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The ifo Institute takes a critical view of the German government’s new industrial strategy

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The ifo Institute takes a critical view of the German government's new industrial strategy. "This industrial strategy harbours dangers and neglects the special conditions of Germany as a business location," says ifo President Clemens Fuest. "The orientation towards China's industrial policy is misleading because China is still a country that is catching up technically in many sectors. An investment steering industrial policy with a strong export orientation can accelerate this development." The ifo researcher Oliver Falck says: "German industry, on the other hand, is moving at the global technology frontier. Research on industrial policy strategies shows that in such a situation fierce competition and pressure to change are far more important for success,

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The ifo Institute takes a critical view of the German government's new industrial strategy. "This industrial strategy harbours dangers and neglects the special conditions of Germany as a business location," says ifo President Clemens Fuest. "The orientation towards China's industrial policy is misleading because China is still a country that is catching up technically in many sectors. An investment steering industrial policy with a strong export orientation can accelerate this development." The ifo researcher Oliver Falck says: "German industry, on the other hand, is moving at the global technology frontier. Research on industrial policy strategies shows that in such a situation fierce competition and pressure to change are far more important for success, especially for large companies.“

It is positive that the German government is committed to maintaining the competitiveness of Germany as an industrial location, for example through the tax system, Fuest continues. It is also right to take into account the consequences of technological change and the industrial policies of other countries, especially China. "But protecting large German companies from takeovers and facilitating large-scale mergers would reduce competitive pressure and the pressure to innovate and change in these companies."

The emphasis that the size of companies is important for their competitiveness is problematic. "The global success of the German economy is based precisely on the success of the 'hidden champions', who achieve competitive advantages not through size but through flexibility and a high degree of specialisation," says Fuest. The steering of investments to specific projects where market failures are not apparent, such as mass production of battery cells in Germany, entails the danger of resource misdirection and distortions of competition to the detriment of other companies in Germany. Moreover, "the discussion about such subsidies will only lead to private investors waiting," says Fuest.

Clemens Fuest
Clemens Fuest took over from Hans Werner Sinn as chairman of the IFO Institute in April 2016. He is professor at the Faculty of Economics of the University of Munich.

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