In ten years it might be too late

MICHAEL Kern believes that any country which fails to invest in research and development and reform its education system will lose competitiveness and fall behind in the race for substantial investments. These moves need to be taken today because in ten years it could well be too late: by then there will be other countries with good locations, well-trained and affordable labour forces, and attractive tax incentives, according to the executive director of the German-Slovak Chamber of Commerce and Industry (DSIHK).Political system: Federal republic, consisting of 16 states Capital: Berlin Total area: 356,854 square kilometres Population: 82.5 million Germany has the biggest population of any EU country and has the world's third largest economy. German is the most widely spoken first language in the EU.

Kern is also a believer in vocational training and suggests that several top managers of German firms started their careers by learning a profession first and later moving to higher education. Many post-communist countries, he says, seem to have forgotten how important it is to train blue-collar workers.

The Slovak Spectator spoke to Kern about the challenge posed by the lack of qualified labour, different aspects of the German business community in Slovakia, the German view of the Slovak business environment, and also the experiences that Germany can share with Slovakia in the area of renewable energy.

The Slovak Spectator (TSS): More than half of Germany’s industrial production comes from areas with huge research and innovation potential. What makes Germany so successful in developing such potential? Why are investments in research and development so crucial for countries like Slovakia?
Michael Kern (MK): Over the past 30 or 40 years, Germany has invested quite a lot into its education system, which basically laid the foundations for the current research and development potential while allowing interaction between business and science. In fact, after Sweden and Finland, Germany is the country with the third most generous investment in research and development. The country pours about 2.5 percent of its GDP into this area. While money is only part of it, the country has also created a good model for cooperation between business and academia.

In Germany there are so-called technology parks, which are situated close to universities so that the gap between the university and the practical use of some research and development is more easily bridged. These parks represent strategic cooperation between the companies and the universities but often are also subsidised by municipalities. In these parks and clusters start-up businesses can develop a product or work out a system of functioning while being provided with an administrative framework which means they do not need to worry about that aspect. They can stay for two years and then leave.

Germany also has some internationally acknowledged research institutes such as the Fraunhofer Institute and the Max Planck Institute. Research institutions too are now becoming more sympathetic towards the needs of business. In the past we had a phenomenon called the “ivory tower syndrome” which meant that some high-profile research and development was disconnected from the needs of the business. But now this is improving in Germany. For example, there is a very high number of innovation patents registered in Germany. But if you look at the number of products which are developed from these patents there is a gap. Germany has also missed the chance to develop some very good, innovative products. But we have been working hard on improving.

Germany also has a large number of internationally acknowledged universities. Now they are trying to attract even more international students to Germany, though the competition with North American or British universities remains a big challenge because these institutions often have even more financial support and chances to develop. Also, in the United States, for example, people are, in general, able to actually develop something on their own much younger. In Germany people have to reach a more senior position before they get the chance to show some results. However, the situation even this area is improving.

TSS: Slovakia is still lagging behind in investment in research and development, while academia here has been much slower developing links with business. What are the options for countries which have financially under-resourced their education sectors? And what are the dangers of underestimating investment needs in this area?

MK: It is quite obvious that research and development were not among the prime reasons for German companies to come here to Slovakia over the past decade. Low labour costs and trained labour lured them here. Now this situation is changing.

The danger for countries which fail to invest in research and development is quite obvious: they will lack competitiveness on the international market. Slovakia has made quite some progress over the past 10 years and, since it offers a good location, companies have moved their production here. Of course the good geographical location remains but the low labour costs are not something that can keep Slovakia attractive for the future. There are other places that are becoming similarly attractive further east. Slovakia needs to achieve higher productivity and thus build a basis for higher wages, but one cannot achieve that any other way than through investment in
education.

What can countries do if they do not have enough funds? Strategic cooperation and partnership with companies is one of the options, but not the only one. There is huge potential to cooperate with other countries, utilise EU funds, or even look again at the priorities of the state budget, where spending on investment should increase at the expense of spending on consumption.

Slovakia is in a crucial position because if the country does not build these capacities now, it will be very hard to start in 10 or 15 years. There are German companies which are moving their production to Slovakia but there are other companies which are also moving out of the country, especially if we look at labour-intensive production. But you can see that the requirements of companies are for higher productivity, so that they can respond to the demand for higher wages.

TSS: Germany is a key investor in Slovakia, with over 400 firms operating here. However, there are concerns that some countries further east are already offering even cheaper labour and even more tax incentives, which might encourage investors to move further east. Are these concerns realistic as far as German investors are concerned?

MK: Sectors with labour-intensive production are vulnerable and there is a danger that these might reduce the number of employees and instead invest more in equipment. But we do not think that German investors will move soon since most German investment is not excessively labour intensive. However, all companies, not only German but also Slovak, will strive for higher labour productivity since they cannot pay higher wages if productivity does not improve. The largest problem is if the gap between productivity and wages is too deep.

If that is the case, then of course they have to do something: either to move somewhere else, or to close production, or to invest in equipment or employee education - and this third option is what German companies are doing, especially the bigger ones. The training of employees, however, should be shared with the state: companies can, of course, train employees in some specific requirements but the basics should be provided by the country.

TSS: According to a survey prepared by the German-Slovak Chamber of Trade and Commerce, 86 percent of firms would pick Slovakia again as a destination for their investments. What are Slovakia’s competitive advantages, as listed by investors, and what are the areas in which they expect improvement?

