It is often the dazzling scene of high-tech start-ups that is courted by politicians.

But not the founding of new high-tech start-ups, but rather company fluctuation in the low-tech sector without high research and development spending is the main driver of German productivity growth.

This is shown by a new study by the Leibniz Center for European Economic Research (ZEW) in Mannheim on behalf of the Bertelsmann Foundation, which is available exclusively to the FAZ.

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The researchers found that there is a positive correlation between company dynamics - i.e. the entry and exit of companies in a market - and the productivity of the established companies.

The progress of labor productivity, which shows the relationship between overall economic production and labor input, is a decisive factor in determining the long-term growth potential of an economy.

However, the researchers observed a significant decline in business dynamics in almost all industries.

While 205,978 new companies were founded in the industries examined in 2005, the figure was down to 132,855 in 2019.

The number of companies that left the market fell from 168,289 to 105,882 over the same period.

The only exceptions: the IT industry and the Berlin region.

“The entry rate has been falling more slowly than the exit rate since 2015, but in view of demographic change and growing international competitive pressure, we actually need a significantly higher level of corporate and productivity dynamics," says Marcus Wortmann from the Bertelsmann Foundation.

If the start-up activity remains weak, this is not a good sign for German prosperity.

Low-tech companies are adopting technology

In the low-tech and high-tech sectors, different mechanisms ensure an increase in productivity. According to ZEW researchers, intellectual property rights and research and development capacities are the main drivers of competition in the high-tech sector. New companies with innovative ideas put existing technologies and business models under pressure and displace less innovative companies from the market. This creates space for more technologically advanced companies.

Low-tech companies, on the other hand, adopt technological improvements and business models that have prevailed among competitors, explain the study authors. This would lead to more intense competition because - unlike in the high-tech sector - more companies could take part in the market competition. The fact that more companies can enter and exit the market triggers the greatest increases in productivity among established companies. This effect has a much stronger effect than the mere displacement of less productive companies, which is the driving force behind the dynamism in the high-tech sector.

The study shows that “there is great potential for the German economy in a more pronounced diffusion of knowledge and technology,” says Bertelsmann economist Wortmann.

The aim must be to simplify technology transfer, for example through better networking of science and business in open innovation processes.

The results also suggest that politics in recent years has focused too much on the high-tech sectors.

“Low-tech companies must not be neglected when it comes to promoting start-ups,” warns Wortmann.

Overall, reasons in this country must be quicker and easier.

"In particular, the barriers to entry due to the dismantling of bureaucracy need to be lowered and groups of the population that have so far been less interested in start-ups, such as women and immigrants," he demands.

The authors of the study write that it is important to stimulate the establishment of new companies and the adoption of technologies, especially with a view to the corona pandemic. During the crisis, government support slowed the departure of companies with non-viable business models, while young companies received limited support from governments.