Newsletter November 2021

How can we ensure all players in economy, including multinationals, contribute to society in a fair way? How should taxation be handled in individual countries against the backdrop of international value chains and global markets? At this year’s MannheimTaxation Annual Conference many topics presented by ZEW Mannheim addressed the currently hotly debated new regulations in international corporate taxation.

China aims to become the world’s leading nation in innovation and technology by 2050. Research and development (R&D) are crucial for achieving this goal. Therefore, the government grants Chinese companies extensive subsidies for their R&D activities. However, these funds are not always used for the intended research purposes. In the latest episode of the #ZEWPodcast ‘Wirtschaft · Forschung · Debatten’/‘Economy · Research · Debates’, Professor Bettina Peters, deputy head of the ZEW Research Department “Economics of Innovation and Industrial Dynamics” and Dr. Philipp Boeing, ZEW innovation economist and China expert, talk about the misappropriation of R&D subsidies in China.

What role do economic research institutes play in addressing economic policy challenges in Germany and Europe? This question was the topic of the panel discussion on 8 November 2021 on the occasion of the 30th anniversary of ZEW Mannheim. ZEW President Professor Achim Wambach was joined in the discussion by Dr. Guntram Wolff (director of Bruegel, Brussels) and PD Dr. Monika Köppl-Turyna (director of EcoAustria, Vienna). The panel was moderated by Silke Wettach from the news magazine “Wirtschaftswoche”.

The keynote speech at the event was held by Dr. Georg Müller, CEO of MVV, who, as chairman of the ZEW Sponsors’ Association, made clear the strong relevance of ZEW.

Economic experts expect the economic recovery to be postponed until 2022. However, not only is economic growth in Germany expected to pick up in 2022, the forecasts for the inflation rate in Germany and the euro area are also being revised up slightly. This is the result of the business cycle tableaus by ZEW Mannheim and the German daily newspaper, Börsen-Zeitung.

The decision of the Federal Constitutional Court of 24 March 2021 on the Federal Climate Change Act is already considered historic. The First Senate ruled that the legislation was insufficient, especially with regard to emission reductions from 2031. The complainants’ rights of freedom were violated to the extent that the emission levels permitted in the Federal Climate Change Act until 2030 jeopardised “practically every type of freedom protected by fundamental rights” of the complainants after that time.

The Act was declared unconstitutional in parts and the younger generation was granted a right not to have to bear the consequences of climate change alone. The President of the Federal Constitutional Court, Professor Stephan Harbarth, spoke about the Court’s order and its far-reaching consequences as part of the event series First-Hand Information on Economic Policy at ZEW Mannheim on 26 October 2021.

Christina Meyer, a researcher in the ZEW Research Department “International Finance and Financial Management”, received the Gerhard Fürst Award of the Federal Statistical Office (Destatis) on 18 November 2021. The award aims to promote young researchers. She was honoured in the category master’s/bachelor’s theses for her master’s thesis on gender-specific differences in old-age provision after the introduction of so-called unisex tariffs in the Riester pension scheme.

The German business magazine Capital counts ZEW economist Professor Vitali Gretschko among the “top 40 under 40” talents from science and society. For Capital, the head of the Research Department “Market Design” at ZEW Mannheim is one of the most important talents from business, politics, science and society who are shaping developments in Germany.

The currently very high consumer price inflation rates in the euro area are expected to gradually decline over the next two years, but are projected to remain well above the ECB’s target of two per cent over this period. Disruptions in international supply chains, raw material shortages and high energy prices are expected to become less important drivers of inflation by 2023. On the other hand, the relevance of wage growth in the euro area for the experts’ inflation expectations has increased significantly compared to previous surveys, especially for the year 2022.

Germany and Europe are lacking digital sovereignty. This jeopardises the ability of the German economy and its European partners to respond effectively to future challenges, to innovate and to remain competitive. This is the result of a study by ZEW Mannheim, which is based on a comprehensive evaluation of the existing literature and a representative company survey. On behalf of the Federal Ministry for Economic Affairs and Energy, ZEW researchers surveyed more than 1,200 companies from the information economy and manufacturing industry.

European companies will be obliged to disclose their country-related profits and income taxes in the form of so-called country-by-country reporting in the future. A corresponding draft directive was approved today by the Parliament of the European Union. The aim of the directive is to detect and curb tax avoidance practices. The announcement of a preliminary political agreement on 1 June 2021 to introduce such a directive had already led to noticeable reactions on the capital market:

A current study by ZEW Mannheim, in cooperation with the University of Mannheim, identified cumulative average abnormal returns between ‑0.499 and ‑0.699 per cent for up to two days after the announcement. This corresponds to a cumulative loss in firm value of 48 to 65 billion euros.

