SKOPJE, Macedonia, Jan. 29 (UPI) -- An arthritic and worker-friendly regulatory framework and a pro-big business tax regime have burdened the German Mittelstand. Still, if anything, Germany's labor market has been liberalized under Chancellor Gerhard Schroeder's governments and tax rates went down across the board. One must look elsewhere for the causes of the inexorable deterioration of the country's small and medium enterprises.
It is remarkable that the decline of the Mittelstand has coincided with an unprecedented surge in small- to medium-scale entrepreneurship in both developed and developing countries. It would seem that Germany simply spectacularly pioneered what has become, decades later, an economic fad.
Indeed, it is Germany's overwhelming success -- its post-war industrial miracle -- that harbored the seeds of its decline and fall. Sated, rich people make bad risk-taking entrepreneurs. Germany's unification was its last attempt at rejuvenation. It failed because the West chose to smother the East with an unrealistically priced deutschmark, a tangle of rules and regulations, an artificial construction bubble and a forced liquidation of its industrial base.
If it ain't broke, don't fix it, goes German folk wisdom. On the surface, everything functions impeccably: German infrastructure is gleaming, its healthcare efficient, its environment pure, its welfare unsurpassed. "Why tinker with success?" wonders the average citizen of this regional economic powerhouse. Only lately did a few brave souls admit that the miracle has been consumed and that Germany, unreformed, may be facing a Japanese decade.
Germany's second attempt at revitalization is unfolding outside its borders. The enlargement of the European Union to incorporate countries in Central and East Europe is largely a German project. Cheap labor, abundant raw materials, hungry, growing consumer markets in the new members -- promise to resuscitate the German industrial sector.
Big German firms have taken note of this repossessed hinterland and moved decisively -- but not so the Mittelstand.
Preoccupied by their multidimensional crisis, they failed to colonize the east. Battered by cost pressures, better-informed customers, aggressive international competition, dizzying and costly technological changes, spiraling needs for investment in R&D, vocational training and marketing -- the Mittelstand companies are punch-drunk and more xenophobic and self-destructively "independent" than ever.
One would be hard pressed to find a substantial Mittelstand representation in the German drive to diversify abroad either by establishing a presence in major export markets, or by sourcing from cheaper countries. As the Center for Advanced Studies at Cardiff University in Wales notes, Mittelstanders rarely out-source to key suppliers, maintain open-book accounting, engage in simultaneous engineering, sign long-term contracts, or reduce the number of direct suppliers as part of implementing a lean production strategy.
Many SMEs function as family employment agencies rather than as properly governed businesses. From hubs of innovation and early adoption of bleeding edge technologies, the Mittelstanders have lately become the bastion of paralytic conservatism. Most of them support self-interested liberalization and deregulation. But few would know what to do with these poisoned chalices, having become far less competitive than they used to be in the 1970s.
So, is the Mittelstand sector doomed?
Not according to a report published two years ago by the Institute for Development and Peace at the Gerhard-Mercator University in Duisburg. The authors believe that, despite all the shortcomings of the Mittelstand business model, it could serve as a blueprint for the countries of Latin America and other developing regions.
The Mittelstand have survived largely intact wars and devastation, division and unification. There is no reason why they should not outlive this second round of globalization -- they did marvelously in the first round, a century ago. But the government must recognize the Mittelstand's contribution to the economy and reward these struggling firms with a tax, financing and regulatory environment conducive to job creation, innovation, ownership continuity and exports.
The reason for hope is that Germany is finally waking up. Universities offer courses in family-orientated management. Offline and online exchanges -- such as EuroLink -- connect German SMEs to willing private equity investors, strategic partners and fund managers. Small business service centers and one-stop shops proliferate.
An army of consulting and trading firms proffer everything from management skills to networks of contacts. Others peddler seminars, Web design and Internet literacy syllabi. Software companies such as SAP, IBM and Sybase maintain special small business departments. Think tanks and scholarly institutes devote increasing resources to the SME phenomenon. There is even an Oscar award for Mittelstand excellence.
Initiatives spring in the most unlikely places. DG Bank teamed up with the German daily "Die Zeit" to "promote small businesses who have innovative ideas." Mittelstand trade fairs (for instance in Nuremberg last year) are well attended. Venture capitalists, portfolio managers and headhunters monitor developments closely.
The Business Angels Network of Germany, knon by its acronym BOUND, is a group of individual investors who also contribute time and management know-how to fledgling technology startups. Lobbying and advocacy groups, specialty publications, public relations firms -- all cater to the needs of German SMEs.
It looks less like a funeral than a resurrection.
Part 1 of this analysis appeared Wednesday. Send your comments to: [email protected]
