What Asia can learn from German innovation

Author: Shinwen Yap

By any metric, Germany surpasses most countries, China and the USA included, in making use of innovation.  Across industry verticals and diverse functional areas such as sustainable energy systems, biotechnology, lasers, additive manufacturing and experimental software engineering, Germany leads the world.

Nobody denies the ability of the US to innovate and finance radical ideas, nurturing startup ventures into business giants like Google, Yahoo, Facebook and Twitter. All of these are products of the infrastructure of Silicon Valley and American entrepreneurship. But these innovations are narrow in their scope.

There are three stages for the innovation cycle: invention, commercialisation and diffusion. The US dominates in the first two stages and leads Germany in patent grants and citations. However, Germany is more focused on the diffusion stage.

Germany adapts new inventions to industry, allowing them to spread throughout the business sector and benefit it. German innovation, in many ways comparable to Japanese innovation, involves infusing old products and processes with fresh ideas and capabilities, recombining them into something new.

In short, refining concepts through the input of new knowledge capital enhances the value of various products and processes, something that Germany has shown the world. This style of innovation explains German manufacturing prowess.

For instance, many Chinese products are produced by German-made machinery, with the companies that make them thriving on the demand for their equipment. In fact, China is the largest non-European investor in Germany after the USA.

Main Differences

Germany’s industrial base hasn’t declined, unlike the US which has suffered the loss of numerous manufacturing jobs to emerging economies, primarily China. In fact, Germany’s strong core of Mittlestand and willingness to invest capital in domestic industry allows it to compete globally. It also serves to maintains the brand strength of German products.

While US manufacturing has declined, this is partly due to new technological and business process inventions (e.g. automation, robots, outsourcing, etc.), which has displaced costly US labour and resulted in the shift of manufacturing to bases overseas.

Germany’s low unemployment rate relates to its industrial policies, with extensive subsidies and the promotion of mid-sized businesses, education policies (e.g. streaming 12 year old children into academic and vocational tracks) and pro-worker labour policies, with prevalent part-time or family business work opportunities and barriers to firing workers.

Germany has sustained employment growth and productivity, while expanding the real incomes of its citizens. Despite higher wages and benefits than the U.S, nearly a fifth of the German workforce is employed in manufacturing, which contributes 21% of GDP in Germany as of 2010.

By comparison, the US has a decreasing amount of workers employed in middle-class manufacturing vocations. According to 2010 figures, under 11% of the workforce was employed in manufacturing, with the sector contributing 13% of GDP. Inequality is rising, and with it the socioeconomic difficulties.

Innovation must also result broad beneficial outcomes, with productivity gains that are widespread and distributed across various sectors, rather than focused on specific sectors.

A Deeper Look

Besides developing new industries, Germany also infuses existing industries with fresh ideas and technologies. For instance, the design and manufacture of a new BMW is based on ICT (information and communication technologies) innovations. Many talented German software programmers choose to work for Mercedes-Benz.

The US lets old industries die, rather than renew them by investing capital in new technologies and innovation. The decline of Detroit and its distinct motor industry is a significant example of this difference in ethos.

Germany invests in maintaining a network of public institutions that aid companies in recombining and improving ideas. Innovation doesn’t end with invention. The  Fraunhofer Institutes, partially government-supported, aim to commercialise unconventional ideas and aid SMEs (Small & Medium Enterprises) in applying this research across the entire industrial sectors.

The US lacks comparable infrastructure or institutes.  No organisations aiding local SMEs exist to applying the latest innovations from the lab to the marketplace on the same broad scale as in Germany.

The German workforce also undergoes constant training, enabling the deployment of innovative products and services in creative ways. For high-quality household goods, German brands like Miele, Bosch, BMW, and Audi are an obvious choice.

Germany actively coordinates policies in technology, education and industry to create a virtuous cycle designed to empower workers and improve their productivity. The US, by contrast, focuses more on technologies that reduce the need for human resources and manpower, while increasing the need for more technical expertise.

German innovations create and sustains employment across the broad spectrum of educational attainment found in the workforce. American innovation however tends to be narrower in scope, requiring extensive education and knowledge and benefiting specific segments of the educational attainment more than others.

Germany has policies and procedures in place for applying scientific innovations to the marketplace, via public-private institutions like the Fraunhofer Institutes. Workers across the education spectrum are trained in using and deploying various technologies, in order to boost productivity and distribute productivity gains throughout the various sectors of the economy.

Germany provides a good case study of what Asian countries can refine and adapt, especially as industries move up and value chain and become increasingly capital-intensive and knowledge-based in nature.

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