Academics Shumpeter's  Contribution on the IO Industrial Operation Theory Modelling (toimialan luova tuho -konsepti), Case German's Industrial Success Part I 

1. The German success recipe 1 – national system of innovation Friedrich List (1841) argue that economic policy has to be adapted to the needs of specific nations. He was a member of the German historical school of economics. His main concept is national system. List argued that a nation's true wealth is its productive power, rather than its current exchange values. During his carrier, List advised Germany and the U.S. to develop education, railways and technology. Contrary to Smith (1776), List argued that private economic interests must be subordinated to the strengthening of the nation. List's ideas have been the basis for three economic miracles (Wirtschaftswunder) in Germany: (1) Zollverein 1834-1919; (2) West German from the 1950s to the 1960s; and (3) globalization of Germany since 1990s, and for the completion of the vision of European economic integration by Bundeskanzler Konrad Adenauer (1949-1963). Joseph Schumpeter (Lintunen, 2000) was a well-known member of the German historical school of economics. He modernized List's doctrine as the Harvard professor. He propose that an entrepreneur, as innovator, creates profit opportunities. An entrepreneurial discovery occurs, when an entrepreneur makes the conjecture that a set of resources is not allocated to its best use. The temporary monopoly profit rewards entrepreneurs on innovations that are the major source of evolution in a whole society. Schumpeter's dynamic view of List's doctrine is based on a good balance between MNCs and innovative companies: 1. Creative destruction is associated with radical or drastic innovations of entrepreneurs entering 1 https://www.bmwi.de/DE/Themen/Aussenwirtschaft/handelspolitik-euwto.html. 2 https://www.gtai.de/GTAI/Content/EN/Invest/_SharedDocs/Downloads /GTAI/Brochures/Germany/economic-overview-germany-market-productivity-innovation.pdf/. Problems and Perspectives in Management, Volume 11, Issue 4, 2013 10 unexplored market where there are low entry barriers for new entrants utilizing the common pool of knowledge stock. Creative destruction is a microeconomic process by its nature but has macroeconomic implication for economic growth (Agion & Hovitt, 1998). 2. Creative accumulation is associated with institutionalized innovation by MNCs that carry out innovation along established technological trajectories. MNCs dominate R&D investments and commodity markets worldwide, and they impact on industry life cycles and market structures (Scherer, 1999). Kenneth Arrow, the Nobel Prize-winner, claimed that a market leader in oligopoly is not ready to take the risk of radical or drastic innovations (Arrow & Hahn, 1971). German companies innovate and try to maintain their differentiation positions by customer-orientation. They are highly Schumpeterian of their business thinking. German MNCs will be unique and differentiated to avoid the devastating oligopoly power games. Siemens and Bosch are global market leaders in their niches. In WIPO statistics of 50 biggest PCT-applicants1 in 1978-2011 Siemens (19,719 PCT-patents) and Bosch (17,197 PCT-patents) are at the top with Philips (24,966). A strong evidence of Germany's technology excellence is Fraunhofer-Gesellschaft that is the second among science communities after the U.S. University of California (3,555 PCT-patents). German MNCs are internationally oriented – even earlier state-owned companies, e.g. Deutsche Post. They finance their domestic investments by incomes from international operations. As Venohr & Meyer (2007) estimate, there are over 340,000 export companies in Germany is and over 100,000 German companies are active in FDI operations. Germany's National System is not power-oriented as the Harvard-Chicago IO model (Scherer and Ross, 1990) widely applied in other EU countries where big companies are stacked in devastating domestic oligopoly power games. Germany consists of 16 federal states that are independent states although their historical status varies as the current economic performance (Table 2). Three of states are "free" (Freistaat): Bayern (since 1919), Sachsen (1990) and Thüringen (1994). Two are city-based states (Stadtstaat) and "free" (Freie und Hansestadt): Hamburg (1806) and Bremen 1 The Patent Cooperation Treaty PTC) signed in 1970, provides a unified procedure for filing patent applications to protect inventions in each of its contracting states. In 2008, there were 139 contracting states to the PCT that constitute the International Patent Cooperation Union. See https://www.wipo.int/export/sites/www/freepublications/en/patents/901 /wipo_pub_901_2012.pdf. (1806). The states have their own legislation, constitution, parliament and government. At the federation level federal states use their constitutional power in parliament (Bundesrat) in which the voting power is related to the number of people. History matters! Differences in economic performance between regional states are major. Germany's successful reunification has reduced differences. Germany has still its core states, e.g. Bayern, and its periphery, the earlier East Germany. The Harvard's top-down