How Germany can become the global innovation champion

HOW GERMANY CAN BECOME THE GLOBAL ­INNOVATION ­CHAMPION? 12 points for enhancing Germany’s innovative power

HOW GERMANY CAN BECOME THE GLOBAL ­INNOVATION ­CHAMPION? 12 points for enhancing Germany’s innovative power

Imprint

SANTIAGO GmbH & Co. KG Jagdschlösschen Anrath Donkweg 47 47877 Willich Tel.: +49 (0) 2156 / 4966 910 www.santiago-advisors.com Editors Philip König, Juan Rigall, Georg Wolters Willich Layout BOROS www.boros.de Print Druckerei Jakobs GmbH

HOW GERMANY CAN BECOME THE GLOBAL INNOVATION CHAMPION?

Jointly boosting Germany’s innovative power

JOINTLY BOOSTING ­GERMANY’S INNOVATIVE ­POWER

HOW GERMANY CAN BECOME THE GLOBAL INNOVATION CHAMPION?

It is becoming increasingly difficult for Germany to maintain its top position as an industrial location: Global competition is increasing. Threshold nations don’t merely want to be production locations, they want to become high-tech centres – and they’re investing massively in education, research and development to this end. Industrialized nations like the USA, Japan and South Korea are also accelerating their innovation processes. This effort is aided by location advantages, which for instance the US and various Mideast countries can count on in the form of low energy and raw-material costs. In Germany, however, industrial production has virtually stagnated. This effect is threatening to negatively impact the value creation chains of the entire industrial innovation network.

As Germany cannot win a cost-based competition with regions like Asia, it must depend even more on innovation leads. The innovative power of German industry is key for ensuring the competitiveness of this industrial location in future.

In its study “Paving the Way for Innovation”, published in September 2015, the German Chemical Industry Association (VCI) identified the most important internal and external obstacles to strengthening innovative power in the German chemical/pharmaceutical industry and developed action recommendations for enterprises and political decision-makers. Since then, presentation and discussion of the results with VCI member companies has served to address and initiate work on the internal barriers. Political decision-makers noted the results with great interest and approval. The bottom line: the innovation-policy parameters in Germany must be improved overall.

What actions does this specifically require? In a 12-point plan, this analysis ­describes the most important levers for overcoming external innovation barriers from an overall industry perspective. The VCI commissioned the consulting firm SANTIAGO to conduct the analysis.

The analysis is based on a mixture of literature analysis, workshops with representatives of industry associations and 20 interviews with experts from government ministries, industry, associations, labour unions and academia. To obtain the most comprehensive picture possible, experts from the broadest possible range of industries (automotive, chemical, pharmaceutical, machinery and plant equipment, electrical and electronics industries) were consulted.

The findings and action recommendations are based on the qualitative evaluations of the participating experts and the authors’ practical experience.

4–5

HOW GERMANY CAN BECOME THE GLOBAL INNOVATION CHAMPION?

Promoting culture and talents

HOW GERMANY CAN BECOME THE GLOBAL INNOVATION CHAMPION?

6–7

PROMOTING CULTURE AND TALENTS

Strengthening innovation culture Social acceptance of innovations, new technologies and products is a key prerequisite for the innovation dynamic of a nation. Efforts should thus be made to foster a positive and open attitude toward innovation among the general population. Social openness to technology and innovation also plays an important role in the generation of ideas and knowledge on the part of the innovators. Additionally, essential characteristics of future start-up entrepreneurs and innovators, such as inventiveness, a willingness to assume risk and entrepreneurial thinking, must be further reinforced and supported. Strengthening innovation culture is a joint task of business and political leadership.

Actions

Innovations are made by people. A motivating environment (innovation culture) and a sound and appropriate education are thus key innovation drivers. In this respect, Germany shows significant need for improvement. A widespread innovation-critical attitude among the population and the increasing shortage of skilled staff are major obstacles here.

1.1: Communicate the importance of innovation at an early age Germany’s prosperity today is based on the innovations of the past. This insight must be communicated early on and comprehensively in the schools so as to promote the renaissance of a more innovation-friendly culture.

1.2: Intensify innovation-supportive communication In the public debate on innovation, the “nays” often drown out the “yeas”. Particularly with respect to high-potential technologies, the advantages must once again be enunciated more clearly, and the need for change should be promoted more intensively.

