Varieties of Capitalism and the Limits of Entrepreneurship Policy:
Institutional Reform in Germany’s Coordinated Market Economy
Alexander Ebner
Received: 20 September 2009 /Revised: 9 May 2010 Accepted: 22 June
2010 /Published online: 24 July 2010 # Springer Science+Business
Media, LLC 2010
Abstract Recent debates on the comparative institutional advantages
of diverse national models of capitalist development tend to
differentiate between liberal market economies like the United
States dominated by market coordination and coordinated market
economies like Germany that highlight nonmarket coordination
schemes. Institutional advantages of the liberal type inform reform
initiatives in coordinated market economies, involving the domain
of entrepreneurship policy. These efforts in the liberal reshaping
of coordinated varieties of capitalism by the use of
entrepreneurship policy need to be critically assessed. The case of
entrepreneurship policy in Germany provides related insights on the
prospects of these efforts. It gives evidence for the suggestion
that the systemic character and institutional embeddedness of
entrepreneurial activity need to be adequately reflected in the
design of entrepreneurship policy.
Keywords Germany . varieties of capitalism . entrepreneurship
policy . national innovation system . institutional reform .
coordinated market economy
JEL Classification B52 . M13 . P16 . P17 . P51
1 Introduction
The notion of entrepreneurship policy has become a key motive in
policy-related discourses on institutional reforms all over the
OECD world. The underlying tendency of perceiving entrepreneurship
as a key factor in the promotion of innovation, employment and
economic growth is closely related with debates on the comparative
institutional advantages of diverse national models of capitalist
development. A most influential conceptualization in this regard is
the ‘Varieties of Capitalism’ approach, which differentiates
liberal market
J Ind Compet Trade (2010) 10:319–341 DOI
10.1007/s10842-010-0086-x
A. Ebner (*) Professur für Sozialökonomik, Fachbereich
Gesellschaftswissenschaften, Goethe-Universität Frankfurt,
Frankfurt, Germany e-mail:
[email protected]
economies like the United States dominated by market coordination
and coordinated market economies like Germany, whose coordination
mechanisms leave considerably more space for nonmarket schemes.
Coordinated market economies are said to specialize in incremental
innovations carried out by large enterprises. Liberal market
economies are said to exhibit advantages in radical innovations,
which is due to their flexible institutional setting that is
conducive to entrepreneurial start-up activities. This competitive
advantage of the liberal type informs market-oriented reforms in
coordinated market economies. Entrepreneurship policy is usually
addressed as a centrepiece of these efforts. Viewed in this
setting, the case of Germany provides further insights on the
prospects of these efforts. It gives evidence for the fact that the
systemic character of entrepreneurial activity and its embedding
institutional environment need to be adequately reflected in the
design of entrepreneurship policy. Varieties of capitalism come
together with varieties of entrepreneurship. Entrepre- neurship
policy thus needs to be sensitive to the specificities of
historically rooted varieties of capitalism with their complex
institutional set-up.
The following presentation proceeds as follows. The first section
sketches a conceptual framework for assessing the rationale of
entrepreneurship policy. As the entrepreneurial operations within
an economy are embedded in a distinct socio-economic order, so is
the articulation of entrepreneurship shaped by institutional
complementarities that specify the corresponding varieties of
capitalism and their complementary sub-systems, involving the
particular systems of innovation. The second section surveys the
institutional determinants of Germany’s social market economy,
addressing key complementarities that are subject to ongoing
efforts of institutional reform. This leads to an exploration of
the ongoing hybridisation of the German variety of capitalism. The
third section highlights the matter of entrepreneurship in the
context of the German innovation system, which is viewed as a most
relevant subsystem of the German variety of capitalism. Its
institutional peculiarities are at the root of further concerns
with the foreseeable prospects and limits of entrepreneurship
policy in Germany.
2 Theorising on entrepreneurship and innovation: bringing
capitalism back in
Representing a most influential strand of theorising on
entrepreneurship and innovation, Schumpeter’s theory of economic
development defines innovation as the internal force of
discontinuous change, carried out by means of an entrepreneurial
introduction of new combinations of productive factors. Crucially,
according to Schumpeter, this developmental perspective needs to be
specified in institutional terms. First, it applies to the
development process of modern capitalism as an economic system,
which goes through various historical phases that shape the
expression of entrepreneurial activities. Accordingly, the diverse
institutional expressions of entrepreneurship in the private sector
are a historically-specific feature of modern capitalism. Second,
entrepreneurship is also subject to various national influences
that reflect a specific institutional environment, involving
wide-ranging aspects such as industrial specialisation, social
structure, legal order and cultural norms (Schumpeter 1939). In
reiterating this Schumpeterian position from an institutionalist
perspective, it may be argued that entrepreneurship is embedded in
distinct institutional frameworks and knowledge infrastructures,
which reflect the opportunity space of a particular socio-economic
order (Ebner 2010).
The systems of innovation approach provides a most relevant
framework for elaborating on this perspective. It examines
collective entrepreneurship in the generation and assimilation of
innovations within a given territorial setting. In addition to
business firms
320 J Ind Compet Trade (2010) 10:319–341
as a principal terrain for innovation, further elements such as
R&D and education are taken to the fore as components of
institutional networks in the private and public sector that
contribute to the introduction of new technologies. Industrial
structures and the institutional set-up of an economy determine the
shape and performance of innovation systems, which articulate a
specific entrepreneurial potential (Freeman 2002; Lundvall et al.
2002). Government, law and culture delineate an institutional arena
on the national level, which affects the intensity and direction of
technological innovation (Lundvall 1992; Nelson and Rosenberg
1993). In globalization, however, national settings are confronted
with a reconfiguration towards international openness and market
dynamics, which invokes a hybridisation of innovation systems
(Galli and Teubal 1997; Freeman and Soete 1997). The linkages among
the co-evolving sub-systems of the national economy thus become key
factors in the developmental process.
Indeed, the ‘innovative capacity’ of a national innovation system
reflects specialization patterns and related competitive advantages
that are based on variations in interlinked factor conditions such
as skilled human resources, efficient R&D endowments and a
financial system that supplies venture capital (Furman et al.
2002). In terms of the Porterian ‘competitive advantage of
nations’, national economies will excel in those industries, which
mirror competitive advantages that are rooted in historically
evolving institutional capacities, as reflected by technological
and organisational skills. For instance, financial systems based on
capital markets stand out in promoting radical technological
innovation by means of providing risk capital. Bank-based financial
systems tend to support long-term investment in ‘intangible assets’
such as workforce training (Porter 1990). A reconsider- ation of
these characteristics allows for stylizing distinct types of
national innovation systems. Patel and Pavitt distinguish ‘myopic’
and ‘dynamic’ innovation systems. The United States stand for a
myopic innovation system with short-term market orientation.
Investment in technology is said to be exclusively oriented towards
existing demand, framed by an organisational setting that separates
financial and technical competence. Historically, Germany has been
standing for the less market-driven, rather long-range oriented
type of the dynamic innovation system. Learning processes and other
intangible assets are said to be considered as key arguments in
investment decisions, which points to training and education
programmes that sustain industrial learning (Patel and Pavitt
1994).
