Appendix A2

Fraunhofer-Gesellschaft: The German Model of Applied Research

The Fraunhofer-Gesellschaft (Fraunhofer Society) is a network of German institutes for applied research. The Fraunhofer’s primary mission is to perform contract research for German industry, particularly small and medium enterprises (SMEs), which translate basic research from universities and non-university research organizations into commercial products and industrial processes. The 60 Fraunhofer institutes in Germany, with an average staff of 400, perform research and test industrial processes on their premises which enjoy state of the art equipment and deep human competencies. Fraunhofer’s funding is derived from diverse sources, including federal, state, and European Union public funding, fees from contract research for industry and public organizations and foundations, and licensing fees for intellectual property. It has created roughly150 spin-off companies, with a very high rate of success.

Each Fraunhofer institute specializes in a particular technology or sector, and a Fraunhofer institute exists for virtually every sector of significance to a modern industrial economy, ranging from renewable energy, aerospace, automotive manufacturing, microelectronics and information technology. Each Fraunhofer institute is paired with a German university and can utilize the most promising students as part-time researchers, thereby giving students practical experience in commercially-oriented research and manufacturing environments. The institutes generate technology for commercial products and processes, enable companies to test equipment and industrial processes on pilot manufacturing lines, and foster a continual flow of trained engineers and technicians to the private sector.

The German model of innovation is widely credited as a major factor underlying Germany’s strong international competitive performance since the onset of the global financial crisis in 2008. German exports are at an all-time high and GDP growth outpaces the rest of the Euro zone and the United States. German competitive strength are often attributed to factors such as the country’s



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Appendix A2 Fraunhofer-Gesellschaft: The German Model of Applied Research The Fraunhofer-Gesellschaft (Fraunhofer Society) is a network of German institutes for applied research. The Fraunhofer’s primary mission is to perform contract research for German industry, particularly small and medium enterprises (SMEs), which translate basic research from universities and non- university research organizations into commercial products and industrial processes. The 60 Fraunhofer institutes in Germany, with an average staff of 400, perform research and test industrial processes on their premises which enjoy state of the art equipment and deep human competencies. Fraunhofer’s funding is derived from diverse sources, including federal, state, and European Union public funding, fees from contract research for industry and public organizations and foundations, and licensing fees for intellectual property. It has created roughly150 spin-off companies, with a very high rate of success. Each Fraunhofer institute specializes in a particular technology or sector, and a Fraunhofer institute exists for virtually every sector of significance to a modern industrial economy, ranging from renewable energy, aerospace, automotive manufacturing, microelectronics and information technology. Each Fraunhofer institute is paired with a German university and can utilize the most promising students as part-time researchers, thereby giving students practical experience in commercially-oriented research and manufacturing environments. The institutes generate technology for commercial products and processes, enable companies to test equipment and industrial processes on pilot manufacturing lines, and foster a continual flow of trained engineers and technicians to the private sector. The German model of innovation is widely credited as a major factor underlying Germany’s strong international competitive performance since the onset of the global financial crisis in 2008. German exports are at an all-time high and GDP growth outpaces the rest of the Euro zone and the United States. German competitive strength are often attributed to factors such as the country’s 224

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APPENDIX A2 225 highly-skilled work force; a longstanding “dual system” of education/apprenticeship, which marries academic learning and practical skills; the export prowess of Germany’s small and medium enterprise (Mittelstand), which dominates hundreds of world markets for niche technologies; a web of mutually-supporting networks of companies, associations, and research organizations that can address complex technological challenges and diffuse technology through collaboration; and the excellence of German engineering and manufacturing technology in companies of all sizes. The Fraunhofer plays a central role in supporting all of these aspects of German competitive strength. Reflecting Germany’s international competitive performance, the Fraunhofer is probably the world’s most thoroughly studied applied research organization, with other countries examining the question of whether they could apply the “Fraunhofer model” wholly or partially and emulate Germany’s success. Of particular interest is Fraunhofer’s role in Germany’s abiding strength in “traditional” industries which have eroded in other developed economies, such as automobiles and machinery. Germany companies have remained competitive in these sectors through a continual process of incremental improvement in existing products and processes, an approach that may not yield technological breakthroughs but builds a competitive edge over a long timeframe. The Fraunhofer emphasizes performance of a large number of short- term research projects that have near-term commercial impact, an approach which reinforces the German method of incremental innovation. It continually diffuses competitively relevant innovation technology throughout the German economy and trains highly-skilled engineers, technicians and managers. Public funding of the Fraunhofer reflects a longstanding German national consensus that public investments must be made in research infrastructure that includes infrastructure for applied research with commercial relevance. 1 It is important, however, not to overrate the impact and the importance of Fraunhofer Gesellschaft for the German research and innovation system. While Fraunhofer Gesellschaft have contributed in significant ways to the recent success of German industry, this success has also rested on factors such as the high demand for capital goods/machinery by emerging economies and the match of this demand with Germany’s industry profile. Other factors supporting German competitiveness include a competitive currency, worker training programs, policies to subsidize the retention of skilled workers in economic downturns, and a dense network of supporting institutions, including localized banks with long-term relationships with Mittlestand firms.2 1 Dirk-Meints Polter, a former Fraunhofer deputy director, addressed this point in 1992, characterizing “subsidy,” as a misleading word: “we see ourselves as part of a scientific and technological infrastructure that is provided by the government, just as phones and roads are provided.” New Scientist. 1992. “German Innovation, British Imitation.” November 21. 2 Additional instruments include innovation vouchers and Industrial Collective Research institutes. “In numerous Länder, including North Rhine-Westphalia, Baden-Württemberg and Bavaria,

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226 21ST CENTURY MANUFACTURING INTRODUCTION The Fraunhofer has an enviable reputation throughout Germany, Europe, and the world. A report by the U.K. House of Commons Science and Technology Committee commented in 2011 that “the name Fraunhofer resonates across the world and is widely associated with an impressive network of German technology and innovation centres.”3 In 2010, the United Kingdom’s Minister of State for Universities and Science, David Willetts, testified that the Fraunhofer Institutes “have been a key part of Germany’s success in advanced manufacturing and high grade engineering.4 In 2010, Fraunhofer was Germany’s second most popular employer for graduates in the natural sciences, fourth most popular for information and communications technology graduates, and seventh most popular for engineering graduates5. The amount of contract research business with industry—an accepted benchmark of Fraunhofer’s effectiveness in promoting industrial innovation—is at an all-time high and increased by 15 percent between 2010 and 2011.6 Recent German Economic Performance A recent resurgence of interest in the Fraunhofer reflects the fact that Germany has weathered the financial crisis which began in 2008 far more innovation voucher programmes have been launched. Normally aimed at SMEs that conduct no R&D of their own, the programmes subsidise part of companies’ costs for consulting or external R&D services. The Federal Ministry of Economics and Technology (BMWi) launched a similar programme in 2010” . The Industrielle Gemeinschaftsforschung, (IGF) is a “a mechanism enabling businesses to solve shared problems through shared projects. This kind of pre-competitive research closes the gap between basic research and industrial application. The results are available for everyone interested and the basis for individual adaptations within enterprises” . 3 House of Commons. 2011. Second Report: Technology and Innovation Centres. Committee on Science and Technology. February 9. p. 41. 4 Ibid. pp. 7. German industrial leaders attribute their abiding success in export markets, in substantial part to Fraunhofer and other similar German research organizations. In 2008, Der Spiegel interviewed Ekkehard Shutz, the CEO of Germany’s biggest steel firm, ThyssenKrupp. Commenting on his firm’s success in a global market increasingly affected by low cost manufacturers based in Asia, he observed that despite Germany’s higher cost structure, it remained a “good place for production. You can tell by the fact that the lion’s share of our investment still flows into our German plants. We have exceedingly well-trained employees here, a good research environment, close cooperation with our customers and suppliers, our six partner universities, and non-university research institutions like the Fraunhofer Society and the Max Planck Institute.” Spiegel Online International. 2008. “We are not driving the Price Hike.” July 16. 5 Reid, Benjamin et al. 2010. Technology Innovation Centres: Applying the Fraunhofer Model to Create an Effective Innovation Ecosystem in the U.K. Submission to the House of Commons Science and Technology Committee, December. 6 Fraunhofer Magazine. 2012. “Boost in Earnings.” February.

