What has been maintaining Germany’s Competitiveness in Manufacturing?

The German economy has been outperforming other member countries of the European Union during the recent Great Recession and the ongoing European financial crisis and in spite of the strong incentives for outsourcing/offshoring manufacturing activity existing in the world economy. What are the determinants of this surprising outcome This paper sets out to empirically analyze the trade and technology specialization and the price/cost performance of the German economy over the last decades. Drawing on standard indicators of trade and technology specialization (Revealed Comparative Advantage, Relative Export Advantage, Relative Import Advantage, Revealed Patent Advantage) and of the country’s price/cost position (real effective exchange rate, unit labor cost, labor productivity), complemented by data on R&D expenditures and personnel, we identify the leading product groups in German industry. Furthermore we use the unit value approach to determine whether the competitiveness of German manufacturing products is related to price or quality advantage. Also, we estimate the degree of vertical specialization characterizing the German export sector in order to identify the role global value chains play in strengthening Germany’s competitiveness. All indicators are calculated for Germany, Korea, China, Japan and the United States for the period 1990-2011. Our results confirm the work of other authors as concerns the specialization of Germany in the field of products representing medium-range technology. In contrast to most other studies we conclude that quality is the main driver of German international competitiveness and that the evolution of price and cost indicators and particularly the R&D efforts have contributed to develop and maintain German competitiveness in manufactured products. Finally, the paper briefly discusses issues in public policy, particularly R&D activity and human capital accumulation, in the light of the empirical findings and taking into account major future challenges to industrial production faced by the world economy.