'Start-ups are the main drivers of growth'

Dietmar Harhoff is Director at the Max Planck Institute for Innovation and Competition where he heads the Department of Innovation and Entrepreneurship Research. As Chairman of the Commission of Experts for Research and Innovation (EFI), he also advises the German government on innovation issues. We spoke with him about how future-proof German industry is in the digital age, the role of start-ups, and the latest buzzword, “Industry 4.0”.

"Industry 4.0", otherwise known as advanced manufacturing, is a concept we hear a lot of in the debate about how future-proof German industry is. What does it really mean?

Dietmar Harhoff: Most experts believe that products are going to become increasingly individualized and that production will therefore be more flexible. The aim here is to realize two benefits at once: 1) low costs based on a large number of units produced and 2) a high level of flexibility enabling products to be adapted to suit specific needs. This is not something totally new – these were already important aspects in the digitization wave that swept over us in the 1980s. But we are now able to harness the potential of the Internet for this purpose. This means that not only production, but also services can be set up in a manner that is both more flexible and more efficient.

To what extent are German companies actually implementing the concept?

Advanced manufacturing is not a homogeneous concept – in fact it describes many different approaches. And so far it has only been implemented in part. Many aspects of the concept are still in the development stages and serve as more of a guiding principle. Companies large and small are starting to work on it, but it is too soon to say anything about the actual status of implementation. What we can say, though, is that “Industry 4.0” has already proven very successful as a source of impetus for the production industry and as a marketing tool for Germany as a business location. But the narrow focus on these areas may sometimes distract us from the fact that there are other applications for Internet-based technologies and that using the Internet successfully is more than just a question of technology.

What are German companies lacking, specifically?

German policymakers and some German business leaders still see innovation as largely technology driven, or so the criticism goes. Furthermore, innovation tends to be limited to the industrial context. That may be all well and good in some cases, but when it comes to Internet-based innovations, these are increasingly destined for use in new business models. The way companies handle data, the way their business models are designed is going to be more important than what they do in terms of refining technology. There are a great many shortcomings in this area. I am slightly concerned about the way policymakers focus almost entirely on production technology, too. It is a good thing that we are placing a great deal of research emphasis on “Industry 4.0” and the fourth industrial revolution it heralds. But we should not forget that the “Internet of Things” extends far beyond the production sector itself.

Can start-ups go some way to filling the gap?

Start-ups today are the main driver of growth in the Internet-based economy. How we can best use start-ups to fill the gaps in value chains is an important question. A number of German companies have already developed processes by which they can profit from the strong innovation capacity of start-ups. Others are still experimenting or are just realizing the need to start working on this. In the USA, start-ups have the opportunity to acquire the growth capital they need by floating their business on the stock market. This is all but impossible in Germany and we certainly need to create a suitable stock market segment as soon as possible. Aside from that, start-ups are increasingly being bought by companies keen to strengthen their own innovation activities. But integrating into a large company is a complex process, and one that often fails. This is another area in which companies in other regions have more experience than we do. The culture in many German companies still lives on the assumption that internal solutions are fully sufficient for continued business success. That could turn out to be a serious mistake.

Are we also suffering from a lack of qualified young people here?

No. We have a problem of acceptance and a problem of resources but there is no shortage of talented and ambitious people out there who can see themselves developing their career in a start-up and are putting this idea into practice. However, there is still limited acceptance of start-ups as sources of new innovation concepts among large corporations and in the political world. And despite all the political lip service paid to this topic, the conditions for start-ups in Germany are anything but optimal.

What can and should policymakers do to foster the digital economy?

First of all, policymakers can improve the underlying conditions for new companies. The Commission of Experts for Research and Innovation has made a number of proposals as to how this can be done. A second important area is education. Our annual report 2016 argues the case for all stages of the education system to prepare people to handle data and pave the way for new methods of using data. Thirdly, it really is time that policymakers took e-government seriously. When it comes to use of the Internet and digital technologies in the public sector, politicians in Germany have not made a good showing. Countries like South Korea and Estonia have shown us that it is indeed possible to have end-to-end online processes in public administration and that this can be attractive to citizens. The citizens of Germany are currently being denied an improvement in government services. Furthermore, we could use the Internet to bring a greater measure of transparency into what public authorities actually do. We are also hampering the stimulation of demand if German bureaucracy continues to be paper based and officials fail to grasp the opportunities presented by digital technologies.

When we hear the words “big data” and “cloud computing” many of us here in Germany think immediately of data protection issues. Are we being overly cautious or might we, in the light of cyber attacks, one day find that it was beneficial to take a more conservative approach in this area?

Dealing with data in a smart and deliberate way is a positive thing. On the other hand, being cautious owing to unthinking scepticism vis-à-vis innovation is something that I view as an obstacle to innovation. We have both of these scenarios present in Germany. But other countries are exactly the same – I can’t see any convincing empirical evidence to indicate that we Germans are overcautious or particularly averse to technology. I hope that smart pan-European regulations on data protection will help to reduce the level of uncertainty among people here. Innovations bring new benefits but often carry new risks, too – so this is not a new phenomenon.

You are one of the co-founders of the Munich Center for Internet Research. What are the initiative’s objectives?

The Internet is much more than an important technology – it has become a new space for social and economic interaction. In Germany, we don’t yet have any research institutions with global visibility working on this phenomenon. That is why several scientists from universities and research institutions got together in Munich and came up with the idea for a new and interdisciplinary research centre. The Munich Center for Internet Research (MCIR) entered into operation in December 2015 as a new research centre of the Bavarian Academy of Sciences and Humanities. It will be studying the transformation of society associated with the Internet and digitization, and will provide guidance with a view to shaping it successfully.

To what extent do you use the Internet and social media yourself?

I use the Internet almost all the time – both for communication and as a platform for my research work. E-mailing and video conferencing have been joined by a number of project management tools over the years. Personally, I’m a bit more reserved when it comes to social media. And having long worked with very large data records on patents and publications, I find that the use of big data and the cloud come fairly naturally to me in my research.

Thank you very much for talking to us!

The interview was conducted by Mechthild Zimmermann