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«Original citation: Owen, Geoffrey (2012) Industrial policy in Europe since the Second World War: what has been learnt? ECIPE Occasional paper, 1. ...»

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What Germany lacked was the flow of entrepreneurial start-up firms which had been such a source of dynamism in the US. Nixdorf had been an exception, and there were a few others such as SAP, a software firm set up by ex-IBM engineers in 1972. SAP found a profitable

–  –  –

niche in enterprise resource software and eventually became a major international supplier, although its growth was slower than that of Microsoft in the US. The initial public offering of SAP shares on the German stock market came in 1988, much later in its history than Microsoft’s debut on NASDAQ in 1985.130 Starting and building this sort of business was harder in Germany than in the US because of the absence of supporting institutions, including a venture capital industry that was willing to back untried entrepreneurs and a stock market that allowed early-stage investors to exit.

The same obstacles held back the biotechnology industry. This sector had been targeted by the BMFT in the 1970s and Federal support for biotechnology research increased sharply during the 1980s and 1990s, but German performance remained poor, mainly because of the absence of the specialised biotechnology companies which were driving the growth of the industry in the US. Direct intervention by the BMFT could not make up for the absence of the supportive institutions and policies which were vital to the success of the American biotechnology industry.131 A high-technology industry that did make progress, with the aid of generous state subsidies, was aerospace.132 As noted earlier, a group of German aircraft manufacturers had got together to form Deutsche Airbus, which became the German partner in the Airbus consortium.

In 1989 these companies, together with Dornier, were taken over by Daimler-Benz, which at that time was trying to reduce its dependence on cars and trucks by diversifying into hightechnology industries. The acquisition was opposed by the Cartel Office on the grounds that it would lead to too much concentration of power, but for the Federal government – and for the Land governments which were part-owners of several of the companies – it had the attraction of putting the German aircraft industry into the hands of a large, well-financed company which should, over time, no longer need to be subsidised.

The aircraft industry was a special case, not least because it had strong political support both at the Federal and at the Land level. Other high-technology industries were still lagging, and there were some calls in Germany for a Japanese-style industrial policy, based on close cooperation between government and industry.133 By the mid-1990s, however, the Japanese model was out of fashion as the country’s economy entered a prolonged period of stagnation.

Instead, attention turned to the US.

In Germany, as in other European countries, policy makers were impressed by the extraordinary success of American companies in exploiting the opportunities created by the internet. It was clear that, if Germany was to catch up with the US in the industries of the “new economy”, institutional reforms were necessary, especially in the capital markets. US-style entrepreneurial start-ups were unlikely to flourish unless they had access to funds from venture capitalists, and the venture capitalists in turn needed to be able to exit their investments through a stock market flotation. Given the absence in Germany of a shareholding culture, German citizens had to be persuaded that buying shares on the stock market was a worthwhile investment.

The government took two steps in the second half of the 1990s to promote greater interest in equity. One was the privatisation of Deutsche Telekom in 1996. The other was the establishment in 1997 of the Neuer Markt, a new trading arm within the Frankfurt Stock exchange which was specifically designed to attract young firms that needed equity finance.

The first of these was in part a response to the European Commission moves to liberalise the European telecommunications market. Privatisation was “an important step in converting

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a government-run telephone monopoly into a nimble competitor in the emerging European and world telecommunications market”. 134 As a shareholder-owned company Deutsche Telekom would have greater freedom to acquire, or make alliances with, overseas telecommunications companies. But privatisation of a large, high-profile company was also a means of encouraging wider share ownership. The flotation of Deutsche Telekom was the largest-ever initial public offering of a European company. Nearly 2m Germans subscribed to the offer, including 400,000 who had never previously owned shares.

The Neuer Markt was intended to match some of the features of Nasdaq in the US, with more liberal listing rules so as to allow young companies, even if loss-making, to obtain a public quotation. The market got off to a slow start – only twelve IPOs took place in 1997 – but the momentum increased as a few high-flyers, such as Mobilcom, a mobile telecommunications company, attracted investor interest. In 1999, when the boom was at its height, more than 130 new companies were floated.135 Other initiatives were taken during this period to improve the environment for high-technology start-ups. In 1995 the Ministry of Research launched the BioRegio competition, the purpose of which was “to encourage local biotech communities to interact more closely, to create an entrepreneurial spirit among scientists and to help them in the setting up of their own businesses”.136 The aim was to enable Germany’s lagging biotechnology industry to overtake its British counterpart and to become the leader in Europe.





One commentator, writing in early 2000, hailed these moves as an example of a new type of technology policy. “The unexpected has happened. The federal government has assumed a leadership role, and is responsible for the turnaround in biotech and venture capital”.137 There was certainly a remarkable surge in the creation of new biotechnology companies, but the collapse of the stock market boom exposed the frailty of some of these firms, which had vastly inflated their profit expectations. Although all stock exchanges were hit by the share price collapse, the Neuer Markt suffered most; it was closed at the end of 2002.

