The key facts

  • High-tech sectors account for 68% of R&D spending in US manufacturing (2023) versus 20% in Germany; the share of medium-tech sectors in Germany is 76% against an average of 56%.
  • A 10 percentage point increase in the share of high-tech R&D is associated with a 0.5 percentage point increase in average annual per capita GDP growth in the medium term.
  • No direct link was found between the overall level of R&D spending and per capita growth.

Innovation deficit as a cause of weak growth

The Ifo economic research institute published a report on Tuesday, October 20, according to which Germany's strong focus on research in medium-tech industries weakens its competitiveness, while reallocating spending towards high-tech areas promotes economic growth. The study's authors, Oliver Falck and Yuchen Guo, believe that Europe's weak economic growth is explained by an innovation deficit, which they call the 'medium-tech trap'.

Germany versus the US and China

According to the study, fast-growing economies concentrate R&D spending in high-tech sectors — biotechnology, hardware and software, and the aerospace industry. Unlike the US and China, R&D in Germany is concentrated in medium-tech industries, including mechanical engineering and automotive manufacturing. In 2023, high-tech sectors accounted for 68% of R&D spending in US manufacturing, whereas in Germany it was only 20%. The share of medium-tech industries in Germany reached 76%, which is noticeably higher than the sample average of 56%.

Quantitative assessment

An analysis of 18 countries over the period from 2000 to 2024 showed that a 10 percentage point increase in the share of high-tech R&D is associated with a 0.5 percentage point increase in average annual per capita GDP growth in the medium term. At the same time, the researchers found no direct link between the overall volume of R&D spending and per capita growth. The share of high-tech R&D in Germany fell from 32% in 1995 to roughly 20% in 2023.

Policy implications

The authors emphasised that purely quantitative R&D spending targets are insufficient and called on policymakers to reform the framework conditions for innovation.