With the 14th Five-Year Plan, the Chinese government has set itself the ambitious goal of creating a more innovation-based economy and becoming the world’s leading nation in science and technology by 2050. To this end, gross expenditures on research and development (R&D) are targeted to grow by at least seven per cent annually between 2021 and 2025. There are plans to stimulate more R&D in companies through extensive subsidies and other policy incentives. However, this is not the end of the story. As a recent study by ZEW Mannheim shows, misappropriation of subsidies has been widespread in China in the past and has long stood in the way of efficient use of state funding.

Therefore, as early as 2006, a seminal change in China’s innovation and industrial policy took place and numerous measures were introduced to improve funding instruments and curb their misuse. “Should such measures become even more effective in the future, China will turn into an increasingly innovative competitor on the world market and at the same time become more attractive as an R&D location for foreign companies,” says Dr. Philipp Boeing, China expert at ZEW, commenting on the results of the study.

The ZEW Indicator of Economic Sentiment for Germany increased in the current November 2021 survey, climbing 9.4 points to a new reading of 31.7 points. This is the first time since May that the indicator has recorded a rise. The assessment of the economic situation in Germany has worsened again in the current survey, falling by 9.1 points to a level of 12.5 points.

According to a report in the Handelsblatt, the so-called traffic light coalition partners SPD, FDP and the Greens, named after the traditional colours of the parties, have agreed not to create a digital ministry. Professor Irene Bertschek, head of the ZEW Research Department “Digital Economy”, has commented on that matter.

Incentive programmes in France that aim to support private households in refurbishing their homes in order to improve their energy balance differ considerably in their cost-effectiveness. This is shown by a recent analysis by ZEW Mannheim. “The result is that energy consumption in households can be reduced most cost-effectively with energy efficiency certificates from energy suppliers,” explains ZEW researcher Dr. Claire Gavard, one of the authors of the study.

An increase in local business taxes has a negative impact on innovation in companies and economic growth in Germany. Higher taxes cause companies to reallocate their research and development (R&D) activities or abandon them altogether. As a result, the number of newly registered patents decreases, and with it the competitiveness in the market. This is the conclusion of an international team of researchers who examined how changes in local business tax rates slowed innovation over a 30-year period.

“Higher taxation on companies leads them to reduce their investment in research and development, regardless of the company’s size. It is worthwhile for policymakers to take a closer look at this matter. So far, tax incentives for R&D have often been closely linked to the size of a company,” says Professor Sebastian Siegloch, head of the ZEW Research Department “Social Policy and Redistribution”. Under the Research Allowance Act implemented in Germany in 2019, all businesses conducting R&D have access to research allowances, which is a reasonable approach.

In the coming years, public budgets in Germany will have to earmark considerable resources for long-term goals in the areas of climate, education and innovation policy. These are in competition for budgetary resources with policy areas that have an immediate benefit today and therefore enjoy strong political support. On behalf of the Federal Ministry of Education and Research, ZEW has now designed and calculated a “future quota” for the federal budget. This quota reflects the extent to which the budget provides funds for policies that will only generate benefits in the medium or long term.

For 2019, which is the last federal budget before the pandemic, the study calculated that the “future quota” of the federal budget was at 18.3 per cent. ZEW recommends that such a quota be used as a compass for the budgets of the federal and state governments to counteract a budgetary present bias.

Successful climate protection requires more effective incentive schemes that motivate countries to increase their efforts to reduce greenhouse gas emissions. According to ZEW, the UN Climate Change Conference in Glasgow (COP26) offers a good opportunity to negotiate or even establish a climate club. This would be an important step towards raising the level for ambitious climate protection. For the ZEW economists, on the other hand, it is questionable whether the gradual increase in country-specific climate change mitigation efforts agreed in the Paris Climate Agreement is really sufficient to achieve the global climate protection target.

According to calculations by Climate Action Tracker, many countries have hardly shown any ambition to further reduce their emission targets. At the same time, only a few signatory countries to the Paris Agreement are on track with the 2-degree target. The reason for the hesitation of many countries certainly also lies in the underlying free-rider incentives that emanate from contributions by others to their own ambition levels.