1.3: Support basic traits that promote innovation Innovation needs inventors. Stimulating enthusiasm for technology, the desire to risk experiments and practice entrepreneurship must be better embedded in the education system as key tasks (awards, founder start-up grants, etc.).

HOW GERMANY CAN BECOME THE GLOBAL INNOVATION CHAMPION?

Promoting culture and talents

8–9

Developing our location

Promoting talents The already apparent and increasingly severe shortage of skilled staff in Germany represents an enormous challenge. The situation will become even more drastic in the coming years due to the demographic trend and the growing international competition for talents. As innovative companies are especially dependent on highly qualified employees, ensuring a supply of trained staff in future is one of the key criteria for innovative success. To this end, it will be necessary to stimulate a fundamental interest in mathematic/natural science/technical subjects, guarantee a top-quality training and strive for on-going continuing education.

Actions

HOW GERMANY CAN BECOME THE GLOBAL INNOVATION CHAMPION?

2.1: Strengthen STEM qualifications Strengthening STEM qualifications means awakening a passion for these subjects at a young age. This in turn requires a further development of teaching techniques, rapid transfer of new knowledge to curricula, regular on-going teacher training and consistent coverage of STEM subjects throughout secondary education.

2.2: Improve academic instruction The STEM subjects continue to suffer from high dropout rates. Optimization of supervision, improved student counselling, modification of the incentive systems for professors and further development of university infrastructure are important actions in this context.

2.3: Expand vocational on-going and continuing education Lifelong learning is key to sustained innovativeness. The prerequisites for this must be improved. On-going and continuing education in parallel to work must be intensified and curricula continually updated (digitalization, Industry 4.0, etc.).

Germany’s research infrastructure plays in the global Champions League. But continual development is necessary to insure that this remains so in future.

Among other things, development is needed to realize synergies between existing research institutes, provide nationwide high-performance broadband coverage and actively attract innovative foreign companies to Germany.

Actions

3.1: Optimize research and start-up centres In Germany, research centres are established according to federal and bureaucratic principles. Innovation potential that could be created through the bundling of know-how and resources (innovation clusters) simply remain unused.

3.2: Provide nationwide high-performance broadband coverage Without high-performance Internet, Germany’s innovative capability will be significantly impaired. Yet digitalization, Industry 4.0 and the new 5G standard already define tomorrow’s data capacity requirements. Germany must urgently address this backlog.

3.3: Intensify location policy Not every innovation must originate with German researchers. With its excellent framework conditions, Germany ranks high in the international competition of business locations. This must be utilized as a basis for intensifying efforts to attract innovative foreign companies.

HOW GERMANY CAN BECOME THE GLOBAL INNOVATION CHAMPION?

Eliminating obstacles

HOW GERMANY CAN BECOME THE GLOBAL INNOVATION CHAMPION?

10–11

ELIMINATING OBSTACLES Expanding “better law-making” Bureaucratic procedures are particular impediments to innovation when assessment and decision-making processes take too long, when the discretionary scope granted by regulations is not used in an innovation-friendly manner and when existing processes have not been adapted to the possibilities of digital data processing. A lack of long-term dependability of regulations also impedes innovation. Process optimizations in this area can result in significant improvements.

Actions

4.1: Accelerate approval and permitting processes The innovation-friendliness of a nation is also reflected in how it deals with the opportunities and risks of innovation. Approval and permitting processes must be simplified and accelerated without compromising protection and safety standards.

4.2: Give innovations priority Speed is often a question of priorities. Innovation-relevant processes must receive priority consideration, e.g. in the form of dedicated resources in the appropriate public agencies. An innovation-friendly basic attitude on the part of public administration should also manifest itself in the use of interpretive discretion and not obstruct innovations.

A great many enterprises in Germany see in regulatory and administrative requirements enormous obstacles to innovation. That is particularly true for small and medium-sized enterprises. As a land of SMEs, this is particularly crucial for Germany’s innovative power. When it comes to striking a balance between innovation-friendly “better law-making”, compliance with legal safety and protection standards and basic administrative requirements (proper budget administration etc.), three important areas of development are apparent.

4.3: Digitize administrative processes and interfaces Speed is also achieved by reducing turnaround times. In this connection, a consistent digitalization of processes and interfaces in bureaucratic procedures is a key lever, and one that also enhances process quality and contributes to greater transparency.

