Recent Trends in German Entrepreneurship

At ZEW (Centre for European Economic Research, Mannheim), we monitor recent trends and figures of entrepreneurship activity in Germany. A new report on the development in 2014 was released some days ago*. Overall, there is a stable decreasing trend in the number of newly founded companies since the mid 1990s which has continued. In 2014, the number of new start-ups was around 155,000. Compared with a total of 248,000 in 2005, this amounts to a decrease of 37.5%. On the positive side, however, the share of so-called “necessity-driven entrepreneurship” is with 16% relatively small. Entrepreneurship is necessity-driven if the founders find no alternative occupation on the job market and are therefore driven into self-employment.

Another development, which I’d say mirrors the behavior within the entire German economy, is a stagnating level of investments undertaken by start-ups. On average, young companies (up to an age of 4 years) invest around €20,000 per year. This number is stable since 2009 and considerably lower than pre-crisis levels. According to survey data, financial constraints don’t seem to be the reason for the decline. Only 12% of start-ups in 2013 indicated that they face problems to attract external investors. The average R&D expeditures by start-ups in their first 4 years in business likewise decreased by 14%, from €9,300 in 2008 to €8,000 in 2013.

An interesting analysis looks at the effect of the economic crisis, which had its peak in Germany around 2009, on entrepreneurship activities. There are several potential causal mechanisms at play here. On the one hand, labor market turmoil, associated with economic crises, can stimulate new business ventures. Especially when we think of necessity-driven entrepreneurship. On the other hand, founding a new business in times of macroeconomic depression might complicate the access to start-up capital and a lack of demand can hinder a successful establishment on the market.

One particularly interesting causal channel is that, during recessions, young companies may find it easier to attract skilled and talented employees because they face less competition by established firms. Figure 1 plots the direct employment effect of newly founded companies, the number of people hired by start-ups founded in a given year, together with the growth rates of the German economy. You can sense an acyclic pattern, especially at the peak of the crisis. This suggests that start-ups are able to attract more employees at more favorable terms (and are thus larger right from the beginning) in a sluggish economy. In particular, because of policy measures such as short-time work, employment levels in established firms could be kept comparably high in Germany. In turn, this means that outsiders such as graduates or immigrants faced high entry barriers to the job market and start-ups seemed to be able to take up these slack resources.

Of course, correlation is not causation. But the theoretical explanation has a lot of appeal. I myself graduated in 2012, at times when the market was not exactly desperate to hire fresh university graduates. Anecdotical evidence tells me that quite a few of my peers found their first job in young companies which usually offer a less favorable package in terms of job security, salary and non-monetary benefits compared to large corporations. However, this shift in resource allocation might foster creative destruction in the economy and since the start-up lifestyle currently seems to be en vogue, the overall deal for these young people might not have been too bad at all so far.

* The report (in German) can be downloaded here.