However, such an exploration of comparative innovation patterns may
benefit enormously from going back to Schumpeter’s original
concerns with the institutional specifics of the capitalist
process. This requires a further broadening of the analytical
perspective, which needs to account for both the national varieties
and cross-national commonalities of the capitalist order. Such a
perspective involves an exploration of the institutional tension,
which might arise from the developmental dynamics of change and the
maintenance of systemic coherence (Streeck 2009; Jackson and Deeg
2008; Hübner 2009). Bringing the political economy of capitalism
back in to the theory of entrepreneurship and innovation is thus
the primary task at hand—with far reaching implications for the
analysis of entrepreneurship policy.
Indeed, current efforts in comparative institutional analysis
highlight the diversity of national models of capitalist
development and the institutional foundations of their innovation
patterns. A most influential conceptualization in this regard is
the ‘Varieties of Capitalism’ approach, which aims at a
firm-centred analysis of micro-behaviour in the exploration of
national types of capitalist development—approached in terms of the
institutional foundations of competitive advantage, which are set
to determine firm strategies. These include the systems of finance,
corporate governance, industrial relations, education and training,
and inter-firm relations. In this institutional context, firms
face
J Ind Compet Trade (2010) 10:319–341 321
coordination problems in their relationships with other firms and
agents that are reflected by the prevalent level of transaction
costs (Hall and Soskice 2001). Two varieties of capitalism are
differentiated ideal typically:
& Liberal market economies with a dominant pattern of market
coordination through investment in transferable assets.
& Coordinated market economies with a dominant pattern of
strategic coordination through investment in specific assets.
These dichotomised ideal types are outlined in Table 1. Liberal
economies such as the United States share the market-oriented
characteristics of
short-term orientated company finance, deregulated labour markets,
general education, and strong inter-company competition. In
coordinated economies such as Germany, the strategic behaviour of
firms is coordinated to a much larger extent through nonmarket
mechanisms, basically characterized by long-term company finance,
cooperative industrial relations, high levels of firm-specific
vocational training, and inter-firm cooperation in technology and
standardization, framed by industry associations. Liberal market
economies exhibit advantages in radical innovations, due to their
flexible institutional setting that is more conducive to
entrepreneurial start-ups with their need for venture capital.
Coordinated market economies tend to specialize in incremental
innovations within stable organizational settings, based on
endowments with skilled manual workers, long-term capital
investments, and cooperative labour relations. Crucially, these
capitalist varieties specialise in industrial areas that complement
their particular institutional advantages. As there is no
single-best model achievable and as the gradual character of path
dependent institutional change excludes options of isomorphic
convergence, the diversity of capitalist models prevails. Still,
the liberal model may prove to be supreme in times of rapid
technological change (Hall and Soskice 2001: 38–41, Soskice 1994;
Boyer 2003).
In this view, the systemic dynamism of institutional stability and
change is fuelled by the impact of complementarities among the
major institutional subsystems of the capitalist varieties. This
scenario implies that each set of institutions depends on others
sets in order to function effectively. In the words of Hall and
Soskice: ‘It suggests that nations with a particular type of
coordination in one sphere of the economy should tend to develop
complementary practices in other spheres as well’ (Hall and Soskice
2001: 18). This phenomenon is caused by positive feedback effects:
‘One set of institutions is said to be
Table 1 Varieties of capitalism (Hall and Soskice 2001)
Subsystems Liberal market economies Coordinated market
economies
Corporate governance Short-term financial resources with publicly
assessable market monitoring
Long-term financial resources with relational and reputational
monitoring
Industrial relations Market-oriented capital-labour relations with
competitive wage setting
Cooperative capital-labour relations with bargained moderation in
wage setting
Education and training Investment in general skills and human
capital
Sunk investment in firm- and industry- specific skills and human
capital
Intercompany relations Competitive standardisation and market-based
technology transfer
Commonly promoted standards and cooperative technology
transfer
Country example United States Germany
Source: Adapted from Hall and Soskice (2001)
322 J Ind Compet Trade (2010) 10:319–341
complementary to another when its presence raises the returns
available from the other’ (Hall and Gingrich 2009: 136). Put
differently, the complementarity of institutions implies that the
presence of one institution increases the efficiency of the other
one (Amable 2003: 6). Accordingly, when institutions facilitate
market coordination in one domain, these patterns of coordination
will support similar forms of coordination in other domains as
well. For instance, short-term finance requires low barriers to
market entry and exit, thus it exhibits an institutional fit with
flexible industrial relations systems. In formal terms,
complementarities may be defined as constellations where the
difference in utility between two alternative institutions, say
U(x’)–U(x”) increases for all actors in domain X, when z’ rather
than z” prevails in domain Z, and vice versa. If the additional
conditions of supermodularity exists, x’ and z’ (as well as x” and
z”) complement each other and constitute alternative equilibrium
combinations. This logic of complementarities implies a functional
interdependence among institutions across different domains.
Accordingly, suboptimal arrangements may persist beyond systemic
optimality consid- erations (Aoki 2001).
An important implication of this view on complementarities is that
viable policy changes must be compatible with existing
institutional patterns, that is, they must be ‘incentive
compatible’ with the coordination mechanisms of the prevailing
political-economic system and its particular bent towards market-
or non-market coordination. It follows that the dynamism of
institutional change is predicted to be incremental, for it needs
to contain a wider array of linkages among the institutional
subsystems. Complementarities are thus viewed as key components in
the evolution of capitalist varieties—and this implies that they
also shape the institutional architecture of national innovation
systems, which may be viewed as subsystems of the capitalist
varieties (Hübner 2009; Ebner 1999; Amable et al. 1997).
Accordingly, institutional complementarities resemble historically
variable con- stellations among sub-systems with varying degrees of
coherence (Amable 2003; Mayntz 2006). Moreover, there is no
functional determinism in the notion of complementarities due to
the different rationales and actor constellations of the
interacting subsystems, which promote the persistence of
institutional diversity in capitalist development (Boyer 2005). The
endemic uncertainty concerning the functional relationships among
complementary institutional sub-systems resembles the dynamics of
evolving complex systems, involving trial-and-error search for
local fitness, path dependence and multiple equilibria beyond
optimality considerations (Hölzl 2006). Thus, the economic
performance of actually existing varieties of capitalism may be
most adequately explored in the conceptual terms of evolutionary
considerations (Hodgson 1996).
Implications for a conceptual assessment of institutional change
are straightforward: instead of radical alterations of the actually
existing varieties of capitalism, a wide scope for institutional
‘hybridization’ may take place, which changes the quality of
complementarities by adding new institutional components (Jackson
and Deeg 2006). On a conceptual level, speaking of hybridization
implies dealing with deviations from empirically grounded ideal
types and thus allows for an understanding of capitalist diversity
in terms of institutional recombination and change (Crouch 2005).
Institutional change in varieties of capitalism, however, is to be
perceived as a subtle political process that is covered by the
temporary stability of formal institutional regimes. At this point,
state-market relations as well as the organisational pattern of
interest groups have a major role to play (Hancké et al. 2007).