4.4: Ensure long-term dependability of parameters Long-term innovation-critical parameters (e.g. subsidy programmes, approval and permitting processes, price restrictions in the pharmaceutical segment) must be aligned with an innovation-oriented industrial policy, planned with an extremely broad time horizon with respect to European regulations and reliably adhered to. A “moving goalposts” environment always harms innovation.

HOW GERMANY CAN BECOME THE GLOBAL INNOVATION CHAMPION?

Eliminating obstacles

Instituting regulatory impact assessments for innovations

HOW GERMANY CAN BECOME THE GLOBAL INNOVATION CHAMPION?

Improving implementation Consistent and dependable regulatory parameters are essential for Germany as an innovation location, as they enable planning and legal certainty. Thus, it is more important than ever that new regulations be examined carefully for potential innovation obstacles before they are promulgated and possible interactions with other national, European and international requirements be considered.

Germany can do better.

Actions

12–13

5.1: Institute an innovation check New laws often impede innovation unintentionally. To avoid this in future, new regulations should be reviewed for potentially innovation-critical elements such as implementation periods, changes in standards, cost of implementation, etc. as part of a regulatory impact assessment.

Administrative processes involve a great number of officials and authorities.

This entails additional coordination requirements and prolongs the process, to the detriment of innovative enterprises. Bundling authority and creating clear responsibilities are important approaches. The adoption of solution paradigms from the business world (service-centre philosophy, responsibility for entire processes) must be examined here.

Actions

6.1: Reduce the number of agencies involved in the process A priority for innovation requires rapid decisions. The fewer decision-makers are involved, the faster decisions can be made. Reducing the number of public authorities involved in the most important innovation-relevant administrative processes, coupled with the delineation of clear responsibilities, is a key instrument.

6.2: Create innovation contact points for enterprises Particularly for small and medium-sized enterprises, the administrative overhead associated with innovations is a high hurdle. Establishing special points of contact to inform and advise enterprises (service centres) on the administrative requirements in the area of innovation could prove helpful.

6.3: Improve internal administrative coordination Even in clear and transparent administrative processes, it is up to the enterprise to coordinate the process, which ties up resources. The appointment of persons with overall responsibility who assume the coordination across all agencies would simplify the process.

HOW GERMANY CAN BECOME THE GLOBAL INNOVATION CHAMPION?

Focusing and intensifying support

HOW GERMANY CAN BECOME THE GLOBAL INNOVATION CHAMPION?

14–15

FOCUSING AND INTENSIFYING SUPPORT Expanding support for research Global competition in science and innovation has intensified in recent years.

Germany is still well positioned internationally and is among the world’s most innovative countries. Research funding must be reformed in order to defend this position. Specifically, increased R&D spending, tax breaks for research, more innovation-friendly structuring of tax parameters and ensuring long-term financial resources are important steps for preserving future capability.

Actions

7.1: Increase government R&D funding to achieve a target level of 3.5 % Overall, Germany invests less in innovations than other innovation-oriented nations. Public research funding should be increased further. This would incentivize industry to jointly increase R&D spending to 3.5 % of GDP in future.

7.2: Implement tax-side research funding In most EU and OECD nations, tax relief is used as an instrument for promoting research. In order to prevail in international competition, this should also be implemented in Germany, and precise criteria for research spending in the various industries should at the same time be developed. Tax relief for research staff could represent a first step here.

In addition to creating the necessary prerequisites and eliminating existing ­barriers, a sustainable innovation culture requires intensive, efficient and focused financial support. Action is required in all three areas. State support for industrial R&D lags behind that of other innovative nations, bureaucratic obstacles persist in the support process and the current industrial policy is insufficiently focused.

7.3: Make tax parameters more innovation-friendly The increasing intensity of competition makes an innovation-friendly tax system even more important. Above all, it must be ensured that no further barriers to innovation are erected. Tax exemptions for transferred know-how e.g. when relocating operations and functions would be one example of this. The global marketing of know-how generated in Germany also strengthens Germany as a research and manufacturing location.

7.4: Ensure long-term funding for research Disruptiveness requires patience and must also permit ideas to fail. Publicly funding research according to current revenues and making this secondary to social-policy expenditures does not promote any innovation. For instance, concerns about follow-on financing often prevent new paths from being taken.