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APPENDIX A2 227 successfully than most industrialized nations.7 German manufacturing as a share of GDP stood at 20.7 percent, versus 12.7 percent for the United States and 11.5 percent for the U.K.8 “[D]espite despite the onset of the financial and economic crisis in 2008, German research-intensive industry was able to develop a leading position among the established economies. Sectors which particularly profited from this development include the manufacture of road vehicles, machinery, electrical machinery, and chemicals.”9 This performance poses the obvious question of how a wealthy, high- wage country with a strong currency could compete so successfully in a global market where the terms of competition are increasingly driven by low-cost Asian firms.10 German Model of Innovation The German model of innovation applies science, technology, and engineering to drive incremental but constant improvements in processes and technologies and aims at niche areas where competition is less intense than in large commodity markets.11 Although Germany has a vast array of research organizations capable of supporting such a strategy, the Fraunhofer is the foremost, and is most often cited as the driver of German competitiveness in export markets. The perception of Fraunhofer as a success story underpinning German competitive achievements in global markets has led other countries to study its methods and structure to determine whether part or all of the 7 Spiegel Online. 2011. “Stronger than Expected Growth: German Economy Defies Crisis.” November 15. German GDP grew 3.6 percent in 2010, with the rest of the Euro zone growing at 1 percent or less and the United States at 2.9 percent. German exports in 2011 reached 1 trillion Euros, an 11.4 percent increase over 2010 and the largest volume in German history. Spiegel Online. 2012. “News of Germany’s Strong Growth isn’t Welcome Everywhere.” February 9. 8 Manufacturers Alliance for Productivity and Innovation. 9 DIW Economic Bulletin. 2011. “German Manufacturing Withstands Rise of Emerging Economies.” June. The Christian Science Monitor observed in 2011 that Germans have looked around lately to find they have the preeminent world-class export economy in Europe. No one else comes close. German precision tools are coveted in Asia and Russia like Fabergé eggs. Germany is building much of the Summer Olympic and World Cup facilities in Brazil. The next generation of Eurostar trains linking the Continent and Britain will be made by Siemens of Germany, not, as they traditionally have been, by Alstom of France—a blow to French pride. The Christian Science Monitor. 2011. “Germany—the new mini-superpower.” January 30. 10 Xinhua. 2012. “What’s Behind the Success Story of German Manufacturing Industry?” February 23; Spiegel Online. 2012. “How the German Economy Became a Model.” March 21. 11 “Mass production has never been the norm in [Germany] to the degree that it has been in the United States (and Japan)…as a consequence, Germany’s factory work force shows a much stronger element of craftsmanship…this is also the result of the basic education that apprentices get in addition to their on-the-job training.” Junne, Gerd. 1989. “Competitiveness and the Impact of Change: Applications of ‘High Technologies’.” In Katzenstein, Peter J. (ed.) Industry and Politics in West Germany: Toward the Third Republic. Ithaca: Cornell University Press. pp. 256.

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228 21ST CENTURY MANUFACTURING “Fraunhofer model” could be adopted domestically.12 The Fraunhofer model was extensively reviewed in 2010 and 2011 by the House of Commons Science and Technology Committee, and aspects of that model are now being adopted in the United Kingdom. 13 In the United States, the Fraunhofer was the subject of studies during the 1990s by the Council on Competitiveness and the Office of Technology Policy in the Department of Commerce.14 In 2005, French Research Minister Francois d’Aubert commented that his country needed to develop “Partnership research…on the model of the German Fraunhofer Institutes.”15 Other countries have demonstrated similar interest.16 Non-German observers tend to cite the Fraunhofer’s funding model as its strongest positive feature. That model, based on a formula of one-third core public funding, one third private contract research and one third publicly-funded contract research, ensures stable long-term funding. The model is particularly attractive to Anglo-American observers whose research institutions have suffered from erratic funding and a partisan political environment in which government support for science is controversial and uncertain. Fraunhofer staff acknowledge the success of the institute’s funding approach, but emphasize its relational aspects as the real basis for its success. Fraunhofer institutes operate in vast, multiple overlapping human and institutional networks embracing universities, companies, research organizations, trade associations, and foundations, organized by scientific field and areas of interest. Relevant units of these networks can be brought to bear on research projects, consortia, and development alliances to address specific tasks based on their particular competencies. Any private or public entity which enters into a research relationship with Fraunhofer gains entrée to these networks. Fraunhofer is more than a networking organization. It possesses deep and broad organic competencies and institutional scientific memory, reflecting 12 In the run-up to the United Kingdom’s 1992 general election, each of Britain’s leading political parties vied to convince voters that their plan to apply the Fraunhofer model in the UK was the superior choice. Physics World. 1992. “Fraunhofer Fever Hits the UK.” March. New Scientist. 1992. “British Innovation, German Style.” March 21. New Scientist. 1992. “German Innovation, British Imitation.” November 21. 13 Hauser, Hermann. The Current and Future Role of Technology and Innovation Centres in the U.K. Report for Lord Mandelson. The Daily Telegraph. 2011. “Follow the German Model and be Patient for Manufacturing to Thrive.” August 25. The Sunday Telegraph. 2010. “Welcome to Berlin, Peter. Is it the Future?” February 7. 14 Mitchell, A. Duff. 1998. The Fraunhofer Society: A Unique German Contract Research Organization Comes to America. Burton, Daniel F. and Kathleen M. Hansen. 1993. German Technology Policy: Incentive for Industrial Innovation. Council on Competitiveness Occasional Paper, Challenge, January-February. 15 Le Monde. 2005. “Research: The Key Points of the Law.” January 17. 16 In 2008, the Dubai Institute of Technology (DIT) signed an agreement with Fraunhofer pursuant to which the institute agreed to help DIT develop a “comprehensive R&D and innovation model.” MENA Business Reports. 2008. “DIT, Fraunhofer Sign Agreement on Development of R&D Model.” September 22; Irish Times. “Bavaria or Bust.” June 8.

