Declining Business Startups in Germany Raise Concerns

Mannheim - A recent study by the Mannheim Center for European Economic Research (ZEW) reveals a significant decline in the number of new businesses being established in Germany. This trend, observed since the mid-1990s, indicates a troubling shift in the entrepreneurial landscape of the country.

According to the analysis, while there was a modest increase in 2023, with approximately 161,000 new companies founded--up by 1.3 percent compared to the previous year--this figure remains well below the peak of around 240,000 startups recorded in 1995. The report highlights a resurgence in certain sectors, such as hospitality, post-COVID pandemic, but notes a marked decrease in industrial startups.

Hanna Hottenrott, an expert at ZEW, emphasizes that fewer startups lead to diminished competition, reduced investments, and bleak prospects for the German economy. She argues that governmental measures are necessary to make entrepreneurship more appealing.

The study indicates that industries with intensive research and development, including machinery, chemicals, and electrical engineering, have experienced particularly sharp declines in new business formations. Since 2002, the number of startups in these sectors has halved, plummeting from approximately 1,400 to just 625 in 2023. In contrast, less research-intensive industries like food production, textiles, and construction have seen a smaller reduction of around 27 percent, totaling about 5,300 new enterprises.

A major barrier to launching new businesses is attributed to bureaucratic hurdles. A survey conducted by ZEW involving around 5,000 companies found that young businesses typically allocate around nine hours per week to administrative tasks, ranging from compliance with data protection regulations to various reporting obligations. Compounding these issues are challenges such as a shortage of skilled labor and rising energy costs, particularly affecting the chemical and pharmaceutical sectors, where high energy prices have been identified as a primary reason for the recent drop in new startups.

In energy-intensive industries like steel and metal production, startups declined by over ten percent in both 2022 and 2023. Conversely, the electrical engineering and machinery sectors have shown signs of recovery in startup activity.

The decrease in new firms, particularly in research-intensive fields, raises alarms about potential innovation shortfalls that could, over time, adversely affect broader segments of the German economy. While it may not be crucial whether innovations stem from startups or established corporations, the lack of new companies with groundbreaking ideas could reduce competitive pressure across entire industries.