This applies well to recent liberalization efforts in coordinated
market economies, which may be approached as a general trend of
disembedding market forces by legal-political means, yet on
different national pathways and confronted by distinct social
counter-movements, to put it in Polanyian terms (Streeck and Thelen
2005). The complex features of the underlying
J Ind Compet Trade (2010) 10:319–341 323
political process generate manifold unintended consequences through
complex interactions. Thus, there is no unequivocal ‘move to the
market’ but rather an undetermined search process in the face of
pressing socio-economic problems (Hall and Thelen 2009:
266–267).
The tendency of an institutional hybridisation based on
liberalisation measures is well exemplified by recent debates on
the rise of an ‘entrepreneurial economy’ all over the OECD world,
reiterating the discourse on the crisis of coordinated market
economies in times of rapidly changing techno-economic paradigms.
The corresponding call for institutional reform pinpoints the
micro-foundations of innovation, in particular the role of new
business ventures in structural change. As a matter of fact, major
impulses for employment creation and income growth in the OECD
world during the recent decade have been generated by start-up
enterprises of diverse scale and scope, which are set apart from
the operations of large corporations in global production and
service networks. Some countries cope with these tendencies better
than others, as exemplified by the advent of biotechnology as an
industrial fields marked with outstanding start-up activities,
which seem to be predominantly successful in the context of liberal
market economies (Casper and Murray 2004). From a ‘varieties of
capitalism’ perspective one may expect liberal market economies to
exhibit a major institutional advantage, whereas coordinated market
economies would face reform challenges in line with their reliance
on non-market coordination mechanisms. Obviously, the logic of the
‘entrepreneurial economy’, as outlined by Audretsch and others,
comes to resemble the key characteristics of the liberal market
economy in the varieties of capitalism perspective. Yet the
explanatory range of the concept of the entrepreneurial economy is
associated with the more general level of a productive paradigm. In
this manner, the entrepreneurial economywith its start-up dynamics
is set to replace the Post- War model of a ‘managed economy’ with
its large business organisations. Features of this allegedly
emerging entrepreneurial economy are as follows (Audretsch 2007;
Audretsch and Thurik 2000):
& the defining logic of the market process, & the
commercial role of knowledge, & the industrial dynamics of
business start-ups, & the developmental impact of radical
innovation, & the policy role of civil society.
All of this is said to be well represented by the performance
profile of the U.S. economy since the Reagan era of the 1980s. It
provides a model of entrepreneurial dynamism that counters the
bureaucratised setting of coordinated market economies with their
prevalence of large and inflexible business organisations (Acs and
Stough 2008). Yet something is to be added to this historical
prototype, namely the matter of the knowledge-based economy, which
provides the resources for entrepreneurial innovations. According
to Audretsch’s ‘knowledge spillover theory of entrepreneurship’,
national differences in entrepreneurial performance reflect
knowledge-related institutional contexts. Those which are rich in
the generation and diffusion of new ideas will also generate more
entrepreneurial opportunities, resulting in a higher level of
start-up activity, given adequate endowments with venture capital
and other market-related context factors that are especially
relevant on the regional level of development (Audretsch 2007;
Audretsch et al. 2006).
In supporting this developmental tendency, a new policy approach is
emerging which aims at the support of the creation and
commercialization of knowledge by promoting new firms that combine
technological novelty and organizational dynamism in the emerging
knowledge-based economy (Hart 2003). Originally conceptualised and
implemented in the
324 J Ind Compet Trade (2010) 10:319–341
United States, entrepreneurship policy encompasses multiple levels
of activity in a multidimensional structure of systemic linkages,
ranging from individuals to enterprise organisations, and to
clusters or networks. Related policy instruments thus transcend the
fields of industrial policy, as they address taxation, immigration,
or education, as well as more interventionist instruments such as
public resources for finance or training (Audretsch et al.
2007).
The question is, however, what kind of entrepreneurship policy is
desirable in the context of coordinated market economies. The
caveat of institutional specificity with its insistence on the
systemic limits of policy interventions applies also in this case.
The requirement of incentive compatibility implies that merely
transplanting a policy concept from a liberal market economy into a
coordinated variety of capitalism will not work. Most prominently,
prevailing complementarities will obstruct such a redesign of the
economic system, leading to inefficiencies and other unintended
consequences. This aspect is aggravated by the fact that the
relevant institutional environment in explaining different patterns
of entrepreneurship involves not only skills and motivations that
stem from technological and legal infrastructures but also
collectively shared cultural values which frame institutional
complementarities on the level of ideologies and interpretations
(Ebner 2009; Lundström and Stevenson 2005). Indeed, those social
structures, which are a most indispensable element of innovation
processes, need to be perceived as culturally entrenched in norms
and values that shape the underlying entrepreneurial efforts
(Lundvall 1992; Ebner 1999). Also, the emergence of political
coalitions for institutional change mirrors both social interests
and cultural norms, which contribute to the actual orientation of
entrepreneurship policy and its fit with the socio-economic
environment (Bruff 2008). The case of institutional hybridisation
in the German political economy thus provides a most informative
example for the ensuing prospects and limits of this novel kind of
policy.
3 Institutional change in the German variety of capitalism: towards
an entrepreneurial economy?
The German economy has been Europe’s export-oriented ‘growth motor’
ever since the Post-War era, elevating its ‘social market economy’
to the status of an international role model that combines
competitive openness with an extensive welfare state. From a
historical point of view, the roots of these developments may be
traced in the catch-up growth of the German Empire in the last
quarter of the nineteenth century, which was already based on major
efforts in education, research and innovation. Indeed, both the
modern research university and the science-based firm originated
during the late 19th century in Germany. They formed the backbone
of an industrial system that enabled Germany to overtake British
technological leadership in key industries such as synthetic dyes
quite rapidly (Murmann 2003; Keck 1993). After World War II, the
Western German ‘economic miracle’ of the 1950s made the Federal
Republic an export-oriented economic power in the world economy,
home-base of major multinational enterprises and home- market of
competitive industries such as electronics, pharmaceuticals and
automotives. Framed by the Atlantic ‘golden age of growth’, this
development trajectory depended also on a favourable international
economic environment with expanding trade in the context of the
Bretton Woods exchange-rate regime (Eichengreen 2007).
The corresponding production model underlines the non-Fordist
specificity of German industry regarding small business networks,
quality production and social corporatism. The concept of flexible
specialisation, as put forward by Piore and Sabel, addresses a
sectoral
J Ind Compet Trade (2010) 10:319–341 325
production model in industries like steel, chemicals, machine tools
and automobiles. Its adaptive flexibility to rapid shifts in demand
is based on a skilled workforce, cooperative industrial relations,
and high levels of social compensation (Piore and Sable 1984; Lane
1988). In related terms, coping with the relationship between
industrial relations and technological change in Germany, Sorge und
Streeck have suggested the notion of diversified quality production
as a representation of competitive advantages in the specialised
production of high quality manufactured goods. Again, the adaptive
flexibility of this production system and the integrative role of
the workforce in industrial relations are decisive (Sorge and
Streeck 1988; Streeck 1997).
