Why Germany Dominates the U.S. In Innovation

by Dan Breznitz

Reading the headlines, you might think that the most urgent question about national success in innovation and growth is whether the U.S. or China should get the gold medal. The truth is: Germany wins hands down. Germany does a better job on innovation in areas as diverse as sustainable energy systems, molecular biotech, lasers, and experimental software engineering. Indeed, as part of an effort to learn from Germany about effective innovation, U.S. states have encouraged the Fraunhofer Society, a German applied-science think tank, to set up no fewer than seven institutes in America. True, Americans do well at inventing. The U.S. has the world’s most sophisticated system of financing radical ideas, and the results have been impressive, from Google to Facebook to Twitter. But the fairy tale that the U.S. is better at radical innovation than other countries has been shown in repeated studies to be untrue. Germany is just as good as the U.S. in the most radical technologies. Germany’s style of innovation explains its manufacturing prowess. For example, many, if not most, of the Chinese products we buy every day are produced by German-made machinery, and the companies that make them are thriving. It also explains why Germany’s industrial base hasn’t been decimated, as America’s has. Germany is better at sustaining employment growth and productivity, while expanding citizens’ real incomes. Even with wages and benefits that are higher than those in the U.S. by 66%, manufacturing in Germany employed 22% of the workforce and contributed 21% of GDP in 2010.

Three factors are at work here:

- Germany understands that innovation must result in productivity gains that are widespread, rather than concentrated in the high-tech sector of the moment. As a consequence, Germany doesn’t only seek to form new industries, it also infuses its existing industries with new ideas and technologies. For example, look at how much of a new BMW is based on innovation in information and communication technologies, and how many of the best German software programmers go to work for Mercedes-Benz. The U.S., by contrast, lets old industries die instead of renewing them with new technologies and innovation. As a result, we don’t have healthy cohesive industries; we have isolated silos. An American PhD student in computer science never even thinks about a career in the automobile industry — or, for that matter, other manufacturing-related fields.

- Germany has a network of public institutions that help companies recombine and improve ideas. In other words, innovation doesn’t end with invention. The Fraunhofer Institutes, partially supported by the government, move radical ideas into the marketplace in novel ways. They close the gap between research and the daily grind of small and medium-size enterprises. Bell Labs used to do this in the United States for telecommunications, but Fraunhofer now does this on a much larger scale across Germany’s entire industrial sector.

- Germany’s workforce is constantly trained, enabling it to use the most radical innovations in the most diverse and creative ways to produce and improve products and services that customers want to buy for higher prices. If you were to fill your kitchen and garage with the best products that your budget could afford, how much of this space would be filled with German products such as Miele, Bosch, BMW, and Audi?

Germany actively coordinates these factors, creating a virtuous cycle among them. Germany innovates in order to empower workers and improve their productivity; the U.S. focuses on technologies that reduce or eliminate the need to hire those pesky wage-seeking human beings. Germany’s innovations create and sustain good jobs across the spectrum of workers’ educational attainment; American innovation, at best, creates jobs at Amazon’s fulfillment centers and in Apple stores. It’s high time for the U.S. to revamp its innovation system. Americans need to recognize that the purpose of innovation isn’t to produce wildly popular internet services. It’s to sustain productivity and employment growth in order to ensure real income expansion. We need new policies that allow American innovation to be scaled up and produced on American soil, by American workers. Changes need to happen in how we transfer radical inventions from the lab to the marketplace, via a set of public-private institutions that do for America what the Fraunhofer centers do for Germany. We need to think about skills training as a lifelong endeavor, with workers across the spectrum of education being taught how to use new technologies to increase productivity.

Economic growth doesn’t happen at the moment of invention. Only innovation policies that target the complete innovation cycle will succeed in creating economic growth that enhances the welfare of all citizens.

https://hbr.org/2014/05/why-germany-dominates-the-u-s-in-innovation&ab=Article-Links-End_of_Page_Recirculation

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The traditional economy

It’s hard to imagine our lives without coins, banknotes and credit cards. Yet for most of human history people lived without money. For thousands of years human societies had very simple economies. There were no shops, markets or traders. There were no employers, paid workers or salaries. Today, we call this kind of economy the traditional economy, and in some parts of Asia, South America and Africa this system still exists.

