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Economic policy tour in Germany Preparing for “local Abenomics”

July 7, 2014

The LDP's Research Commission on Small and Medium-Sized Enterprise and Small Business (Chairman: Tatsuya Ito, Member of the House of Representatives) provided Prime Minister Shinzo Abe with recommendations on "local Abenomics." The recommendations have attracted wide attention as a new growth plan which would bring the support of Abenomics to the small and medium-sized enterprises, as well as small businesses that support local communities, and would establish a virtuous cycle within local economies. The commission toured Germany to prepare for the enactment of its recommendations, and Chairman Ito provided a summary of their observations.


Small and medium-sized enterprises are strong drivers of economic growth in Germany

The Research Commission on Small and Medium-Sized Enterprise and Small Business departed on July 7 and returned to Japan on July 11. While in Germany, we observed examples of how the recommendations on "local Abenomics" could be put into action.


The German economy plummeted after its reunification, and the country became known as the "sick man of Europe," but its manufacturers were so successful in driving an export-led turnaround that Germany has since become the continent's dominant economy and, according to some, the "sole winner." Beginning in 1998, Germany lowered its corporate income tax by more than 20%, but during this period, tax revenue increased by approximately 1 trillion yen, and the country is expected to suspend issues of deficit bonds for the first time in 46 years as it is planned to achieve fiscal equilibrium in 2015. Small and medium-sized enterprises have been the drivers of economic growth, and in some areas there are "hidden champions" with top global shares in their markets. Germany has an enormous number of these strong small and medium-sized enterprises - they account for 20% of the country's manufacturing exports and 95% of them are family-run. The purpose of our trip was to identify the policy measures that foster these "hidden champions."


Ambitious public support for business

The Fraunhofer Society (referred to as "Fraunhofer" below) has an annual budget of 1.9 billion euro (approximately 270 billion yen), and is the largest application-oriented research organization in Europe, employing 23,000 at 67 different institutes in Germany. Private contract research provides roughly one-third of its funding. The JenaValve Technology GmbH develops medical equipment and systems and has seen steady growth in its sales in Europe and North America. Many of its ideas come from university professors, and the products are initially developed by Fraunhofer. Zippel GmbH, a manufacturer of industrial cleaning equipment has also grown, thanks to technology proposals from Fraunhofer. Economic development corporations bring companies and research institutes together and also develop international sales channels. Together with local government entities, they have their own booths at international trade shows to support small and medium-sized enterprises as they expand abroad. In Bavaria, there are 19 industry clusters where product development and marketing functions are concentrated. In Regensburg, for example, city employees also work for the economic development corporation and oversee clusters.


Regensburg is a model for outlying cities in Japan

The city of Regensburg has a population of 150,000, and is the wealthiest city in Germany, as measured in terms of per capita GDP. It has achieved full employment, and its population grows by roughly 1,500 each year. The city is home to three universities, and one in five of its residents are students who will go on to be employed by companies in the city after graduation. The female population is large, particularly young women. This city could serve as a model for solutions to the issues confronting Japan's outlying cities, which the Japan Policy Council says face an existential crisis.



Like Japan, Germany is a country founded in manufacturing that is also experiencing declines in its population, lower birth rates, and aging demographics. However, Germany demonstrates that sustained economic development is possible with the right policy mix.

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