Strengthening the German Craft sector through Innovation and Cooperation

The paper analyses different forms of region bound innovation and cooperation amongst small and medium sized firms of the German craft sector, mainly engaged in ?traditional? branches. The analysis is based on a recent questionnaire survey covering all trade groups of the craft sector and a comparison group of competitors in the industrial sector. Further data are generated through case studies in selected trades as well as through the analyses of published statistics and results of former research. The focus is on different strategies to cope with the challenges of present structural change: Which type of innovation are dominant in different craft trades, in firms of different size and in different places? To what an extent and in which way do the craft firms organise their innovation processes in collaboration with other firms? Which cooperation strategies do they follow in order to manage the trade-off between access to greater resources and loss of information to (regional) competitors? Which role do intermediary organisations play in the innovation process? The German craft sector (?Handwerk?) is defined by law as encompassing certain categorised occupations and currently includes 94 trades (?Gewerbe?) in 7 trade groups. Traditionally craft firms are SME and they are closely attached to intermediary organisations such as district based guilds, region based chambers, national professional associations. The sector provides facilities for vocational training for about one third of all German apprentices. Craft activity includes artistically creative trades as well as the mass production of goods, construction work and the provision of a wide range of services. Most of the trades serve the local and regional markets. A remarkable number of specialised firms ? in some trades strongly clustered - also serve the national and partly the international market. Between 1994/95 and 2002 the sector as a whole faced a remarkable loss. Its share in the gross added value diminished from 10,7 % to 8 %. The annual turnover went down from 409 to 370 billion ?. The number of employees was reduced by 1,5 million. At present, about 4,5 million people are employed in nearly 562.000 firms. Surely the actual economic depression contributes to the decline, e.g. in the construction industries. However, other factors also seem to determine the structural changes such as the massive introduction of IT and the linked facilities for the industry ? the strongest competitor of the craft sector in most of the branches - to realize very flexible the production of small series at moderate costs. The process of European integration, the changing demographical structure and newly emerging consumption patterns are other important determinants. The background for the paper is an explorative study conducted in 2002/2003 by the Rhine-Westphalia Institute of Economic Research (RWI). It aims to describe the character of the structural changes faced by the German craft sector and to identify strategies of firms to enhance their competitiveness in regional, national and international markets. The outcome shall contribute to appropriate policy measures, considering also the effects of the sectors development on the spatial economic structure.