Innovation and Specialization in the German Export Industry

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German Export Growth

As one of the largest economies in the world, Germany has for long been a major player on the world export market, although its position as an exporting nation has strongly improved. In 2003, Germany for the first time in modern history took the position as the largest exporter on the world market in respect to nominal value. The position as the number one exporter on the world market has been achieved through a large increase in export value since 2000, with an out-performance of the German export industry over other technologically developed countries be-tween 2000 and 2004 (OECD, 2005).
As Figure 3.1 shows, the German total export value seems to exhibit growth periods, in cycles of different time-length in which the value of the German export grows rapidly. These periods are then followed by a non-growth period. The cycles in export increase for Germany are similar to France, although not correlated with the export growth cycles of the United States (U.S.) and Japan. However, the export volume in kilos does not seem to grow in cycles. Except a down-turn around the time-period of the German reunification in the beginning of the 1990s, Germany has experienced a constant growth in the export volume, see Figure 3-2. Interestingly, the German export value index has grown much faster than the volume index compared to the other major international competitors. Having the same year as base, it indicates that Germany has been able to increase the value per kilogram in its export faster than its main competitors.
Still today Germany is dependent on its heavy manufacturing industries in export; with machine building, automobiles and chemicals making up 37 percent of the total German export value in 2003. The export share of these industries has been constant between 35 and 40 percent since 1991. However, the importance of the automobile industry has steadily increased, from a total export share of 13.7 percent in 1991 to 18.4 percent in 2003.2
The increased importance of the German automobile industry in the German export portfolio is also reflected in Germany’s surplus of R&D-intensive goods. Germany has a comparative advan-tage in export of advanced-technology3, in which the automobile industry export constitutes a substantial part. Even though Germany is a technological advanced country, with a comparative export advantage in R&D-intensive goods; dividing R&D-intensive goods in advanced technol-ogy and cutting-edge technology, identifies Germany as a net importer of cutting-edge technol-ogy and a major net exporter of advanced technology (Breitschopf and Grupp, 2004). Germany’s strong export dependence on its heavy manufacturing industries the last decade and its strong positioning in the advanced technology export segment, might indicate a German dependence on development of existing export products rather than on the development of new high-innovative products for the export market.