HOW GERMANY CAN BECOME THE GLOBAL INNOVATION CHAMPION?

Focusing and intensifying support

Reducing bureaucratic obstacles to funding

HOW GERMANY CAN BECOME THE GLOBAL INNOVATION CHAMPION?

Drafting a coherent innovation/industrial policy Applying for research funding often entails a lot of bureaucratic red tape. Complex and non-standardized administrative and funding processes are a great obstacle particularly for SMEs. The subsidy process must be improved further in order to make applying for public research funding an attractive business proposition for a broad range of enterprises.

Actions

16–17

8.1: Publicize funding programmes early on Planned subsidies and expert discussions must be communicated and announced at an early stage. A transparent information policy is essential to ensure smooth processes and avoid possible competition distortions ahead of subsidy programmes.

8.2: Streamline the subsidy process For subsidies as well, fast turnaround times are vital. Important aspects include reducing the work entailed in application, streamlining the evaluation process and shortening the approval process.

8.3: Simplify project execution Project execution can be simplified further using IT solutions and by standardizing/bundling documentation obligations. In this context, a uniform process must be defined for the various subsidy programmes, and additionally coordinated on the European level.

Among other things, highly innovative nations like Japan, Switzerland, South Korea and the USA owe their success to a coherent and consistent innovation/ industrial policy. Germany has not yet realized its potential in this area. Although the political efforts have become more sophisticated in recent years, from the energy transition and electromobility to digitalization, challenges remain with respect to both strategy/planning and consistent implementation.

Actions

9.1: Define innovation goals with a clear strategy and concrete plan What is lacking isn’t goals (e.g. one million electric vehicles by 2020), but rather in many cases concrete strategies and the corresponding actions that underlie the targets. Without a coherent strategy, however, there is no basis for concerted implementation.

9.2: Establish effective task forces to implement the strategy The destination determines the route. In future, the supporting actions should be planned and implemented when the goal is formulated. A coordinating task force should be formed for each defined innovation goal to ensure communication and coordination between the actors during the implementation process.

9.3: Preserve end-to-end value creation chains Innovation is sustained by feedback from production. If production is relocated abroad (e.g. solar cells), the platform for innovation will be lacking in the medium term. Thus, preserving end-to-end value creation chains is a main innovation driver.

HOW GERMANY CAN BECOME THE GLOBAL INNOVATION CHAMPION?

Simplifying cooperation

HOW GERMANY CAN BECOME THE GLOBAL INNOVATION CHAMPION?

18–19

SIMPLIFYING COOPERATION

Simplifying research cooperation Among other things, successful innovations require cooperation in research, for instance between universities and enterprises. Parties agree to cooperate when this appears fruitful for both sides. On the other hand, if the parameters are too rigid, the cost quickly exceeds the potential benefit. Innovative potential remains unutilized. The challenge is to find the right compromise between reasonable protection interests (e.g. IP protection) and pragmatic implementation. Germany has room for improvement in this respect.

Actions

In view of increasing complexity, global networking and exponentially increasing knowledge, innovation is less and less a product of individual actors working on their own. Cooperation with partners is becoming ever more important for concentrating the resources and know-how necessary for successful innovations. This requires framework parameters that enable rapid and efficient action. Germany has a lot of ground to make up here.

10.1: Refine legal parameters The desire to use knowledge created using tax money to finance research is understandable. However, the resulting current parameters (e.g. patent exploitation offices and complex cooperation agreements) make cooperation e.g. with universities unattractive for many enterprises. A pragmatic revision would unleash a great deal of potential.

10.2: Promote an understanding for industry in academia The better the parties understand each other, the better they cooperate. Greater communication between industry and academia could prove useful here, as would a refinement of the appointment criteria for professors (more practical experience).

10.3: Adjust funding rates for collaborative projects Successful innovations, particularly disruptive ones, require stable financing.

Variable funding rates for companies in cooperative projects mean the opposite.

Stable rates would provide greater certainty.

HOW GERMANY CAN BECOME THE GLOBAL INNOVATION CHAMPION?

Simplifying cooperation

Strengthening application-oriented research

HOW GERMANY CAN BECOME THE GLOBAL INNOVATION CHAMPION?

Improving technology transfer Germany remains one of the leading nations in basic research. However, new knowledge alone does not add value. Knowledge must be made applicable before it can reach people and ultimately manifest itself in the balance sheets of German enterprises. Germany is missing a number of opportunities in this transfer.

