Companies create jobs, growth and wealth. The government needs to support them in adapting to the ever changing circumstances they are confronted with.

The economy’s structure is changing, both on the German and on an international level. Companies need to constantly change and adapt – for instance to the demands posed by digitisation. At the same time, companies can actively influence and shape those developments.

The government should support companies and firms in doing so, for instance by setting up the right political parameters. This includes reviewing competition rules and maintaining a balance between more traditional medium-sized enterprises and start-ups with new business models, which are crucial to the German economy.

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Digitisation has penetrated all areas of our lives, integrating people, machinery and processes into networks and creating huge opportunities for the German economy.

Digitisation has triggered profound structural change in all areas of the economy and of our society. It is important that we exploit the opportunities provided by this digital transformation, which includes the automation and “autonomization” of processes in the value chain to create what is increasingly being called Industry 4.0. By enabling machines to organize, repair and optimize themselves, “autonomization”, in particular, is opening up previously undreamt-of possibilities.

The prerequisites for this digital transformation are universal high speed networks and an unbureaucratic and capital-rich environment for innovation. The workforce also faces challenges: Companies must identify the new skills their employees will need and train them accordingly. Moreover, companies, and especially small and medium-sized enterprises, must press ahead with their own digitisation, for example by further developing existing business models and creating new ones, perhaps in cooperation with start-ups.

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The German industry is considered the backbone of the country’s economy. For it to remain in this position, the government will need to make Germany more attractive for foreign and domestic investors, encourage innovations and endorse structural change.

In Germany, the industrial sector contributes about a fourth to the country’s economic output, more than in other industrialised countries such as the US or France. Because exports are driven by the German industry, the sector is also important for Germany’s external economic performance.

The digitisation of the working world and the increasing interconnectedness of people and machines will provide companies and employees with greater flexibility and leeway. At the same time, employers and employees will need to master new tasks and skills and acquire – for instance – knowledge in information technologies. If seized successfully, the chances offered by the so-called Industry 4.0 will put the German industry in a strong position, both on a European level and internationally.

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International competition changes the economy. However, governments should refrain from trying to push structural change into a specific direction.

Industrialised countries often react to the increasing competition from emerging markets by focusing on those sectors of production in which they are superior to their competitors. German companies, for instance, concentrate on highly specified tasks such as research and development in their home-country and perform simple manufacturing processes abroad.

Before the global economic and financial crisis, building a large service sector was considered indispensable for reaching economic prosperity. This has changed: History has shown that both countries with a large service sector and countries with an important industrial sector can reach high income levels. Therefore, governments should refrain from steering structural change into a particular direction. Rather, they should allow for flexibility in the labour market, so as to enable the downsizing of sectors that are no longer profitable and to encourage entrepreneurship and growth in growing economic sectors.

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Competition is the result of several companies offering the same or similar products or services. When this occurs, those products or services are offered for sale at low prices.

Perfect competition is not the only market structure, however. Other possible market structures feature few or only a single supplier, as in the case of a monopoly. The structure of the market and the behaviour of the market participants determine the market result.

The aim of competition policy is to promote competition and to prevent the abuse of market power. Digitization, in particular, has brought new market structures and thus also placed new demands on competition policy.

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R & D accelerates technical progress, drives economic growth and creates jobs. Large conglomerates are the keenest innovators; small and medium-sized enterprises still have some catching up to do.

Patents offer an incentive for R & D. They protect companies which conduct research from competitors intent upon copying their innovations. Overall there is no shortage of ideas in Germany but too rarely are they developed into marketable products. One cause of this is the complicated system of research subsidies, which are restricted to selected technologies.

The state must abandon its conviction that it is a better judge than business of what will be in demand tomorrow. A general tax break for R&D activity would be a better solution. A further obstacle to innovation in Germany is the shortage of young people with the appropriate technical background. In recent years there have been too few graduates in technical subjects. Women, especially, are showing too little enthusiasm for subjects like mechanical and electrical engineering and chemistry.

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Bureaucracy

Bureaucracy

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Every year several thousand pages of laws and decrees are published in the German Law Gazette. These regulations cost not only the public administration but also private business billions of euros.

Simply by meeting their obligation to disseminate information required by federal laws companies incur processing costs of almost 45 bn euros. Such red tape hobbles growth and prevents the creation of new jobs. In many cases, such as occupational health and safety, regulations are essential. Yet a good many of the rules on the statute books are dispensable. Tax bureaucracy, responsible for 45% of all administrative costs, is a particular burden for business. For instance, the provisions governing value-added tax require invoices to be retained for ten years. The European Union has also proven especially creative in thinking up new regulations, often supplemented by more detailed clauses added by the German government. This regulatory frenzy deters investors, who usually have fewer laws to comply with in other countries.

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