Soete, Birgit

In recent years, Germany has been one of the European Union’s slowest growing economies. Investment in research and development (R&D), particularly by small and medium-sized enterprises (SMEs), has considerably slowed clown. Furthermore, a reduced export share of research and knowledge-intensive products has been observed for Germany (BMBF 2002; Schumacher et al. 2003). To address these economic issues, David Audretsch (Max Planck Institute, Jena and Indiana University), Michael Fritsch (TU Freiberg and DIW), Dorothea Schäfer (DIW), Birgit Soete (DIW) and Andreas Stephan (European University Viadrina and DIW) organized an international workshop entitled “Sustaining Innovation and Growth: Public Policy Support for SMEs-Conception and Evaluation” hosted by the German Institute for Economic Research (DFW) in Berlin in June 2003. This workshop brought together leading scholars, German government officials, representatives of the KfW banking group and various entrepreneurs to discuss contributions on the role of entrepreneurship and SMEs for innovation and growth, their specific problems and potential public policy support.1

In general, the presentations at the workshop supported the view that entrepreneurship and innovative SMEs play a crucial role in promoting economic growth. With regards to knowledge spillovers in regional innovation systems, some presentations provided evidence that universities have a significant impact on the location choice of new ventures, and consequently on the technology and know-how transfer.

More specifically, three main conclusions were derived which may be summarized as follows.

First, there is strong evidence of a positive relationship between entrepreneurship and growth. Thus, countries or regions with a stronger attitude towards entrepreneurship and self-employment, for example, the USA, have witnessed higher economic growth during the last decade in comparison to countries such as Germany. It is clear that the European Union (EU) is lagging behind the USA as far as innovative start-ups are concerned. Consequently, entrepreneurial attitudes and behaviour should be reinforced in the EU, for instance, through education.

secondly, it emerged that one of the main obstacles for entrepreneurship and innovative SMEs is early stage financing. High-technology start-ups often face specific financing problems due to information asymmetries. Normally venture capitalists have-as opposed to private banks-the advantage that they employ different strategies to address the information problems, ranging from sitting on the board of startup firms to structuring sophisticated financing packages. These strategies enable venture capitalists to acquire information about opportunities and problems, something that other financial institutions are not well equipped to do. Whilst banks are a relatively well-established source for financing innovative SMEs in Europe, private equity financing is still in its infancy. Nevertheless, it became obvious that venture capitalists are not really interested in early stage investments, either. One reason for this is that venture capitalists favour backing SMEs at a later stage of product development and commercialization. Another reason is that venture capitalists also prefer to finance single large projects as opposed to a portfolio of smaller ones in order to minimize monitoring costs. Thus, there is still a financing gap for start-ups.

Thirdly, this market failure may provide a rationale for government intervention in promoting innovative SMEs. If the private rate of return of a new technology is below the social rate of return, as might be expected if firms are unable to fully appropriate the rents on their innovations, then entrepreneurial activities could be lower than socially optimal. Similarly, if firms experience significant external financial constraints as described above, with agency costs limiting the funds available from external investors, then the rate of innovative start-ups may again be lower than optimal. In Germany, there are some specific programmes, for example, FUTOUR/ that grant R&D subsidies for new high-technology firms. However, it is stressed that ongoing evaluation of these public policies is necessary in order to assess their costs and benefits. As examples, some recent studies presented at the workshop included evidence that public policy support of R&D investments in SMEs with less than 250 employees is beneficial because it stimulates private R&D investment, thus there is no crowding out effect from public R&D grants (Czamitzki and Fier 2003; Belitz et al. 2004).

The papers included in this special issue of Industry and Innovation have all been subject to a referee procedure. The first paper provides an overview of the literature on entrepreneurship and its linkage to growth and also discusses public policy implications. The common feature of the following four papers is that their empirical analyses focus on Germany. Two papers provide evidence on the role of universities in regional innovation systems and investigate whether knowledge spillovers from universities have an impact on the geographical choice of high-technology new ventures. In the other two papers, venture capital (VC)-as informed capital-and its impact on the performance of VC-backed enterprises is analysed.

Innovative activity is a central element shaping both the competitiveness and the economic development of nations and regions. The capacity to innovate has been shown to serve as the driving engine of economic growth and job creation. Since the 1980s, high-technology new ventures and SMEs have increasingly been recognized as important sources of such innovative activity.

The first paper by David Audretsch links entrepreneurship to innovation and growth, and provides explanations as to why SMEs have become more important over time. There has been a marked change from a “managed economy” to an “entrepreneurial economy” as a result of globalization, deregulation, outsourcing and new emerging technologies such as information and communication technologies or biotechnology (Audretsch and Thurik 200Ib). From the end of World War II up until the beginning of the 1980s, scholars and politicians alike were convinced that only large enterprises, particularly multinational corporations with economies of scale and scope, were able to invest in R&D. However, these advantages of large firms have diminished under the new economic conditions (Audretsch and Thurik 2001a, b; Acs and Audretsch 2003). Today start-up firms and SMEs are seen as one channel of technology transfer from science to commercialized ideas or knowledge. However, SMEs face specific problems due to potential market failures and serious problems as a result of asymmetric information, particularly in the financial market. Furthermore, SMEs are more embedded in regional innovation systems and thus, more dependent on the regional knowledge infrastructure and social networks (Cooke 1998; Thornton and Flynn 2003).

Market failures inherent in entrepreneurship-network externalities, knowledge externalities and demonstration or learning externalities-result in a discrepancy in the evaluation of entrepreneurial activities by private parties and public policy makers. Thus, Audretsch discusses the shift in policy from the traditional policy instrumentsregulation, competition policy or antitrust-to a policy favourable to the creation and commercialization of knowledge, for example, through encouraging start-ups, R&D, venture capital or networking.

