Ifo: German industry lags behind in high-tech research

Munich-based Ifo shared with the public its analysis titled "Germany's Medium Technology Trap", which examines the impact of countries' R&D expenditures on economic growth.

According to the analysis, German industry lags behind developed countries in high-tech research.

Only 20 percent of the country's industrial R&D expenditures go to high-technology sectors such as pharmaceuticals, semiconductors and aerospace. While the USA leads the global race with a high technology share of 68 percent, Germany's neighbor France is in the middle ranks with 46 percent.

Data reveal that the gap between Germany and leading countries has been widening for years.

Germany's share in high technology expenditures decreased from 32 percent in 1995 to 20 percent by 2023. In the same period, the share of the USA increased from 57 percent to 68 percent.

Currently, 3/4 of German R&D expenditures are transferred to areas called "medium-scale technologies" such as automotive, mechanical engineering and chemical industry. Although Germany is among the leaders in these traditional sectors on a global scale, it has difficulty in the transformation to high technology.

Investment in high technology directly increases economic prosperity

Within the scope of the analysis, economists examined the data of 18 countries for the period 2000-2024 and empirically revealed the relationship between the structure of R&D expenditures and economic growth.

Accordingly, when a country's high-technology share is 10 percentage points higher in any year, real economic growth per capita is approximately 0.5 percentage points higher per year on average over the following 5 years.

If the share of high technology in Germany's R&D expenditures were at the international average level of 38 percent, this would bring about an annual growth of approximately 0.9 percentage points more in Gross Domestic Product (GDP) per capita in the medium term.

Experts urge policymakers to take action

President of Ifo Center for Innovation Economy and Digital Transformation, Prof. Dr. In his evaluation on the subject, Oliver Falck said, "Germany concentrates its research in traditional industrial sectors. On the other hand, even when the level differences in general research expenditures are taken into account, countries with a higher share of high-tech research generally grow much stronger."

Emphasizing that quantitative targets that only increase the total research budget are insufficient, Ifo researcher Yuchen Guo said, "What is critical here is not only the amount of expenditure, but whether this resource is allocated to technologies that lead to higher growth. Political decision-makers should create framework conditions that will make risky and groundbreaking innovation projects more attractive for companies."

In Ifo's analysis, it is stated that within this framework, an innovation-friendly tax system should be established and access to risk capital should be facilitated.