Germany's middle-tech trap limits economic growth, research shows

Germany's heavy focus on middle-technology research weakens its competitiveness, while shifting spending toward high-tech fields boosts economic growth, according to a report released by the Ifo Institute on Tuesday.

Ifo Institute researchers Oliver Falck and Yuchen Guo found that Europe's weak economic growth stemmed from an innovation deficit known as the middle-technology trap.

The study showed that fast-growing economies concentrated research and development (R&D) on high-tech sectors such as biotechnology, IT hardware and software, and aerospace.

Unlike in the US and China, Germany's R&D activities remained heavily focused on middle-technology sectors, including machinery and automotive manufacturing.

High-tech sectors accounted for 68% of manufacturing R&D spending in the US in 2023, while Germany's share stood at just 20%.

Conversely, Germany's middle-technology share reached 76% of manufacturing R&D spending, well above the sample average of 56%.

Analyzing 18 countries from 2000 to 2024, the researchers found that a 10-percentage-point increase in the high-tech R&D share was associated with a 0.5-percentage-point increase in annual per capita growth in the medium term.

The study found no direct relationship between the overall level of R&D spending and per capita economic growth.

Germany's high-tech R&D share dropped from 32% in 1995 to around 20% in 2023.

The authors stressed that purely quantitative R&D spending targets were insufficient and urged policymakers to reform innovation framework conditions.