Technological Innovation, Entrepreneurship and Productivity in Germany, 1871-2015

Abstract

Entrepreneurship in Germany has been stagnating. As a result, the effectiveness of technological innovation to improve labor productivity weakened, which has been implicated in rising income inequality and poverty. In this paper we provide an overview of technological innovation and labor productivity growth from 1871. From this we show that over the past three decades the economy has found it increasingly difficult to transform technological innovation into labor productivity growth: in glaring contrast to earlier periods. Despite higher spending on R&D and more personnel than ever working in research labs, labor productivity growth continues to decline. Two interrelated reasons are offered for this phenomenon. The first is that the national innovation system itself has certain weaknesses. The second is entrepreneurial stagnation. We discuss the weaknesses of the innovation system and the nature and causes of entrepreneurial stagnation. We call for policies that will improve the innovation system, educational and managerial capabilities, venture capital investments, and the contestability of markets. Strengthening social protection and raising real wages are important supportive measures.