After the financial crisis, productivity growth performed particularly poorly in the United States

At the time, the impressive rise of Silicon Valley tech companies triggered significant fears in Germany that the important manufacturing sector could become a commodity provider for data-driven businesses from the United States. Politicians and scholars alike prophesied the end of manufacturing-led growth and the golden age of highly innovative tech companies.

What is more, several scholars underlined the productivity-hostile environment resulting from structural factors such as demography, climate change, and globalization. In this view, productivity decreases are especially expected in manufacturing economies that depend on an aging workforce, face the costs of decarbonization, and are constantly threatened with companies moving abroad because information and communications technologies allow low-cost real-time steering of global value chains.

In contrast to these expectations, after the financial crisis, productivity growth performed particularly poorly in the United States. Puzzlingly, low productivity figures from the United States are even interpreted as a result of the economy’s dependence on Silicon Valley companies’ innovations. It turned out that tech firms run highly profitable business models but only through securing a high level of market power in winner-takes-it-all platform markets. Today, the tech giants hold huge cash reserves and hoard highly qualified employees in a way that is tantamount to creating implicit barriers to market entry. In this sense, large tech corporates create a two-speed economy where normal companies cannot compete at arm’s length at the technology frontier, but instead focus on standard products requiring lower risks and investments. Additionally, the new information and communications technology companies are less dependent on geographical production sites than the old manufacturing industries. For taxing authorities, this provides a major challenge as it becomes more difficult to prevent profit shifting and enforce a level playing field.

However, the domination of new platform corporations in monopolistic or oligopolistic markets is not the only game in town. A country-wide and long-established business model that has recently proven fruitful for productivity progress can be found in the Germany. In contrast to the presumably secular trend of deindustrialization and in the face of demographic change, medium-sized German high-tech Mittelstand companies from rural areas keep dominating global niche markets with their highly innovative manufacturing goods. Manufacturing still accounts for 23 percent of German value added (and only 12 percent in the United States, 11 percent in France, and 10 percent in the United Kingdom). During the past few years, these companies have managed to integrate customer-specific services such as servicing or consulting into their goods. This joint production accounts for another 9 percent of the German economy. As a result, productivity progress is not limited to a few shining stars but distributed much more inclusively. Due to the integrated value chains in Germany, service sector innovations spill over into manufacturing faster than in the United States, where the economy is more characterized by stand-alone companies. It seems obvious that if we want to master the challenges of the future—climate change, demographic change, and globalization—in a socially acceptable way, we need more productivity progress and we need it to be distributed throughout the entire economy. This seems to work better through the well-known manufacturing business model. Total factor productivity contributions to the reasonable GDP growth in Germany between 2011 and 2018 ranged around 0.6 percent yearly—far ahead of comparable economies.

After introducing “Industrie 4.0” technologies, the German business model will shift even more strongly to the integration of services into the manufacturing sector. Hence, incentivizing manufacturing investment and research and development activity as well as enabling employees through adequate on-the-job training is going to accelerate productivity in Germany on a broader scale. By contrast, triggering productivity growth in the United States depends much more on fostering inter-company technology spillovers and creating a level playing field for competitors in platform markets.