By Caitlyn Buchanan, 27.10.17
There are tens of thousands of German-based businesses, with more companies being formed every day, from sole proprietorships to large corporations. Germany has the fourth largest economy by national GDP and fifth largest with respect to PPP. Germany’s prominent economy is largely due to the small and medium-sized businesses (SMEs) operating there. The government has engaged in a large catalogue of positive measures including PR campaigns and funding programs to boost public-private partnership and entrepreneurial spirit. The country is actively promoted as a future-oriented, financially inclusive destination with a well-laid path for SMEs and large multinationals. Included in these efforts is the recent, startup initiative “Gründerland Deutschland” that encourages start-ups and entrepreneurial activity throughout Germany. The various incentives for attracting international businesses and entrepreneurs are laid out in this article.
With a global reputation as a leader in technology, Germany offers a dynamic economy characterized by a highly skilled workforce, high spending power and dense transport network, making it an ideal business location attracting both local and international investors. Ideally located in the heart of European Union, the country is the third largest exporter and importer of goods in the world. Germany is well known for its state-of-the-art transportation infrastructure, ranking well above the EU average. The efficient airports and high-speed rail and road networks are continually being upgraded and improved. Postage and shipping companies promptly adhere to delivery timeliness making it an ideal location for importing and exporting goods.
Grants for Investment
Production facility set-up costs can be significantly reduced by cash incentives provided in the form of grants. These grants are available to new commercial enterprises primarily involved in selling their products or services outside the region. A major program allocating these funds is the “Joint Task for Improving Regional Economic Structures” (Gemeinschaftsaufgabe, GRW). This scheme offers maximum funding incentives to assist with production facility set-up costs in eligible regions throughout Germany. The Regions with the highest incentives rates offer grants to small enterprises of up to 35% of eligible expenditures. These higher incentive rate regions are mainly situated in Eastern Germany with the border regions to Poland, receiving up to 40% funding.
- Eligible projects for Joint Task grants include investments in fixed assets connected with:
- The establishment of a new production site
- The expansion of an existing production site
- The diversification of a production site’s output to include new products
- Fundamental changes to the entire production process at an existing production site
- An independent investor taking over a production site that is closed or facing closure
Grants for R&D
Research and development leading to innovation are considered to be the backbone of the German economy. The technology industry and the public sector have made a commitment to spend at least 3% of the national GDP on research and development activities each year. There are numerous programs offering financial support to R&D projects in the form of grants, interest reduced loans and special partnership programs. A few of the programs available are:
i) The High-Tech Strategy Approximately EUR 5 billion annually is reserved for R&D projects in the form of non-repayable project grants. Grant rates can reach up to 50% of eligible project costs and even higher rates may be available for SMEs. Cooperation between project partners, especially between enterprises and research institutions, is usually required.
ii) EU R&D Grant: Horizon 2020 This is the world’s largest funding program for research and innovation, with the budget set at more than EUR 77 billion. This support is provided to R&D projects operating on an international level with at least three project partners from different European countries. Support is allocated in the form of grants covering 100% of R&D project expenditures or 70% of innovation project expenditures with an additional 25% for indirect project costs.
iii) R&D Loans Loans are an alternative to grants with several advantages: they are not usually attached to a specific technology field, entrepreneurs can apply at any time, and they can be used cover higher project costs. R&D loans are provided by various programs, the ERP Innovation Program offers 100% financing of eligible projects up to EUR 5 million.
Public Loans and Guarantees
i) Publicly Subsidized Loans are an attractive alternative to bank loans. Publicly owned and organized developmental banks offer interest-reduced loans accompanied by a grace period. This is a cost-effective means of acquiring capital that SMEs can particularly benefit from. These loans are easily accessible by foreign investors and they are given the same conditions as German investors.
ii) Public Guarantee Programs are designed to help entrepreneurs obtain bank financing by dealing with the collateral constraint. Commercial and public banks are encouraged, to offer loans to startup companies who use a guarantor. The guarantor does not offer financial support, but they will pay all or part of the loan if the borrower defaults on repayment.
iii) Public Funding Framework- Many incentives offered to companies are funded by the European Union. The German government and federal states also offer their own funding to investors. Distribution metrics are in sync with European competition rules. Various programs are available such as cash incentives, loans at competitive rates, and public equity programs.
Labour- Related Incentive Programs
The success of a company is largely dependent on its employees, fortunately, finding suitable staff in Germany is quite easy. The labor market is composed of highly skilled professionals as the government offers easy access to higher education which is often free. Germany’s Federal Employment Agency (Bundesagentur für Arbeit) and the German states offer a wide range Labour-Related Incentive Programs. These programs are available regardless of the company size, industry or location, significantly reducing operational costs when attaining a workforce. There are four programs categories:
- Recruitment support
- Training support
- Wage subsidies
- On-the-job training program
Incentives for SME/Mittelstand
The German government offers incentives to a group that include SME called “Mittelstand”. This group includes SME as well as bigger businesses providing a large number of jobs that are extremely performance oriented industries in several ways, both direct and indirect. The “Mittelstand” group consists of companies whose owners largely make the business decisions on their own, assume the risks and liabilities. The owners typically have close ties with the business bears the responsibility of ensuring job security for their employees.
Indirect support to SME– includes promoting development in industries that lag behind such as local development projects and agriculture.
Direct support to SME– enterprise program have been developed to promote competitiveness and to foster the entrepreneurial spirit.
In both cases, the German government will provide financial assistance and lay framework conditions to which a company must abide by.
The EXIST Business Start-up Grant
This grant offers support to students, graduates and scientists working at universities and other research institutes who want to develop a business plan. This grant is only available to technology-oriented and knowledge-based projects in the pre-startup phase. A team of up to 3 people are provided guidance to develop a solid business plan as well as assistance funding for up to 12 months.
There is rapid economic development in Germany is characterised by rapid urbanization and modern development, improvement in energy-efficient transport and infrastructure. The German government is continually investing in the country and the entrepreneurs that operate there, they understand that entrepreneurship requires energy, patience, and support. With the support available all kinds of business can thrive in Germany regardless of whether they are a local establishment, foreign investor or multinational.
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