More Chances Than Risks in Globalization for German Business

Think of German companies and the first to spring to mind will probably be giant heavyweights like Siemens and Mercedes. But even some small and mid-sized firms such as famous pencil-maker Faber Castello or toymaker Playmobil have made their mark internationally. Innovative and tech-savvy, they've managed to stay one step ahead of the competition and hold on to their leading position in the world market.

But that's not to say all mid-sized German companies are so successful.

"We have the impression that it depends on the size," said Hartmut Schauerte, parliamentary state secretary in the German Federal Ministry for Economics. "The smaller they are the more fearful they are and the bigger they are the more decidedly at home they are in world markets."

Backbone of the German economy

Medium-sized businesses are often considered the backbone of the German economy. It's easy to see why. Around 70 percent of all German employees work at small and mid-sized companies, which are defined as firms that have a yearly turnover of 50 million euros ($59.7 million) and less than 500 workers.

However, in reality most of the companies are actually smaller than that: some 80 percent of the total 3.5 million small and mid-sized companies have less than 10 employees.

And for most, globalization poses a huge challenge. According to a study by the KfW bank group, German mid-sized firms are already over well over average on a European level when it comes to being international involvement. Every fourth mid-sized company exports its products abroad and that does have an effect on turnover, said KfW supervisory board chairman Hans Reich.

"Our estimates show that a German mid-sized business achieves, on an average, 17 percent of its turnover abroad," Reich said. "Against that, the 15 EU nations (before eastward expansion) are estimated to have had an export average of just 12 percent in 2002."

Rising foreign direct investments

Small German companies export two-thirds of their products to the EU, thus making it its most important market.

But it's not just exports that have skyrocketed; even direct foreign investments have climbed steadily in the past few years. Mid-sized German firms currently invest some 2.5 million euros abroad on an average, mainly to gain access to further markets, according to Reich.

Political changes in central and eastern Europe have significantly added new impetus to the trend.

"For mid-sized suppliers in particular, the setting up of an own production outlet in the vicinity of the final product manufacturer became a question of survival: They had to follow their big customers abroad," Reich added.

Indeed, countries in central and eastern Europe have proved to be the most important target regions for direct investments after the core EU nations. Almost 30 percent of all foreign investments by German mid-sized firms are channeled to the region -- that's almost 10 times more than what the entire German economy invests in central and eastern Europe.

"Central and eastern Europe -- I'll underline it again -- is a curse and blessing at the same time," Reich said.

Though jobs are increasingly moving there, the German firms manage to get cheaper preliminary products there.

"We also create income there that would spur demand for German products," Reich said. "And we integrate central and eastern Europe much more strongly in German economic developments than any other European country can and does."

Government lends a helping hand

The German government, too, is increasingly playing a role in the new developments. Hoping to keep qualified jobs in Germany, Berlin plans to strongly promote mid-sized firms that are internationally active. And it's also stepping up federal financial guarantees for such companies by increasing the yearly budget for it to 2.5 billion euros.

Schauerte of the German Economics Ministry is also pinning hopes on so-called cluster building where small companies are encouraged to organize their foreign operations and their sales and distribution sectors together.

In addition, the German government also plans to invest more in trade fairs.

"We plan to financially support 265 trade fairs and exhibitions abroad," Schauerte said. "I think we're world leaders in the field. It's important to us that small and mid-sized companies are part of it."

In light of the fact that globalization's march will continue unhindered, KfW boss Reich believes that more and more German mid-sized firms will focus on foreign markets.

If mid-sized businesses succeed in continuing to refine their competitiveness through further specialization and investments in innovative products then they would be in a very good position to profit from globalization, he said.