Actions

20–21

11.1: Expand pre-competitive joint research Germany is the land of the successful SME. However, these SMEs, the world champions in implementation, often lack access to academia. Simplifying this access would do a great deal for greater application orientation.

11.2: Strengthen research at universities of applied science Research in Germany is conducted in the enterprises, research institutes and universities. The more practice-oriented universities of applied sciences still play an insignificant role in publicly funded academic research. Greater integration of the universities of applied sciences in research would be an important element in the transfer from basics to applications.

Successful innovations require not only brilliant ideas. Systematic implementation is equally important. For innovations that were developed at public institutions, implementation begins with transfer to the private sector. Corresponding functions have been established at many universities. However, they are often still too bureaucratic and need to be developed further.

Actions

12.1: Professionalize technology transfer offices As organizational units of universities and research institutes, many technology transfer offices have a bureaucratic character. Incentives and industrial experience are often lacking. Professionalization would simplify and accelerate transfer.

12.2: Lower transfer hurdles To achieve ambitious innovation targets and transfer more technologies, the hurdles for these transformations must be lowered. The expansion of validation promotion (e.g. VIP programme) is one important element here, as it can reduce risks and create transfer incentives.

12.3: Improve framework parameters for start-ups Start-ups are a key element for transferring technologies to the market. Even though this segment is developing dynamically, Germany lags far behind countries like the USA and Israel. One reason is the lack of venture capital. An adjustment of the framework parameters, from tax incentives for investors to the offsetting of losses, could provide an important push here.

HOW GERMANY CAN BECOME THE GLOBAL INNOVATION CHAMPION?

22–23

SIMPLIFYING ­COOPERATION

FOCUSING AND ­INTENSIFYING ­SUPPORT

ELIMINATING ­OBSTACLES

PROMOTING ­CULTURE AND ­TALENTS

12 points for enhancing Germany’s innovative power

1 2 3 4

Strengthening innovation culture

Promoting talents

Developing our location

Expanding “better law-making”

5

Instituting regulatory impact assessments for innovations

6

Improving implementation

7

Expanding support for research

8

Reducing bureaucratic obstacles to funding

9

Drafting a coherent innovation/industrial policy

10

Simplifying research cooperation

11

Strengthening application-oriented research

12

Improving technology transfer

This roadmap is intended for policymakers. Many of these actions additionally require joint activities of government and businesses.

Concrete Actions

Coordination

1.1: Communicate the importance of innovation at an early age

national, state governments

1.2: Intensify innovation-supportive communication

national

1.3: Support basic traits that promote innovation

national, state governments

2.1: Strengthen STEM qualifications

state governments

2.2: Improve academic instruction

state governments

2.3: Expand vocational on-going and continuing education

national

3.1: Optimize research and start-up centres

national

3.2: Provide nationwide high-performance broadband coverage

national

3.3: Intensify location policy

national

4.1: Accelerate approval and permitting processes

national

4.2: Give innovations priority

national

4.3: Digitize administrative processes and interfaces

national

4.4: Ensure long-term dependability of parameters

national

5.1: Institute an innovation check

national

6.1: Reduce the number of agencies involved in the process

national

6.2: Create innovation contact points for enterprises

national

6.3: Improve internal administrative coordination

national

7.1: Increase government R&D funding to achieve a target level of 3.5 %

national

7.2: Implement tax-side research funding

national

7.3: Make tax parameters more innovation-friendly

national

7.4: Ensure long-term funding for research

national

8.1: Publicize funding programmes early on

national

8.2: Streamline the subsidy process

national

8.3: Simplify project execution

national

9.1: Define innovation goals with a clear strategy and concrete plan

national

9.2: Establish effective task forces to implement the strategy

national

9.3: Preserve end-to-end value creation chains

national

10.1: Refine legal parameters

national

10.2: Promote an understanding for industry in academia

state governments

10.3: Adjust funding rates for collaborative projects

national

11.1: Expand pre-competitive joint research

national

11.2: Strengthen research at universities of applied science

national, state governments

12.1: Professionalize technology transfer offices

national, state governments

12.2: Lower transfer hurdles

national

12.3: Improve framework parameters for start-ups

national

2017

Priority:

2020

2023

1 2 3