"From Rags to Riches"? Differences and Parallels as Regards to the Foundation and Future Development of American and German Enterprises

Table of contents

1. Introduction

2. Frame Conditions
2.1. Political and environmental situations
2.1.1. Political and environmental situation America
2.1.2. Political and environmental situation Germany
2.2. Demographics
2.2.1. Demographics America
2.2.2. Demographics Germany

3. Society and Culture
3.1. school and education
3.1.1. school and education America
3.1.2. School and education Germany
3.2. Culture
3.2.1. Culture America
3.2.2. Culture Germany

4. Conclusion

5. Summary

6. Bibliography

Statement

1. Introduction

Companies are the driving force of a country’s economy. Besides the fact that the innovations improve the standard of living by making life much more comfortable and easy, they create new jobs which lead to economic growth. In addition, the national income increases due to a higher rate of tax revenue. A stable economy with a wide variety of businesses is one reason for prosperity in the country. Therefore, it is a country’s aim to attract (young) people with new and passionate ideas who aim to set up their own businesses - these people are known as entrepreneurs. Moreover the be- lief is that even with a low budget it is possible to make money and become a million- aire. Especially in America the “the American Dream” is still in mind.

“From rags to riches”? Is this saying still true? Can people rely on what is always said and believe in the “unlimited opportunities” they are indirectly promised? On the contrary the Federal Republic of Germany is aware of the potential of the newcomers in business. With much effort, Germany tries to create promising surroundings for entrepreneurs. America, however is a giant, regarding geographical size and the size of the markets that are open to any potential founders. Is Germany even a good alternative to the well-known America, “land of dreams”?

This extended project focusses on the differences and parallels in regard to the foun- dation and future development of American and German enterprises. After comparing the social and market factors of these two countries, the reader will be given an answer to the question “From rags to riches?” -a true statement for Germany as well as Amer- ica. In this project, the main focus is on the product and innovation based start-ups.

2. Frame Conditions

2.1. Political and environmental situations

2.1.1. Political and environmental situation America

The ‘GDP‘(Gross Domestic Product) transfers the health of a country’s economy into numbers. All products and services that have been produced in a specific period of time are calculated to a total dollar value. On the one hand, the number makes a com- parison between states possible, one the other hand it gives information about the size of the economy which is directly linked to the performance of the entrepreneurs¹ (Conway, Managing and Shaping innovation). A high GDP indicates that the entre- preneurial activity is enhancing as the market grows to a larger extent. Moreover, it means security for the entrepreneurs as it is unlikely that a sudden destruction of the market occurs and therefore will lead to a forced shutdown of the business. The Gross Domestic Product also provides information about the expenditure of the citizens. Es- pecially for the innovation driven start-ups, a population of the financial wealth is of great significance as they are only able to sell their products if the population has the materialistic prosperity to make these expenditures. Another aspect that has to be taken into consideration is innovation. Innovation means the “commercialisation of techno- logical change”² (Rosenberg).

The Unites States of America has a population of 319.0 million people who live on 9,826,675 km²³ (Kelley). Being the third largest country as regards the number of cit- izens, the entrepreneurs profit of the numerous markets they have access to. The size is advantageous - especially for founders who try to get into the market with niche products. In addition, for people of foreign origin that factor is often the reason for a relocation as that economy is very favorable to position new investments. However, the entrepreneurs have to be aware that a larger market also indicates a greater number of market participants who embody further competitors. This assumption is borne out by “World Economic Forum Global Competitive Ranking” in which America is on the third rank of 140 countries⁴ (World Economic Forum). The American market is continuously prospering which is an exceedingly positive aspect with regard to the entrepreneurial options. America’s physical infrastructure is on a high level in com- parison to other 62 countries⁵ (Kelley). That result implies that the entrepreneurs can make use of a widely extended infrastructure, an online network and transport facilities. The infrastructure is the essential fundament, especially when the entrepreneurs want to extend the business.