Innovation and Specialization in the German Export Industry

A number of empirical studies have shown a relationship between innovation and productivity (See for example; Klette and Kortum, 2002, and Lööf and Heshmati, 2002). The increased pro-ductivity in turn has been shown to increase the potential of export for the individual firm (See for example Bernard and Wagner, 1997; and Bernard and Jensen, 1998). Lachenmaier and Wössman (2004) verify the connection between innovation, productivity and export, by showing that German firms with at least one innovation in the previous year had on average ten percent-age points higher export share of total turn-over than non-innovators.
Bernard and Wagner (1998) suggest that the competition on the export market in general is more intensive than on the domestic market, and therefore German export firms are more productive and more skilled-worker-intense than domestic oriented firms. International competition is gen-erally divided in product or price competition, with each competitive segment related to the PLC-theory. As Siebert (2003) and Breitschopf and Grupp (2004) have shown, Germany has a com-parative advantage in R&D-intensive export, with a concentration in advanced technology rather than cutting-edge technology. This comparative advantage in R&D-intensive export makes it possible to assume that Germany is competing over product attributes rather than price.
Combining the theory suggesting a relationship between innovation, productivity and export with the empirical results identifying the German comparative export advantage to be advanced R&D-intensive products, allows us to assume that German export performance to a large extent is con-nected to the German export industries’ innovative capacity. But how can innovative capacity be measured? No academic consensus has been reached on the proxies for innovative activity. However, Pavitt and Soete (1980) suggest that patents and R&D-expenditures can be seen as general proxies for innovative activity. Acs, Anselin and Varga (2002) conclude that patents con-stitute an accepted proxy for new technology creation by American firms. By accepting patent production and R&D-expenditures as proxies for innovative capacity, attention has to be drawn to these variables in order to analyze the German export performance.
Germany devotes substantial private and public resources to R&D. In 2002 Germany invested 2.5 percent of GDP to R&D, placing it seventh in relation to a number of other developed coun-tries in the world. 31 percent of R&D came from public funds, 66 percent was privately financed and two percent originating from abroad (Breitschopf and Grupp, 2004). Though, not only R&D to GDP expenditures is of importance to measure innovative activity. The importance of en-dogenous growth of innovation, originated from knowledge-clusters and knowledge spill-over, has been recognized as important determinates of innovative activity (see for example Glaeser, 1996; Ciccone and Hall, 1996 and Dohse and Schertler, 2003). The technological know-how-transfer within clusters results in an increasing return to scale of innovative activity. This results in that the nominal stock invested in R&D has consequences for the innovative activity in a country. In nominal expenditure on R&D, Germany places third to the U.S. and Japan (Breitschopf and Grupp, 2004).
Even if the financial resources devoted to R&D in Germany are substantial, Germany has lost its world-leading position in R&D-investments. In 1988 Germany reached a high of 2.8 percent of R&D expenditure to GDP. In the late 1980s Germany was one of the countries in the world that devoted the largest share of GDP to R&D.
Since the end of the 1980s Germany has lost its leading position in R&D expenditure to GDP, however its growth rate of patent share in the world has been positive and larger than for the main international competitors between the first and the second half of the 1990s. In the second half of the 1990s, 19 percent of all patents in the world were German patents (Breitschopf and Grupp, 2004).
The German patent production is strongly allocated to the heavy manufacturing industrial sec-tors, as machine building, chemicals and the automobile sector, all with cumulative innovation characteristics. The patent production in Germany is located to industries in the advanced tech-nology sector rather than in the cutting-edge sector, clearly showing a relationship between Ger-many’s innovative activity and its strong export performance in this sector (Fuentes et al, 2003).
On the individual firm-level Lachenmaier and Wössman (2004) show, by using a sample from a micro data set for the German manufacturing industry, that the German manufacturing industry is heavily oriented towards foreign markets, with 72.8 percent of the firms identifying themselves as exporters. The innovative performance of the German manufacturing sector is also high. 45.4 percent of the firms reported having introduced an innovation during the last year; with innova-tors having exported on average 32.4 percent of total production while non-innovators exported significantly less; 19.8 percent of production. Lachenmaier and Wössman’s empirical study shows that German manufacturing firms with at least one innovation the previous year had an export share of total turnover on average ten percentage units higher than non-innovators.
The successful German automobile industry constitutes a good example of the German product competition through innovations in the international market, in which firms are forced to diver-sify their products in order to avoid an intense international price competition. The automobile industry in Germany with BMW, Audi and Porsche at the forefront, has been successful to com-bine technological improvements with a customer focused design, resulting in a good reputation of the German automobile industry. However, the success of the German automobile industry rests upon its ability to diversify itself from the international competitors, and to find product features segments in which the customer is willing to pay more than general. Since Germany,with its high labour costs4, hardly can compete over price, the German automobile industry must provide the customers with special quality features in order to be able to sell its cars to a higher price than the competitors. If the competitors are able to copy the new product features, and produce them to a lower cost, Germany’s automobile industry might lose its comparative product advantage. The German automobile industry is dependent on continues product development requiring a high innovative capacity. The increased export share of the automobile industry shows that Germany has been successful to further develop existing products, in order to provide the customers with extra quality feature they are willing to pay a premium for (Peters and Becker, 1998; Spatz and Nuennkamp, 2002).

1 Introduction
2 PLC, Innovation and Export Advantages
3 German Export
3.1 German Export Growth
3.2 Innovation and Specialization in the German Export Industry
3.3 The Individual Firm’s Export Decision
3.4 Hypotheses
4 German Export Competitiveness and the PLC
4.1 The Empirical Models
4.2 Data
5 Analysis
5.1 International Competitiveness and Product Development
5.2 Competitiveness and Foreign Demand
6 Conclusion
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Export Competitiveness