Competition is a driver for innovation in Germany

The German government is trying to mitigate the consequences of the corona pandemic with aid programmes and economic stimulus packages worth billions. But despite these measures, there is a considerable threat of upheaval. Many sectors such as tourism, the hotel and restaurant industry are massively affected by the lockdown. Industries that are strongly integrated into international supply chains, such as the metal and electrical industry and vehicle construction, are also struggling with losses. Especially in the crisis-ridden industries, there is a threat of a decline in competition. Some companies will disappear from the market, ailing companies are good takeover candidates.

These concentration tendencies can have serious consequences for Germany as a location for innovation, according to our new study. The Leibniz Centre for European Economic Research has examined the importance of competition for productivity and innovation activities in Germany. And this shows that the weaker the competitive pressure, the less companies invest in their innovation activities. For the economy as a whole, an increase in market power of one percent leads to a 1.7 percent decline in innovation expenditure. The effect is strongest in industry. Here, innovation expenditure even falls by 3.7 percent. Especially in this key sector, competition is thus an important driver of innovation and thus of overall economic productivity.

It is therefore necessary to protect competition in the markets. In the past, this has been done quite well in Germany. After a slight slump in the financial crisis, the market power of German companies has increased only moderately. The average price premiums are between 30-45 percent, which is in line with the European average. Likewise, no significant concentration tendencies have been observed so far.

However, experience from the financial crisis also shows that small companies in particular were significantly less crisis-resistant than large companies. They needed much longer to recover from the consequences of the past financial crisis, as our study shows. A pattern that will probably continue in the current crisis. But it is precisely small and medium-sized companies that form an important backbone of the German economy. Politicians are therefore called upon to support those companies that had a well-functioning business model even before the crisis. Otherwise, there is a threat of a shift in market power in favour of the large corporations.  Such a concentration, as we prove in our study, will endanger Germany as a location for innovation.