Our publications are available to download in PDF format. PDF files can be viewed using, among others, Acrobat Reader, which you can download for free at https://acrobat. adobe. com/us/en/acrobat/pdf-reader. html

Philipp Böing and Bettina Peters
A New China Shock?

Johannes Geyer, Svenja Lorenz, Thomas Zwick, and Mona Bruns
Early Retirement of Employees in Demanding Jobs: Evidence From a German Pension Reform

Philipp Böing and Bettina Peters
Misappropriation of R&D Subsidies: Estimating Treatment Effects with One-Sided Noncompliance

Andreas Lichter, Max Löffler, Ingo E. Isphording, Thu-Van Nguyen, Felix Pöge, and Sebastian Siegloch
Profit Taxation, R&D Spending, and Innovation

Rainer Frietsch, Denilton Darold, Maria Karaulova, Sonia Gruber, Peter Neuhäusler, Christian Rammer, Thorsten Doherr, Julian Oliver Dörr, and Sandra Gottschalk
Spin-Offs from Public Research Organisations in Germany: A Comprehensive Analysis Based on Bibliometric, Patent, Website and Company Register Data

This issue contains a Focus on M&A with the following articles:

Paul Berbée, Katia Gallegos Torres, César Barreto, Martin Lange und Katrin Sommerfeld
Wir schaffen das! Zivilgesellschaftliches Engagement und die soziale Integration von Geflüchteten (We can do it! Civic Engagement and the Social Integration of Refugees)
Eine empirische Analyse für die Jahre 2016 bis 2019 (An Empirical Analysis for the Years 2016–2019)

Christian Rammer, Marius Berger, Insa Weilage, Vivien-Sophie Gulden, and Birgit Gehrke
Innovationsindikatoren Chemie und Pharma 2021 (Innovation Indicators for Chemicals and Pharmaceuticals 2021)

Mareike Seifried, Irene Bertschek, Patrick Breithaupt, Daniel Erdsiek, Manuel Lauer, Thomas Niebel, Christian Rammer, Vincent Rost, and Tim Schieber
Schwerpunktstudie Digitale Souveränität 2021 (Focus Study Digital Sovereignty 2021)

Friedrich Heinemann, Albrecht Bohne, Patrick Breithaupt, Thorsten Doherr, Georg Licht, Thomas Niebel, and Michael Thöne
Studie zur Einführung einer Zukunftsquote (Study to Design a Future Share of Public Spending)

Bundesländerindex Familienunternehmen (Federal State Index for Family Businesses)

Geocoded Innovation Data for a Small-Scale Spatial Analysis of the Innovation Performance of Regions

Due to the ongoing COVID-19 pandemic, the following event details may be subject to change. The current status of the events can be found in the ZEW Events Calendar. If you have any questions, please don’t hesitate to contact our event team at event@zew.de.

Speakers: Claudia Buch (Deutsche Bundesbank, Frankfurt), Annamaria Lusardi (George Washington University, Washington, D. C., USA) and David Leiser (Ben Gurion University of the Negev, Israel)
Location of the event: Online

Speaker: Marco Manacorda (School of Economic and Finance, Queen Mary University London, United Kingdom)
Location of the event: Online

Speaker: Christian Miege (Thyssenkrupp AG, Essen)
Location of the event: Online

Speaker: Gary E. Bolton (University of Texas at Dallas, USA)
Location of the event: Online

Speaker: Yongseok Shin (Washington University in St. Louis, USA)
Location of the event: University of Mannheim

Speaker: David Slusky (University of Kansas, Lawrence, USA)
Location of the event: Online

Picture Credits: personalia article of 26.11.2021: Statistisches Bundesamt (Destatis) 2021, personalia article of 18.11.2021: Anna Logue Fotografie/ZEW, news article of 17.11.2021: Anna Logue Fotografie, press release of 15.11.2021: iStock.com/kasto80, press release of 11.11.2021: iStock.com/Viktor_Gladkov, news article of 11.11.2021: Erich Dichiser EDM, press release of 10.11.2021: gui yong nian/stock.adobe.com, press release of 05.11.2021: Anna Logue Fotografie/ZEW, press release of 04.11.2021: iStock.com/metamorworks, press release of 03.11.2021: iStock.com/ipopba, press release of 02.11.2021: iStock.com/MichaelUtech, press release of 31.10.2021: iStock.com/kodda, news article of 27.10.2021: Erich Dichiser EDM
All further pictures: ©ZEW