The German economy is falling behind its global competitors in research and development (R&D) expenditure, undermining the long-term profitability and commercial returns derived from its technological investments.

Furthermore, despite the federal government’s public declarations of support for a domestic “high-tech agenda,” public spending is increasingly being diverted toward the defense sector.

A recent study conducted by the German Economic Institute (IW) on behalf of the Bertelsmann Foundation reveals that Germany’s share of global R&D expenditure declined from 8.5% in 2008 to 5.6% in 2021.

Similarly, Germany’s share of global patent applications has fallen significantly, dropping from 21.9% in 2000 to just 15% in 2022.

Faced with these domestic headwinds, German companies are increasingly relocating their research departments abroad. This shift places German industry under intensifying pressure within key future-oriented sectors, where it is steadily losing ground, particularly to China.

While the federal research budget remains capped at 4.15% of the total federal budget—prompting complaints of stagnating innovation funding from small and medium-sized enterprises (SMEs)—the official defense budget already accounts for more than 15% of federal spending and is projected to double in the near term.

Relative Decline Against the US and China

The IW study on the innovative strength of German industry assesses R&D expenditure alongside the volume of patent applications as the primary indicators of industrial innovation performance.

The authors conclude that although Germany’s absolute spending on industrial research and development has risen slightly, the country has lost substantial ground in international comparisons.

This relative decline is driven by the United States and China, both of which have accelerated their R&D spending at a much faster rate.

Consequently, Germany’s share of global R&D expenditures contracted from 8.5% in 2008 to 5.6% in 2021, while its share of global patent applications fell from 21.9% in 2000 to 15% in 2022.

This downward trend has particularly impacted the pharmaceutical, chemical, electrical, and automotive sectors. Among major industrial segments, only the German mechanical engineering sector managed to strengthen its international standing in terms of patent applications.

Foreign Control Over Key Technologies Increases

The study highlights the issue of patent ownership and control over key technologies as a matter of geopolitical and economic sensitivity.

According to the research, between 2000 and 2022, 29% of all international patents generated within Germany—amounting to approximately 189,000 filings—were registered by foreign-owned enterprises, primarily based in the US and, increasingly, China.

As a result, operational control over these patents resides outside the Federal Republic of Germany.

By contrast, German companies registered and retained control over only 102,000 patents filed abroad during the same period, leaving the country with a negative net balance in transnational patent control.

To illustrate the strategic implications of this imbalance, the study points to the defense sector. The ongoing debate surrounding Germany’s purchase of F-35 fighter jets from the US defense contractor Lockheed Martin highlights the potential risks of relying on foreign-controlled technologies. Without explicit US authorization, spare parts cannot be secured, and the aircraft may be rendered unable to take off.

Geographically, the state of Hesse recorded the highest share of foreign-controlled patent applications in Germany, at 42%. The primary drivers behind this concentration are the Opel manufacturing facilities in Rüsselsheim—which hold a vast patent portfolio and operate as part of the multinational group Stellantis—alongside the highly concentrated pharmaceutical industry in the Frankfurt am Main region.

Core German Sectors Under Pressure

A sector-by-sector analysis underscores the extent to which the German economy is falling behind in global benchmarks.

In 2021, the German electronics sector ranked sixth globally in terms of R&D investment.

Japan secured the fifth position with spending twice as high as Germany’s.

Meanwhile, China accounted for 35% of global R&D expenditure in the electronics sector, while the US maintained its global leadership.

In mechanical engineering, Germany’s share of global R&D expenditure dropped from approximately 13% in 2008 to below 8% in 2021.

China now commands nearly half of all global spending in this sector, compared to a 15% share held by the US.

Nonetheless, the German mechanical engineering sector has managed to retain its leading global position specifically in terms of patent applications.

In the automotive sector, Germany ranked third globally, with its R&D expenditure accounting for approximately 20% of the world total.

China reached a 22% share, while Japan led the global market at 25%. The US followed in fourth place with 17%.

In the chemical industry, Germany accounted for 9% of global R&D spending. The US held a 15% share, while China dominated global trends with 42% of total investment.

In the pharmaceutical sector, Germany’s share plummeted from 13.1% in 2000 to just 4.4%, placing it fourth internationally.

The top spots in pharmaceutical R&D are held by the US, China, and Japan.

Defense Spending Takes Precedence Over R&D

The federal government maintains that it is actively working to counter these negative trends. Chancellor Friedrich Merz has frequently championed a “high-tech agenda” designed to support and revitalize German industry.

“The federal government will do everything in its power to ensure that Germany remains a successful and innovative business hub,” Merz declared at the Hannover Messe trade fair in late April.

However, the allocation of funds within the federal budget indicates that Berlin’s actual priorities lie elsewhere.

The draft 2026 federal budget, which totals 525 billion euros, allocates 21.8 billion euros to the Ministry of Education and Research. In addition, the ministry is set to receive 1.1 billion euros from the “Infrastructure Special Fund.” According to the ministry, these specific funds are earmarked for initiatives “particularly in the New Space sector,” which holds high strategic importance for the defense industry.

Excluding this special fund, federal innovation spending accounts for just 4.15% of the total budget.

By comparison, the 2026 budget allocates 82.69 billion euros directly to the German Armed Forces (Bundeswehr). When combined with an additional 25.51 billion euros drawn from the military’s own “Special Fund” (Sondervermögen), total defense spending reaches approximately 108 billion euros.

By 2029, Germany’s regular defense budget is projected to rise to 152 billion euros.

The Bundeswehr’s share of the core federal budget (excluding special funds) already stands at 15.75%, and this percentage is expected to increase rapidly.

Corporates Relocate R&D Activities Abroad

As a consequence of these shifting domestic priorities and rising operational pressures, a study by professional services firm Deloitte and the Federation of German Industries (BDI) reveals that 13% of surveyed German industrial companies have already relocated their research departments abroad.

Furthermore, 35% of surveyed firms plan to follow suit within the next three years. According to the Innovation Report published by the Association of German Chambers of Commerce and Industry (DIHK), the German economy’s propensity to innovate has fallen to its lowest level since 2008.

Industry representatives attribute this decline in part to the federal government’s neglect of Germany’s traditional Mittelstand—the small and medium-sized enterprises, alongside established family-owned businesses, that serve as the backbone of the country’s export economy. Key public funding programs for these businesses have stagnated for years.

Of particular concern to the sector are the Central Innovation Program for SMEs (ZIM) and the Inno-Kom program for small businesses, both of which are administered by the Ministry for Economic Affairs and Climate Action.

“In the meantime, more money is flowing to the large players,” stated the Association of Innovative Enterprises (VIU). VIU President Uwe Möhring warned of the structural risks ahead: “In light of this ongoing reallocation of funds, we are deeply concerned about the future of project financing, which is vital for our survival.”