The German corporate sector is characterised by a large number of micro enterprises (Fig- ure G.1). In 2011, more than 90 % of the 3.6 million firms in Germany had less than 10 em- ployees. Despite being small, they account for nearly 27 % of total employment in Germany. Only 6 % of the micro enterprises with less than 10 employees work in the manufacturing sector, while more than 60 % of them are active in the service sector. In contrast, more than 32 % of the firms with 100 and more employees are active in manufacturing, while only 50 % operate in the service sector. Hence, among the smallest firms in the Germany economy, service firms are much more prevalent, while manufacturing firms are rather underrepresent- ed. However, firms with 100 or more employees account for only 0.9 % of the total firm popu- lation. Approximately two thirds of the firms in this size class or 0.6 % of the total population have less than 250 employees and could thus be classified as medium-sized enterprise. This implies that SMEs, defined as micro, small and medium-sized enterprises with less than 250 employees, account for about 99.7 % of all firms in Germany. As in other European coun- tries, the firm size distribution is clearly skewed towards smaller firms.
Figure G.1: The relevance of SMEs for the German economy
Number of enterprises Number of employees
Firm size class Number Share Number Share
1 to 4 2,941,432 81.3 % 6,932,653 19.1 % 5 to 9 331,969 9.2 % 2,713,707 7.5 % Micro enterprises 3,273,401 90.5 % 9,646,360 26.6 % 10 to 19 173,837 4.8 % 2,838,838 7.8 % 20 to 49 102,347 2.8 % 3,676,355 10.1 % Small enterprises 276,184 7.6 % 6,515,194 18.0 % 50 to 99 34,561 1.0 % 2,899,823 8.0 % ≥ 100 33,636 0.9 % 17,168,949 47.4 %
Medium and large
enterprises 68,197 1.9 % 20,068,773 55.4 %
Total 3,617,782 100.0 % 36,230,326 100.0 %
Note: Figures for 2011. Includes firms in the following sectors: manufacturing (NACE Rev. 2 sections C, J58, and S95), construction (NACE Rev. 2 section F), wholesale and retail (NACE Rev. 2 section G) and services (NACE Rev. 2 sections E37–39, H, I, J59–63, K, L, M, N, P, Q, R, and S96), as well as agriculture, forestry and fishing (NACE Rev. 2 section A), mining and quarrying (NACE Rev. 2 section B), electricity supply (NACE Rev. 2 section D) and water supply (NACE Rev. 2 section E36). Firm size class measured in terms of employees. A more de- tailed classification of firm in the largest size class is not available, but can be approximated based on data for earlier years. This would imply that about 21,342 firms or 0.6 % of the total population have 100 to 249 employ- ees, while 12,294 firms or 0.3 % of the total population have ≥ 250 employees.
Source: KfW SME Panel. Micro, small and medium-sized enterprises have gained importance since 2008, mainly be- cause larger firms, which rely more heavily on exports, were hit harder by the financial
Country Reports – Germany 39
crisis.28 This is also reflected in the number of bankruptcy proceedings (Figure G.2). While
there was a surge of insolvencies across all firm size classes, the increase was much more pronounced for larger firms. In particular, while the number of bankruptcy proceedings rose by about 10 % from 2009 to 2010 for firms with 10 or less employees, it nearly doubled for firms with more than 100 employees, climbing from 152 to 292 proceedings.
Figure G.2: Bankruptcy proceedings of German firms
Note: Bankruptcy proceedings of firms by size class as measured by employees. The numbers for the different size classes do not add up to the total, as the total also includes firms with unknown size.
Source: Deutsches Statistisches Bundesamt. The remarkable resilience of micro enterprises is also visible in their profit rates. While espe- cially larger firms with more than 50 employees experienced a loss in profitability during the financial crisis, with profit rates falling from 4.0 to 3.1 % on average, micro enterprises even saw a slight increase in their profit rates from 9.4 to 9.8 % (Figure G.3).
While economic prospects were particularly good and profit rates increased for German SMEs in 2013, they were rather moderate in 2014, which was characterised by geopolitical uncertainties and repeatedly dashed hopes of an economic upswing in Europe. Only towards the end of 2014, falling oil prices and a declining external value of the Euro spurred growth. Cautious optimism best describes the expectations of SMEs for 2015, according to the KfW-ifo SME Barometer.29
28 See European Commission (2014a). 29 See Müller (2015). 24,085 20,552 2,119 164 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
40 SME Investment and Innovation
Figure G.3: Profit rates of German SMEs
Note: Gross operating profits over total turnover. Includes firms with up to EUR 500 million turnover in the follow- ing sectors: manufacturing (NACE Rev. 2 sections C, J58, and S95), construction (NACE Rev. 2 section F), wholesale and retail (NACE Rev. 2 section G) and services (NACE Rev. 2 sections E37–39, H, I, J59–63, K, L, M, N, P, Q, R, and S96), as well as agriculture, forestry and fishing (NACE Rev. 2 section A), mining and quarrying (NACE Rev. 2 section B), electricity supply (NACE Rev. 2 section D) and water supply (NACE Rev. 2 section E36). SMEs defined as all firms with less than EUR 500 million annual turnover.
Source: Schwartz 2014a. Different to the situation in southern European countries, funding conditions for the corporate sector in Germany are favourable. Interest rates are low and access to finance is comparably easy, even for SMEs.30 Rather, the challenges lie in the uncertainty regarding the future eco-
nomic development in Europe. Additionally, a series of recently introduced reforms might put economic growth prospects and competitiveness of SMEs at risk. A nationwide minimum wage of EUR 8.50 was introduced in all sectors in January 2015. While the economic impact is still uncertain, however, it is very likely that SMEs will be particularly affected since the share of low-paid employees is generally higher the smaller the firm. The DIW estimated that around one third of enterprises with less than five employees have to increase wage pay- ments when the minimum wage is introduced.31 This will put profits under pressure and might
potentially affect investment and innovation activities of SMEs.
Moreover, a newly introduced pension system reform – allowing long-term employees to re- tire at the age of 63 without pension payment reductions – can potentially harm SMEs in Germany if elderly and more experienced employees leave the companies earlier than planned. This could additionally worsen the skilled labour shortage, a problem Germany will
30 See Schwartz and Braun (2013). 31 See Brenke and Müller (2013).
13.3 % 4.9 % 4.2 % 6.7 % 0 % 2 % 4 % 6 % 8 % 10 % 12 % 14 % 2007 2008 2009 2010 2011 2012 2013 < 10 employees 10 to 49 employees
Country Reports – Germany 41
most likely face in the upcoming years as its working-age population and total population shrink.
But not only demographic developments hold major challenges for German SMEs. Rising energy and electricity costs put SMEs returns under pressure32 and depress investment ac-
tivities.33 The Energiewende, i.e. the shift from conventional non-renewable to renewable
energy sources, could intensify this development. However, Germany’s energy transition also holds many opportunities for SMEs as the pressure to increase the use of energy effi- cient production methods and machinery can also drive innovation activities related to these areas.