The second paper by David Audretsch, Erik Lehmann (University of Konstanz) and Susanne Warning (University of Konstanz) examines the geographical choice of hightechnology new ventures. The authors use a unique and hand-collected data-set of high-technology start-ups publicly listed in Germany on the former Neuer Markt [Germany’s new stock exchange] which they use to test whether geographical proximity to a university is influenced by the kind of science and type of knowledge spillover. When discussing spillover generated by universities, Audretsch, Lehmann and Warning differentiate between science and social science, as well as between codified knowledge in articles (academic output) and tacit knowledge embodied in students and researchers (education output). Their results provide evidence that younger high-technology start-ups (less than 8 years old) settle near universities with a high academic output and a high number of students in both natural and social science. Thus, spill-over of tacit knowledge has an impact on the firms’ geographic decision. Older firms, however, only locate closer to technical universities in order to satisfy demand for traditional German industries such as engineering and machinery.

The next paper, by Jürgen Egeln, Sandra Gottschalk and Christian Rammer (all ZEW), uses a representative data-set for Germany to test the spatial distribution of new ventures by academics from universities and public research organizations. So far, case studies have shown that spin-offs from universities or research organizations locate close to their parent organization in order to benefit from spillover. Consequently, spin-offs are a channel to transfer academic knowledge into the regional economy. However, this paper shows that location patterns of public research spinoffs do not differ from those of other start-ups. Proximity to the parent university or institute is of little significance for the geographic decision. Agglomeration effects such as a high number of potential customers or a large supply of highly qualified labour also have an important impact on the location decision. Therefore, the authors conclude from their empirical results that public research spin-offs contribute to interregional rather than intraregional knowledge transfer.

While banks are a rather established source for financing SMEs in Germany, private equity financing is still in a state of development. The private equity industry is relatively young. Experience with the complete venture cycle (funding, investing and exiting) is limited among German venture capitalists. The fourth and fifth papers investigate the issue of private equity financing of young high-tech firms in Germany from different perspectives. Dorothea Schäfer, Axel Werwatz (both DIW Berlin) and Volker Zimmermann (KfW) analyse the determinants of debt or equity financing of young high-tech firms. Particular attention is paid to the role of risk in the choice of the method of financing. Since risk is not directly observable, different indicators for financial and project risk are applied. It turns out that the data generally confirm the hypothesis that the probability of a young high-tech firm receiving equity financing is an increasing function of the financial risk. However, with regard to the intrinsic project risk, the results are less conclusive, since some of the indicators of a risky project are found to have a negative effect on the likelihood of being financed by private equity. These results indicate that venture capitalists and other sources of private equity may focus less intensively on the highly risky stages in the process of developing a new product or process, and instead select ventures that have already succeeded in completing these steps.

The final paper by Dirk Engel (BWI Essen) analyses whether the growth and survival of young venture-backed firms is determined by the type of VC company. The empirical analysis is based on data of the ZEW Foundation Panel and relates to venture-backed firms founded in Germany between 1990 and 1999. The results of regression analyses indicate the importance of some characteristics of V(I companies as additional factors that explain the high variation of the employment growth rate of portfolio firms and their probability of surviving. The most striking result is that venture-backed firms supported by independent VC companies are not among the most successful firms. Since independent VC companies are often those with the greatest profit orientation, high quality of the value chain process would be expected. Significantly higher employment growth rates are evident for firms financed by locally active VC companies.

1 sec: http://www.diw.clcAlcutscli/service/veranstaItiingen/ws_innovation/indcx.html

2 See:


Acs, ZJ. and Audretsch, D.B. 2003: Innovation and technological change, in Zoltan J. Acs and David B. Audretsch (eds) Handbook of Entrepreneurship Research. An Interdisceplinary Survey and Introduction, pp. 55-80. Dordrecht: Kluwer Academic.

Audretsch, D.B. and Thurik, R.A. 2001a: Linking entrepreneurship to growth, STl Working Papers 2OO1/2, OECD, DSTI/DOC (2001)2, Organisation for Economic Cooperation and Development, Paris.

Audretsch, D.B. and Thurik, R.A. 2001b: What’s new about the new economy? Sources of growth in the managed and entrepreneurial economies, Industrial and Corporate Change, 10: 207-315.

Belitz, H., Heshmati, A., Stephan, A. and Werwatz, A. 2004: Microeconometric evaluation of R&D subsidies in East Germany, Mimeo, DIW Berlin.

BMBF 2002: Zur technologischen Leistungfähigkeit, Deuschland 2002 [On germany’s Technological Competitiveness, Report 2002], Bonn für Bildung und Forschung [German Ministry of Education and Research].

Cooke, P. 1998: Regional innovation systems: an evolutionary approach, in H.-J. Braczyk, P. Cooke and M. Heidenreich (eds) Regional Innovation Systems. London: UCL Press.

Czarnitzki, D. and Fier, A. 2003: Publicly funded R&D collaborations and patent outcome in Germany, ZEW Discussion Paper No. 03-24, Mannheim.

Schumacher, D., Legier, H. and Gehrke, B. 2003: Gute Position Deutschlands bei forschungsund wissensintensiven Produkten gefährdet [Germany’s high position for R&D and knowledge-intensive products challenged], Wochenbericht des DIW Berlin, 31/2003.

Thornton, PH. and Flynn, K.H. 2003: Entrepreneurship, networks and geographies, in Z. J. Acs and D. B. Audretsch (eds) Handbook of Entrepreneurship Research. An Interdisciplinary Survey and Introduction, pp. 401-436. Dordrecht: KIuwer Academic.

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