Germany Is Squandering Its Innovation Potential
ResearchZEW Study on Government Research Funding in the Chemical, Pharmaceutical and Biotech Industries
The research allowance is proving successful in the German chemical, pharmaceutical and biotech industries. Around 40 per cent of some 2,700 companies have applied for this funding since 2021. However, the potential is far from being fully realised although innovation is a crucial driver of competitiveness: New products and more efficient processes generate growth, secure value creation and strengthen Germany’s position as an industrial hub. Government funding can spur additional investment in research and development (R&D) – particularly for high-risk projects. This makes it all the more important to remove existing barriers. These are the conclusions of a study jointly conducted by ZEW Mannheim and the Center for Economic Policy Studies (CWS) at the Leibniz University Hannover, on behalf of the German Chemicals Industry Association (VCI). It identifies shortcomings and unnecessary administrative efforts associated with the research allowance, insufficient consideration of the chemical, pharmaceutical and biotech sectors in technology programmes, and gaps in the financing of start-ups.
Ulrike Zimmer, director of Science, Technology and Environment at VCI, says: “Research funding should not be an obstacle course. If we want innovation, we must not tie researchers down with red tape. Policymakers need to make funding instruments simpler, more reliable and more attractive, and they need to cut red tape to enable further innovation.
Dr. Christian Rammer, deputy head of ZEW's “Economics of Innovation and Industrial Dynamics” Research Unit, explains: “The research allowance is an important instrument, but it does not yet reach all companies that carry out research. Access to funding must be facilitated, particularly for smaller companies. The effort involved in familiarising oneself with the procedure and setting up the necessary internal processes is the main hurdle.”
Research allowance: Facilitating access
To date, 714 companies in the chemical sector and 352 companies in the pharmaceutical industry have applied for the research allowance. The eligible R&D expenditure totalled just under 3.6 billion euros for the approved projects.
According to the study, small and medium-sized enterprises account for a large proportion of applicants. This group accounted for 73 per cent in the chemical sector and 81 per cent in the pharmaceutical industry. Nevertheless, the instrument does not reach all companies in the sector that are in principle eligible for funding. The study identifies potential for improvement regarding the current funding cap of 12 million euros per year, the low funding rate and bureaucratic hurdles in the application process.
The study therefore proposes simplifying the application process and refining the funding conditions. This includes raising the funding cap to 25 million euros, expanding digital support services for the application process and introducing a more attractive funding rate for industrial research.
Promote technology: Greater weight for chemical, pharmaceutical and biotech sectors
The study also identifies a clear need for action regarding the federal government’s thematically focused technology programmes: Between 2021 and 2025, the government allocated eight billion euros annually to these programmes. Technologies related to the chemical, pharmaceutical and biotech sectors accounted for seven per cent of this – around 500 million euros.
The Central Innovation Programme for SMEs (Zentrales Innovationsprogramm Mittelstand, ZIM) demonstrates that the sector benefits significantly more from open-topic funding opportunities: there, the corresponding share stood at 20 per cent. Zimmer says: “Chemicals, pharmaceuticals and biotech are key industries for innovation and transformation. This makes it all the more problematic that the sector benefits significantly less from themed funding than from the Central Innovation Programme for SMEs.”
The study therefore calls for themed technology funding to be aligned more closely with the needs of industry. For the chemical, pharmaceutical and biotech sectors in particular, this concerns technologies that are just as crucial for new products and processes as they are for the transformation of Germany as an industrial hub.
Start-ups need better access to venture capital
Since 2010, more than 400 start-ups have been founded in the chemical-pharmaceutical and biotechnology industries. For research findings to be turned into marketable products and processes, young companies need sufficient venture capital. Particularly in the case of technology-intensive developments, the path to market readiness is long and fraught with high risks.
This is why the study underlines the importance of reliable financing options. More cooperation between start-ups, academia and established firms can help to accelerate the translation of knowledge into marketable products. The regulatory framework also must evolve. Consequently, the study recommends establishing experimental spaces and sandboxes for companies of all sizes and development stages, enabling them to test new technologies under real-world conditions and bring them to market more quickly.
About the methodology
The study examines the research and innovation performance of the German chemical and pharmaceutical industry. It uses a wide range of indicators. This year’s focus is on the financing of research and innovation. The analysis draws on data from, amongst others, the authority granting the research allowance, the ZEW Mannheim Innovation Panel, the R&D Statistics by Stifterverband, the R&D statistics of the Organisation for Economic Co-operation and Development (OECD), funding data on government technology programmes, and venture capital investments from Invest Europe and PitchBook.
The calculation of eligible companies is based on data from around 4,680 chemical, pharmaceutical and biotech firms listed in the revenue statistics. Of these, around 2,700 companies with relevant R&D expenditure were taken into account.
In 2025, the chemical-pharmaceutical industry invested just under 16 billion euros in research and development.
