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Doing business in Germany – focus on the SME sector

Editorial by Alexander Dominicus

Germany was long regarded as one of the world’s leading places to do business. With its strong industry, innovative technologies and highly qualified workforce, its success seemed inexorable. In recent years, however, this picture has started to fragment, and Germany is facing an array of challenges that hamper international competitiveness and require both political and corporate action.

The misguided energy policy has led Germany down a blind alley. Companies and consumers now have to shoulder the consequences of this in the form of structurally higher energy costs. Therefore, for energy-intensive businesses, doing business in Germany is increasingly becoming a problem. Producers in particular depend upon being able to manufacture their products at competitive costs, so they can offer them on the world market. This could hasten the relocation of energy-intensive producers, with knock-on effects for domestic real net output and leading to job losses.

Another challenge in Germany is excessive red tape. Companies face a barrage of regulations that cramps their flexibility and innovative capabilities. This slows down decision-making processes and can limit a company’s agility and adaptability.

A major issue for German companies is the skills shortage, which is reaching a crisis point. Notably, the shortage of IT workers is hampering innovation and digitalisation, which needs to proceed at pace. In general, the labour market has increasingly shifted in favour of employees but the effects are not all positive, as employees can demand more these days without having to be more productive. This development could intensify, as a wave of retirements and thus an even greater loss of skills can be expected in the coming decade.

The German capital market, too, has fallen further behind the US in the past ten years. The pinnacle of this trend so far was the delisting of Linde, one of the largest and most successful Germany companies. BioNTech, which came up with perhaps the most defining German innovation in recent history, also opted for a US listing.

That said, Germany has a crucial advantage that other countries do not. While in the US, for instance, a few companies account for most of the value creation and the stock market capitalisation, Germany has a particularly strong SME sector. These companies, often global hidden champions, are the backbone of the German economy. Frequently, they have focussed business models, and are market leaders in their niches. This makes them successful and greatly enhances Germany as a place to do business, despite the challenges and the global competition. You will find these companies listed not in the DAX but in the second-tier market. Shareholders in these enterprises stand to benefit from the innovative power and the growth imperative of German SMEs and to participate in the long-term success of these companies.

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