People who live in a traditional economy don’t have money because they don't need it. They live lives of subsistence. That means they hunt, gather or grow only enough food to live. There is almost no surplus in the traditional economy, and there is almost no property. Families may own simple accommodation, but land is shared by all the tribe. Economic decisions are taken according to the customs of the tribe. For example, every family may need to give some of the crops they grow to the tribal leader, but keep the rest for themselves. They don’t do this because it makes economic sense. They do it because the tribe has always done it. It’s simply a custom.

Custom, also, decides what jobs people do in the traditional economy. People generally do the jobs that their parents and grandparents did before them. Anyway, there aren’t many jobs to choose from in the traditional economy. Men are hunters, farmers or both. The woman's place is at home looking after children, cooking and home-making. This division of labour between men and women is another characteristic of the traditional economy. Whatever the work is, and whoever does it, you can be sure it's hard work. This is because traditional economies have almost no technology. Physical strength and knowledge of the environment are the tools for survival.

Like any other economic system, the traditional economy has its benefits and drawbacks. Probably the biggest benefit is that these are peaceful societies. People consume almost everything they produce and own practically nothing. They are equally poor. For all these reasons, war is almost unknown in these societies.

However, people who live in traditional societies are among the poorest people in the world. Because custom decides what people do, nothing in these societies ever changes. Because there is no technology, people depend on nature to survive. They have no protection from environmental disasters like droughts and floods. They are always in danger of hunger and disease. But the traditional economy is in danger itself. There are only a few examples left on the planet. In 100 years from now, it may have disappeared forever.

(from Raitskaya L., Cochrane S.Macmillan Guide to Economics, Издательство: McMillan, 2005)

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The market economy

Have you ever walked through a busy street market? People push their way through crowds of others in order to reach the stalls first. The air is full of deafening shouts. Stall owners yell to advertise their goods. Buyers cry out their orders. It's hard to imagine, but behind this noisy confusion is a very logical economic theory: the market economy.

The market economy is sometimes called the free market. A free market is not controlled in any way by a government. It is also free from the influence of custom or tradition. In a free market, the only reason why things are bought and sold is because there is a demand for them. Prices for goods and services are simply what people are prepared to pay. The market economy is not really controlled by anyone. It controls itself.

The street market where we began has many of the characteristics of the free market. Customers arrive at the market with a shopping list of things they need. They also come with an idea of how much they are prepared to pay. Stall owners sell what customers demand, and try to get the highest price they can for it. Supply and demand control what is on the market and how much it sells for. In the wider economy, we are all customers, and the stall owners are like companies.

The role of the company in the free market is to supply what people want. However, companies need an incentive. The incentive is profit. There are two ways for companies to make a profit. The first way is to raise their prices. The second way is to reduce their production costs. And this brings us to two more features of the market economy: competition and technology. Competition exists in a free market because, theoretically, anyone can be a producer. This means that companies have to compete with each other for a share of the market. Competition is good for consumers because it helps to control prices and quality. If customers aren't happy with a product or service, or if they can't afford it, they will go to a competitor. Technology exists in a free market because producers need ways to reduce their costs. They cannot buy cheaper raw materials. Instead, they must make better use of time and labour. Technology is the use of tools and machines to do jobs in a better way. This helps companies produce more goods in less time and with less effort. The result: more profit. People often think that most economies are free markets. However, at the macroeconomic level, a truly free market economy does not exist anywhere in the world. This is because all governments set limits in order to control the economy. Some governments set many limits, other governments set very few, but they all set some. For this reason, a true market economy is only theoretical. Nevertheless, many of the features of the market economy do exist in most societies today.

(from Raitskaya L., Cochrane S.Macmillan Guide to Economics, Издательство: McMillan, 2005)

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