Wealth Creation: How Badly Off Are German Companies Really?

There is a crisis atmosphere in the German economy. There are claims that Germany as an investment location is doomed: not only has it missed the technology growth driver and become a bargain bin, but economically speaking, it seems to be on its way to becoming a developing country. Companies, from their side, increasingly demand less bureaucracy and corporate tax cuts to ensure more competitive conditions and remove investment barriers.

A newly released study of the Forum New Economy dampens these claims. It is in fact often overlooked that large companies, in particular, have accumulated substantial savings over the past decades, strengthened their equity bases, and enabled their owners to expand their wealth.

The study examines the economic power and use of funds of German listed companies. Although Germany is known for its SMEs and small, traditional family businesses, the revenue of the approximately 400 listed companies accounts for about 38 percent of the total corporate sector revenues. Moreover, the share of family businesses among these is about 43 percent, which contradicts the common belief that family businesses are primarily small, owner-managed firms.

Macroeconomic data shows that the German corporate sector has become a net saver: Historically, it used to incur debt to finance investments, but since the early 2000s, it has generated a financial surplus. Corporate data reveals differences in the use of funds between family and non-family businesses: While the latter distribute about 8 percent of their gross value added to shareholders, family businesses distribute less than 5 percent, which can be interpreted as a lower shareholder-value orientation. Due to significant voting rights in family hands, owners with smaller shareholdings have relatively little ability to demand or enforce higher payouts. Also, the wage share of gross value added in family businesses is about 50 percent, roughly 7 percentage points lower than in non-family businesses. The decline in the wage share is particularly evident in the manufacturing sector, where family businesses are especially concentrated. Both trends have emerged since the financial crisis.

The differences in the use of funds lead to significant differences in the gross savings of companies.

Looking at the balance sheet, there is also a clear increase in the equity ratio and, in particular, the retained earnings of listed companies. For non-family businesses, retained earnings were just under 10 percent of the balance sheet total in 2002 and rose to nearly 16 percent in 2019. For family businesses, there is an even stronger trend at a higher level: from 15 percent to over 25 percent in the same period.

This type of fund use leads – whether intentional or not – in the long term to wealth accumulation in these companies, thus benefiting their owners. These owners are particularly concentrated in the top 1 percent of the wealth distribution in Germany. Comparison with the total listed equity assets of German households shows that a large proportion consists of controlling stakes held by families. In 2019, for example, more than half of directly held equity assets were held by just 141 families, who largely belong to the absolute top of the wealth distribution.

Many of these corporate assets are entrenched and have been owned by the same families for many generations. Wealth accumulation in these companies is favored by Germany’s tax policy environment: The suspension of the wealth tax, extensive corporate tax reforms in the 2000s, and generous exemptions for business assets in inheritance and gift tax lead to significant concentration of wealth among a few very wealthy families.

These developments are problematic not only because of the high wealth inequality and its social and political consequences in Germany. The perpetuation of ownership structures can also foster a less dynamic corporate landscape, which, due to a lack of willingness for structural change, carries the risk of misallocation of resources in the long term. This is also reflected in the international location ranking of the IMD World Competitiveness Center, where Germany has recently fallen two places not only due to inadequate competition policy conditions. Companies in Germany are also too slow when it comes to developing and integrating future technologies.

All this shows: While the desire for predictability and demands on politicians are quite justified, especially in times of high energy costs, inflation, labor shortages, and the climate crisis, dramatizing the situation by companies is neither productive nor appropriate. Companies themselves also have a duty to strengthen Germany as a business location and to bravely face the transformation. Instead of only waiting for political solutions, they can make a significant contribution to securing and improving the economic situation in Germany through increased investments and agile business models. The necessary funds are available.

Authors: Carmen Giovanazzi and Vincent Victor are PhD candidates at the Institute for Socio-Economics at the University of Duisburg-Essen.