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Why Germany Lacks Innovation and Start-Up Culture

Germans and Americans have different attitudes on failure. Americans risk failure, while Germans are too afaid. That's the main reason for the lack of innovation in Germany according to David Vickrey's op-ed in the Atlantic Community's Policy Workshop:

The barriers to creating a start-up culture in Germany are both institutional and cultural. Germany lacks the critical mass of independent venture capital groups required to support a significant number of start-ups, and the German research universities lag behind US powerhouses Stanford and MIT. But perhaps the biggest impediment is fear: fear to risk failure. For every WebEx there are ten start-ups that never make it. In the US failure can be a badge of honor and entrepreneurs will try again, while in Germany failure is often stigmatized. By avoiding the risk of failure in innovation, Germany risks long-term economic failure, as innovation is increasingly the key driver of sustainable growth.

Related post in the Atlantic Review: Brain Drain: German YouTube Founder Enjoys the American Dream

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Pat Patterson on :

According to Freedom House Germany ranks near the middle of the European Union for economic freedom. Mainly via its government and labor rules that seem to strangle many companies of capital to either invest in new products as well as creating a work force, well trained, but not as agile as other countries. But Germany is one of the easiest countries in Europe to start a business, average of 24 days to get permits vs. 48 days average for the other countries. German entrepeneurs have access to financial markets that are transparent and competitive. Germany's best universities are competitive with the US but there are no where near enough of them. For example, Germany has had four Nobel Prize winners since 2000, one in economics and 3 in physics. But if the German winners that were living and working in the US counted in the total the number would jump to nine. There are more German Nobe Prize winners living and working in the US then in Germany. These ideas that are created will eventually benefit Germany but only via either paying for the patent rights or contracting with a US university or business. Another disturbing trend is in the amount spent on R&D. The US spent $330 billion dollars in 2006 while Germany with admittedly 2/5 the population spent an estimated $55 billion. That means on a per capita basis the US spent almost 50% more. Germany sends more in transfer payments to the East, $80 billion, then it spends on R&D. I don't really believe that there is an aversion to failure in Germany any greater than there is in the US. But without the spending to create new ideas its irrelevant whether any of these ideas will prove successful. If Germany fears the stigma of failure then why didn't Porsche, when its sales began to collapse in the late '80's and early '90's to barely 13,000 simply continue with the air-cooled 911 rather than risk all with the 924, the 944 or the subsequent water-cooled 911s? Instead its world wide sales in 2006 were over 85,000 cars plus owning 40% of VW. Porsche was definitely not risk averse during this period and it too was saddled with the same problems as all the other companies in Germany.

Don S on :

I think Pat is missing the point here. It's not that German companies are 'risk-averse' but that it does seem virtually verboten for individuals to hazard something and risk failure to create something new. Not quite unique - there are a few examples of Germans startups which have made it - Software AG for one. But even there it seems fairly common for german companies to rebase themselves to Silicon Valley (the engineers stay in Germany but headquarters moves) - in order to be closer to customers, capital, and news networks. This wasn't always so - post WWII there seem to have been tons of startups in Germany - to the point where Germany was probably more entrepenerial that the US in the 50's and 60's. Volkswagen being a prime example. It was founded by Porsche in the 30's but in 1948 there was virtually nothing in Wolfsburg. But it grew.....

Pat Patterson on :

On rereading both the post and my comment I am more inclined to agree with Don S. regarding startups. But since it is relatively easy to start a company in Germany and there appears to be ample capital as well as many highly competitive existing companies the physical barriers to entrepeneurs appears slight. But Don S. does point out the conumdrum in that why are German companies able to reelocate and become as agile as any other startup in California but are unable to do so if anchored in Germany?

Don S on :

I wonder whether the 24 days to form a company isn't just the tip of the iceberg, Pat? In the US or UK I can form a company in a couple days (go to a website, fill out a form, and wait for the paperwork in the mail. But the company is a legal entity virtually from the moment the payment goes through. Not that the difference between 1 hour and 24 days is critical - but it may be a symptom of a more general malady. Getting premises, hiring workers, doing all the health and safety regulation and payroll stuff. I wonder whether the paperwork & regulation isn't drowning new companies. I also wonder whether the age and training of German students isn't contributing as well? A lot of companies are started by people in their 20's. The average German graduates from university at what - age 30? Age 30 and no experience while his counterpart in San Jose may have 6 years of experience in two startups by then! What is German bankruptcy law like? Do ddebts stay with you forever? Perhaps employers do a credit check on applicants. In the US an employer may well see participation or heading a failed startup as a great asset - do German employers disrate such 'failures'?

