Anyone wondering why we don’t have enough IT start-ups in Germany should read Naren Shaam’s story. It was published in the Berlin daily Der Tagesspiegel not long ago. Of Indian origin, Naren Shaam is a graduate of the American elite Harvard University. After graduating, he was ready to set up his own business – and wanted to know where would be the best place in Europe to do that. From a language perspective, London would have been the easiest option – access to investors is also less complicated there than elsewhere. But instead, he opted for Berlin: the city draws in talent, and the cost of living is relatively low. Despite some initial difficulties – such as applying for a work visa when he had no employer – Naren was able to go ahead with his start-up. This was mainly possible due to the support he received from friends and, later, from a German venture capital fund. An encouraging story. However, it also highlights the challenges Germany faces as a place to set up and do business.
Digital economy and society
What is at stake here is nothing less than the digital economy and society. The digital age is characterized by three key trends: firstly, mobile Internet – in other words, the continuous availability of information and services; secondly, social media – the growing significance of social motives and needs; and thirdly, the “Internet of things” – in other words, Internet-based autonomous device-to-device or machine-to-machine communication – with the latter trading under the name “Industry 4.0” in the manufacturing sector.
The world market leaders in the information and communications (ICT) industry, however, are not based in Europe. Most of the world’s largest providers of online services, hardware, software, smartphones and top Internet sites are located in the United States, although there are a few Korean, Japanese and Chinese companies among them as well. But German firms are a rarity. SAP is the notable exception.
So how can we move Germany’s strong industrial base into the digital age? Should all our efforts be directed at creating a second or third SAP? Do we need a German Google? Indeed, should we be attempting to create our own Silicon Valley? My answer to these questions is no. Rather, we should focus on and expand our specific strengths and identify and address our weaknesses.
Strengths and weaknesses
Germany’s strengths undoubtedly include its strong industrial base, with Industry 4.0 being a key topic for our economic future. Our linkage between major corporations and small and medium-size enterprises (SMEs) in value chains is unique in the world. German SMEs, which include many world market leaders that are largely unknown to the public (the “hidden champions”), are the backbone of the German economy. Small and medium-sized enterprises are particularly dominant in the ICT industry, accounting for around 90 percent of Germany’s IT companies. They are a key driver of innovation and an important interface for channelling scientific research into the economy.
In my view, there are weaknesses in two main areas: the establishment of innovative companies as the next generation of SMEs, and the support provided for German business as it moves towards Industry 4.0.
The number of business start-ups has fallen by almost 100,000 in the last four years. Of course, this trend is partly due to the improvement in the labor market situation: many people in Germany prefer to be wage-earners than risk the uncertainty of self-employment. But this also underlines that we need a new entrepreneurial spirit in Germany. That means having the courage to venture into business, backed by a “second chance” culture like in the United States. In the US, there is no stigma attached to business failure. On the contrary, it is seen as a chance to become better equipped for the next attempt. Naren Shaam’s story also shows that in Germany, we need a more welcoming culture for budding entrepreneurs from other countries. What’s more, today business start-ups with a high capital requirement face particular problems accessing funding – and yet often these businesses are the most powerful drivers of innovation.
Concerted action
With the German government’s initiatives such as the EXIST program, which supports the innovative business start-up projects at universities and research institutions, and the successful public-private High-Tech Start-Up Fund, which invests in new companies in the technology sector, we are on the right track. Nonetheless, in other countries, such as the US and Israel, far more venture capital is available for start-ups.
We will also need strategic support for innovation, which must focus on the opportunities afforded by Industry 4.0. Building on our strengths rather than imitating others is the challenge here. The country that equips the workbenches of the world is ideally placed to set global standards in the field of smart devices, innovative production and control technologies.
Ultimately, the task is to achieve convergence between the established “Germany, Inc.” and the new Internet-based start-ups. Policy-makers have a role to play here. We cannot and should not create a new Silicon Valley – what we need is concerted action by industry, academics, politicians, and society to create a successful digital future.