"Germany spends a similar amount on research and development (R&D) relative to its own economic power as the USA.
Unfortunately, only a few groundbreaking "moonshot startups" that can become multi-billion dollar companies emerge or survive in this country.
There are some obvious and some deeper reasons for this. R&D spending in 2021, at 3.1 percent of gross domestic product, was only 0.4 percentage points lower than in the USA.
However, only 63 percent of these funds in Germany come from the private sector, compared to 69 percent in the USA.
There, the funds flow predominantly into key technologies such as artificial intelligence, biotechnology, quantum technology, or microelectronics; in Germany, the research departments of major automotive companies still dominate. We called this the middle technology trap some time ago—the excessive emphasis on technological developments that are slowly losing relevance in a digital society. Why can't Germany escape this trap?
Edmund Phelps, The 2006 Nobel Prize winner in economics vividly describes how German corporatism is affecting the German innovation system. Innovations primarily occur in established companies that have transformed the innovation process into a predictable process of small steps. Innovations are therefore often only small improvements within the existing business model. Accordingly, funding programs and frameworks have emerged that reward these small, predictable successes and penalize or exclude disruptive, but highly risky innovations from the outset.
This type of innovation funding is not only unproductive, it also results in high administrative costs for the government and companies. A much more sensible and less bureaucratic approach would be to provide broad-based support through tax incentives for research and development or a research allowance.
Due to the ever-increasing pace of global technological developments, "business as usual" is no longer an option. Only through disruption, i.e., precisely innovations outside of existing business models, can Germany maintain its competitiveness. This is where the real pitfall becomes apparent: German policymakers are already struggling to integrate disruptive projects with adequate funding programs and necessary infrastructure investments. In addition, there is ample evidence of industry summits where business and employee representatives pressure government officials simply to secure vested rights. A genuine reorientation of innovation policy is repeatedly thwarted here.
Breaking down such structures requires courage. Innovation policy would have to be transferred to an institution that operates largely independently of politics. Such an innovation agency would replace the current fragmented and opaque funding landscape and focus on promoting technological developments to solve major societal challenges. The US has precisely this: these agencies are called ARPAs, or "Advanced Research Project Agencies."
Their funding activities are based on the three principles of expertise, autonomy, and competition.
First, American ARPAs are thematically focused. This enables the development of in-depth expertise within the institutions, which is crucial for the design and evaluation of funded projects by experienced experts from academia, industry, or government. This is complemented by forward-looking monitoring of critical technologies by the "Fast Track Action Subcommittee on Critical and Emerging Technologies."
Secondly, the agencies are autonomous organizations. They enjoy considerable freedom in defining their R&D funding programs, although the overarching objectives are set by the ministries. They have lean administration and are authorized to operate outside the usual limitations of public institutions with regard to personnel and funding. This promotes quick and unbureaucratic decision-making.
Thirdly, the ARPAs rely on competition. Instead of committing to one approach from the outset, several projects are usually funded in parallel. Projects that do not deliver the desired results are consistently stopped, and resources are reallocated to more promising approaches. This fuels competition between projects and creates incentives for rapid progress.
The German Agency for Breakthrough Innovations and the European Innovation Council are initial developments in this direction. While the three structural elements mentioned are integrated into these institutions, they are not consistently implemented. In particular, these agencies do not replace existing funding institutions; as additional players, they also have only limited resources.
Without a fundamental restructuring of innovation and technology policy, Germany will continue to remain in the medium-technology trap and is in danger of losing ground in key technologies. Therefore, the institutional framework that strengthens Germany's innovative strength should be created now.
Oliver Falck heads the Center for Innovation Economics and Digital Transformation at the Ifo Institute in Munich.
Germany funds a lot, but the wrong things. Three principles will be crucial in the future.” [1]
1. Warum Deutschland eine andere Innovationspolitik braucht. Frankfurter Allgemeine Zeitung; Frankfurt. 21 Aug 2025: 17. Von Oliver Falck