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APPENDIX A2 229 its permanent staff of scientists, technicians, and managers. Its institutes are extremely well-equipped and most of them operate multiple pilot manufacturing lines and other demonstration facilities.17 The Fraunhofer is a beneficiary of the “power and generosity of the…German machine tool industry,” which permits its labs to be equipped with state-of-the-art machines loaned on generous terms.18 The institute holds a massive patent portfolio which can be deployed on behalf of clients seeking to license cutting-edge technology. It is relentlessly focused on practical applications of technology. Supporting the Mittelstand The Fraunhofer is frequently cited in connection with the export strength of Germany’s small and medium enterprises. The best of these firms, the so-called Mittelstand, are typically family-owned, highly specialized, based in small cities and towns, and “build products that dominate obscure industrial subsectors”. “There is no doubt that the German Mittelstand were one of the main factors that generated economic success and prosperity in Germany after World War II.”19 Observing the slogan, “don’t dance where the elephants play,” the Mittelstand pursue niche markets, particularly at the high end of the product spectrum, and make continuous incremental improvements in their products to maintain leadership over their competitors.20 “It might be that their products will not be the cheapest, but they definitely have the best quality.”21 A 2007 study 17 Typically the Fraunhofer Institute for Molecular Biology and Applied Ecology IME in Aachen states in its 2011/2012 Annual Report that “The R&D activities in the various IME business areas involve certain platform technologies that need sophisticated apparatus and infrastructure as well as highly trained staff…The services provided include sequencing, chip technologies, proteomics, metabolomics, recombinant protein production, protein purification, protection structural and functional analysis, antibody manufacturing, and high throughput imaging technologies and are available to the working groups within the IME as well as the external clients.” Fraunhofer IME. 2012, Jahresbericht/Annual Report: 2011-2012. p. 15. 18 The director of the Automation Department at the Fraunhofer Institute for Production Systems and Mechanical Constructions Technologies IPK, Gerare Dulen, commented in 1987 that in his department, “There are DM 50 million of machine tools in place. Most of them have been lent to us by industrialists. But we do developmental work for their account. Often, they turn prototypes over to us even before commercializing them. We then complete the development and programming of these prototypes. Afterwards they leave the machines with us at no charge for several months. The advantage of this arrangement is that we always have the most modern machines.” Industries et Techniques. 1987. “Applied Research: The Fraunhofer Method.” October 20. JPRS-ELS-88-006. 19 Hamburg, Christian. 1999. Structure and Dynamic of the German Mittelstand. Heidelberg and New York: Physica-Verlag. pp. 1. Volker Treier, chief economist of the German Chamber of Commerce, characterizes the Mittelstand as the backbone of the German economy. Treier, Volker. 2011. “The Engine of Growth. Wall Street Journal. June 26. “If a particular job can be best done by a machine, then the chances are that the machine in question was built in a small town in Germany.” The Economist. 2011. “German Business: A Machine Running Smoothly.” February 3. 20 Software Magazine. 2011. “Finding Hidden Gems in the German Mittelstand.” October. 21 Boeing, Phillip. 2012. “What’s Behind the Success Story of German Manufacturing Industry?” Xinhua. February 23.

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230 21ST CENTURY MANUFACTURING found that over 1,130 small and medium-sized German companies occupied the number one or two position in the world market for their products, or the number one position in the European market.22 According to one source, the Fraunhofer’s “main focus [is] on the Mittelstand companies,” and “the research facilities of Fraunhofer serve as external, very well equipped research departments of the Mittelstand companies.”23 The Skilled German Workforce The Fraunhofer is cited in connection with another aspect of the German model, the country’s highly trained, technologically-adept work force, which has been a subject of foreign admiration and study for over a hundred years.24 To some extent this phenomenon is cultural—German blue collar workers draw on a tradition of craftsmanship with the attitude that “excellence on the shop floor is every bit as important as in the Nobel Prize caliber laboratory.”25 The pursuit of excellence in manufacturing is widely attributed to Germany’s longstanding “dual system” of vocational training, pursuant to which a course of academic study of a practical discipline is undertaken in parallel with apprenticeship at a company or a public vocational institute.26 The Fraunhofer applies the principle of the dual system at the highest educational levels, with masters and PhD candidates and postdocs simultaneously pursuing courses of study in science or engineering while performing work and acquiring practical experience in a Fraunhofer institute.27 22 The study was co-authored by Professor Bernd Venohr, a German management consultant generally regarded as one of the world’s leading experts on the Mittelstand and built on findings in earlier work by another expert, Hermann Simon, who coined the term “Hidden Champions” to describe the best of these companies. Venohr, Bernd and Klaus E. Meyer. 2007. The German Miracle Keeps Running: How Germany’s Hidden Champions Stay Ahead in the Global Economy. Berlin: Berlin School of Economics, May. 23 Hamburg, Christian. 1999. Structure and Dynamic of the German Mittelstand. Heidelberg and New York: Physica-Verlag. pp. 58-59. 24 Thelen, Kathleen, 2004. How Institutions Evolve: The Political Economy of Skills in Germany, Britain, the United States, and Japan. Cambridge: Cambridge University Press. pp. 39. 25 “This has much to do with the fact that the pursuit of excellence in Germany has not been limited to university-trained elites, but has occurred within each layer of German society...One relevant consequence is that managers trained in engineering or the sciences often feel they should be able to prove the mettle of their own skills in front of workers who have high standards against which to measure performance.” Beyerchen, Alan D. 1990. “Trends in the Twentieth Century German Enterprise.” In The Academic Research Enterprise within the Industrialized Nations: Comparative Perspectives. Washington, DC: The National Academies Press. pp. 80. 26 In 2008, roughly 58 percent of Germany’s upper-secondary school students were also enrolled in vocation or technical programs, and many students combine apprenticeships with the pursuit of graduate degrees, entering the work force in their mid-20s with highly developed practical skills. Helper, Susan, Timothy Krueger, and Howard Wial. 2012. “Why Does Manufacturing Matter? Which Manufacturing Matters? A Policy Framework.” Brookings. February. p. 27. 27 There is increasing overlap between the demand by industry for workers trained in vocational schools and universities. Professor Kathleen Thelen of Northwestern University, who has

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APPENDIX A2 231 Weaknesses of the German System The German innovation system is by no means perfect. German innovation tends to build on established structures rather than creating entirely new ones; product and process improvements are slow, albeit continuous. “The resulting pattern of innovation is one that is more likely to generate improvements of existing products of existing firms and sectors than to give rise to new ones.”28 The postwar German system has not produced “radical, path- breaking innovations found, for example, in America.”29 Some observers believe that Germany’s “heavy concentration of R&D and innovation activities in the automotive sector…may lead to an unbalanced innovation system.”30 “Germany never came close to a computer industry that was able to compete with its U.S. counterpart.”31 Start-ups which become spectacular successes are rare, and would-be startups confront obstacles such as inadequate availability of venture and bank capital and legal and societal factors that punish market failure.32 As a extensively studied the German training system, notes that “firms (even small, medium-sized handicraft firms) are increasingly inclined to recruit new workers from among applicants holding university degrees…[there is] increasing competition between job applicants from the traditional vocational training track and those with technical college and university degrees. Thelen, Kathleen. 2004. How Institutions Evolve: The Political Economy of Skills in Germany, Britain, the United States, and Japan. Cambridge: Cambridge University Press. pp. 274. 28 Streeck, Wolfgang. 1995. “German Capitalism: Does it Exist? Can it Survive? In Colin Crouch and Wolfgang Streeck, eds. Modern Capitalism or Modern Capitalisms? London: Francis Pinter. p. 14. 29 Harding, Rebecca. 2000. “Resilience in German Technology Policy: Innovation Through Institutional Symbiotic Tension.” Industry and Innovation. December. p. 223. 30 Astrom, Tomas, Marie Louis Eriksson and Lars Niklasson. 2008. International Comparison of Five Institute Systems. Copenhagen: Forsknings-og Innovationsstyreisen. December 23. p. 108. Numerous Fraunhofer institutes pursuing research themes with little apparent nexus with the automotive sector are in fact active in that sector. The Fraunhofer Institute for Experimental Software Engineering IESE is working with Audi on the development of software for electric vehicles, with BMW on a model for estimating the cost of software projects, and with “companies from the automotive domain” on software testing techniques. Fraunhofer IESE, “Automotive and Transportation Systems.” . The Fraunhofer Institute for Communications Systems ESK has a large “Business Unit Automotive” working on automotive software engineering, external communications from motor vehicles, and internal transmission and processing of data in vehicles. . The Fraunhofer Institute for Chemical Technology ICT is collaborating with Faurecia to develop advanced industrial processes for composites for application in the automotive field. Fraunhofer ICT, “Faurecia Signs R&D Agreement with the Fraunhofer ICT for Advanced Industrial Processes in the Field of Composites.” . 31 Wieland, Thomas. 2006. “Innovation and Culture, Technology Policy and the Uses of History.” Munich Centre for the History of Science and Technology. p. 7. 32 Uwe Waltz, a professor at the Center for Financial Studies at the University of Frankfurt observed in 2011 that “entrepreneurship is not valued in Germany as it is in the United States. On top of that, U.S. business men are likely to go on the market at the first opportunity, while Germans like to perfect the final technical details before going into business.” Deutsche Welle. 2011. “Germany’s Venture Capital Market Starts to Take Off.” June 1.

