CIAO DATE: 01/03

Behind the Myth of the Mittelstand Economy
The Institutional Environment Supporting Small and Medium-Sized Enterprises in Germany

Jörg Meyer-Stamer and Frank Wältring

August 2000

Institute for Development and Peace

 

Introduction ¹

The existence of highly dynamic and successful small and medium-sized enterprises (SME) is one of the characteristic features of the German economy. They have been, and continue to be, a growth and a job machine. Their strong performance has raised interest in other countries, with less dynamic SME, which are keen to strengthen their SME sector. Learning from the German experience appears as a promising exercise.

What is essential here is to take a sufficiently wide perspective since it would be inadequate to look at the German SME support policies only. There is a causal link between SME support and the performance of German SME, but there are more such links. Ignoring them would give an inadequate picture of the determinants of SME development in Germany. In order to understand the performance of German SME, it is useful to refer to the concept of systemic competitiveness (Esser et al. 1995).

At the meta-level, there are several elements which create a favorable framework for SME. Probably most importantly, the social status of entrepreneurs is high, and entrepreneurial success is an important means of ascendance to higher social strata. This is embedded in a politicoeconomic context which is developmentoriented, with a strong commitment to creating a very stable macro-economic framework and a business-friendly environment while at the same time alleviating the negative social impact of industrialization, i.e. a social market economy as opposed to a free market economy. It is a widely shared view that the basic organization of the German economy in this respect differs from the Anglo- Saxon variety of contemporary capitalism. Moreover, there are numerous institutions that stabilize macro-economic conditions, such as restrictive rules for prudential banking, which have shielded the German economy from speculative bubbles. There are also institutions which keep transaction costs low, such as a well-developed (and actually SMEfriendly) contract law ² and a well-established system of collective bargaining. In fact, many of the institutions which shape the German economy have been crafted deliberately after World War II to avoid repeating the economic disasters of the 1920s and the early post-war years (hyperinflations in 1922/23 and prior to the monetary reform of 1948, depression after 1929). Others reflect more positive experience, such as the preference given to the social market economy and social security systems which go back to the last quarter of the 19th century.

At the macro-level, conditions for SME are moderately favorable. The macro-economic conditions are generally business-friendly, yet there are some aspects which discriminate against SME. This applies specifically to the tax system. Marginal tax rates on profits are comparatively high (up to 53 %). The effective tax burden can be much lower, as there are all sorts of loopholes, like various means which allow firms to stash away a substantial part of their surplus as a reserve rather than declare it as a profit. However, large firms have much more latitude to use such loopholes than SME.

Another important macro-economic factor is European integration. While there is a certain element of protectionism against non-EU-imports, competition between the European states is fierce, being based on high-quality products, technologically advanced production processes, high quality standards and high qualification of the entrepreneurs and workers. German SME are directing three fourths of their exports to other EU countries. The introduction of the common currency and the integration of East European states into this market will both increase competition and structural change in Germany and create new opportunities for companies.

At the meso-level, it is important to note that there is no specialized SME support institution in Germany. Instead, there is a highly differentiated system of organizations and policies which creates favorable conditions for private business in general and SME in particular. The subsequent sections of this paper will investigate this in detail.

At the micro-level, markets are mostly highly competitive, and the degree of specialization, vertical disintegration and differentiation is high, thus lowering barriers to entry and favoring nimble and flexible SME. There is ample latitude for interfirm cooperation so that SME can overcome disadvantages which are due to a lack of economies of scale. The labor market provides SME with skilled workers, yet their layoff in phases of economic downturn poses major problems. The financial system is offering credit to all types of firms. Access to technology appears not to be a problem, either. Regarding competition, the situation is somewhat different in the craft sector, where barriers to entry which are based on the formal qualification of potential entrepreneurs reduce competitive pressure. At the same time, a high level of skills creates the conditions for constant technical upgrading.

Developing countries and countries in transition generally display grave shortcomings at all these four levels. To understand the competitiveness of SME in Germany, it is not sufficient to focus only at the parameters relevant to competition at all the levels. It is the aim of this paper to demonstrate especially the interrelations and interdependencies between them, which sustain the efforts to build competitive advantages within SME.

It is neither the ‘Developmental State’ nor the market alone that is able to create favorable conditions at all levels, and a dynamic interplay between them. A lot of Latin American countries made this experience in the crises of the import-substitution phase in the 60s and 70s and after the liberalization process, especially in the 80s and 90s. Germany has a range of government support policies at the European, national, regional, and local levels. Manifold public and private institutions are responsible for the implementation of supporting instruments. Chapter 2 will discuss definitions and give an overview of the quantitative importance of SME. Chapter 3 will paint a picture of the employment, qualification, innovation and competition performance of SME in Germany with an added focus on the situation in the new Länder (federal states) in the East of the country. Chapter 4 will concentrate on some of the most important intermediary institutions and their organizational forms. Chapter 5 portrays SME support policies at the European, national and regional levels. The last three chapters of this paper will discuss justification and evaluation of SME support, the future of SME development and support policies in Germany, and some conclusions for policy makers in Latin America.

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Notes

Note 1: This paper has been prepared in the context of the joint CEPAL / GTZ Project "Institutional Requirements for Market-Led Structures in Latin America and the Caribbean". For comments on an earlier version we are indebted to Dietrich von Graevenitz, Günther Held, and Jorge Katz. We are also grateful for the permission to publish the English version of this paper as an INEF Report. A Spanish version is going to be published by CEPAL. Back

Note 2: For an in-depth discussion of this aspect, which we will not pursue further, see Casper (1998). Back