Don S on :

Another question: do Germans wishing to form startups go elsewhere? Like Nederlands or to the "Wild East" (Poland, Czech Republic, etc)?

David on :

Venture capital for early-stage start-ups is hard to come by in Germany, which is why some of the large Sand Hill VC's are setting up branches in Europe. Also, in the US most zero-stage ventures get launched through "Angels" - wealthy individuals. That is an alien concept in Germany.

Don S on :

Something which occured to me just now is that there might be something of a climate of disregard within some big German firms toward small firms and startups. I am generalizing from scant data - but worked for a while at Alcatel as a software engineer for a much smaller Canadian form which had won a contract from a Czech telecoms company to provision new accounts on Alcatel switches. Working with big companies can be an exercise in frustration - but Alcatel was in a league (and a world) of it's own. They had harbored ideas of creating their own purpose-built provisioning system (and charge it to the Czech customer) but that did not work - so they took it out on me and my colleagues because our company had underbid them by more than 90%. Foot-dragging, lack of cooperation, not notifying us of meetings - quite creative. If you do that to a startup dependent on the business what happens is quite simple - it goes bankrupt. Even delaying paying invoices can put a startup into bankruptcy! In the US big companies have leaned to work with and depend upon startups to do things which require nimbleness. I'm not sure they have done so in Germany.

Pat Patterson on :

David-I didn't know about the paucity of angels but the lack of native venture capital companies seems very dangerous. Don S-I mentioned Freedom House earlier, I'll provide the link below, but in practically every category Germany is the equal of the US and the UK but in government regulation, which must be primarily on the existence of the company and not its formation, and labor regualtion. Plus it's also my understanding that the German public has nowhere near the investments in the publicly traded stock market as the US and to a lesser extent the UK. It appears that we all are uncomfortable with the idea that the idea that this fear of failure is somehow part of the German psyche. My own thinking tends to see this failure as institutional in the difficulty of accumulating capital to invest and the difficulty in creating and maintaing a work force that, even if unrealistic, will work hard and if necessary retrain in the hopes of sharing in the companys hoped for success after startup.

Pat Patterson on :

The earlier ranking I referred to were not from Freedom House but from the Heritage Foundation. [url]http://www.heritage.org/research/features/index/[/url] Joerg-Maybe it's at my end but I lost three Preview when I went to edit and check the link.

Joerg - Atlantic Review on :

Sorry about that, Pat. Does anybody else have run into this problem with previews? I have upgraded this blog's software over the weekend. So it could be a technical problem. But I did not have any problems so far with Firefox and IE.

Joerg - Atlantic Review on :

Pat, [b]why are you (and the others?) uncomfortable with the idea that "the idea that this fear of failure is somehow part of the German psyche"??[/b] It makes sense to me. I am more "uncomfortable" with your last paragraph concerning lack of a willingness to work hard. Re the psyche thing: I think Germans are much more risk-averse than Americans. And there are many examples for it. Germans own much less stocks than Americans. A higher percentage of Germans than Americans lives in apartment and pay rent rather than their buy a house and get into depths. Germans want more of welfare state (government safety net) than Americans. Germans are more cautious and reluctant to send troops abroad. Aren't all these things related to the fear of failure? In the US, however, people who cannot afford it buy lots of stuff on credit, because they are sooo optimistic that they will soon earn lots of money. And the US banks are willing to give them a lot of money. No fear of failure. And we see the result in the US housing market. So, as usual, yawn, the "ideal psyche" might be somewhere in the middle between the German and the American "psyche"? Probably a bit closer to the American psyche. What do you think?

Don S on :

It's not only Germany which has problems creating the 'start-up' mentality. I've seen it here in the UK. To create the true mentality one's 'critical workers' have to have a real substantial stake in the company. The potential gains must be enough to allow the worker a substantial chance of becoming rich or at least prosperous as a result of the company's success. I worked at a management consultantcy where they implemented an 'ownership' scheme. Unfortunately the plan was so paltry that the potential reward for valueable professionals amounted to no more than 15% of yearly salary. That is enough to purchase a nice holiday but not enough for a house. My rule of thumb is that a 'big win' must be possible for the professional staff of such a company. I define a 'big win' as roughly the price of a small house in a middling neighborhood in the area where the company is located. I'm not sure most European managers grasp that point yet. They understand the concept of 'big win' very well - where it concerns themselves. But they do not seem to realize that their workers are not fools - they will not work their hearts out to make the management rich when they are to be fobbed off with the price of a used car or a fancy holiday as a reward - it's not enough. I am working for a startup in the UK which is run by a Silicon Valley type - and the share options ARE enough - or almost enough. I could always do with more..... ;) I have worked out what proportion of the shares I own are of the entire company - and what a potential sale or float price might be for the company, and the proceeds could be enough to purchase a small house in my area. The company has about a 30-40% chance of this kind of success I think, but even a lesser success might bring enough for a nice car or down payment on a house. Maybe a 5% chance of a major success (2 houses or more), and 10-20% chance of utter failure. That is enough to cause me to bust my butt. Indeed, I have been.....