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232 21ST CENTURY MANUFACTURING result, with the notable exception of SAP, there is no German counterpart to Intel, Apple, Google, or Facebook. The former area of East Germany absorbs a substantial part of the federal research spending but generates comparatively little innovation.33 Dr. Stefan Kulhman, Director of the Fraunhofer Institute for Systems Innovation Research in Karlsruhe, told a National Academies symposium in 2007 that Germany’s education system, long considered quite strong, had declined to a point of crisis and required “and expensive restructuring.”34The German university system is widely criticized and may prove incapable of supplying enough graduates with the skills required by German industry.35 In 2011, on any given month, Germany averaged 92,000 vacant engineering jobs. The director of the Köln Institute for Economic Research IW, Hans-Peter Kloes, commented that “if we cannot close the engineering gap, the continuing shortage of qualified employees will become a threat to the German business model.”36 Even the vaunted vocational training system is under strain; a 2010 study by Germany’s education ministry found that while there was an unmet need in German industry for 9-10,000 apprenticeships, one in five apprentices “did not stick out the apprenticeship,” the number of students entering apprenticeships was declining, and “businesses are facing a huge drop-off in apprentice numbers.”37 The Fraunhofer is implicated in at least some of these systemic weaknesses:  Because the Fraunhofer business model is based on demand for research from industries that already exist, it has little economic 33 “East Germany and Berlin together eat up nearly one-quarter of the…federal research budget while employing only 11 percent of the country’s R&D personnel and accounting for 6 percent of its patent production.” Kuhlman, Stefan. 2007. “The Record and Challenge in Germany.” In National Research Council. Innovation Policies for the 21st Century. Charles W. Wessner (ed.) Washington, DC: The National Press. p. 70. 34 Ibid. p. 70. 35 National Research Council, Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Wessner, Charles W and Alan Wm Wolff (eds.). Washington, DC: The National Academies Press. 2012. pp. 274. The Economist. 2009. “On Shaky Foundations.” June 25. The Times Higher Education World University Rankings 2011-12 place four German universities in the top 100 institutions worldwide. The highest ranked German university was Ludwig Maximillian University in Munich. The Economist. 2011. “German Universities: Mediocre but at least They’re Free.” June 30. 36 Spiegel Online. 2012. “VDI Study—Lack of Engineers Costs German Economy Billions.” April 26. Bernd Rau, one of the founders of the Mittelstand company Roth and Rau, commented in 2010 that his company’s search for skilled workers was becoming acute. “It is more and more difficult, especially for the IT people, and also in engineering and mechanical engineering.” Deutsche Welle. 2010. “Labor Bottleneck Squeezes Germany’s Solar Sector.” November 23. 37 Deutsche Welle. 2010. “Germany faces Youth Employability Crisis, Says New Report.” April 28.

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APPENDIX A2 233 incentive to incur the costs and risks associated with creating entirely new industries.  The Fraunhofer and other non-university research institutions compete with German universities for funding and personnel, and may have contributed to the erosion over time of university-based scientific research in Germany.  The Fraunhofer’s emphasis on research with relatively low risk, short time horizons, and early commercial payoff undermines its ability to support sectors such as biotechnology in which risks are substantial and the path to market is often many years long. Although Fraunhofer centers have been established in the United States and other countries, they have not enjoyed the degree of success of their affiliates in Germany and it is questionable whether the Fraunhofer model is adaptable in its main aspects to a U.S. industrial innovation context:  The full extent to which the Fraunhofer relies on government funding is frequently not appreciated. A widespread misimpression exists that the Fraunhofer’s primary funding source is the private sector. In fact, one-third of Fraunhofer’s funding consists of “core” money provided by the German federal and state governments, roughly another third comes from research contracts with government entities, and one third is provided through research contracts with the private sector—which are frequently supported by government grants and other financial assistance. While Germany as a nation tends to regard such public expenditures as a necessary form of infrastructural investment, it is unclear that such a high-level of government spending on commercially-related research could be reconciled with U.S. economic ideology or fiscal realities.  A system of Fraunhofer-like research institutes could weaken U.S. university-based innovation. The U.S. Bayh-Dole Act of 1980 provided that U.S. universities conducting federally-funded research could own the patents for the technologies they developed, a policy shift that fostered an explosive growth of new companies commercializing university-based R&D. The Fraunhofer model interposes an intermediary organization between universities and industry, at that intermediary—not universities or companies—ends up as the owner of most of the intellectual property rights derived from government-funded research. While the Fraunhofer actively licenses its IP to industry, it is not clear that the German model is as dynamic as the current U.S. university-based system which—in contrast to the German—has given rise to entirely new technology-intensive industries. In addition, an intermediate research organization will

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234 21ST CENTURY MANUFACTURING inevitably compete with universities for public and private funding as well as personnel.38  The Fraunhofer model derives much of its strength from other elements of the German innovation system which are not present to the same degree in the U.S. The United States has no close parallels to the German system of stable government funding for commercially- relevant research; to the Mittelstand; to the “dual system” of vocational and training; or to the German tradition that competition should be subordinated to cooperative arrangements. These aspects of the German system reflect complex, multigenerational cultural and institutional evolution and cannot easily be replicated elsewhere. In this connection, an exchange which occurred in Britain’s House of Commons Science and Technology Committee in 2012 is worth noting. MP Sir Peter Williams commended the Fraunhofer model to his colleagues and urged that the country learn from it: Williams: Down the decades everybody, from John Fairclough onwards, has said to the Government ‘Look at the Fraunhofer- Gesellschaft; there are lessons to be learned’. It is a fact that they do not have to debate the issues that we are debating today because they have been through the valley of death as a nation, as it were, and they prosper by valuing and backing engineering with their Lander, federal government, financial institutions, Mittelstand families, scientists, engineers, and business folk playing like a team, which is why they are going to win the European Championship as well… MP Jim Dowd: So we could have all these benefits as well if all we did was change every single piece of our social structure.39 The Fraunhofer and the German innovation model are nevertheless of interest from an Anglo-American perspective because of Germany’s success in holding its leadership position in traditional manufacturing industries and in retaining a major manufacturing presence in Germany itself, with the implications which that holds for employment and regional economic development. Germany remains strong in industries like automobiles, 38 In the British Parliament’s recent deliberations over the establishment of intermediate research organization patterned on the Fraunhofer, concern was expressed by the Institute of Physics that the result “may well be to put further pressure on the universities which use research contracts as alternative sources of funding.” House of Commons Science and Technology Committee. Technology and Innovation Centres. Second Report of Session 2010-11. Volume I, Report, p. 27. 39 House of Commons, Science and Technology Committee. “Bridging the Valley of Death: Improving the Commercialization of Research.” June 20 2012. Transcript of Oral Evidence.

