The amount of money companies spend on research and development is an indicator of how innovative a society is. This year, German firms are boosting their R&D budgets, but will that keep the country on top?
Big investments in R & D can help Germany keep its good name
German companies spent less on research and development in 2004 than the previous year, but in 2005 they plan to increase their expenditures to 47 billion euros ($56 billion) and in 2006 to 48 billion euros, according to a study by the Stifterverband für die deutsche Wissenschaft, a group that promotes science in Germany.
The organization gathered information from 1,500 German companies last year and showed that R&D budgets are rising, but only marginally -- especially in comparison with the virtual spending sprees of the 1990s, when growth rates hit around 10 percent. In the future, double-digit growth in R&D can't be expected either, according to Jürgen Hambrecht, CEO of chemical giant BASF and deputy head of the Stifterverband.
But Hambrecht said that R&D had made significant advances. One change has been a scale-down in size. "They no longer run big pilot facilities, rather they can do many things on a much smaller scale and thus much more quickly make simulations."
The greater efficiency of R&D allows companies to spend less money than in the past to maintain the same level of research. But knowledge is valued higher by other countries than it is by Germany. In world rankings, Israel spends 4.5 percent of its GDP on R&D, Sweden spends 4 percent and Finland 3.5 percent respectively. Germany, in seventh place behind both the United States and Japan, spends only around 2.5 percent of its GDP on R&D.
Germany's reputation could suffer
The German investments are mainly financed by private business. Their expenditures are continually increasing and had reached 67 percent in 2004, Hambrecht said. Concurrently, government spending on R&D fell, and with it the amount spent on basic research.
Business spends its R and D budgets on applied resaerch
"Should this continue, Germany as a center for science risks sustained damage," Hambrecht said. "State investment in basic research must not be cut back further, for that is where the foundations for tomorrow's products and applications are laid."
Basic research is the foundation upon which companies carry out their own applied research. In Germany, every fourth euro invested comes from foreign firms. Many of the companies were previously in German hands but were acquired by foreign firms which left their R&D departments in Germany.
Some foreign companies, such as, General Electric, have also established research centers in Germany. GE uses its lab near Munich to better cooperate with southern German universities and institutes.
GE opened a research center in Garching, near Munich, in 2004
European companies accounted for 60 percent of the internal R&D carried out by foreign firms in Germany in 2003 and North American companies made up nearly 37 percent, according to Andreas Schlüter, head of the Stifterverband.
And German companies also engage in R&D abroad as a result of multinational business structures, Schlüter said.
"The sale of products abroad is followed by the relocation of production facilities abroad, which is followed by the adoption of foreign standards, which is then followed by the development of R&D capacities," he explained.
Still, foreign companies spend more on R&D in Germany than German firms spent on it abroad. If Germany does lose significance as a center of innovation, it won't be because R&D are relocated abroad. Instead it will be because the German government and German companies spend too little on knowledge and risk missing out on future developments.