methodology (Scherer and Ross, 1990, p. 5) is too static although widely used. The Schumpeterian methodology is compatible with the dynamic nature of German historical school of economics. Table 2. GNP (nominal, billion euros) in 2011-2012 Federal states GNP 2011 GNP 2012 Change, % Baden-Württemberg 382 389 1,7 Beyern 456 465 2,0 Berlin 101 103 2,4 Brandenburg 56 57 2,3 Bremen 26 27 2,7 Hamburg 93 95 2,5 Hessen 226 229 1,5 Mecklenburg-Vorpommern 35 36 3,9 Niedersachsen 224 230 2,5 Nordrhein-Westfalen 572 582 1,7 Rheinland-Pfalz 114 117 2,3 Saarland 31 31 0,6 Sachsen 95 96 1,2 Sachsen-Anhalt 51 52 2,6 Schleswig-Holstein 75 77 2,5 Thüringen 48 49 1,4 Germany 2.592 2.643 1,9 Source: Available at https://www.statistik-portal.de/statistik-portal/en/en_jb27_jahrtab65.asp. Germany's economic geography is based on urbanization economies that Porter excludes of diamonds. Inside and between regional states there are urban networks of small cities/towns that constitute unique metropolises. In Germany there are only 14 cities with over 500,000 inhabitants, and only one mega-sized metropolis (over 10 million inhabitants): Rein-Ruhr metropolis-region (biggest cities Köln, Düsseldorf, Essen and Dortmund), 9 medium-sized metropolis regions, and 4 millioncities: Berlin, Hamburg, München and Köln. These diversified metropolis-regions are the economic engine of Germany's third economic miracle (Wirtschaftwunder). Germany (Reichskirche) was one of the most civilized nations already in the 800s when the U.S. or America was populated by wild Indian tribes. Germany's identity cannot be captures by trivial top-down clustering of companies and other economic actors. Problems and Perspectives in Management, Volume 11, Issue 4, 2013 11 Table 3. German cities and their economic regions (agglomeration) and metropolis regions City City 2010 Aggl. 2012 Metrop. (1) Köln 1,02 1,90 11,69 (1) Düsseldorf 0,59 1,22 11,69 (1) Dortmund 0,58 4,70 11,69 (1) Essen 0,57 4,70 11,69 (2) Berlin 3,51 4,30 5,95 (3) Frankfurt am Main 0,70 1,93 5,52 (4) Stuttgart 0,60 1,80 5,29 (5) München 1,38 2,00 5,20 (6) Hamburg 1,80 2,60 4,27 (7) Hannover 0,53 1,13 3,88 (8) Nürnberg 0,51 1,20 3,50 (9) Bremen 0,55 0,85 2,73 (10) Leipzig 0,53 1,21 2,40 (10) Dresden 0,53 0,75 2,40 Source: https://de.wikipedia.org/wiki/Deutschland. Kenichi Ohmae (1995, 1996) predicted that the collapse of nation states is to be expected. Region states with sound socio-cultural structure are the winners of regional agglomeration. Region states constitute fertile ground for stimulating innovations and competitiveness of existing firms, encourage entrepreneurship and attract inward investments. Economic activities are concentrated geographically. Most people in core countries, and a growing number in periphery countries, live in large, densely populated metropolitans. Ohmae refers to his home country, Japan, where the Tokyo metropolitan, a region state, totally dominates the Japanese global business. Metropolis regions in Germany are exiting or emergent winners as region states. John Dunning (1993, 1997) has proposed that the domestic influences on the diamond should be considered as a specific case of the global influences. In Germany there are 140 universities of which 11 have been named Elite-Universitäten1 . The EU Commission has selected 10 top universities; 4 of them are in Germany. German universities have a glorious history of genius scientists. 34 Nobel-prize winners are related to Ludwig-Maximilians-Universität, München: e.g. Wilhelm Röntgen (physics, 1901), Max Planck (physics, 1918), Werner Heisenberg (physics, 1932), and Otto Hahn (chemistry, 1944); and 29 to Humboldt-Universität, Berlin: e.g. Albert Einstein (physics, 1921) and Max Planck (physics, 1918). Germany has 2.4 million 1 HU Berlin, University of Bremen, University of Cologne, TU Dresden, University of Tübingen, RWTH Aachen, FU Berlin, Heidelberg University, University of Konstanz, LMU Munich and Technical University of Munich. students (42% universities)2 . Germany has a well-organized exchange of students: 115,000 German are studying abroad and 264,000 foreign students in Germany. 31% of German students have as their area of specialization in mathematics, computer science, engineering, etc.3 In 2012 R&D-investments were 1,469 billion dollar worldwide4 . Germany dominates the EU with 91 billion dollar (26% of EU). Research-intensive industries accounted for 12.4% of gross value added in Germany (high-tech (9.5%); cutting-edge technology (2.9%). Germany is the number one worldwide5 . Germany focuses 15 top clusters (Spitzencluster)6 and 12 core technologies (Schlüsseltechnologien)7 : 1. Biotechnologies (Biotechnologie). 2. Service business (Dienstleistungswirtschaft). 3. Automotive and traffic (Fahrzeug- und Verkehrstechnologien). 4. ICT (Informations- und Kommunikationstechnologien, IKT). 5. Aviation technologies (Luftfahrttechnologien). 6. Maritime technologies (Maritime Technologien). 7. Microsystem technics (Mikrosystemtechnik). 8. Nanotechnologies (Nanotechnologien). 9. Photonics / Optics (Photonik / Optische Technologien). 10. Production technologies (Produktionstechnologien). 11. Space technologies (Raumfahrttechnologien). 12. Material technologies (Werkstofftechnologien).