27 October 2022

What can we learn from Bavaria

Bavaria is an interesting case study in economic growth. Its size is about the same as New Brunswick and its population is about 85% that of Ontario. After World War 2 it was a poor region of Germany with no natural resources, primarily agricultural, with poor transportation links and suffering severe damage from the war.

Today it is regarded as Germany’s economic engine, with a GDP per capita about 40% higher than the Canadian average. It is home to several major multinational companies such as Siemens, BMW, Adidas and Puma and a host of Mittelstand companies (small- and medium-sized family-owned concerns that create a wide range of high-quality specialized products).

How did they do this?

One key step was the establishment of the “social free market”. This idea was rooted in capitalism but while also allowing a role for government involvement to ensure that this system worked for as many people as possible. For instance, strong regulations would be put in place to prevent cartels or monopolies from forming. In addition, a large social welfare system would serve as a safety net for those who found themselves struggling. It also called for a strong central bank independent from government. Some of these ideas were similar to those later proposed by Milton Freedman.  These ideas seem commonplace today but were radical in the 1940’s.

A second key fact was the drive provided by the Finance Minister of Bavaria, (later of West Germany) Ludwig Erhard. He institute three key reforms – a new currency, large tax cuts, and removal of all price controls.

Following these reforms the German economy took off, in a development called the German economic miracle, or Wirtschaftswunder.  Germany also benefited significantly from American support through the Marshall Plan.

The Mittelstand, or Germany’s small and medium sized companies, are widely seen as the backbone of the economy. Today it produces about 52% of Germany’s GDP, roughly the same proportion as Canada’s SMEs. However, Mittelstand companies employ about 70% of the labour force in Germany, compared with about 88% for SMEs in Canada. So Germany has about a quarter more of the workforce in large companies than Canada does.

A recent webinar organized by the European-Canadian Centre for Innovation and Research (ECCIR) explained that today in Bavaria they identify 5 main clusters:

  1. Digitalization – Information and communication technologies, Mechatronics and automation, Power electronics and Sensor technologies.
  2. Energy – Energy technologies and Environmental technologies.
  3. Health – Bio-technologies, Medical technologies and the Food industry.
  4. Materials – Chemical industries, Forestry and wood, Nano-technology and New materials.
  5. Mobility – Railway technology, Aerospace and Automotive.

Bavaria prides itself on producing more patent filings in the European Patent Office than any other jurisdiction in Europe.

It also prides itself on having the best startup ecosystem in Germany, with 30 accelerators in Munich alone, along with free co-working space for 3 months, Business Plan Coaching and easy access to industry. They focus on business to business startups.

The Bavarian government [Bavarian State Ministry of Science and the Arts] invests quite heavily in research, planning to spend €3.5 (about $4.6 billion CDN) over the period 2020-2023. They also pay a lot of attention to university-industry relations, developing cooperation among ecosystem players and aiming to build international competitiveness.

It is interesting to note that this spending pattern appears to closely match the current industry structure in Bavaria. So it is focused on needs of existing companies in the region.

What can Canada learn from Bavaria?

In some ways the Bavarian approach is reminiscent of the “Define the Decade” strategy (recently put out by the Business Council of Alberta) in that it starts by identifying areas where Bavaria in already globally competitive and building on that. [See Blog 31 – a New Economic Strategy for Alberta]. Other areas where the two approaches are aligned are:

  • Ensuring that government, industry and post-secondary institutions work together
  • Working cross sectoral, ensuring cross industry collaboration.
  • Emphasis on a strong startup ecosystem

Where the Bavarian strategy goes well beyond “Define the Decade” is its explicit focus on public sector research spending and identifying new trends at an early stage. It also targets support to what it considers to be strategic sectors – artificial intelligence and cleantech; Renovation and Acceleration Programme for higher education institutions; Higher Education Innovation Act – Agility – Excellence – Innovation; and Booster for small and medium-sized enterprises (SME)

 

Of course there are substantial differences between the industry structure of Bavaria and Canada. Bavaria has a manufacturing and engineering based economy, while Canada’s is driven largely by energy and other commodities. Replicating approaches that work somewhere else has a sorry history of failure. (How many Silicon Valleys are there?). Nevertheless, examining what a successful jurisdiction like Bavaria does can provide useful insights into approaches that might work in Canada.

 

Peter Josty