Pat Patterson on :

This whole panic is very weird as, like in Gertrude Stein's quote concerning Oakland, "There is no there, there." The mortgage market in the US is not collapsing, 97.6% are on time and not in danger. 1.0% are in foreclosure, where the bank takes back the property and the other 2.4% have missed one payment. Which sounds bad but that one payment could have been at any time in the last two years. And as I have noted on another thread the national debt of Germany, as a percentage of GDP, is climbing and larger while the US is shrinking. So the popular image of debt ridden Americans is more applicable to those doughty and flinthearted burghers of stereotype. This being uncomfortable with the idea of certain archetypal behaviour by nationality makes many Americans uncomfortable because many of us fled countries to get away from that kind of expectations. As if my ancestors were only good for digging coal or joining the British Army and not in becoming doctors and teachers even though a lot of us did spend time in the service and we all seem to like digging in the garden. Plus as an American it is hard to come to grips with the idea that someone would want to be as poor as his neighbor in the guise of class solidarity. I didn't mean that Germans don't work hard but would a German accept lower pay now and stock options on the possibility of rewards in the future or would they rather have a guaranteed and set salary that wouldn't change even if that company made some future fortune?

Joerg - Atlantic Review on :

I don't know how big this housing market trouble will turn out to be, but the European Central Bank has been pumping quite a lot of money into the market. So they are concerned. Besides, do you agree that many US banks have not been prudent enough with giving out loans? Re the US-German debt comparison. This was indeed an interesting debate back in February. You lost me when you wrote: "In the US owning a house is considered a debt and the equity is not counted as an asset until the property is sold. Then unfortunately it is considered as income yet taxed as a capital gain. If you can figure that one out then more power to you." [url]http://atlanticreview.org/archives/588-Productivity-Growth-and-Foreign-Trade-balances-in-the-EU-and-the-U.S..html#c6678[/url] What I got out of this debate is that debt is another statistic that is measured differently in the US and Germany. Thus it is too complicated for me to understand, which country is in more trouble.

Joerg - Atlantic Review on :

@ Pat "I didn't mean that Germans don't work hard but would a German accept lower pay now and stock options on the possibility of rewards in the future or would they rather have a guaranteed and set salary that wouldn't change even if that company made some future fortune?" Thanks, no I get your point. I guess you are right or were right, because the times they're changin. One in six employees in West Germany already participates in the profit of his company or owns part of the company's capital. And the current German government wants to increase the employees stake in their company with some form of "employee fonds": [url]http://www.welt.de/politik/article979436/Jeder_sechste_Arbeitnehmer_an_Firma_beteiligt.html[/url] Above quote is source from the newspaper Die Welt is in Germany, but [url=http://translate.google.com/translate?u=http%3A%2F%2Fwww.welt.de%2Fpolitik%2Farticle979436%2FJeder_sechste_Arbeitnehmer_an_Firma_beteiligt.html&langpair=de%7Cen&hl=en&ie=UTF8]click here for an automatic English translation[/url]. Probably bad quality.

Don S on :

"One in six employees in West Germany already participates in the profit of his company or owns part of the company's capital." I think the degree of participation is as important as the gross numbers. Percentages can be misleading - the management consultantcy I mentioned earlier would surely have counted as 'employee ownership' but the share options offered were too small to matter much. I think the average professional employee got about £2000 worth - 3 to 5% of their annual salary. Even had the company prospered the shares would not have gone to much more than £5000 - enough for a raggedy used car. The partners made out like bandits - and the line employees knew it. A true startup offers much more in the way of share options, and usually the annual salary is lower. That is the case where I am - I am probably £3-4,000 below market on salary. But the share options are a large enough stake in the company to allow me to own an aparment or house outright in this area - if the company succeeds. We should know for certain in another year or so, I think.