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274 21ST CENTURY MANUFACTURING Anglo-American bombing severely damaged German industry, although by no means destroyed it. The Allied Occupation of Germany at the end of World War II inflicted further harm on Germany’s science-industrial infrastructure. Research bans were placed on sectors such as aviation and rocket propulsion in which German science enjoyed a strong position, setting back the country’s long run prospects in these fields. The U.S.-led “Project Paperclip” identified thousands of the most talented German scientists and removed them to the United States, while the Soviets forcibly relocated German scientists found in their occupation zone.166 Berlin, the traditional center of German science, was divided between Allied occupation zones and marooned in what would become a Soviet puppet state, the German Democratic Republic. German factories in the Russian Zone were dismantled and shipped to the East, along with management and staff.167 Between 1947 and 1950, the British pursued a similar program of industrial dismantlement in the Ruhr 168. The American authorities mounted a “de- cartelization” effort which broke up industrial combinations and trade associations in an effort aimed at “rooting out German-style organized capitalism and replacing it with the idealized version of the American free- market system envisioned by Thomas Jefferson” 169. German industrialists were aghast at deconcentration measures that “dismantled hundreds of viable plants, disrupted supply networks, and broke many of the links between the agricultural and industrial sectors.” “Many Germans saw the Allied controls as even more oppressive than the Nazis,” and those measures contributed to the subsequent German “atmosphere in which enthusiasm for state intervention was quite limited.”170 Despite the massive discontinuities of the period 1914-50, the German innovation system reestablished itself in the immediate aftermath of World War II with a remarkable degree of continuity with respect to pre-1914 institutions 166 BBC News. 2005. “Project Paperclip: Dark Side of the Moon.” Quote from Major General Hugh Knerr, November 21. 167 The Russians dismantled and relocated 92 percent of the Carl Zeiss optical works in Jena. “Carl Zeiss—A History of a Most Respected Name in Optics,” Company 7. . 168 “[S]ome 700 million Deutschmarks worth of plant were unbolted, disassembled, cut apart with blow torches and carted away.” Gillingham, John. 1991. Coal, Steel, and the Rebirth of Europe 1945-1955: The Germans and French from Ruhr Conflict to Economic Community. Cambridge: Cambridge University Press. p. 206. 169 Gillingham, John. 1991. Coal, Steel, and the Rebirth of Europe 1945-1955: The Germans and French from Ruhr Conflict to Economic Community. Cambridge: Cambridge University Press. p. 109. 170 Allen, Christopher S. 1989. “The Underdevelopment of Keynesianism in the Federal Republic of Germany,” in Peter Hull (ed.), The Political Power of Economic Ideas: Keynesianism Across Nations. Princeton: Princeton University Press. p. 266.

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APPENDIX A2 275 and norms.171 The KWG research institutes were reformed under the designation Max-Planck Society. The dual system of education/apprenticeship reemerged more as by habit than by central direction.172 German training institutions, “turned out to be incredibly resilient in the face of huge exogenous shocks of the sort we might expect to disrupt previous patterns and prompt dramatic institutional innovation.”173 German industry regrouped in networks of associations, “cartel-like arrangements,” and industrial combinations linked by a maze of interlocking directorates and cross-shareholdings involving banks and insurance companies.174 Emergence of the Fraunhofer-Gesellschaft The creation of the Fraunhofer Gesellschaft was part of a post-war effort by the state of Bavaria to capitalize on the Allied dismemberment of Prussia and to “lure research and engineering talent from Prussia’s main agglomeration of science and technology activities which was in Berlin.”175 Bavarian politics in the half century after the end of World War II were dominated by the Christian Socialist Union (CSU), a party that was deeply conservative yet committed to the promotion of science, education, and technologically-advanced industries. The Bavarian government invested heavily 171 Kathleen Thelen, an academic who has studied German labor relations, vocational training and education, observed in 2004 that “one of the striking features of the system is the resiliency of core elements even in the face of enormous disruptions over the twentieth century, which of course in Germany include several regime changes, the incorporation of the working class, defeat in not one but two world wars, occupation, and transitions in and out of fascism. Although changes certainly occurred at these junctures, what is remarkable and in need of explanation are some striking continuities in key features of this system despite these disjunctures.” Thelen, Kathleen. 2004. How Institutions Evolve. Op. Cit. p. 7. 172 Plant-based apprenticeship “more or less spontaneously re-surfaced after the war recommencing most quickly and thoroughly in the craft sector as early as 1945.” By the time of the founding of the federal republic in 1949, “the enterprise-based part of the dual system had been re-established on the basis of employer self-governance with distant supporting roles assigned to both the state and unions.” One academic terms these developments a “re-anchoring of traditional training structures.”Thelen, Kathleen. 2004. How Institutions Evolve. Op. Cit. pp. 244-251, citing Gunter Patzold (ed.) 1991. Quellen und Dokumeate zur Betrieblichen Berufsbildung. Koln: Bohlau Verlag. . 173 Thelen, Kathleen. 2004. How Institutions Evolve. Op. Cit. pp. xiii. 174 Der Spiegel. 1991. “Cartel Germany: Competition in our Ranks is Being Curbed.” August 26. Katzenstein, Peter. 1987. Policy and Politics in West Germany: the Growth of a Semisovereign State. Philadelphia: Temple University Press. p. 88. Grant, Wyn, William Patersan and Colin Whitston. 1988. Government and the Chemical Industry: A Comparative Study of Britain and West Germany. Oxford: Clarendon Press. p. 90. 175 Siebert and Stolpe. 2001. Technology and Economic Performance. op. cit. p. 20. The Sunday Times. 2011. “Wiped from the Map—The Compelling Story of East Prussia and its Erasure by a Brutal Post-War Past.” London. June 5. The Soviet blockade of Berlin in 1948 induced a number of German companies to relocate their headquarters from Berlin to Bavaria. Milosch, Mark S. 2006. Modernizing Bavaria: The Politics of Franz Joseph Strauss and the CSU, 1949-1969. Monographs in German History. V.S.