This production regime of the Germany variety of capitalism
coincides with the integrative ideology of the ‘social market
economy’. The underlying ordo-liberal credo of German economic
policy associated the competitive order of the market system, which
should promote entrepreneurial dynamics through
competition-promoting policies, with institutional pillars such as
religion-based community orientation that should confront the
disruptive effects of socio-cultural rationalisation. This
normative position would be executed by a strong state with a level
of policy competence fit to reject the demands of special interest
groups (Watrin 1998; Rieter and Schmolz 1993). The notion of the
social market economy portrays the ordo-liberal model as an order
of social reconciliation, settled in the historical context of
Post-War Germany with its diverse political and ideological
factions. An ‘enlightened’ Catholic social philosophy with its
principles of social balance and subsidiarity was to be combined
with the Protestant ethos of entrepreneurship and communal
cooperation, social democratic concerns for social security, and
liberal principles of civic progress in liberty. This social market
economy should facilitate a third way beyond liberal capitalism and
state socialism (Ebner 2006; Manow 2001). Both the quality-
orientation and flexibility of the German production model, which
required the social integration of a well-trained workforce, were
framed by the ideological setting of a neo- corporatist consensus
democracy that would provide the political backbone for the
international competitiveness of German industries (Abelshauser
2004).
Framed by these conditions, the key complementarities in the German
coordinated market economy evolved on the basis of systemic
linkages among the following subsystems between the 1950s and 1980s
(Hall and Soskice 2001: 28):
& Corporate governance: permitting the flow of long-term
financial resources with reputational monitoring as a non-market
coordination mechanism in the financial sector.
& Industrial relations: permitting cooperative capital-labour
relations with strategic bargaining and situational moderation in
centralised wage setting as exercised by employer associations and
labour unions.
& Education and training: permitting sunk investment in firm-
and industry-specific types of skills and human capital, organised
in an encompassing framework that involves self- governing business
associations.
& Intercompany relations: permitting the non-market diffusion
of common standards and practices that support a cooperative mode
of inter-firm technology transfer.
These complementarities have served as pillars of Germany’s
‘managed economy’, as Audretsch and others would have it. The
corresponding pattern of managerial organisation in large business
firms and dense inter-form networks has been held together by
centralised stakeholder supervision, often coordinated by major
banks in a likewise centralised financial sector. The basic
rationale of this system of non-market coordination involved
comprehensive institutional constraints regarding entrepreneurial
risk-taking in favour of
326 J Ind Compet Trade (2010) 10:319–341
more consensual patterns of activity—both in the business domain as
well as in politics (Kitschelt and Streeck 2004).
Given the competitive advantages of its production regime, Germany
moved rather unhampered through the international stagflation phase
of the 1970s by flexibly adapting its production regime, especially
the mechanisms of wage coordination. Even the liberal- conservative
power shift that came with the Kohl government in 1982 did not
imply a political-economic break with non-market coordination (Hall
2007: 60–63). However, since the 1990s, unemployment, growth
stagnation and the fiscal burdens of reunification have exercised
further pressures for institutional reform, highlighting an
institutional sclerosis of the German system that was aggravated by
the adverse impact of international macroeconomic policy
conditions, in particular by the Maastricht Treaty criteria (Vitols
2006). The actual situation is somewhat paradoxical. Germany is the
production base for almost one quarter of the European GDP and one
of the world’s most decisive export- oriented economies with a
competitive industrial base that produces almost one third of its
GDP exclusively for an export volume, which amounts to 10% of world
exports. Yet Germany is also ridden with persistent structural
problems in the areas of unemployment and economic growth,
reflecting aggregate demand problems that are feeding back on
deficits in public budgets and welfare systems (Carlin and Soskice
2009). On the supply- side, then, a manifest lack in start-up
activities completes the critical picture, which substantiates the
thesis that the German production regime remains biased against
entrepreneurial start-ups (Heinze 2004).
Given these qualifications, the ‘entrepreneurship gap’ of the
German economy remains obvious: the percentage of owners and
managers of business firms relative to the labour force moved from
a mere 7% during the 1970s and 1980s to only 9% during the 1990s
and 2000s. This minor increase in the rate of entrepreneurship
separates the German development profile markedly from other OECD
economies (Freytag and Thurik 2007). It is no surprise that the
World Bank’s global ranking of the institutional environment of
entrepreneurship puts Germany only on rank 25, lagging behind major
OECD members like United States, Great Britain, or Japan. While
German scores are above average in legal aspects such as contract
enforcement, it underperforms most prominently regarding the ease
of starting and closing a business firm (World Bank 2009). A survey
of the German performance in the Global Entrepreneurship Monitor
reveals a similar state of affairs. Germany takes an outstanding
position in the infrastructure for public subsidies, yet it is only
on a middle level in finance, regulation and taxation—with even
worse ranks regarding the entrepreneurial culture and preferences
for business start-ups (Böth and Scott 2007).
More specifically, as put forward in the Global Entrepreneurship
Monitor, the German institutional environment for entrepreneurship
contains strengths in physical infrastructure, policy support for
business start-ups, and legal enforcement of property rights. Most
pressing weaknesses include bureaucratic regulations for new
business ventures and restricted market entry, lack of
entrepreneurial business training in the education system, and the
marginal role of entrepreneurship in the hegemonic set of social
values. Measured in its total early-stage set of entrepreneurial
activity, Germany takes one of the lowest ranks in start-up
activity among the OECD countries. Also, German start-ups contain a
relatively high degree of necessity-driven entrepreneurs, who are
not after business opportunities but lack employment
alternatives—an aspect, which may contribute to a less viable
market performance (Brixy et al. 2009). The matter of
complementarities addresses these issues reasonably well, as
empirical evidence suggests that actual entrepreneurship is
decisively determined by institutional factors such as taxation and
regulation (Audretsch et al. 2006;
J Ind Compet Trade (2010) 10:319–341 327
Audretsch and Thurik 2000). Besides, when it comes to the business
failure rate, German scores are only on EU25 average, which
underlines the lack of market viability (European Commission
2007b).
In a global comparison, the liberal model of the United States does
significantly better in terms of entrepreneurial activity than any
European economy. By viewing the establishment of entrepreneurial
start-ups as a distinct process, the Flash Eurobarometer data
highlight European weaknesses in the planning phase of considering
yet giving up an entrepreneurial venture (Grillo and Thurik 2008).
Apart from the impact of institutional infrastructures on the
realisation of entrepreneurial projects, further differences in
social preferences for entrepreneurial business start-ups may be
taken to the fore. Flash Eurobarometer data from 2007 indicate that
the preference for employee status has remained unchanged in both
the EU25 and EU15 since 2004 with 50% and 51%, respectively. In
contrast to that, a remarkably high proportion of the U.S. sample
prefers self-employment with a ratio of 61% that has not changed
since 2004 (European Commission 2007a: 6). In the German case these
differences are even more obvious. Being an employee in Germany is
valued higher throughout the 2000s than being self-employed—with
shares of 54% to 41% in 2007 (European Commission 2007a: 7). Table
2 illustrates the German position in the social valuation of
self-employment: the dominant preference for being an employee is
above EU25 average, on par with France, and significantly higher
than the UK, whereas the United States stand out with a dominant
preference for self-employment. Similar patterns hold for the
relative strength of the desire to become self-employed, as
depicted in Table 3. Obviously, differences in production regimes
and institutional frameworks feed back on social preferences for
entrepreneurial self-employment.