Examining the degree of innovation, the USA ranks 4th in the overall ranking in 2016. To secure the innovation, the founders intend to file a patent application. That degree of innovation can therefore be examined in the patent application by origin. In the total comparison, the United State rank highly the 6th place⁶ (Pinkwart) .Therefore, it can be stated that America’s economy prospers due to the high quantity of unique innova- tions. Another important factor is the cluster structure in the United States. Clusters, like the world famous Silicon Valley and the city New York City, are defined as a geographical close group of enterprises and institutes which are connected with each other through similarities. The effect is a local competitive situation and an advantage of the economy. Moreover, the entrepreneurs get easier access to knowledge and an exchange of experiences. The clustered environment is especially widespread in the United States.

The U.S. plays a major role in the international trade system and favors a demolition of trade barriers and free trade agreements. Among them are the North American Free Trade Agreement (NAFTA), which is a federation with Canada and Mexico. The United States is also an active member of the World Trade Organization (WTO). These trade agreements enable the entrepreneurs to open their offerings to the world. The chances to make more profit increase⁷. (Schumpeter)

2.1.2. Political and environmental situation Germany

Germany is regarded as a country with a stable economy. The total population of the federal state is 82.150,7 million. Germany, which is at the center of Europe, measures 356,840 square kilometers. The GDP is 3,472,570,4 USD dollar and therefore the 4th largest in the world and is growing with a rate of 1.8 percent. In addition, the unem- ployment rate remains low⁸ (Germany Country Factfile). Having these numbers in the international comparison, Germany stands out and is an excellent fundament for en- trepreneurial activities. A good economy “pulls” employable people into self-employ- ment. That effect is considered as the “pull factor”. In addition, Germany is part of the EU, thus all of their FTA are linked directly to the EU. Being in the EU means trading without barriers. That entails a reduction of cost and therefore a making of more profit is the result. 62% of businesses say that cost is the main reason for moving abroad⁹ (Byrne). That makes Germany favorable as a county to set up for example a logistic business.

Moreover, the trade agreement CETA with Canada has stood as a political agreement since October 2013. Furthermore, the trade agreement with T-TIP with the United States is a positive agreement as the main benefit for entrepreneurs is the simplified international trade and the founders have access to international markets¹⁰ (Office of the United States Trade Representative). Germany is connected to the wider world - but also the inner infrastructure contributes to the entrepreneurial activity. The term “physical infrastructure refers to the basic physical structures required for an economy to function and survive, such as transportation networks, a power grid”, transportation networks and postal and telecommunications services¹¹ (Ascher). In a ranking that compares the countries in the quality of infrastructure, Germany scores the third rank¹² (Schwab).

In another survey where experts had to examine the strength and weaknesses of the framework condition, the physical infrastructure ranks the first place with 83%¹³ (Sternberg). Infrastructure enhances connectivity and links that facilitate the recogni- tion of entrepreneurial opportunities and the ability of entrepreneurs to actualise those opportunities. Another important aspect is that an extensive infrastructure encourages the birth and growth and development of small enterprises. For Germany, a developed infrastructure is essential as the start-up sectors in 2015 were 29% personal services and 37% business services. One in five business founders are established in the digital market. Customers therefore get access to their offering through digital devices¹⁴ (Metzger). It is in the digital markets that founders profit most, using the well net- worked infrastructure in Germany that gives all citizens the possibility of access to Internet.

Innovation and intervention are both crucial aspects that have to be examined in the founding scene. The invention is the discovery of a new product or finding new way to produce products. Innovation on the contrary is defined as follows: It is the process of transferring an invention into a product that customers will buy. The latter is especially important for entrepreneurs as they will only make profit if they sell their products¹⁵ (Wolinski). In Germany, the number of innovative founders rose by 6% to 95,000 persons. Therefore it can be said that Germany has experienced an increasing quality of innovation. A positive correlation has been determined between innovation occurrence and economic growth.