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276 21ST CENTURY MANUFACTURING in its universities and technical schools “but what set…Bavaria apart was its concentration of non-teaching research facilities,” principally the Max-Planck Institute and the Fraunhofer Gesellschaft.176 Bavaria methodically lured eminent scientists and technology-intensive industries to the Munich region. The Max Planck Institute moved from Berlin to Munich in 1949.177 By the 1960s, such efforts had “created the synergy to transform Munich into a Mecca of German science.”178 The Fraunhofer Gesellschaft was established in Munich in March 1949 as a non-profit organization tasked with raising funds from governmental bodies to support industrial research projects.179 It was created under the leadership of the Bavarian Minister of Economic Affairs Hugo Geiger, who wanted to promote applied research in the state.180 At a 1948 meeting convened by the Bavarian Ministry of Economic Affairs comprised of local leaders in science and research, the notion of a broad applied research organization was agreed, with a mission of identifying research topics in various subject areas, mediating between university research and industry, and securing and managing research funding. The Fraunhofer-Gesellschaft was formally launched at a March 26, 1949 meeting hosted by the Ministry of Economic Affairs which convened over 200 eminent Bavarian scientists, economists and political leaders.181 176 The Irish Times. 2009. “Bavaria or Bust.” June 8. 177 Handelsblatt. 1991. “Joseph von Fraunhofer and Max Planck Can Feel Satisfied.” August 9. JPRS-EST-91-015. 178 Adolf Buenandt, the foremost biochemist in Germany, moved to Munich in the 1950s after Bavaria decided to offer “whatever it took” to get him, which included construction of a new building for his institute and a “private house with a garden.” Warner Heisenberg, one of the foremost German scientists of the postwar era, moved his Max-Planck Institute for Physics to Munich in the 1950s when Bavaria committed to construct Germany’s first atomic reactor. Milosch. 2006. Modernizing Bavaria. Op. cit. pp. 38-39. 179 The Fraunhofer-Gesellschaft was named after Joseph Fraunhofer (1787-1826) a Bavarian optician who was a scientists, inventor, and entrepreneur, embodying the virtues which the new institute sought to promote and integrate. He developed optical instruments which enabled Bavaria to overtake England as the world center of the precision optics industry. 180 “Die Grundig der Fraunhofer Gesellschaft,” . . The original idea underlying the formation of Fraunhofer was to promote geological research to identify untapped mineral resources in Bavaria which could be “seeds for increased industrial development,” a concept strongly supported by the American occupation authorities. Deutinger, Stephan. 2001. Vom Agarland zum High-Tech-Staat: Zur Feschichte des Forschungsstandarts Bayern 1945-1980. p. 180, 185. 181 Egger, Christine. 2010. “Nachdenken im Auftrag: Eine Geschichte der Fraunhofer Gesellschaft.” Aventinus Bavaria. October 22. The Fraunhofer’s first president, Nobel Prize winner Walther Gerlach, established a pattern that still characterizes Fraunhofer institutes, retaining a university position while simultaneously serving as head of the research institute. Gerlach, a nuclear physicist, was an important player in Hitler’s efforts to develop an atomic bomb. After the war, he led a movement advocating renunciation of nuclear weapons by the Federal Republic, He held a faculty position at Ludwig Maximiliens University in Munich. Vican, Jacob. 2009. “Tot, Schuldig oder Geflohen.” Badische Zeitung. May 23.

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APPENDIX A2 277 The Fraunhofer struggled in its early years. Initially, Fraunhofer’s main functions were administrative—it raised funds from government organizations, donors and association members for distribution to research projects relevant to industry. The German Federal Ministry of Economics formally recognized it in 1952 as the “third pillar in the German research infrastructure” alongside the Max-Planck-Gesellschaft and the Deutsche Forschungsgemeinschaft (DFG, the German Research Council), but it met with resistance and competition from established research organizations.182 Originally largely limited to geological surveys, it was ridiculed as “the Bavarian Research Association for Mining.” The organization’s first president, Gerlach, was a basic scientist who disdained applied research, and as a result, was pressured into resignation by the Fraunhofer Senate in 1951.183 The Fraunhofer survived its shaky beginning largely as a result of public support. In 1951, it successfully applied to the German federal government for Marshall Plan funding pursuant to the European Recovery Program.184 With the institute on the brink of liquidation in 1954, the Land government of Bavaria, which had theretofore provided “more ideological than material support,” began direct funding to Fraunhofer, although the initial amount was characterized as “enough to prevent death, but not enough to sustain life.”185 In 1954, however, Fraunhofer received additional support from the Land government of Baden-Wurttemburg to establish what was to become the institute’s first contract research organization, the Fraunhofer Institute for Applied Microscopy, Photography, and Cinematography (IMPIC).186 Finally, in 1956, Fraunhofer began to receive contract research funding from the newly- created Ministry of Defense, which for historical reasons preferred to outsource 182 Fraunhofer. 60 Year History of Fraunhofer Gesellschaft. pp. 8-9. 183 A further shock was the 1953 establishment of a laboratory in Frankfurt by the U.S. contract research organization the Battelle Memorial Institute, which was viewed by the Fraunhofer as a direct competitive threat. Battelle is an Ohio-based nonprofit science and technology development company. It was created out of the estate of Gordon Battelle, a steel industry executive who was interested in the application of science to the metallurgical industries. Egger. 2010. “Nachdenken im Auftrag.” op. cit. 184 Walter Hirsch, an official in the Federal Ministry of Economics persuaded U.S. authorities that 41 million deutschemarks should be allocated to support applied industrial research projects of a non- military character. The Fraunhofer and the DFR applied for and were awarded these funds. The United States aid was conditioned on its ability “to stimulate the German economy.” The research institutes complied by restricting their spending to German-made scientific instruments—no foreign equipment could be procured. Krige, John. 2006. American Hegemony and the Postwar Reconstruction of Science in Europe. Cambridge, MA: The MIT Press. p. 36. 185 Deutinger, Stephan. 2001. Vom Agarland zum High-Tech-Staat: Zur Feschichte des Forschungsstandarts Bayern 1945-1980. p. 182. 186 Baden-Wurttemburg had competed with other Länder to become the site of the Battelle laboratory. When it lost out to Frankfurt in 1953, it began looking for other ways to establish its own research facilities. Egger. 2010. “Nachdenken im Auftrag.” op. cit.

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278 21ST CENTURY MANUFACTURING its defense-related R&D.187 For many years afterward, “military funding accounted for more than half of the Fraunhofer-Gesellschaft’s total research budget.”188 The defense research work was critical in the development of Fraunhofer not only because of the revenue it generated but because it enabled the institute to develop the research infrastructure and resources to “develop promising ideas and lines of research to a level where they could be converted into innovative products and processes and offered to firms.”189 In 1965, the German Science Council, an influential advisory body to the federal and Länder governments, recommended a broad expansion of non- academic research organizations in general and the Fraunhofer Gesellschaft in particular as the umbrella organization for applied research.190 The recommendation was conditioned on the implementation of structural reforms and the creation of a substantial development program for the institutes. In 1967, a recommendation by the Science Council “paved the way for incorporation of the Fraunhofer Society in the institutional funding of the BMwF and a Science Council commission studying the Fraunhofer concluded that “promotion of applied research with public means” was necessary for “ensuring the technological development in the FRG.”191 The Fraunhofer grew explosively after it began receiving federal institutional funding. The number of Fraunhofer institutes doubled in the decade 1965-1975. Its budgets grew steadily, enabling it to establish new institutes and modernize existing ones.192 187 In 1955, Germany joined NATO and the occupation was formally terminated. Germany began rearming. The Ministry of Defense recognized the need for defense-related research, but in light of the recent Nazi past, did not want to establish an internal isolated military research department. It chose instead to draw upon university and industrial research, frequently using Fraunhofer as the intermediary. Egger. 2010. “Nachdenken im Auftrag.” op. cit. The Bavarian politician Franz Joseph Strauss who was Defense Minister at the time, “set-up the Defense Ministry as a patron of the Fraunhofer Foundation.” Five Fraunhofer institutes were opened at the instigation of the Ministry and by 1959, the Fraunhofer had four institutes working exclusively for the ministry and six others working part time. Milosch, Mark S. 2006. Modernizing Bavaria: The Politics of Franz Joseph Strauss and the CSU, 1949-1969. New York and Oxford: Berhahn Books. pp. 114. 188 Fraunhofer, 60 Year History. op. cit. p. 8-9. Fraunhofer Vice President Albert Maucher warned in 1960 that if the military work kept growing, at some point, “we are no longer FhG but the Army Ordinance Department. Egger. 2010. “Nachdenken im Auftrag.” op. cit. 189 Winnes and Schimank. 1999. Federal Republic of Germany. Op. Cit. 190 The German Science Council (Wissenschaftsrat) makes recommendations on the development of higher education institutions, science and research, and the establishment of new universities. 191 Winnes and Schimank. 1999. Federal Republic of Germany. Op. Cit. pp. 37. 192 One key to the institutes’ growth was a formula introduced into its funding model by the federal research ministry, “variable success-dependent institutional funding” (erfolgsabhangige Grundfinanzierung). Under the arrangement, Fraunhofer received for each Mark acquired through industry research contracts an equal amount from the federal and state governments, creating a powerful incentive to orient research toward industry needs and to pursue industry funding. There was no ceiling on government matching funds, and from Fraunhofer’s perspective the arrangement worked so well that in the 1980s the federal and Land governments curtailed the funding model to limit the growth in government grants to the institute. Winnes and Schimank. 1999. Federal Republic of Germany. Op. Cit. pp. 69.

