HR, innovation and economic success: lessons from Germany

Germany has learnt a number of valuable HR lessons

The economic resilience of Germany can be attributed to factors which emphasise the link between people management and innovation, writes Stefan Zagelmeyer

Whenever I present research that colleagues and I have been doing on the impact of the global financial crisis (GFC), HRM and the stunningly quick recovery of the German economy (compared to other European economies) colleagues and HR practitioners from other European countries stare at me, first with disbelief, and then with a mix of awe and admiration.

Crisis? What crisis?
The GFC hit Germany, and between September 2008 and May 2009, German exports declined by roughly 35 percentage points, followed by a similar decline in production levels. From 2008 to 2009, the (adjusted) GDP fell by almost 7 per cent, affecting 4 out of 10 establishments in Germany.

Management used a large variety of measures to deal with the decline in demand for products and labour, ranging from restructuring and reductions in working hours to wage reductions and redundancies. Most of these policies were initially targeted at passive (labour) cost reductions, but some were also intended to increase revenue and competitiveness.

Unlike the recovery of many other European Union (EU) countries, economic recovery in Germany began in 2009, and the German economy has been at pre-crisis levels since about 2011. It’s in a rather stable position in the eye of the economic hurricane raging throughout Europe. How can this phenomenon – some observers speak of a second German economic miracle – be explained?

Germany’s innovation system
So what is behind the remarkable performance of Germany’s economy – in the face of not insignificant challenges? Let us start at the abstract, macro-level. According to the OECD, Germany is the largest innovation system in Europe, characterised by a strong science and research base and relative advantages in key technologies. Employment in science- and technology-related occupations has provided for a solid fundament for the innovation system, which has been particularly successful in technology manufacturing exports. According to the EU, Germany ranks highest among EU countries for capacity for innovation in the Global Competitiveness Report 2012–13.

The role of institutions
According to the Business Systems approach, firms need to build competitive competencies in order to be successful – but this depends on the institutional environment within which they operate – the (national) business system. Business systems include a number of dimensions such as governance structures, inter-firm relations and employment policies. According to this approach, Germany represents the case of a “collaborative” business system which has committed (i.e. longer-term-oriented) ownership structures, a high degree of competitor collaboration in networks and employer organisations, a considerable level of interdependence between employers and employees and a high level of employee discretion and influence. This specific configuration, it is argued, leads to the development of high levels of trust and cooperation among the different economic actors involved, which ultimately affect the dynamic and innovative capabilities of German firms in a positive way.

The people management and innovation link
The interested HR manager may ask: “So what is the bottom line for managing people?” Recent research shows that employee participation and involvement at establishment level, backed by a legal framework for workplace representation can support innovation processes and the innovative and adaptive capabilities of companies in various ways.

With regards to innovation, direct forms of employee involvement and participation may encourage employees to make suggestions and to set innovative impulses; mobilise employee talents, experiences and expertise; and allow management to tap into expert knowledge of employees.

Furthermore, indirect forms of employee participation and representation, for example through works councils or other forms of collective representation may improve the quality of communication between management and workforce (thus increasing trust and subsequently the level of cooperation); and increase the legitimacy of change processes (for example, in the case of process innovations, through constructive and peaceful conflict regulation and resolution).

In essence: the institutional environment fosters the establishment and maintenance of an organisational culture climate which is supportive of and conducive to innovation.

Implications for HR
For HR managers, the German case highlights the links between the institutional environment, organisational capabilities and performance outcomes. The specific configuration of institutions, people management and innovation management has contributed to the resilience of the German economy and its businesses. This at least deserves reflection, if not further investigation and analysis.

Should we all be supporters of the German model now? And possibly even recommend transferring Germany-style institutions to countries which are doing less well? Profound answers to these questions require more analysis and explanation. Let me please just issue a word of caution here: similar to soccer teams, national models and business systems have periods during which they do well – as the German model is doing now – and during which they do badly. You remember the substantial criticism levelled at the German model in the late 1990s and early 2000s.

I learnt my lesson during a flight from Bavaria and upon arrival in England the day after the historic Germany vs England soccer match in Munich on 1 September 2001: ups and downs are very much the nature of the game. It is not about being paralysed in awe and admiration of the short-lived beauty of a model, and it is not about mindlessly copying in the hope of becoming more similar to the model. It is about being interested in others, about being open to new ideas and approaches, and about learning from others in order to ultimately improve one’s own way of doing things.

6 lessons in HRM, innovation and economic success

  1. Specific institutional arrangement at national level (business systems) create an institutional environment which helps firms build competitive competencies
  2. The German type of ‘collaborative’ (or “coordinated”) business system has a positive impact on the dynamic and innovative capabilities of firms through fostering trust and cooperation between management and employees
  3. Employee participation and involvement at establishment level, backed by legal institutions, improves the innovative and adaptive capabilities of companies
  4. Direct forms of employee involvement and participation may encourage employees to make suggestions and to set innovative impulses, mobilise employee talents, experiences and expertise, and allow management to tap into expert knowledge of employees
  5. Indirect forms or employee representation may improve the quality of communication between management and workforce and increase the legitimacy of change processes
  6. The resilience of German firms in face of the global financial crisis can be attributed to institutional and cultural factors which emphasise the link between people management and innovation

Professor Dr. Stefan Zagelmeyer is professor of economics and human resource management at the International University of Applied Sciences in Bad Honnef-Bonn, Germany, and academic director at the International Human Resource Management Institute (IHRMI).