2.2. Demographics

2.2.1. Demographics America

In order to investigate the entrepreneurial environment, demographic coherences are a crucial aspect in investigating the entrepreneurial environment. Before investigating enterprises from the economical point of view, the entrepreneurs themselves have to be scrutinised. Gender, age and ethnicity are the central aspects in this examination as a person is categorised in these three aspects. To understand America’s population at the present time, we have to take a step back and must have a look at the first few generations who have lived in the “land of milk and honey”. America was established by migrants that have come to the new explored country with the undeniable dream to create a new existence. Through work and effort, contracts and institutions, America gained prestige and a reputation as a land with the unspoken promise of having a real chance to be really involved and part of the American Dream. Down to the present day, the immigrants contribute to the American culture and business status in versatile ways. More than 7% of the adult immigrant population owns a business as their main source of income. Compared to the 5.8% of the Native-Born in America, the number is proves to be true that the Immigrants make a contribution business culture¹⁶ (Robert W. Fairlie). In the United States, the reputation of the entrepreneurial active immigrant is a highly regarded one and from this it follows the enforced entrepreneurial spirit among the previously foreigners.

A striking aspect when analysing the demographics of a nation, is factor of education. In America, there is just one educational path. You either have a High School or Col- lege diploma or less than a High School degree. After a quick overview of the graphic, it is noticeable that the number of business owners decreases, regardless of the pres- ence of a degree. However, what does have an impact is the scholastic career: In 2015 33% of people who are business owners had a college degree, 29.5% a High School degree and in 37.5% of the cases the owner’s degree was less than High School and other degree¹⁷ (Robert W. Fairlie). The numbers don’t exhibit much of a difference. Therefore, another aspect that has to be mention is that there is still a chance to succeed even if your scholastic career is not well-advanced.

The “gender - issue” is still a widely discussed topic in and outside of the business world. After having had a look at the line chart, the figure conveys a clear message.

63.2% of the owners are male, solely 36.8% are females¹⁸ (Kelley). These number should not prevent any woman from starting a business. There are no fewer opportu- nities chances but some women tend to give up their self - assumption and confidence.

2.2.2. Demographics Germany

The facts and figures of the German demographics provide further insight into the foundation activities of the German population. In the first instance, it is important to investigate the age group. People aged 25-34 dominate the entrepreneurial market. 34% of the total quantity lie within that age group. The older the people become, the less likely they become to be the head of a start - up. Even though 22% of the German population are citizens are 55-64 years old, only 8% account to the number of entre- preneurship. On the other hand, the young generation between 18 and 24 years is very active. They contribute with 16% to the total amount¹⁹ (Pinkwart).The median age is at 29.1 years, showing that the market is especially prosperous for young and middle aged people who are willing to change their ideas into a business idea. The difference between man and woman in this field of work is still large. Compared to 71.3% men, the 28.7% that women represent just a minority. The under-representation affects the founder scene negatively as many young women let the opportunity pass by and the potential remains unused (Kelley).

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¹ e.g. Conway, p. 114

² e.g. Rosenberg Inside the Black Box: Technology and Economics p. 16

³ e.g. Global Report p.112

⁴ e.g World Economic Forum, United States

⁵ e.g. Global Report p.112

⁶ e.g. Analyse des Gründungsgeschehen in Deutschland p.16

⁷ e.g. Schumpeter: The Theory of economic development p. 51

⁸ e.g. Germany Country Factfile

⁹ e.g. Byrne ‘New Entrepreneurship’ p.3

¹⁰ e.g. Office of the United States

¹¹ e.g. Wolinski, John AQA A Level Business 1 Third Edition p.20

¹² e.g. Schwab: The Global Competitiveness Report p.21

¹³ e.g. Brixy: Global Entrepreneurship Monitor p.20

¹⁴ e.g. Metzger: "KfW-Start-up Monitor 2016” p.4

¹⁵ e.g. John et al.: AQA A Level Business 1 Third Edition p.20

¹⁶ e.g. Robert Fairlie: “The Kauffmann Index“ p. 33

¹⁷ e.g. Fairly “The Kauffmann Index” p.36

¹⁸ e.g. Global Entrepreneurship Monitor p.73

¹⁹ e.g. Pinkwart: Analyse des Gründungsgeschehens in Deutschland p.7 20e.g. Metzger, Dr Georg. "KfW-Start-up Monitor 2016 p.6