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Current crises underline the need for Germany to overhaul innovation policy to ensure its industries remain competitive, says OECD

Germany needs to adopt a more agile, risk-tolerant and experimental approach to innovation policy if it is to continue to lead in its historical core industries such as automotive manufacturing, machinery, chemicals and pharmaceuticals, and be a champion of the industries of tomorrow, according to a new OECD report.

The OECD Review of Innovation Policy: Germany says the COVID-19 pandemic and the effects of Russia’s war on Ukraine have highlighted vulnerabilities in Germany’s economic model: an overreliance on fossil fuels, delayed digitalisation and under-diversified supply chains. This comes as the world economy is facing a disruptive transformation driven by digital technologies and the green transition.

A new approach to innovation would help Germany to succeed in its digital and green transformations, the Review says. The share of ICT in German business sector investment remains stubbornly low at only 6.6% in 2021, the lowest in the G7 and significantly behind leading countries such as the United States (17.1%) and France (18.4%). Leadership in core digital enabling technologies for Germany’s industries, such as autonomous driving, is significantly behind competitor economies. At the same time, the need to address climate change presents significant challenges for how the country’s most innovative industries operate.

“Germany must build on its strengths and develop more agile, risk-tolerant and experimental innovation policy processes that encourage risk-taking and allow the country to lead in the digitalised and green industries of the future,” OECD Secretary-General Mathias Cormann said. “The short-term pressures from recent crises require bold, well-designed and coordinated policy measures. At the same time, we need to ensure those measures do not divert Germany from addressing the necessary structural transformation of core industries, which are needed to maintain and drive its competitiveness in the long term.”

The Review says that a new approach to steering and governing innovation policy is also necessary due to the complex and disruptive nature of the challenges involved in the green and digital transitions. This should include more flexibility and experimentation in policy design, along with faster development of optimal connectivity and data infrastructures as well as innovation-friendly regulations.

More innovative regulation and public procurement, and higher public support for medium and later stage venture capital and risk finance, could further help the emergence of breakthrough innovations, faster commercialisation of impactful research, and ultimately create the demand-side signals necessary to help new markets to emerge for a resilient, competitive, net zero economy. Many of the Review’s recommendations aim to better use funds that have already been committed to science, technology and innovation, rather than expanding public support, which would be a major challenge to their implementation in the current context.

The Review notes that uncertainty will be a recurring theme in science, technology and innovation policymaking in the years ahead, and preserving German leadership in this domain will invariably involve risk and stepping into unknown areas of science and technology.
Source: OECD

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