Expenditure on research and development (R&D) in Germany has grown considerably since 2005

• New analysis by ZEW on behalf of KfW Research
• Share of public R&D expenditure is down, but private sector spending has grown to 64%
• Spending is concentrated in a handful of manufacturing industries and large enterprises

Spending on research and development has grown significantly in Germany over more than one and a half decades, according to a study carried out by ZEW Mannheim on behalf of KfW Research. Real expenditure growth averaged 3.4% per annum during the period from 2005 to 2019, up from just 1.4% per annum between 1991 and 2005. The R&D-to-GDP ratio (R&D expenditure as a percentage of economic output) increased from 2.1% in 1994 to 3.17% in 2019.

The study revealed that during the period from 2005, R&D expenditure growth was higher in Germany than in other large, highly developed industrialised countries such as Japan (0.7%), France (1.6%) and the United Kingdom (2.2%). However, it cannot keep up with countries such as China (13.0%), South Korea (8.0%) and Israel (6.0%). In 2019, Germany achieved an R&D-to-GDP ratio of 3.17%, which put it in sixth place among the comparison countries before the outbreak of the coronavirus pandemic, on a par with the US and ahead of European countries of similar size as well as China.

The positive trend is attributable to the broad realignment of research policy in Germany. From 2006, it set clear priorities for increased investment in research and new technologies, adopted a long-term approach and addressed not just the business sector but universities and non-university research facilities. It was also supported by an economic upswing which was characterised by rising demand from emerging economies in particular. In Germany the Federal Government formulated a target value of 3.5% for 2025, while the EU target is 3.0%.

The key findings of the comprehensive analysis of the R&D system in Germany are as follows:

• With regard to financing of R&D, Germany and the comparison countries are experiencing a trend towards a growing private sector share and declining public sector contributions. In 2019, the private sector funded 64% of R&D expenditure in the German economy as a whole (1991: 62%). In the comparison countries the increase was steeper overall (from 59% to 69%). At the same time, the public sector share dropped in Germany from 36% to 28%. In the comparison countries the public sector share also declined from 35% to now 21% – a steeper drop overall.
• Private sector R&D expenditure in Germany is concentrated in a handful of manufacturing industries and large enterprises. The five sectors with the highest R&D expenditure are the automotive industry (37.3% of total private sector R&D expenditure), the electronics/measuring technology/optical industry (18.5%), mechanical engineering (10.3%), the pharmaceutical (6.7%) and the chemical industry (5.9%). These sectors alone combine just under 79% of all private sector R&D expenditure. By contrast, information and communication services – which are important for digitalisation – do not constitute a priority of R&D in Germany. The sectoral concentration of R&D expenditure in Germany has increased since 2009, whereas no such trend is discernible in any of the comparison countries.
• R&D expenditure is more heavily concentrated in large enterprises in Germany than in almost any other country. In 2018, enterprises with 500 and more employees accounted for 88% of R&D expenditure. The only country with a higher share is Japan, where it is 90%.
• Overall, R&D intensity in Germany’s private sector is lower than the economic structure would suggest. That means there is significant potential for higher R&D intensity and, thus, higher R&D expenditure. If every economic sector in Germany with below-average R&D intensity were to raise it to the average level of the comparison countries, R&D expenditure in Germany’s private sector would be nearly 30% higher.

“The Federal Government’s high-tech strategy and its interplay with the corresponding strategies for the private sector have shown that it is possible to achieve a turnaround towards higher R&D activities with a concerted initiative that shifts the political priorities towards research and innovation and adopts a long-term perspective. I believe it is important to continue this strategy by all means – particularly in times when it is becoming more difficult to maintain high levels of investment in R&D”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “Compared with other industrialised countries, R&D intensity is below average in most economic sectors in Germany. Moreover, the relevant expenditure by small and medium-sized enterprises in Germany is significantly lower than in most other industrialised countries. So there is great potential for an increase. In order to mobilise it, it is important to provide R&D incentives for small and medium-sized enterprises in particular and more broadly across the entire private sector in Germany. And the great importance of digitalisation for research and innovation is good reason to more closely integrate R&D and digitalisation projects into support schemes. But strengthening the R&D activities of the German private sector requires an appropriate supply of skilled workers. The skills shortage is currently the greatest obstacle for businesses in Germany who are willing to invest. This applies not just to the general demand for labour but particularly to the implementation of innovation projects. In order to secure the supply of skilled specialists for R&D activities it is necessary to expand academic education and vocational training in relevant occupations, mobilise all people in Germany and put in place a migration policy that makes skilled migration easier”, concluded Köhler-Geib.

The current study can be downloaded from
www.kfw.de/fokus

The dataset:
The new analysis is based on various datasets of the OECD. The comparison countries include large European and North American countries, Asian and Pacific countries and a selection of smaller European states. They are: France, the United Kingdom, USA, Canada, the Netherlands, Japan, South Korea, China, Australia, Israel, Denmark, Finland, Norway, Sweden, Austria, Belgium and Switzerland.