A further significant cross-national difference, which also points
at complementarities between the education system and the
preference for entrepreneurship is echoed by individual assessments
of the role of school education in furthering entrepreneurial
interests to start a new business. While Germany is way below the
EU25 average, the United States show the most favourable position
once again—well before the UK, which is marked as the major liberal
variety of capitalism in Europe (European Commission 2007a: 79-80).
However, also certain ‘commonalities of capitalism’ are in place.
For example, the social status of entrepreneurs does not differ
significantly between Europe and the United States. Also,
individual motives to become an employee or self-employed as well
as the raking of finance as primary hindrance of entrepreneurship
highlight similarities (European Commission 2007a: 12, 38,
52).
In this context of cross-national differences, the German policy
discourse is preoccupied with an infusion of entrepreneurial
elements into the economy, a program that is put forward under the
label of flexibilization to safeguard international
competitiveness, thus promoting institutional changes that are
currently transforming Germany’s ‘social market
Table 2 International comparison: choice of employment status
(2007, %)
Being an employee Being self-employed None of these Not
available
EU-25 50 45 2 3
Germany 54 41 2 3
France 55 41 2 2
UK 49 49 1 1
USA 37 61 1 1
Source: European Commission (2007a: 9)
328 J Ind Compet Trade (2010) 10:319–341
economy’ into an institutional hybrid whose actual shape is not yet
clear. In this ‘clash of cultures of production regimes’, which
confronts the German model with the hegemonic position of the
liberal market economy of the United States, economic problems are
usually attributed to sclerotic weaknesses of cooperative
coordination (Abelshauser 2003). Indeed, for the major currents of
the German reform discourse, the matter of entrepreneurship policy
equals liberalisation efforts that aim at transplanting elements of
liberal market economies into the setting of the German coordinated
market economy. Yet the most pressing problem of unemployment may
not necessarily be an indicator of an institutional failure of the
German variety of capitalism, which would herald a complete
overhaul of the involved subsystems. Instead, it may result from a
distorted structuration of the workforce due to rapid industrial
restructuring, as less-skilled Fordist workforce segments remain
unemployable in a high-skill Post-Fordist production regime. The
international competi- tiveness of the latter may speak for the
persistence of institutional advantages in the German brand of
non-market coordination (Abelshauser 2006). Accordingly, a key
question is whether a specific brand of entrepreneurship policy
that would be set apart from liberal connotations could combine the
strengths of non-market coordination with efforts in promoting the
innovation profile of the German economy while confronting its
economic problems.
Major segments of the reform discourse push for a strengthening of
market coordination, which is said to be more conducive to the
requirements of capital accumulation. The corresponding
reconfiguration of the coordination environment of business firms
pinpoints the key complementarities of the German variety of
capitalism. This involves not only the drive for market-oriented
corporate governance and the introduction of markets for corporate
control, but also the reduction of private sector initiatives in
firm-specific education and training, which is reflected by a
crisis of the apprenticeship system. Reform efforts that aim at
more flexibility in wage setting and labour regulations with an
emphasis on the productivity of firms also highlight a
wide-reaching reconfiguration of the German brand of corporatism.
Both ‘social partners’ are subject to decreasing organizational
capacity, which does not only allow for an adaptation of firm-level
wages to volatile local conditions, but also implies a
fragmentation of interest groups in labour relations—an aspect that
may lead to an intensification of distributional conflicts,
although the institutional arrangement of co-determination, which
gives the unions a strong standing in the supervisory boards and
worker’s councils of large firms, remains firmly in place. Similar
patterns of persistence and change in non-market coordination apply
to the German financial system with its traditionally bank-based
governance procedures in capital allocation. Although it has opened
up for capital markets, it still differs markedly from British or
US-American types of market-based financial systems, as reflected
by the
Table 3 International comparison: desire to become self-employed
(2007, %)
Self-employment very/rather desirable Self-employment undesirable/
not desirable at all
Not available
J Ind Compet Trade (2010) 10:319–341 329
marginal role of German markets for corporate control. In
consequence, the infamous ‘Deutschland AG’ with its
industry-finance linkages that are underpinned by a setting of
intermediate institutions remains subject to path dependent
alterations with uncertain outcomes (Streeck 2009).
The matter of entrepreneurship plays a key role in the German
reform discourse, and indeed entrepreneurship policy emerges as a
terrain of ongoing controversies on the actual shape and impact of
entrepreneurship in the reconstruction of the German variety of
capitalism. The actual conditions of entrepreneurship are
effectively approached in terms of the prevailing institutional
infrastructure. The German trade regime, to begin with, is subject
to the rules and regulations of the European Union ever since the
Rome Treaties of 1957 installed a Customs Union in Western Europe.
Yet the relatively high degree of openness for foreign trade and
investment is paralleled by areas of explicit protectionism such as
agriculture, accompanied by non-tariff protectionism in emerging or
declining industries that are supported by subsidies and other
instruments of industrial policy. Selective interventions may have
an enabling impact on entrepreneurial start-ups, yet when it comes
to rent-seeking their impact clearly results in a misallocation of
resources. Moreover, the institutional specificities of the German
economy—just to mention the coordinating role of both banking
sector and labour unions in non-market decision-making— may have
been responsible for a long-standing underperformance in capital
inflows, which is usually interpreted as a key indicator of
entrepreneurial opportunities in the trade and investment regime of
open economies (Siebert 2005).
Entrepreneurial opportunities are also subject to a distinct
competition regime, which is shaped by supra-national regulations
on the level of the European Union. German Post-War efforts in
boosting a competitive regime that reflects market principles have
persistently influenced the European policy agenda, resulting in
the adoption of regulations for antitrust, mergers, and cartels
that resemble concepts rooted in the German ordo-liberal tradition
of competition policy (Streit 1998). A key player in Germany’s
competition regime is the Federal Cartel Office (Bundeskartellamt),
which governs the regulations of competition policy in agreement
with the European Commission. Next to the matter of business
mergers and monopolistic market settings also the infrastructural
conditions of competition are subject of its operations,
underlining the conceptual primacy of the notion of the ‘dominant
position’ of a firm with all of its various forward and backward
linkages in a market. The German Monopolies Commission
(Monopolkommission), made up of selected representa- tives of
academia and business, parallels these concerns with its reports
and recommen- dations. Still, the practice of German competition
policy is typically filled with exemptions from the rules. For
instance, mergers that lead to market dominance may be legal when
they are in line with R&D synergies. Also, the executive may
provide a ministerial permit (Ministererlaubnis) in the case of
mergers that have been rejected by the Monopolies Commission
although they seem to benefit the economy at large. Obviously, this
poses a major problem for entrepreneurial market entry, an aspect
that is also prevalent on the European policy level (Motta 2004;
Kühn 1997).