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APPENDIX A2 279 As the German “economic miracle” (Wirtschaftswunder) began to accelerate, Fraunhofer succeeded in attracting significant funding from industry for contract research.193 Hermann von Siemens, CEO of Siemens AG, assumed the presidency of the Fraunhofer in 1955, a post which he held for nearly a decade. Thereafter Fraunhofer added 1-2 new institutes per year, gradually extending a network of research organizations across West Germany. In 1973, Fraunhofer received the status of a federal research organization and began receiving funding from the BMFT, now the BMBF.194 Beginning in the early 1970s the Fraunhfer made a phased shift in emphasis away from military R&D toward civilian applications.195 The Fraunhofer has grown not only by opening greenfield institutes but by absorbing institutes affiliated with other research organizations. In 1970 it took over an organization originally formed in 1930 as the Prussian Institute for Wood Research, which was rebranded as the Fraunhofer Institute for Wood Research WKI.196 In 1971, it acquired the Max-Planck Institute for Silicate Research in Wurtzburg, which became the Fraunhofer Institute for Silicate Research ISC.197 In 1991, in the wake of German reunification, numerous research organizations based in former East Germany were absorbed into Fraunhofer.198 In 2001, Fraunhofer acquired 8 research institutes of the German National Research Center for Information Technology (GMD) a move that was backed by the German research ministry but bitterly resisted by the GMD’s management and staff, who believed (correctly) that integration with Fraunhofer would orient GMD away from basic research and towards applied research.199 193 In 1955, the Institute received 600 million marks from German industry for contract research. Fraunhofer, 60 Year History. op. cit. pp. 8-9. 194 National Academy of Engineering, Technology Transfer Systems in the United States and Germany, Washington, DC: National Academy Press, 1997, p. 321. 195 VDI Nachrichten. 1991. “Research Institutes Seek Civilian Customers.” JPRS-EST-91-003. February 2. 196 Fraunhofer WKI, “History of Our Institute.” . 197 Fraunhofer Institue for Silicate Research. ISC Website. 198 A booklet written by then-Minister of Research and Technology Dieter Thierbach in 1991 stated that “Nineteen new establishments, nine institutes and 10 branch facilities will be operated by the Fraunhofer Society in the new Länder. Eight independent Fraunhofer facilities are planned—and an institute section of the Duisburg Fraunhofer Institute for Microelectronic Circuits and Systems (IMS)—with a total of 700 employees and 10 branch facilities of existing Fraunhofer institutes with 250 employees.” Thierbach, Dieter. 1991. Deutsche Einheit in Forschung und Technologie. Bonn: BMFT. Part. 2.6. 199 Spiegel Online 2000.”Faule Fusion. October 12. Spiegel Online 2000. “Stillstand be; Verhandlongen.” April 19. Spiegel Online 2011. “Gelahmte Fusion.” February 2.

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280 21ST CENTURY MANUFACTURING Box APP-A2-6 Promoting Factory Automation Beginning in the 1980s, the German research ministry implemented a succession of large-scale, long range programs to promote factory automation.a By the early 1990s, BMFT was spending nearly 300 DM per year on projects to promote innovation in manufacturing.b Ten Fraunhofer institutes with over 1,000 employees were supporting this effort, exploring themes such as robotics, micromechanics, sensors, computer-aided design and manufacturing (CAD/CAM), machine tools, software for factory controls, and factory systems.c In 1986, the Technical University of Berlin and the Fraunhofer Institute for Production Facilities and Mechanical Construction Technology IPK entered into a “marriage” to develop “the structures of the factory of the future,” which the Director of the Institute, Dr. Günter Spur said “will be a mechanized organism that, coalesced from individual production cells, is capable of using programmed intelligence to automatically produce goods.” Numerous German companies donated equipment to this project and the Fritz Werner mechanical engineering company shifted part of its own production operation to the 3,200 square meter joint project facility, setting up two complete processing centers. Reflecting such initiatives, in the 1980s “West Germany adopted computer integrated manufacturing more rapidly than most other countries.”d ____________________________ a Technologie Nachrichten—Programm-Informationen. 1988. “Report on 1988-1992 BMFT Research Program on Manufacturing and Engineering.” JPRS-EST-88-04. July. In 1984 BMFT made available DM 441 million for investments in CAD/CAM, robots and handling systems. “There was a flood of applications” from German industry and 1,285 applications for CAD/CAM grants were approved. Produktion. 1986. “Firms, Funds up to Fall 1985 in FRG Process Technology.” JPRS-WST-86-006. February 12. Suddeutsche Zeitung. 1983. “FRG 1984-87 Plan for Computer Aided Design, Manufacturing.” November 18. b Technologie-Nachrichten Programm-Informationen. 1994. “Strategies for Production in the 21st Century. September 16. JPRS-EST-94-023. c Utlands Rupport. 1985. JPRS-WST-85-002. January 17; Technische Rundschau. 1985. “Funding Sources, Organization of CAD/CAM Research in FRG.” JPRS-WST-85-012. April 10; VDI Nachrichten. 1984. “Micromechanics Yields Innovative Sensors.” JPRS-WST-84-051; Bild der Wissenschaft. 1987. “Research for Factory of the Future.” JPRS-ELS-87-028. d Siebert and Stolpe. 2001. Technology and Economic Performance. Op. Cit. pp. 9. Bild der Wissenschaft. 1987. “Research for the Factory of the Future.” JPRS-ELS-87-025. May 6. CONCLUDING PERSPECTIVE In the Nineteenth Century, German companies generated spectacular innovations that established many of the technological foundations of the

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APPENDIX A2 281 Box APP-A2-7 Bavaria—From Rural Backwater to Germany’s Silicon Valley Today Bavaria’s heavy and sustained investments in science, education, and industrial promotion—prominent among which was support for the Fraunhofer—appear prescient. By the first decade of the Twenty-First Century, Bavaria had become one of the pre-eminent high technology regions in the world, and was widely characterized as “Germany’s Silicon Valley.”a The German company with the most patents, Siemens, was headquartered in Munich and virtually all of Germany’s top 20 patentees were either based in Munich (Infineon, BMW), operated research institutes in the city, or were involved in research collaborations with one of Munich’s research institutes. The greater Munich region was the site of 10 Fraunhofer institutes, 11 Max-Planck institutes, 11 universities, and 17 polytechnics. Bavaria’s Fraunhofer institutes include one of the largest, the Fraunhofer Institute for Integrated Circuits, with 450 employees operating at sites in Nuremburg, Furth, and Erlangen.b High tech manufacturing accounted for over half of the employment and nearly two-thirds of the revenues generated by the Bavarian manufacturing sector. In 2005, Bavaria had the highest number of start-ups in Germany, accounting for one- fifth of the total in 2005.c “Even though the Czech border is just 300 km from Munich, companies stay in the high-cost Bavarian capital because of their dependence on the highly-trained staff and world class facilities.”d ____________________________ a The Guardian. 2011. “How Bavaria Became European Silicon Valley.” March 14. See also Technologie-Nachrichten Programm-Informationen. 1991, “Report by the Federal Ministry of Research and Technology on the Implementation of the Unification Treaty Dated August 31, 1990 in the Area of Research and Technology.” June 20. JPRS-EST-91-012. b The Bavarian Land government invested more than 140 million Euros, or their equivalent in Deutschmarks between 1984 and 2005, to establish and expand the Erlangen facility Pressbot. 2005. “Beakstein: Fraunhofer Institute Leisten Wichtigen Betrag zum Ausbau des Technlogie-Standortes Bayern.” June 30. c Van Winden, William, Leo Van Den, Luis Carvalho, and Erwin Van Tuijil. 2011. Manufacturing in the New Urban Economy. Abington and New York: Routledge. Pp. 93, 95-96. d The Irish Times. 2009. “Bavaria or Bust.” June 8. modern world. These include the designs and thinking of Werner von Siemens in electric power generation (which included the very idea that electricity could be a power source); the Diesel and Otto cycle internal combustion engines; and the discovery of aspirin and other pharmaceutical substances in the world’s first

