Germany’s €90B R&D Investment Falls Short Without Startups

Germany’s status as a global leader in engineering is well-established, with corporations investing a remarkable €90.4 billion in research and development (R&D) in 2023. Despite this substantial financial commitment, a significant issue emerges: over 85% of this investment is confined within corporate walls, limiting the involvement of startups in shaping the innovation landscape. This cautious approach risks Germany’s ability to compete effectively in the rapidly evolving sectors of artificial intelligence (AI) and deep technology.

A recent study by Speedinvest and Bits&Pretzels reveals a stark contrast between Germany and major U.S. tech companies. For instance, firms like Alphabet, Amazon, and Meta direct nearly 30% of their R&D budgets towards external innovations, notably startups. In comparison, traditional German corporations such as Volkswagen and Bosch allocate almost 90% of their innovation spending to internal labs.

The Innovation Dilemma: Pilot Projects vs. Scaling

While Germany excels in initiating pilot projects, the challenge lies in scaling these innovations. Alexander Pöhler, founder of Assemblean, emphasizes that the major barriers arise not at the outset, but after initial success. He notes, “In Germany, there is a great deal of openness to testing new ideas in pilot projects. However, once it comes to integrating the innovation into the core business, things get stuck.”

The issues stem from unclear responsibilities, drawn-out decision-making processes, and a predominant focus on risk avoidance. Corporations prioritize security and compliance, which can hinder the potential of promising innovations. According to Charlotte Goggin, Director at CIBC, avoiding the so-called “pilot trap” requires securing budgets for scaling initiatives, with conditional approvals tied to key performance indicators (KPIs).

Transforming the Innovation Landscape

The cultural landscape in Germany also plays a crucial role in innovation success. Robert Windesheim from Founders Fund points out that while corporations are becoming aware of AI’s value in driving business, traditional industries often lag behind their U.S. counterparts. He stresses that treating pilots like academic exercises rather than business commitments can lead to failure.

To facilitate a more dynamic innovation environment, Sebastian Heinz, CEO of HPB, identifies structural and legal barriers as significant obstacles. He suggests that the focus should shift from exhaustive due diligence to fostering an environment where innovation can thrive. “Innovation needs governance to secure time,” he states.

The report by Speedinvest and Bits&Pretzels highlights the financial benefits of corporate collaboration with startups through mechanisms like Corporate Venture Capital. Companies that engage in these partnerships experience superior growth, profitability, and market valuation. For instance, every additional year of corporate venture capital activity corresponds to an estimated 8.5% increase in price-to-sales multiples among German firms.

Germany’s path toward reclaiming its innovation leadership demands a shift from an insular mindset to a collaborative, partnership-driven ecosystem. Businesses that successfully merge robust internal R&D with agile startup collaboration are poised to harness the technological advancements of the future.