Furthermore, when it comes to market entry for start-ups as a key
issue of market competition, the public regulations of market entry
as well as the system of taxation may be taken into account. For
instance, the reported time for starting a business in Germany is
unfavourably settled on EU average, whereas the liberal market
economy of the UK fares much better (European Commission 2009a:
190). Thus, it has been argued that Germany’s low rate of start-ups
could be ascribed to constraining bureaucratic procedures, which
also include the cost of establishing a new venture. Capital
requirements for establishing a limited-liability company in
Germany, for example, are among the highest within the
330 J Ind Compet Trade (2010) 10:319–341
European Union. The German tax system is also denounced as an
impediment for entrepreneurship. A key criticism is related to the
fact that it biased in favour of profits from debt-financed
innovations, which aggravates risks of bankruptcy. The low capital
endow- ments and turnover rates of small entrepreneurial businesses
makes them most vulnerable to these regulations—and ongoing efforts
in reducing these tax-related burdens have not been all too
successful so far (Harhoff 2008).
Institutional reform with a drive for entrepreneurial activation is
an outstanding characteristic of the German labour market and
social policy regime. The relevance of this area is accentuated by
the observation that one third of the German GDP is allocated to
social policy issues, financing budgets for social transfers in
areas like unemployment benefits, health care provision, and
old-age pensions. The combination of labour market policy and
social policy has been a fundamental concern since the 1990s,
confronting fiscal pressures exercised by persistent unemployment
and further aggravated by reunification and demographic change.
Related liberalisation efforts since the 1990s may be evaluated as
an objective attempt at loosening some non-market coordination
mechanisms in order to make the basic system of strategic
coordination more viable, as exemplified by the local
differentiation of wage coordination and the activation approach in
labour market policy. An outstanding component of institutional
reform was the establishment of a secondary labour market,
characterized by low-wage and part-time jobs that should raise
employment in a manner that was more typical for liberal varieties
of capitalism and thus deviated from the ideological norms of the
social market economy (Hall 2007: 69–71). This orientation became a
priority after the failure of neo-corporatist labour market
initiatives in the shape of the doomed ‘Bündnis für Arbeit’, as the
red-green Schröder government began implement- ing reform proposals
of the ‘Hartz Commission’. Their key thrust, as bundled in the
‘Agenda 2010’ program, was a drive towards the entrepreneurial
activation of long-term unemployed by means of material incentives
that lower the reservation wage and facilitate an earlier re-entry
on the labour market—thus leading to a labour market dualism with
far reaching social consequences (Czada 2005).
The underlying activation approach may be viewed as a distinct
version of entrepreneurship policy, which aims at a support of
business start-ups. Its rationale hints at a move towards a liberal
variety of capitalism, as the systems of unemployment benefits in
liberal market economies are market-oriented in providing
incentives for pushing transfer-dependent unemployed to become
self-employed entrepreneurs who earn a market- generated income
(Asheim 2009). A key feature of this policy thrust in Germany has
been the ‘Ich AG’ program, which subsidizes the entrepreneurial
start-up efforts of unemployed beneficiaries. Obviously, in terms
of a distinction between necessity-driven and opportunity-driven
entrepreneurs, this program has primarily addressed the former. Its
sheer size is remarkable: during the mid-2000s almost half of all
start-up activities were subject to related subsidies. Yet its
performance has been subject to criticism, given the fact that
almost half of the subsidized new ventures have exited the market
within 5 years (Block and Sandner 2009). This empirical fact
indicates that labour-market incentives are insufficient as policy
devices for promoting entrepreneurial initiatives.
Accordingly, beyond the normative concerns of the liberalisation
discourse that shapes Germen reform efforts, entrepreneurship
policy needs to be based on solid conceptual foundations that
entail a notion of entrepreneurship which is compatible with the
institutional context of the prevailing variety of capitalism.
Obviously, varieties of capitalism come together with varieties of
entrepreneurship that are embedded in complementary institutional
sub-systems. Indeed, when it comes to an assessment of the German
situation, the need for reformulating the concept of
entrepreneurship becomes
J Ind Compet Trade (2010) 10:319–341 331
obvious. It needs to go beyond the emphasis on business start-ups,
in order to address the actual driving force of capitalist
development, namely technological and organisational innovations
that are commonly introduced by entrepreneurial start-ups in new
industries (Baumol 2004). Widely used entrepreneurship indicators
such as the percentage of owners and managers of business firms
relative to the labour force tend to overemphasise the issue of
self-employment while they neglect innovativeness and
competitiveness as entrepre- neurial features. For instance,
non-liberal types of welfare states tend to develop culturally
entrenched institutional incentives in taxation and regulation that
may be incompatible with entrepreneurial start-up dynamics
(Henrekson 2005). However, the conclusion that non- liberal welfare
regimes and a vibrant innovation performance are incompatible is
misleading. The issue is more complex: in fact, welfare state
expenditures and R&D expenditures may be positively correlated
while entrepreneurial activities in the market process cannot be
determined by R&D expenditures alone, for they are subject to
more comprehensive institutional influences (Heidenreich 2004).
Approaching the prospects and limits entrepreneurship policy in
Germany thus requires an account of the institutional architecture
of the German innovation system—conceptually perceived as a
subsystem of the German variety of capitalism.
4 Entrepreneurship policy and the restructuring of the German
innovation system
The domain of industrial policy may be singled out as the closest
predecessor of what has only very recently emerged as
entrepreneurship policy—given the fact that the German brand of SME
policy (Mittelstandspolitik) is less concerned with innovative new
businesses and more focussed on the general support of established
SME for structural purposes. While traditional types of industrial
policy have focused on large firms in both sunrise and sunset
sectors of the German economy, the most pressing task of modern
industrial policy is the promotion of entrepreneurial initiatives
on all organizational levels of the economy, regardless of the
scale and scope of the involved firms. Indeed, traditional
industrial policy has neglected the networks of small and
medium-sized enterprises that are a most relevant terrain of
employment, training and income generation in Germany’s production
regime with its regional basis in South-West Germany (Sorge 2006).
During the 1990s, the role of entrepreneurial business start-ups in
promising new industries has been recognized as a policy issue,
leading to initiatives such as the Bio-Regio contest that aimed at
the formation of regional innovation networks in biotechnology. In
this manner, the entrepreneurial reshaping of industrial policy
coincides with a regional and sectoral differentiation of the
German innovation system (Heidenreich 2005; Annesley 2004). This is
in line with advances in industrial policy that address the
regional knowledge base of innovation and industry evolution. Such
a knowledge-based industrial policy explicitly highlights the nexus
of entrepreneurship and innovation as driving forces of economic
growth (Aiginger 2007; Dobrinsky 2009).
Entrepreneurship policy in Germany has emerged as a differentiated
means for confronting unemployment and growth stagnation in the
context of this entrepreneurial and regional reorientation of
industrial policy. It aims at the support of viable entrepreneurial
start-up ventures and their innovation-oriented, knowledge-based
networks, which are most prominently identified in regional
constellations (Beckmann 2009). Thus, entrepreneurship policy may
be evaluated as a response to the problems of structural change in
former industrial core areas that have been suffering from economic
decline in both West and East Germany. More specifically,
entrepreneurship policy transcends
332 J Ind Compet Trade (2010) 10:319–341
traditional policy fields as it integrates policies for SME
support, competition, innovation, and education. This is due to the
fact that entrepreneurship relies on diverse institutional
resources and infrastructures that involve the provision of public
goods, financial and human resources as well as market governance
(Peneder 2009).