Pat Patterson on :

O/T and FYI-Debt on a house is the difference between what has been paid and what is still owed yet equity is created if the value of the house exceeds the amount still owed. But for tax purposes that equity does not count as either taxable income or as an asset. Mortgages are still deductible from the yearly income tax. Without this positive amount being counted as an asset the debt load of an American seems awfully high. While the more frugal German, with more money in actual assets, savings or stocks, is relatively debt free. Here's where my comment became confusing in that at the sale of the house the equity is now considered income but not taxed as income for that tax year. A few years ago my mom sold her house for over a milliion dollars and became a millionaire for that year for statistical purposes by the IRS in determining how much tax revenue to expect. But she only paid the 15% capital gains tax for that year not the income tax which would have been, I think, 36%. The biggest chunk of an American's savings, his house, is not counted as an asset except for statistical purposes at sale but only taxed as capital gain. And after all this neither country is in financial trouble but both will make the necessary changes to become even more secure.

Don S on :

Seems to me that three posts by guestblogger Ed Philip last year on the German Joys blog might offer some insight to lack of German dynamism and risk-taking. Philip describes his assembly of the perfect employment CV - 40 pages worth of documentation about every facet of his work life since childhood! http://andrewhammel.typepad.com/german_joys/2006/10/getting_hired_i.html http://andrewhammel.typepad.com/german_joys/2006/10/getting_hired_i_1.html http://andrewhammel.typepad.com/german_joys/2006/10/getting_hired_i_2.html The risks of a spotty work history seem much, much higher in Germany than in the US or the UK. That may contribute to German reluctance to take risks. In the US taking a flyer on starting a company or joining a startup are relatively low. In my field it is rare for an employer to take much (if any interest) in anything occurring more than 5 years ago; I am tempted to write 2 or 3 years ago. Well.... let me qualify that. My general level of experience and the fact that I've done lots and lots of weird & diverse things in the software engineering field ARE critically important - and a large asset. Certain employers look at my CV and see someone who has solved the weird, the bad, and the crazy. But they are unconcerned with a 3 month gap in my employment in 1985 - or even a 9 month gap in 2005! According to Philip that is not the case in Germany. I might venture to say that employers in the US are looking for talent but in Germany they are looking for perfection. In many ways talent and perfection are opposites in the work world. In startups it is talent which counts - not perfection......

Reid of America on :

The lack of German entrepeneurship is a recent phenonema so I would blame the welfare state. The safety net is a disincentive to perform. What to do about entrepeneurship in Germany? Eliminate capital gains taxes for stock in startup companies. Reduce regulations. Create a seperate class of work rules for startup companies. Unions should have zero input and power at startup companies. The media should promote entrepeneurship. Successful entrepeneurs should be celebrated instead of the standard leftist villification of "exploiters".

Don S on :

"The lack of German entrepeneurship is a recent phenonema so I would blame the welfare state. The safety net is a disincentive to perform." I'm not so certain that is completely correct, Reid. The heyday of Silicon Valley was in an era when the safety net in the US was more comprehensive than it is now. And how many welfare recipients are potential entrepeneurs? Not many. How many entrepeneurs are likely to go on the dole? Not many? It's simply not an attractive choice - no matter how generous the dole is. In the longer term - perhaps. Two keys to the choices a person makes in life are role models and early jobs. A kid with almost no workers in their circle starts out well behind everyone else. But that is not necessarily the fault of the welfare state as much as how the welfare state is designed. A welfare state which supports work may work better than one which supports (or even enforces) idleness.

David on :

Actually, "socialist" Sweden is an example of a country that has transformed itself into a highly innovative knowledge-based economy. I spend a lot of time in hated "socialist" Canada - home of the BlackBerry - which has a very vibrant start-up culture. One strange consequence of the Silicon Valley start-up culture is the number of millionaires who consider themselves underprivileged. The [url=http://www.nytimes.com/2007/08/05/technology/05rich.html?ex=1187236800&en=63fd67a8ed9eb578&ei=5070]New York Times[/url] had a feature article about this phenomenon. Only in America.

Don S on :

"Actually, "socialist" Sweden is an example of a country that has transformed itself into a highly innovative knowledge-based economy." How deep does the innovation go? Well- how deep does it goo in the US. So Ok I'll buy at least part of your argument. As I argued above with Reid I'm not sure I see an compelling argument for the idea that innovstion and the welfare state are opposed. I do see a link between work and innovation - but work conditions and national customs have if anything a stronger corelation. Most reports that I have of the traditional Swedish welfare state is that it is designed to support work and keeping or returning people to work - rather than just issuing checks and lrtting them rot. Such a system can actually reduce the consequences of taking a few risks - and thus raise people's willingness to take them. In Germany the current system may be designed to punish failure or (really) any kind of flakiness at all, including the weird notion that one could be the next Steve Jobs. My advice to the Germns is to unbutton the (white) collar a bit and hang loose. When evaluating a candidate look at what they can do rather than what they can't. Value degrees from 'The University of Hard Knocks' more highly relative to more formal qualifications. And value entrepeneurs more.

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