Productivity Slowdown, Innovation and Industry Dynamics

Germany, in common with other industrial nations, has in recent years witnessed a decline in productivity growth despite sustained economic growth, falling unemployment and strong technological dynamics. The decline in productivity growth is not a measurement problem. However, the difficulty in measuring productivity has increased as digitalisation has spread and dynamic innovation activities have shifted into the services sector. In many sectors of the economy, the gap between highly productive and less productive firms is now widening more sharply than at the start of the millennium. More and more firms are no longer able to keep pace with the productivity growth achieved by leading firms. At the same time, there are differences between individual sectors when observing the development of intra-industry productivity divergences. The levels of innovation spending by large firms on the one hand and by small and mediumsized enterprises (SMEs) on the other have been diverging for years. As digitalisation has spread, many firms – especially SMEs – are facing considerable problems in adopting new technology. Both the public and private sectors in Germany are laggards compared with other countries when it comes to investing in these technologies. The number of business start-ups has been falling for years. This slowing entrepreneurial activity is both a symptom and a cause of the fact that financial and human resources are tied up for too long in established firms with low (productivity) growth.