The question is, therefore, whether this kind of policy is
incentive-compatible with the institutional complementarities and
systemic interdependencies of the actually existing German variety
of capitalism and its distinct system of innovation. Is
entrepreneurship policy a vehicle for promoting the liberal
varieties of capitalism or is it a strategy for an updating of
coordinated market economies? Even though globalisation may
coincide with a global paradigm change towards an entrepreneurial
knowledge-based economy, still the varieties of capitalism
perspective provides convincing arguments for the position that the
local adaptation of this new paradigm will not result in an overall
convergence towards a liberal market economy. Although liberal
varieties may prove to be supreme when it comes to the absorption
of rapid technological change, the coordinated varieties exhibit
competitive advantages, which play out their strengths in the
setting of established paradigms (Hall and Soskice 2001). Moreover,
innovation indicators seem to suggest that the stylised innovation
performance of liberal varieties fits almost exclusively the case
of the United States whereas the performance of the UK and other
examples of liberal market economies is much more varied (Taylor
2004).
Despite the manifold structural problems it is safe to state that
Germany remains one of Europe’s most innovative economies.
According to the European Innovation Scoreboard, Germany is well
established in the group of innovation leaders, with an innovation
performance far above EU27 average—yet the performance gap in
favour of the United States remains significant (European
Commission 2009c). German Gross Expenditures on R&D equalled
about 2.5 % during the 2000s, well above OECD average. The private
sector takes a share of almost two-third of R&D expenditures; a
tendency that differs markedly from expanding public expenditures
in the United States and Japan. Industrial contributions to GERD,
however, are predominantly based in traditional high-skill,
high-quality industries such as automobiles, electronics,
chemicals, pharmaceuticals, mechanical engineering, and machine
tools whereas newly emerging high-technology industries like
microelectronics and biotechnology are comparatively
underrepresented—and the same applies to services at large. This
assessment holds despite recent advances in technological niches
such as nanotechnology and environmentally-friendly technologies
(Harhoff 2008). Indeed, the automobile sector has become
outstandingly active in its R&D operations, while international
trends rather put the focus on high-tech industries and knowledge-
intensive services. Basic research accounts only for 20% in the
overall R&D profile, which is way below OECD average—an aspect
that is aggravated by the fact that international R&D
investment in Germany only amounts to a share of nearly 20% in
overall R&D efforts (Legler et al. 2009; Rammer et al. 2004;
Prange 2005).
The matter of entrepreneurship enters this picture more visibly as
soon as it is realised that R&D in Germany, and across Europe,
is predominantly carried out in R&D facilities of large firms,
whereas R&D in the United States exhibits a larger share of
young firms, in particular in vibrant industries such as
biotechnology. Thus, the bias towards mature industries in the
German model of diversified quality production may obstruct
entrepreneurial start-up dynamics, which are typically most
relevant in new industries with a high level of market entry (Sapir
et al. 2003). Nonetheless, following the methodology of the
European Commission’s ‘Innovation Scoreboard’, there are positive
signs of an entrepreneurial turn to be taken into account. Germany
is well above EU average—yet significantly behind the UK—regarding
the sheer number of SMEs innovating in-house,
J Ind Compet Trade (2010) 10:319–341 333
innovative SMEs collaborating with others, and SME market entries
and exits (European Commission 2009c). Also, a comparatively high
share of German firms targets creativity as a problem-solving
competence in support of innovation (European Commission 2009b:
36).
The German innovation system is biased towards incremental
innovations, which are set apart from radical changes that are
driven by the disruptive introduction of new technologies. Again,
this constellation reflects the specialisation pattern of the
German production model and its key complementarities regarding
skilled workforce, cooperative technology transfer, and relational
monitoring in corporate governance. Close links between industry
and public research institutes constitute a further backbone of the
German innovation system, as represented by the science
associations of Max-Planck-Gesellschaft in basic research and
Fraunhofer-Gesellschaft in applied research. While the underlying
long-term approach of non-market coordination has been relatively
successful in the past settings of established technological
paradigms, it may lead to rigidities and a loss of efficiency in
the context of rapid technological change, when more short-term and
market oriented approaches come to gain in competitive impact
(Harding and Soskice 2000; Hall and Soskice 2001; Soskice
1997).
The latter aspect hints at recent changes in the institutional
setup of the German innovation system, moving it away from a focus
on innovation support that benefits research consortia among
established large firms. Indeed, public institutions of scientific
research are most intimately related with the R&D facilities of
multinational enterprises, whereas entrepreneurial spin-offs, which
tend to be highly relevant in newly emerging science-based
industries, remain comparatively underdeveloped. A telling
illustration of this deficit in knowledge-intensive
entrepreneurship is provided by empirical assessments of attitudes
towards innovation in national populations, using sources like the
World Values Survey. In the case of Germany, the socio-economic
role of science and technology is highly appreciated whereas the
attitudinal assessment of start-up activities and entrepre- neurial
risk-taking remains below OECD average (Witt and Redding 2009;
Belitz and Kirn 2008). A recent report on innovation indicators
even puts Germany on the worst rank among the OECD economies when
it comes to ‘attitudes regarding entrepreneurial risk’ (DIW 2009).
Again, the institutional and structural environment of the German
variety of capitalism feeds back on the subjective attitudes of the
involved economic agents.
Summing up, the distinct style of Germany’s coordinated market
economy shapes the institutional architecture of the German
innovation system. Its comparative advantage in incremental
innovation makes a general shift towards the type of start-up
dynamics that drives radical innovation in liberal varieties of
capitalism rather undesirable, although evidence on new
knowledge-based industries such as software and biotechnology
suggests that coordinated market economies provide adequate niches
for these industries in areas set apart from high-risk
constellations (Casper et al. 1999). Thus, finding the right fit
for an entrepreneurial dynamism that accounts for the key
complementarities in production, finance, education and innovation
poses the most decisive problem for entrepreneurship policy in
Germany. This set of problems reflects the fact that the strengths
of the German innovation system in terms of a sustained output of
triadic patents and an effective combination of competiveness and
innovativeness is met by prominent weaknesses that arise from a
shortage of human capital in engineering and high-tech industries,
an insufficient supply of venture capital as well as a slow growth
of knowledge-intensive services (Ebner and Täube 2009).
The matter of human capital is one of the most prominent issues in
these considerations. It sounded remarkable when the first Merkel
government announced a boost of R&D spending by 6 billion
Euros, although it remained an insufficient attempt at reaching
the
334 J Ind Compet Trade (2010) 10:319–341
strategic threshold of a 3% GDP share for gross expenditures in
research and development until 2010, as announced in an ambitious
earlier plan. Yet it is not only the matter of financial resources
that is at hand, even more pressing is the problem of manpower in
innovation. The gap in human capital that would be required to put
a GERD/GDP ratio of 3% to efficient use is outlined by 100.000
research scientists and engineers. This aspect becomes even more
problematic when the current decline of engineering graduates at
German universities is taken into account. Neither governmental
initiatives for attracting international manpower in
knowledge-intensive industries, like the Greencard initiative for
foreign IT experts in 2000, nor the reforms of the German system of
higher education in 1998 and 2002, which have aimed at increasing
the autonomy of universities to become more entrepreneurial could
counter these issues (Grupp et al. 2008). Indeed, the lack of human
capital in engineering and high-tech industries demands more
attractive conditions for these areas of the research and education
system. Also, an entrepreneurial extension of university-industry
relations has been singled out as a requirement when it comes to
the entrepreneurial commercialization of knowledge in science-based
industries (EFI 2009). As these aspects echo an inherent lack of
entrepreneurial competences in the German innovation system at
large, it seems that the problem of human capital in innovation is
not to be solved on the level of education and training
alone.