MK: Last year it was 88 percent and the year before it was 89 percent, yet 86 percent is a very good number. Several German chambers of commerce in other countries in Central and Eastern Europe do the same survey and Slovakia’s 86 percent was the second highest among 12 countries. It means that companies can still do good business here. But this is also a typical “insider-outsider” issue, since we asked only companies that are still here: there are also companies that have left Slovakia for some reason.

TSS: However, the majority of firms in the survey said they do not expect there to be a further improvement in conditions. How would you interpret this result? Why is it so?

MK: The first reason is purely statistical. In Slovakia, the quality of business conditions has been rising over the past decade and the higher the level is the more difficult it becomes to achieve or even anticipate higher rates. Also, we performed the survey in April and May and in some sectors we were already seeing the impact of the global crisis and with it an expectation that the economy would slow. I think that companies reduced their expectations in connection with these developments. But there is also the aspect that the companies in fact did not expect too many reforms in the future.

Among the most negative aspects that firms mentioned was the lack of transparency in public procurement; they also called for infrastructure improvements, especially in the eastern part of Slovakia. They of course also mentioned the lack of qualified labour. While the labour force a couple years ago received high ratings, now the evaluation is negative. The need for more effectiveness in the public sector and enforcement of the law were also listed as areas that need improvement. After all, these things are not only problems for German companies.

The chamber has been doing these surveys since 2004. This year we sent the survey out to 460 companies and 95 responded. The companies we surveyed employ nearly 80,000 people in Slovakia. These companies create around 20 percent of the country’s GDP.

TSS: German businesses have been complaining about a lack of qualified labour in Germany, while even the critical high-tech sector has been affected. What steps has Germany taken to find a cure?

MK: Slovakia needs to reform its education system thoroughly. Indeed it was the most important point of our survey. This topic was the rising star. Last year it appeared in fourth or sixth position, but this year it was mentioned in almost all the countries where we did the survey in the most important position. Of course, you always have a lack of qualified labour because you can use qualified labour everywhere. Now, the economy is doing well, so the labour force has better conditions, but we will have to see how the labour market evolves when there is perhaps more impact from the crisis. But how can countries respond?

In Germany there has been an alliance for employment created between business, unions and the government to provide more training for young people. It gave a lot of young people the opportunity to learn a profession, especially in the field of mechanical engineering.

There also is a lot of discussion focused on university degrees. But a much more pressing need is the typical blue-collar worker. There should definitely be more attention paid to the vocational training. We often hear the opinion that with vocational training you do not have good enough prospects for your further career, which is completely wrong. There are a lot of examples among German CEOs who started with vocational training. They of course had to undergo additional training, but you do have some excellent possibilities and people should be made more aware of this. If you first undergo vocational training and then build your further education over it, you have much more experience and, in fact, you know what you are talking about.

There was also something like a dual approach of education, combining elements of vocational training and general education, in which students received both professional training and also preparation for further education. It functioned here in Slovakia as well until the mid-nineties, but unfortunately it was cancelled and in terms of the labour-force training Slovakia has been living from the past over the last 10 years.

TSS: Energy security is becoming an urgent problem for Slovakia, but the issue is very much alive in the wider European context as well. Your chamber recently organised a symposium on biomass and biogas in order to initiate a wide discussion on renewable energy sources.

MK: We have three major areas in which we work here at the chamber: automotive, mechanical engineering and then renewable energy. To be honest, our renewable energy efforts are not so much about energy security; rather, we were inspired by climate change to pay more attention to it.

But also, our main task as a chamber is to encourage knowledge transfer between Germany and Slovakia in certain areas and compare the existing situations. In this area Germany can provide a lot of experience concerning technologies. We concentrate on biogas, biomass and also geothermal energy, in which Slovakia has great potential. We do not see such big potential for solar or wind energy. There is also the area of energy efficiency, since the best way to save energy is not to use it you don’t need it. This area has a huge unused potential in Slovakia, not only among companies but also households.

There are a lot of technologies to achieve this and that’s why we organised the symposium. We based the activities on contacts with German companies and institutions but also Slovak institutions and companies presented their products and services.

There are regions with high unemployment where the use of these energy sources could create jobs because there is a lot of forested area and biomass area which cannot be used for industrial production. However, the country needs a new energy law in order to give some security over the next 10 years to companies which choose to build such biomass plants. Germany is generating almost 12 percent of its energy needs from renewable sources.

TSS: Has the status of the German language changed in the sphere of business interaction? Do, for example, German investors or companies face language barriers when doing business in Slovakia?

MK: As for the use of language in companies, you have to differentiate a little bit. At larger companies of course managers use English as their business language. However, most of these 400 German companies are small and medium-sized companies and their main language is German.

Just to add a note: in Germany small and medium-sized companies are a very important part of the German economy, most people are employed by them, and they form the foundations of the economy. In Slovakia, we have some large companies but numerous small and medium-sized firms operate here and they operate in German and look for people here in Slovakia who speak German. They also find a lot of people who speak German and who are able to communicate in Germany.

Our chamber also offers language courses in business German, together with the Goethe Institute: in particular crash-courses for accounting, marketing, and assistance to CEOs.

As for the main role of our chamber, it is to intensify German-Slovak trade in general. Eighty percent of our work consists of finding partners for German companies in Slovakia and vice versa, but of course we also assist Slovak companies and we serve as a platform for discussion about issues that matter to the business community.

General Facts

Source: EU website: http://europa.eu/