Structural Analysis and Outlook of Baden-Württemberg as a Business Location by National and International Comparison

Tasks

Since the financial and economic crisis Germany, and particularly Baden-Württemberg, have consolidated their position as economically prosperous and innovative locations in the European Union. Thanks to high share of value creation in the manufacturing sectors and its international orientation, Baden-Württemberg's economy has generated a high growth rate by national and international compari-son. Many companies in Baden-Württemberg are at the cutting edge of changes in international labour division and technological developments. This has enabled them to expand their sales markets and increase value creation and employment in their domestic location. This development, however, has not been linear. Risks cur-rently lie less in short-term economic setbacks, as discussed in the wake of the fi-nancial and economic crisis, than in mid-term shifts in the field of technology and the international division of labour. New propulsion technologies in vehicle manu-facturing, new mobility concepts, the enhanced importance of manufacturing ser-vices in areas like mechanical engineering and changed conditions due to the energy turnaround are creating new challenges in terms of the traditional focal points of Baden-Württemburg's economy. Growing external risks created by Britain's immi-nent exit from the EU and the potential reorientation of US trade policy, could justify additional needs for adjustment.

The study provides relevant economic policy background knowledge and explains which developments economic policy in Baden-Württemberg should bear in mind if it wishes to consolidate its economic strength and to recognise potential risks and the need for adjustments in advance.

Methods

The study draws on several types of methodology, including the ifo Trade Model, which is used to calculate economic policy changes. The study aims to provide rele-vant economic policy background knowledge on critical issues. In the first of three modules the competitiveness of Baden-Württemberg is analysed using different in-dicators over time. The second module focuses on external risks, and also looks at the issue of foreign direct investment in Baden-Württemberg as a potential structur-al problem. The third module deals with is the influence of disruptive technological changes and the problematic finding that innovation among SMEs is waning.

Data sources

EPA-PATSTAT, WIPO, EU-SILC, Eurostat, Genesis, OECD, WIOD, WITS, Midi, Ustan, Erhebung Frauenhofer ISI, Statistisches Bundesamt und Landesamt

Results

Prosperity in Baden-Württemberg is generated by manufacturing to a larger extent than in other German Länder or countries. Although employment is falling in the long term, this development is more than offset by rising productivity in terms of value creation. In view of intensive research activity in manufacturing, technica-related productivity in Baden-Württemberg can be expected to increase in the fu-ture. In terms of development in productivity, the service sector lags way behind manufacturing. At the same time, however, new jobs are largely created in services. Within the sector there are segments that are experiencing growth in added value, but little increase in employment (ICT services), as well as segments with a strong employment dynamic, but little growth in added value (business-related services). This phenomenon can be explained by the fact that the productivity of new workers in segments with employment growth is below average. 
As a result of rising productivity in manufacturing and relatively moderate increases in wage costs, the price competitiveness of Baden-Württemberg's economy has in-creased significantly over the last decade.

Baden-Württemberg has stronger international links than Germany as a whole thanks to trade in goods. These economic links continued to strengthen between 2006 and 2016, regardless of the huge collapse in world trade after the financial crisis of 2007/08. Trade with other European countries became slightly less important, measured in relation to the country's gross domestic product, while the USA and China gained importance; disproportionately compared to Germany as a whole. The goods structure of Baden-Württemberg's external trade shows a significant weighting in favour of vehicle manufacturing and civil engineering, which is also reflected in trade compared to domestic product.

In view of this changed trade policy environment, the question is how Baden-Württemberg's economy, which is very open to external trade, will be affected by the incipent, or at least potential, reintroduction of tariff and non-tariff trade barriers. The results of simulation models show that the return to higher import protection in the field of trade in goods as a result of the reorientation of US trade policy would have a strong negative impact on exports by Baden-Württemberg's traditional export industries (electronics industry, mechanical engineering and vehicle manufacturing). If US import protection also includes the non-tariff area, these declines in exports will range from between 7 and 8% in nominal terms. In terms of value creation a nominal decline of between 3 and 4% can be expected in the electronics, mechanical engineering and vehicle sectors. This would be offset by positive value creation effects in services. From an economic policy point of view, the key factor here is the reallocation of production factors from tradeable goods to services, which is bound to cause friction. All of the US import protection scenarios also mean prosperity losses for Baden-Württemberg in the shape of a reduction in households' real income, ranging from between 0.4% and 0.85%. The extent of these losses can be reduced slightly through retaliatory measures in the form of import protection for Europe against US imports, but even this "retaliatory" scenario means losses in real income for Germany and/or Baden-Württemberg. As a result, it is therefore important to avoid a return to greater import protection in the USA.

Various scenarios were also defined for Brexit and their impact on Baden-Württemberg were analysed. Trade and value creation effects are on a far smaller scale than in the case of US import protection, but follow a similar pattern. Baden-Württemberg and Germany would suffer real income losses in all of the scenarios analysed in the study, but the losses in prosperity would be far smaller in the Brexit scenarios due to the symmetrical impact of terms-of-trade changes; with a reduction of just 0.04 and /or 0.03% in real income.

Publication

Berger, Marius, Bernhard Boockmann, Gabriel Felbermayr, Charlotte Klempt, Andreas Koch, Wilhelm Kohler, Christian Lerch, Peter Neuhäusler, Christian Rammer, "Strukturanalyse und Perspektiven des Wirtschaftsstandortes Baden-Württemberg im nationalen und internationalen Vergleich", Abschlussbericht Strukturanalyse, 2017 (PDF)