The fragmented nature of the East German economy

The lack of larger business units is often cited as one of the reasons for lower growth dynamics in eastern Germany. For example, large companies are often more productive than average, important for a region’s innovation performance, pay above-average wages and are significantly better able than small companies to tap into international markets. They are also important anchor points for the development of clusters and regional value chains.

The study confirms that the East German economy has a comparatively small structure compared to the West German economy. In particular, there is a lack of substantial companies. Even if a slight growth trend can be observed among medium-sized companies in the manufacturing sector in eastern Germany, an alignment of the company size structure in eastern and western Germany is currently not foreseeable.

At the same time, eastern German companies have no disadvantages concerning classic location factors. East Germany also has a well-developed infrastructure and numerous universities and other public research institutions. Furthermore, east German companies do not differ significantly from their West German counterparts in terms of their investment behaviour. However, obstacles to growth for eastern German companies arise from the following aspects:

  • They engage in innovation activities to a lesser extent and introduce product and process innovations less frequently;
  • as a result, eastern German companies also have lower productivity on average;
  • they are less frequently and to a lesser extent, active on international markets.
  • Furthermore, growth is not part of the corporate strategy for a relevant share of companies.

The authors of the study derive various recommendations for action for economic policy, but also associations and companies. The recommendations for action primarily concern the following areas:

  • First, the shortage of skilled workers in eastern Germany must be addressed more decisively.
  • Second, support for the R&D and innovation activities of eastern German companies should continue to be a priority of state economic policy.
  • Thirdly, a promotion of networking among East German companies. One disadvantage of the East German economy is that with the lack of large companies, there are also too few relationship “nodes” that promote the formation of networks and stabilise these networks.
  • Fourthly, the better development of foreign markets. East German companies export less frequently and to a lesser extent than comparable West German companies. However, opening up foreign markets is a growth opportunity that can also contribute to overcoming the small-scale economic structure.
  • Fifth, offers for management support, especially in the areas of export promotion, business succession and the recruitment of skilled workers.
  • Sixth, support for start-ups, especially innovative start-ups, which will expand the pool of potentially growing enterprises in the long term.

Link to study (extended version 1.68 KB)

Link to study (short version 334 KB)

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