Farewell to Germany as an innovation hub?

The number of new startups has been in sharp decline recently. Is Germany’s status as an innovation hub waning?

The number of startups in Germany has recently declined significantly. What are the reasons for this and what does it mean for Germany as an innovation location?
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German companies: innovative, but not innovative enough by international standards

How is Germany currently faring in terms of innovative capability and speed? Has the coronavirus crisis left Germany struggling to keep up as an innovation hub? Several studies definitely suggest that Germany is being knocked off the top of the leaderboard. For example, the Leibniz Center for European Economic Research (ZEW) found that the German economy’s spending on innovations fell by a much greater rate in the pandemic year of 2020 than in most other European countries. In the key area of research and development, 6.3 percent fewer investments were made compared to the previous year, while spending throughout the rest of Europe, with the exception of Italy, rose during the same period despite the crisis.

Although investments in research and development significantly increased again by almost 6 percent in 2021, it wasn’t enough to get back to the pre-crisis level.

In the Global Innovation Index 2022, published by the World Intellectual Property Organization (WIPO), Germany ranks eighth internationally as an innovation hub – behind the U.S., Sweden, the UK, the Netherlands, Korea, Singapore, and Switzerland, which bagged the top spot for its innovativeness for the 12th year running. The Digitalization Index published by the German Economic Institute (IW), headquartered in Cologne, also shows that Germany is growing relatively slowly: from 107.9 points in 2021 to just 108.9 points in 2022. Particularly in company-internal categories, such as digital work processes, there was only a marginal increase of 0.9 points.

Next-generation report: new startups are losing ground

With innovative power dwindling and investors becoming increasingly hesitant, the number of new German startups is also clearly on a downward trajectory. According to the report “Next Generation – New German Startups in 2022” published in January 2023 by the German Startups Association (Startup-Verband) in collaboration with the “startupdetector” industry information service, 18 percent fewer startups were founded in 2022 compared to the previous year. While a total of 3,196 new companies were started in 2021, only 2,618 came on the scene in 2022. The decline was especially apparent in the otherwise highly innovative areas of Hamburg (−31 percent) as well as Baden-Wuerttemberg and Berlin (both −29 percent). What’s more, the startup capital Berlin was overtaken by Munich for the first time in terms of new startups, although Berlin is still sealing the biggest deals.

The next-generation report reveals that the decrease in new startups in Germany, once an innovation hub, is mainly being felt in the software (−26 percent), fintech (−28 percent), and e-commerce (−39 percent) sectors, while the fields of environmental technology (+14 percent) and blockchain and crypto technology (+65 percent) saw an increase in new startups compared to 2021.

Why are startups receiving less support from investors?

There are a number of reasons why fewer startups are being founded: crises and wars, the generally weakened economy, the shortage of skilled professionals, the persistently high inflation rate, and rising interest rates are all having a negative impact on how willing investors are to part with their money. Investors are exercising caution when it comes to new and risky business models. For example, venture capitalists invested just under 10 billion euros in German startups in 2022 compared to 17.4 billion the year before – a decrease of 43 percent. However, it should be added that 2021 was a record year for investments in startups.

The BMWK is promoting innovation

Although Germany has recently lost some of its sparkle as an innovation hub, new companies with the potential for long-term success still have good chances of securing funding and successfully positioning themselves on the market.

For example, around 15 percent of total funding in 2022 was invested in startups that have sustainability as their focus.

The German government is also offering a vast array of funding options geared toward small and medium-sized enterprises (SMEs) that have developed innovative business ideas and digitalization strategies. The Federal Ministry for Economic Affairs and Climate Action (BMWK) is aiming to promote innovation in Germany in a number of ways. First, the BMWK voucher is targeted at SMEs and helps them develop innovative products and processes by covering 50 percent of the costs of engaging external consulting firms. Second, the WIPANO program (“knowledge and technology transfer via patents and standards”) is intended to bring innovations to market in a quicker and more targeted way. And last but not least, the “go digital” support program helps SMEs digitalize their work processes and build their internal data expertise.

You need promising ideas to overcome a crisis

Although the decline in new startups combined with restrained investment activity in research and development indicates that Germany is losing momentum as an innovation hub, these factors are ultimately just snapshots of the many crises we’re currently facing. At the same time, this challenging backdrop is precisely where we need clever innovations that have long-term prospects for solving complex problems, such as the energy crisis. New companies in particular should tap into the opportunities that this difficult economic climate presents to them.