Furthermore, the bank-based financial system with its equity and
monitoring interdependencies needs to be taken into account. The
most significant changes to Germany’s financial system that could
indicate an entrepreneurial turn of affairs have been propelled by
the advent of venture capital and the emergence of rather volatile
stock market segments for entrepreneurial ventures. Although the
role of venture capital in Germany is far from its relevance in
liberal market economies, both the UK and Germany account for 50%
of venture capital investment in Europe. Yet the failure of
Germany’s ‘Neuer Markt’ indicates that institutional transplants
from a liberal variety of capitalism lose their momentum due to a
mismatch with the complementary institutions of the German variety
of capitalism. The prevailing type of incremental innovation in the
organisational routines of the German production regime contradicts
the uncertainty of radical innovation in newly established and more
easily adaptable organizations. The mismatch also involves the
labour market. The comparatively low degree of inter-firm mobility
and wage flexibility obstructs adaptive competences of business
firms in coordinated market economies—with negative effects on
entrepreneurial dynamics (Vitols and Engelhardt 2005).
The reconfiguration of the German innovation system towards a more
entrepreneurship- oriented approach is well represented by
science-based industries like biotechnology with their cooperative
research and commercialisation agreements between firms,
universities and non-university research institutes. The increasing
costs of innovation in these industries promote closer interactions
between basic and applied research, which tend to stimulate
spin-off activities from the academic sector (Knie and Lengwiler
2008). Also, these tendencies may be interpreted as a reflection of
the strategic orientations of research institutions in liberal
varieties of capitalism, which are becoming more relevant in the
innovation systems of coordinated market economies as well. Indeed,
the commercialisa- tion of science in the context of rapid
technological change seems to be in line with the more recent
formation of ‘entrepreneurial universities’ as a genuinely
US-American phenomenon (Rosenberg 2003). The public sector
character of the German university system precludes the full
realisation of this model. Still, the implanting of an
entrepreneurial logic may lead to a hybridisation of the basic
rationale of German academia, which would thus accompany similar
tendencies in the German innovation system.
J Ind Compet Trade (2010) 10:319–341 335
The regionalisation of policy programs in support of biotechnology
is in line with these attempts of promoting local knowledge
agglomerations with extensive start-up dynamics, as witnessed in
the format of the Bio-Regio contest, which fostered competition
among regional innovation networks. At this point, entrepreneurship
policy is closely related with policies for regional development.
Thus, regional authorities play an increasingly important role in
the governance structures of German high-tech industries like
biotechnology, paralleled by an increase of supra-national
competences on the level of the European Union. Similarly,
regarding the finance of innovation, recent reforms aim at
improving the access to local as well as international venture
capital. Increasingly, small and medium- sized research enterprises
form partnerships and alliances with local knowledge providers and
national as well as international firms, as they become players in
global knowledge networks. Indeed, the innovation regime of
biotechnology becomes a multi-level affair (Kaiser and Prange
2004). Entrepreneurship policy needs to respond to these challenges
by framing adequate governance structures.
However, the production regime of the German economy is still
largely shaped by the rationale of diversified quality production,
as exemplified by industries like automobiles and tool-making.
Changes of the dominant techno-economic paradigm are subject to
institutional conditions, which make a complete transition of the
German variety of capitalism towards the liberal model of an
entrepreneurial economy unlikely. Reform projects that favour a
drive for adaptive flexibilization without due consideration of
systemic complementarities and interactions among the major
institutional components are thus doomed to create unintended
inefficiencies (Hall and Gingrich 2009: 168-169). Instead,
entrepreneurship policy in Germany needs to combine the support of
innovative business start-ups with a renovation of the established
production regime, framed by the increasingly ‘hybridised’
institutional profile of a coordinated market economy. Beyond the
creed of liberalisation as a leitmotif of reform, which is in line
with the generalising understanding of an ‘entrepreneurial
society’, such a venture may address experiences of other
coordinated market economies and by doing so maintain the key
characteristics of complementary institutional sub-systems.
Accordingly, entrepreneurship policy needs to account for the
diversity of political-economic interactions that fuel the
persisting divergence of varieties of capitalism (Soskice 2006;
Thelen 2010). In the German case, a hybrid type of coordinated
market economy may emerge that contains a specific profile of
entrepreneurial activities, which reflects the peculiarities of the
German variety of capitalism, its production regime and innovation
system. It is the most pressing task of German entrepreneurship
policy to support such a performance in a context-specific,
incentive-compatible manner.
5 Conclusion
Recent debates on the comparative institutional advantages of
diverse national models of capitalist development tend to
differentiate between liberal market economies like the United
States dominated by market coordination and coordinated market
economies like Germany that highlight nonmarket coordination
schemes. In contrast to the prevalence of incremental innovations
carried out by established firms in coordinated market economies,
liberal market economies are said to exhibit advantages in radical
innovations, which go well together with entrepreneurial start-ups.
This competitive advantage of the liberal type informs reform
initiatives in coordinated market economies, involving the domain
of entrepreneurship policy. As discussed above regarding the case
of Germany, efforts in the liberal reshaping of coordinated
varieties of capitalism by the use of entrepreneurship
336 J Ind Compet Trade (2010) 10:319–341
policy, among other reform initiatives, needs to be critically
assessed. Indeed, the institutional embeddedness of entrepreneurial
activity requires a design of entrepreneurship policy that is
sensitive to the specificities of historically rooted varieties of
capitalism, which derive their coherence from systemic
complementarities. Exclusively pushing for a transformation of
coordinated market economies towards a liberalised entrepreneurial
economy by means of entrepreneurship policy thus may be
ill-conceived. Instead, a wide scope for institutional
hybridization is to be expected.
The institutional hybridisation of Germany’s coordinated variety of
capitalism provides a most informative example for the prospects
and limits of entrepreneurship policy as an integrative approach to
institutional reform. Germany takes one of the lowest ranks in
start- up activity among the OECD countries. This may be due to the
prevailing production regime of diversified quality production,
which finds its base in mature industries such as automobiles and
tool-making, whereas entrepreneurial start-up initiatives are
typically most relevant in new industries with a high level of
market entry. Moreover, in accordance with that pattern of
industrial specialization, the dynamism of innovation is
characterized by incremental innovations, which are set apart from
radical innovations that are carried out by new enterprises. The
underlying complementarities among the sub-systems of production,
finance, education and innovation pose major problems for an
adequate design of entrepreneurship policy, as the latter needs to
be incentive compatible with these complementarities. Thus, in a
truly Schumpeterian manner, entrepreneurship is to be viewed as an
institutionally embedded, historically specific phenomenon, which
requires policies that account for these specificities and systemic
characteristics.
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