A sober review of the German biotechnology industry, written in 2003, noted that the “maturation process of the German biotechnology industry has been abruptly stopped”; most German companies lacked the critical mass for sustainability.138 Although some biotechnology firms survived the crash and established themselves as viable concerns, the growth of the industry during the 2000s has been disappointingly slow, as it has been in other European countries.139 For some German observers the collapse of the Neuer Markt came about because the German business system did not lend itself to the kind of high-risk, high-reward form of capitalism that flourished in the US. The late 1990s, according to this view, were something of an aberration. “Prior to 1997, Germany was located in a conventional company equilibrium in which both investors and employees had a low-risk profile. In the late 1990s there was a significant increase in the amount of risk capital. The surge in high-tech IPOs on the Neuer Markt was attributable to this brief surge in the availability of risk capital. Since 2001, however, the supply of risk capital has reverted to levels corresponding more to the norms of the 1980s and first part of the 1990s”.140 Even if this judgement is correct, the rationale that lay behind the flotation of Deutsche Telekom and the creation of the Neuer Markt remained valid. The German business system needed to move at least some of the way towards the American model and to provide a more conducive environment for start-up firms. It was no longer enough to rely on giants such as

–  –  –

Siemens, Bayer and Daimler-Benz; some way had to be found of injecting greater entrepreneurial vitality into German industry.

Meanwhile some of those giants were becoming increasingly reluctant to devote large sums of their own money to high-technology businesses which showed no prospect of earning an adequate return. This was in part the consequence of a change in German share ownership.

During the 1990s, as in the French case discussed earlier, foreign investors, mostly American and British financial institutions, became significant shareholders in large German companies. This coincided with a loosening of ties between companies and their banks, and a partial unwinding of the cross-shareholdings which had effectively insulated companies from shareholder pressure.141 Managers found themselves dealing with investors who were primarily interested in shareholder value – a concept that had previously been almost unknown in German industry. Anglo-American shareholders were particularly critical of diversified groups which were subsidising bad businesses out of profits made in good ones.

Siemens was one such group, and it was attacked by investment analysts for sticking too long with loss-making businesses. The company had invested in semiconductors in the belief that as a large producer of computers and other electronics-based equipment it would be at a competitive disadvantage if it did not have an in-house source of semiconductors. But the semiconductor business was not profitable. As an analyst in a British investment bank noted in 1991, “by taking on the Japanese head-on in memories the semiconductor division has become and remains a painful example of how the Siemens style of running a business can leave the group with a burden no competitor would countenance”. 142 This analyst was also doubtful about Siemens Nixdorf, the computer business, which had a strong position in Germany but little presence elsewhere. Although Siemens continued to invest in both these sectors during the 1990s, at the end of the decade it decided to pull back. The semiconductor division was divested as a separately quoted company (Infineon) and Siemens Nixdorf was put into a joint venture with Fujitsu. 143 The restructuring of Siemens was one of several cases where German companies divested poorly performing subsidiaries, and part of the motivation was to make themselves more attractive to non-German investors.144 A partial Americanisation of German business was under way.145 But the other much-admired feature of the US business system – fast-growing entrepreneurial firms in high-technology industries – was still lacking.

In a report on the German economy published in 2004 the OECD noted that the number of new entrants in high technology was relatively low in Germany. “The closure of the Neuer Markt stock exchange segment for young technology firms in 2003 was a blow to the venture capital industry as the Neuer Markt provided about 75 per cent of the initial public offerings for VC-backed firms between 1998 and 2000”. Similar points were made in a later European Commission study, which argued that Germany’s innovative capacity needed to be reinforced. The main weakness, according to this study, was that innovation appeared to be concentrated in a relatively small number of large companies and geared towards rationalisation and cost reduction rather than developing and introducing new products. “Small- and medium-sized companies clearly lag behind the industrial leaders and their position has apparently weakened over time. It is they who are most constrained in their access to venture capital, especially since the Neuer Markt had been closed”.146 In response to these concerns the Ministry of Education and Research introduced in 2006 a new “high-tech strategy”. Described as “the first national strategy to show how Germany can become and remain a global leader in the most important cutting-edge technologies”, it was 36 No. 1/2012

ECIPE OCCASIONAL PAPER

accompanied by an increase in government support for R & D. The government also set up an expert commission on science and innovation to assess Germany’s progress and to make recommendations for policy changes. In its first report, published in 2008, the commission drew attention to the country’s continuing lag in new technologies.147 “The driving force for radically new forms of value creation is provided by new enterprises. However in Germany there are no signs of a drive to start up new companies in cutting-edge technologies and knowledge-intensive services”.

3.4. INDUSTRIAL POLICY AT THE EUROPEAN LEVEL

The 1980s saw two initiatives at the European level aimed at improving European industrial performance. One was what became known as the European Strategic Programme for Research in Information Technologies (ESPRIT). The other was the Single Market Programme, an attempt to create an integrated European market by removing the remaining obstacles to the cross-border movement of goods, capital and people.

The starting-point for ESPRIT was the dialogue that began in 1980 between Étienne Davignon, Commissioner for Industry, and the heads of Europe’s leading computer and telecommunications equipment manufacturers.148 Agreement was soon reached on a pilot phase, consisting of a range of projects that would be funded jointly by industry and the Commission; the first call for responses in 1983 prompted applications from two hundred companies, including many small- and medium-sized firms. Work then began on a five-year ESPRIT programme, to run from 1984 to 1988. The focus was on pre-competitive research, ensuring that the participants would not contravene the Community’s rules on competition.



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