2021 Entrepreneurial Activity Review

Much like Japan, which also has a strong base of established companies focused on exporting, Germany typically has a higher EBO rate relative to its TEA rate. Yet in 2021 this also flipped for Germany, with its TEA rate increasing to 6.9%, up from 4.8% in 2020, while EBO decreased to 5% in 2021, from 6.2% in 2020. This trend of increasing early-stage entrepreneurship amid decreasing business ownership may signal a delayed market reaction to COVID-19 which hit entrepreneurs in some economies more in 2020 and others more in 2021.

The performance of the German economy certainly suggests 2021 was more volatile than expected. In the early months of the year, growth was picking up and business sentiment was growing, but new COVID waves and supply chain crises which formed bottlenecks for Germany’s exporters have resulted in reduced GDP forecasts and declining business sentiment. Energy prices have also increased throughout the year. In this environment it is easy to see how more Germans turned to entrepreneurship in 2021, starting new businesses out of necessity, while some established businesses suspended operations or closed entirely.

This suggests Germany’s TEA rate may decrease in the coming years as the economy recovers from COVID-19, even if at reduced levels. One indicator is the country’s low expectations for future entrepreneurship. According to GEM’s 2021 survey results, only 5.8% of Germans plan to start a business in the next three years, third lowest among GEM Level A economies. Furthermore, Germans have typically shown lower interest in becoming entrepreneurs than peer economies. This was true in 2021 even as the country’s TEA rate increased.

For example, Germany had among the lowest rates for Level A economies in response to the questions “There are good opportunities to start a business where I live” (48.2%), “It is easy to start a business in my country” (38.2%) and “I personally have the skills, experience and knowledge to start a business” (37.1%). The lower rates in these indicators of future entrepreneurial activity are also an acknowledgement of Germany’s generally strong economy, with high employment rates and wages. When this is the case, many would prefer not to pursue entrepreneurship.

German policymakers should be mindful of this as they will likely want to differentiate between new innovative entrepreneurial firms they want to support among a general increase in entrepreneurship.

2021 Framework Conditions Review

Experts tended to be critical of Germany’s conditions for entrepreneurship. This may be surprising, given Germany’s reputation as a well-governed state with an efficient, advanced economy; however, it is worth noting that experts are assessing how these factors relate to either enabling or constraining entrepreneurship. Therefore, scores on Entrepreneurial Finance (5.3, 11th among GEM Level A economies), or Government Policy: Taxes and Bureaucracy (4.7, 16th among GEM Level A economies), are considered barely or below sufficient by experts for enabling entrepreneurship. Relatedly, while German’s education system is quite strong overall, its curriculum for entrepreneurship needs improvement, hence the 2.8 score on the condition Entrepreneurial Education at School.

One surprising result, however, is the 6.1 score for Physical Infrastructure, third lowest among GEM Level A economies. While the score itself is fairly strong, and Germany is known for its well-maintained infrastructure, it appears to be falling behind some of its Level A peers. In 2020, its score was 6.3. It also may be the case that the current supply chain crisis revealed some previously hidden bottlenecks or inefficiencies. Moving forward, it appears the German government may need to provide more direct policy for entrepreneurship as some of the country’s clear economic strengths are not being felt by the entrepreneurial sector.