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282 21ST CENTURY MANUFACTURING large-scale industrial laboratories200. Although the modern day Federal Republic can cite many economic and technological achievements, it has generated no obvious innovations comparable to the revolutionary achievements of Germany’s industrial and scientific heyday. Instead the German innovation system has built on the strong position it achieved over a century ago with continuous incremental improvement of products and process in the automobile, engineering, machinery, electric power, chemical, and pharmaceutical industries. It remains highly competitive in all of those sectors today, in contrast to a number of other industrialized countries. The German innovation model in general, and the Fraunhofer’s approach, in particular, do not offer the prospect of radical, paradigm-shattering technologies. They do, however, demonstrate that a high cost, high wage country can compete effectively in global markets in established industries through the systematic and continuous application of knowledge—without necessarily moving production processes offshore. The Fraunhofer represents a vast knowledge system which a company of any size can commission to perform commercially-relevant research at below-market cost, with a high degree of assurance in the quality of the research and the associated business counseling. Fraunhofer projects appear to involve less bureaucracy, faster time-to-market, and greater probability of success than pursuit of government research grants by individual companies. Participation in Fraunhofer research projects exposes companies to highly qualified and motivated students and employees who can be recruited. The Fraunhofer makes its technology and business networks available to its industrial partners, a benefit small companies, in particular, usually cannot replicate on their own. The Fraunhofer spins off new companies and assists other start-ups, but it is unclear whether on a net basis it fosters or inhibits the kind of start-ups that grow into world class companies in the United States. A prominent German academic commented in 2012 that Fraunhofer “kills start-ups. It offers services that should be provided by private companies. It thwarts individual activities.”201 While the Fraunhofer itself would undoubtedly dispute the assertion, it performs tasks in Germany that might be undertaken by entrepreneurs in some other economies. In most collaborations the Fraunhofer—a large parapublic institution—owns the intellectual property, rather than a small business or university, arguably acting as an inhibition on innovation, particularly that of a paradigm-breaking variety. The Fraunhofer is an important member in the group of parapublic non- university research organizations that has gradually been displacing German universities as sites for scientific research. German universities are suffering 200 Deutsche Welle. 2011. “The Automobile at 125: From Humble Birth to Global Dominance.” January 25. 201 Interview with Professor at Ludwig Maximilians University. Munich. June 13, 2012.

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APPENDIX A2 283 from numerous problems including shortages of funds, overcrowding, and a reputation for mediocrity—and as The Economist noted in 2009, the universities “would do better if research at non-university institutes like the Max-Planck Society were brought into academia, adding teaching to research.”202 Organizations representing the interests of German universities have urged restraint in the establishment of non-university research organizations for many years based on the “concern that universities will fall back in the resource competition with non-university institutions.”203 Non-university research organizations like Fraunhofer exert a gravitational pull on individuals who might otherwise become or remain members of university faculties because they offer relief from teaching obligations and the need to pursue grant funding independently, superior equipment and research infrastructure, and the chance to make money on innovations which they originate. Recognizing the risk of a wholesale “emigration of research” from universities to non-university research organizations, the German Science Council has sought to encourage close collaborations between universities and non-university research institutions—a phenomenon which has been developed to a very high level in the Fraunhofer. Finally, the Fraunhofer model might not work in the United States because the industrial and scientific milieu is substantially different than Germany. Systematic application of new technology in factories may prove more difficult in situations where the work force has not undergone a long apprenticeship process, has a more fragile allegiance to a particular company, and may be demoralized as a result of falling wages and benefits, downsizing, offshoring, and labor-management strife. While the United States has many innovative small and medium businesses, the proportion that possesses the peculiar structure, traditions, discipline, and values of the Mittelstand is probably relatively small. Competition at every level of the U.S. innovation system is more intense and destabilizing than is the case in Germany, and complicates efforts at network-building and collaborations. Perhaps most importantly, the ability and willingness of federal and state governments to provide a stable source of long-term public funding to non-university institutes of applied research is highly questionable. Whatever the obstacles to a literal implementation of the Fraunhofer model in the United States, the United States has adopted and adapted other German institutional innovations ranging from Kindergarten to the modern university research laboratory system, and it would appear that limited aspects of the German system could be adopted in this country. While the United States will not replicate Germany’s Dual System of vocational education, the enlightened expression of that system at the high end of the educational ladder in the Fraunhofer institutes, featuring concurrent academic study and applied 202 The Economist. 2009. “Germany’s Mediocre Universities: On Shaky Foundations.” 203 Winnes and Schmank.1999. Federal Republic of Germany. Op. Cit. p. 37.

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284 21ST CENTURY MANUFACTURING industrial research, could be more broadly incorporated in university curricula in collaboration with local industry. The Fraunhofer funding model, which locks in public funding on a virtually permanent basis is an obvious factor underlying the institute’s achievements, could be put in place for a U.S. system of institutes of applied public research, although this may seem improbable in the current impasse over government spending. The Fraunhofer has refined technology networking to what it regards as a higher level than U.S. counterparts, and the adoption of the institutes’ techniques should be studied by U.S. research organizations. From an American perspective, the German experience is also of interest because like the United States, Germany is a federal system. Some aspects of German federalism would never be considered attractive in the United States such as the interlocking of state-federal responsibilities in a manner which limits the ability of each to act independently of the other. However, in Germany, the Länder have often functioned as laboratories in which institutional innovations have been implemented which, when demonstrated to be successful, have been adopted at the national level. The states of southwestern Germany pioneered the Dual System of education and practical training which was embraced nationally with the enactment of the Handicraft Protection Law of 1897. The Prussian initiative which established the first Kaiser Wilhelm institute eventually led to the creation of a nationwide network of parapublic research organizations. A similar initiative by Bavaria and Baden-Wurttemburg in the 1950s culminated in the creation of the nationwide network of Fraunhofer institutes. The successful postwar efforts by Bavaria and Baden-Wurttemburg to promote education and research and attract technology-intensive industries finds a current expression at the federal level in the form of initiatives to create innovation clusters on a nationwide basis. There is no readily apparent reason why the U.S. federal system could not be used to explore institutional innovations in applied research at the state level with potential for national policy. From the broadest U.S. perspective, the Fraunhofer system represents a major public investment by Germany in applied research with short-run commercial relevance. The positive effects of that investment over the long run, as manifested in the international competitive performance of German industry, are undeniable. In the U.S. government investments in commercially-oriented research are commonly controversial in the short run and politically unsustainable over the long run. But against the background of an economic environment which has seen the erosion and offshoring of traditional industries in the face of global competition, some elements of the German innovation system merit consideration by U.S. policymakers.