted interviews with  When looking at the top-10 obstacles more closely, we see that founders confirm

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In the same survey, founders were also asked: "What can policy makers do to facilitate 664 venture creation?" An overview of the answers to this question is listed in Table 7.4.

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While an important share of the founders interviewed still thinks that policy makers   ship in Germany. Our quantitative data analyses suggested a large regional hetero-743 geneity in entrepreneurial ecosystem performance, whereas for the country as a whole 744 or the regions affected, this does not necessarily constitute a problem.

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The results from the surveys do not suffer from this problem and confirm that 746 the challenges and bottlenecks in the German ecosystem are indeed not formidable.  The first proposal (2) refers to intellectual property. We think it is in the interest of  Intellectual property Limit the breadth, width, and span of patent protection to cover working prototypes and market-ready innovations only for a short period of time and permit economic actors to infringe upon patents that have not been commercialized This is an international issue, but it would certainly help if Germany were to advocate this at the appropriate levels, because Germany is an important player in this field. It may, at first sight, go against the interests of a country that patents a lot. But this will stimulate commercialization also in Germany  Many of the flexicurity reforms tend to put administrative or financial burdens and risks on firms that work as a deterrent to hire and/or as a penalty on growth. In reforming the labor market, policy makers should take a dynamic view of entrepreneurship and realize that successful firms need to grow 29 Social security Ensure full portability of social security entitlements by making them independent of tenure at a specific employer Labor market mobility in Germany is relatively low. It seems that in Germany this is also due to the "orderly" educational system that sets people on a very predictable career path. Linking social security entitlements to jobs is perhaps a consequence as much as a cause but it is a good place to start    to start a venture with less administrative hurdles and to grow them with capital, 820 labor, and knowledge for which they can compete on a more level playing field.

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These reforms would have to be implemented while keeping sensible and important 822 regulations in place to screen out business models that add no social value.

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It is likely that, even though all German Länder stand to benefit from these inter-824 ventions, the fact that density and clustering tend to promote the quality and impact of 825 entrepreneurial venturing will imply that the same policy improvements will benefit and reforms that will strengthen the ecosystem, but to do it in such a way that other 854 important policy priorities are also achieved.

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In order to receive the first round of feedback on the proposals for Germany 856 presented in Table 7.5, a policy round The participants also agreed that institutions like high employment protection 868 and entrepreneurship-inhibiting insolvency laws increase the risks involved with 869 entrepreneurial failure and the stakeholders also meant that institutional reforms that 870 decrease the personal risks of failure might have an effect on individuals' risk attitude.

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The relatively high-risk aversion in Germany is not innate and can be altered, even 872 if it might take some time.

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Supporting business angels might work to reduce market failure in the seed stage.

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The idea to subsidize the investors and not the firms was regarded as a fruitful strategy. proposal, participants pointed out that this would imply that a given budget has to be 886 distributed among more firms or that the budget must increase substantially to avoid 887 that resources are diluted. Attitudes. The main bottlenecks in the entrepreneurial ecosystem are a limited will-919 ingness to take risk, an educational system that could aim for more creativity and 920 experimentation and a lack of radical innovation that feeds back into a low famil-921 iarity with ambitious entrepreneurship and a rather closed and conservative business 922 culture.

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This chapter discusses proposals concerning taxation and financial regulations as 924 well as ideas about how to improve the regulatory situation for start-ups and founders.

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Germany also needs to strengthen the digital infrastructure and the knowledge 926 generation sector in addition to supporting innovation in SMEs.

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The main message for Germany is that the German institutions could allow for 928 more experimentation and somewhat more radical innovation by strengthening the built-up competitive strengths, Germany could afford to become more adventurous.

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The proposals individually and in combination aim to reward German entrepreneurs Open Access This chapter is licensed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license and indicate if changes were made. The images or other third party material in this chapter are included in the chapter's Creative Commons license, unless indicated otherwise in a credit line to the material. If material is not included in the chapter's Creative Commons license and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder.