Part I: General Introduction
Economic Situation
Since the end of the World War II, Germany has been one of the world’s leading economies. It is a social market economy in which the economy is governed by market forces, but the government maintains a role in assisting the underprivileged and correcting imperfections in the market. Germany is also part of the European Union (EU), and now uses the Euro as its primary currency (Country Breifings: Germany, 2006).
From 2003-2006, Germany was the largest exporter in the world. Its major exports include automobiles (19.2%), machinery (14.1%), and chemical products (13.1%). Exports in 2005 totaled $972 billion, compared with imports of $782 billion, resulting in a trade surplus of $189 billion. Although manufacturing still plays a very important role in the German economy, its overall percentage of GDP has been declining. Germany still has a stronger manufacturing sector than most advanced economies (Country Breifings: Germany, 2007).
Germany’s economy achieved higher than expected growth in 2006, with GDP rising 2.7%. This was buoyed by a strong fourth quarter in which the economy grew .9% from the fourth quarter to the third. After 11 years of below-average growth, Germany is now one of the growth drivers in the Euro region. The accelerating economic growth is due to surging export demand, as well as increased consumer spending and a decline in unemployment. Consumer spending may have also surged in the fourth quarter in anticipation of a January VAT tax increase to 19% from 16% (Meier, 2007).
Because of the VAT tax increase on January 1, 2007, German economic growth is expected to decline this year, and then return to a growth rate of 2% for the next several years (Country Breifings: Germany, 2007). The German government recently revised its 2007 growth projections from 1.4% to 1.7% due to a rise in expectations for exports. This is partly due to a faster than expected growth of the U.S. and Chinese economies. China’s economy grew 10.7% in 2006, its highest rate in 11 years (Meier, 2007).
Political Situation
Germany’s federal parliament consists of two houses, the directly-elected Bundestag (lower-house) and the Bundesrat (upper-house), which consists of representatives of the state government. The federal parliament is primarily responsible for setting economic policy, while the individual state governments are responsible for implementing and enforcing federal policy (Harrington & Merkl, 2004).
The two main political parties in Germany are the Social Democratic Party (SPD) and the Christian Democratic Union (CDU). The CDU also has a smaller sister party, the Christian Social Union (CSU), and the two parties form a joint faction called the CDU/CSU. Minor parties in Germany include the Free Democratic Party (FDP), who believe in limiting government interference, and The Greens, who place a strong emphasis on environmental issues (Country Breifings: Germany, 2007).
In November of 2005, the SPD and CDU/CSU formed a joint coalition led by newly-elected Chancellor Angela Merkel, of the CDU party. The current administration, which runs through September 2009, has a large majority in both the Bundestag, and the Bundesrat, which may lead to a quicker legislative process. One of the major items on the agenda includes a major business taxation reform scheduled for 2008, which will lead to a moderate decline in the tax burden for businesses. The federal parliament is also working through a process of fiscal consolidation to help lower the federal deficit, as well a welfare reform (Country Breifings: Germany, 2007).
Legal Environment
Germany follows a system of civil law (Roman law) which is in contrast to the American system of common law. Under civil law, judges play a more active role than attorneys, and in a typical German trial, a panel of judges hears the case. Germany also maintains a separate system of non-civil constitutional courts, which interpret the German Basic Law (Constitution) and the various state constitutions (Harrington & Merkl, 2004).
With the formation of the European Union, there have been some conflicts between German federal laws and EU rules. For example, a recent criticism aimed towards Germany claims that German law is protecting Volkswagen from a hostile takeover, which is in violation of EU rules regarding the free movement of capital. One of the German rules in question prevents any shareholder from having more than 20% of Volkswagen’s voting rights, regardless of how many shares are owned. Germany was taken to the European Court of Justice in March 2005 over this issue, and the case is still pending (EUbusiness, 2007).
Technological Environment
Germany has one of the world’s most technologically advanced telecommunications systems. Capabilities include a modern network of fiber-optic cables, coaxial cable, a domestic satellite system, broadband internet access and cellular telephone service. Germany is currently the largest broadband internet market in Europe, with 12.5 million connections (Insight, 2007).
Germany continues to invest money in infrastructure improvements in eastern Germany. Annual transfers from western to eastern Germany for improvements total around $70 billion (The World Factbook, 2007).
Impact of Globalization
Although the German economy has been strong recently, it has been impacted by globalization, particularly in the loss of new jobs. Currently, unemployment stands at around 10.2%, with a high percentage of unemployment focused in eastern Germany (McHuge, 2007).
Helle C. Dale argues in her 2005 lecture, “Challenges Facing Europe in a World of Globalization”, that reforms are needed in European labor-markets in order to remain competitive in a global economy. Germans, in particular, are unwilling to accept cuts in their state funded welfare privileges such as pensions. However, global competition has led to a loss of jobs, and the responsibility of providing for the unemployed has become an increasing burden on European nations such as Germany.
State of Corporate Responsibility and Ethics
Social responsibility is a priority in Germany. Germany has one of the most comprehensive systems of health, unemployment, old age, and disability systems in the world. Germany also has a generous welfare system that includes benefits for child support, public housing, and aid for veterans. Pensions for the elderly and disables are financed equally by employee and employer, and typically pay for around 70% of one’s income just before retirement. Employers also pay for accident insurance (Harrington & Merkl, 2004).
Historically, Germany has been home to many companies who place an emphasis on social responsibility. In the 1800’s, Alfred Krupp, founder of the company Krupp, set up medical insurance, a pension, and built housing for the companies 16,700 employees. Ernst Abbe, of the company Carl Zeiss, promoted profit sharing, worker safety, and a reduction in work hours (Hopkins, n.d.).
Germany has a strong tradition of unions, dating back to 1868. The main trade union in Germany is the German Trade Union Federation (DGB). The 9 million person union represents the metalworkers, the autoworkers, as well as the Public Service Union and the Chemical, Paper, and Ceramic Workers union (Harrington & Merkl, 2004).
Many of the current social policy’s in Germany are either required by law, or in accordance with a union agreement. Therefore, it is difficult to determine whether or no corporate responsibility is voluntary or simply a “cost of doing business” in Germany. However, many of these benefits have come under increasing scrutiny in recent years due to pressures brought about by globalization (Hopkins, n.d.).
Risks
Some of the risks of doing business in Germany include the high cost of labor, powerful labor unions, and high taxation. Germany’s wages of $25 per hour in 2002 (U.S. $21) were among the highest in the world. High taxation is also a risk of doing business in Germany. As stated earlier, Germany raised its VAT tax rate from 16% to 19% on January 1, 2007. This lowers the purchasing power of the consumer, resulting in fewer goods purchased within Germany. Germany also places an import turnover tax of 19% on all industrial imports. The tax is designed to place the same tax burden on imported goods as those produced domestically (U.S. Commercial Service, 2006).
Part II: Cultural Factors and Variables
Cultural Dimensions
Professor Geert Hofstede’s “Cultural Dimensions” provide a valuable resource for investigating the various cultural dimensions of a society. For the purpose of this paper, we will use Hofstede’s model as a way to provide insight into the various cultural dimensions of Germany. Areas of examination will include the power distance index, individualism, masculinity, uncertainty avoidance index, and long-term orientation (Hofstede, n.d.).
Of the five “Cultural Dimensions,” Germany ranks highest in individualism. This dimension refers to the degree to which people are integrated into groups. Germany ranks high on the scale (67 out of 100), meaning that connections between individuals are not as strong, and individuals are expected to look after themselves and their immediate families. A collective society relies more on extended families for support. Although Germany ranks high in individualism, it still ranks far lower than the United States (91). However, it is much more individualistic than Asian countries such as China (20) and Japan (46) (Hofstede, n.d.).
Germany also ranks high in masculinity (66). Masculinity refers to the degree of “masculine” values in a society. These values include assertiveness, materialism, and lack of concern for others, as opposed to the feminine values of modesty and caring. Highly masculine countries tend to have a larger gap between the values of men and women. Germany ranks slightly higher than the United States (62) in masculinity, but far less than Japan (95) (Hofstede, n.d.).
In the uncertainty avoidance index (UAI), Germany ranks high with a score of 65. This index measures the degree to which a society tolerates uncertainty and ambiguity. Hofstede claims that uncertainty avoiding cultures typically have strict laws, rules and safety measures, and typically tend to believe in absolute truths. On the other side, uncertainty accepting cultures are more tolerant of differing opinions, have as few rules as possible, and are philosophical and religious relativists. Germany scores higher than the United States (46) in this dimension, but again lower than Japan (92). This high score may be a byproduct of Germany’s recent devastation during World War II (Hofstede, n.d.).
Germany ranks much lower on the power distance index (PDI) with a score of 35. The PDI measures the degree to which less powerful members of a society accept unequal distributions of power. A society with a high PDI score would exhibit a greater acceptance of inequality from the less powerful members of the society. Germany’s relatively low score would suggest that there is less acceptance of inequality from the poorer members of the society. This score is consistent with Germany’s extensive welfare programs for the poor and unemployed. The United States (40) also ranks low in the PDI. However, Asian countries such as China (80) and Japan (54) tend to rank higher (Hofstede, n.d.).
Finally, Germany (31) also ranks low in the long-term orientation dimension. This dimension measures the long-term vs. short-term orientation of a society. Long-term orientation societies tend to value thrift and perseverance, while short-term orientation societies value a respect for tradition, fulfilling social obligations, saving one’s ‘face’. Both Germany and the United States (29) rank low on long-term orientation, while Japan (80) and China (118) rank much higher (Hofstede, n.d.).
Cultural Factors and their impact on Organizations
There are a number of cultural behavior characteristics that have an effect on the way organizations function. The German thought process tends to be extremely thorough, and all aspects of a project are examined in great detail. This time-intensive preparation can conflict with time expectations of other cultures. However, once the initial planning process is completed, the pace of the project picks up and deadlines are met (Priest, n.d.).
In Germany, problem-solving and decision-making tend to be more fact based. Logic and analysis of information are more highly valued than intuition and personal networks. Germans are also very task-oriented. Targets, timetables, planning, and achievement of milestones are all vital to German business practices (Gorrill, 2004).
Consistent with the German score on the UAI index, Germans also do not like surprises or sudden changes involving business transactions. This is true even if the changes would result in a better outcome. While this fits with Germany’s need for thoroughness, it could prevent an organization from being flexible in a rapidly changing environment (Priest, n.d.).
Another aspect of German culture that can affect organizations is the importance of private time and leisure time. The German work week averages between 35 and 40 hours. At the end of the day, employees are expected to leave the office. Staying late after the office closes is a sign that one did not plan their day properly (Germany - Language, Culture, Customs and Business etiquette). Vacation is also important, and is regulated by German law. A typical employee receives between 25 and 30 vacation days per year in addition to public holidays (WilmerHale, 2003).
Communication processes
Germans tend to be very formal in their communications. Business dress is very conservative for both men and women. Hand shakes are common for greetings and departures, along with a slight bow. Men frequently greet each other with Herr (Mr.) and the person’s last name. Titles are also very important to Germans. A person’s academic credentials and background carry more weight than personal connections. When addressing someone in-person, or in a letter, it is important to use the persons full title. Finally, punctuality and seriousness are highly valued by Germans. It is considered rude to be late to any appointment, and humor is unappreciated in a business context (Priest, n.d.).
Business meetings are also very formal in Germany and follow a strict protocol. Appointments are required and should be made 1 to 2 weeks in advance. Meetings maintain a strict agenda, and typically start and end at predetermined times. German meetings are very task oriented, and aim for a specific outcome. When entering a room, the eldest or highest ranking person enters first. At the end of a meeting, it is not uncommon for Germans to rap their knuckles on the tabletop to signal approval. Small talk in Germany is not a priority, and Germans can at times be very blunt in their communications (Germany - Language, Culture, Customs and Business etiquette, n.d.).
German’s tend to favor highly structured and hierarchical organizations. Most organizations are strictly departmentalized and centralized, and final authority resides at the level of the department manager. However, decision making is not always as centralized as one would expect. Often, the hierarchical processes will yield to consensus decision making. The benefits for the individual are weighed along with “the good of the community” in the decision making process. Business decisions must not only benefit the company, but also benefit the employees as well (Deresky, 2006).
German’s also tend to be very private. They prefer more space around them in conversations than most Europeans, typically 6 inches more space than Americans, and value their private time. It is considered rude to call an executive at home regarding business without permission. German’s also prefer closed doors so as to not to have their conversations overheard (Priest, n.d.).
Part III: Negotiating and Potential Strategies for Entry
Negotiating, decision-making, and ethical issues
Negotiations in Germany tend to be very formal. If one is unsure of the meeting procedures, it is important to ask questions beforehand. Germans will usually prepare extensively prior to a meeting, and will expect the same from all participants. Issues, problems and facts will be addressed in the meeting in a very direct and technical manner. Because German’s are very analytical thinkers, they require that people use lots of facts and examples to back up their position. Unlike many eastern cultures, relationships are not considered relevant to business decisions. Objective facts and rational reasoning are the basis for negotiations and decision-making ( Peterson, n.d.).
When negotiating in Germany, it is also important to not “hype” or exaggerate when attempting to create a sale. German’s tend to be cautions of new ideas, and are a low risk-taking culture that is slow to change. All new ideas must be backed up with pertinent technical information. German’s are typically not as impressed by glitzy advertising. Rather, any brochures or promotional material should be packed with relevant technical information, and take on a more serious tone (Peterson, n.d.).
Criticism in Germany tends to be very direct and can seem confrontational at times. It is important to understand that this is an element of the German communication style. Criticism is openly expressed in German negotiations and should not be taken personally. Rather, the criticism is often directed at the specific problem or discussion at hand (Gorrill, 2004). On the other hand, it is also important to be diplomatic and careful when offering criticism to Germans. As an individualistic culture, German’s are careful to “save face” and can become embarrassed if criticism is given improperly (Peterson, n.d.).
Decision-making in Germany can be very slow and drawn-out. Usually, every detail of a proposal will be examined before a decision is made. Spontaneous decision-making is very uncommon. Furthermore, once a decision has been made, it can be nearly impossible to change. While German’s do not easily make concessions, they do typically work to achieve a mutual advantage for both parties (Peterson, n.d.).
Contracts in Germany are considered final after both sides have signed. If the terms of the contract are not honored, legal action can be taken. Any attempt to change the terms of a contract after signing or to continue discussions will be met with suspicion and distrust, and may result in the termination of the contract (Peterson, n.d.).
In Germany, a small gift is considered a polite gesture when a contract is reached for the first time. Large gifts are uncommon, and should never be given before a deal has been reached. Small gifts are also a polite gesture for social events. Common gifts include nice office items with a company logo, or quality imported liquor. Chocolates or a flower bouquet are considered appropriate when invited to someone’s home. Gift-giving in Germany should not pose any ethical dilemmas that contrast with U.S. customs (Peterson, n.d.).
Reasons to do business in Germany
One of the main reasons for doing business in Germany is that the economy is one of the strongest in the world. It is the fifth largest economy in the world, has a highly educated workforce, and is also technologically advanced. Any company looking to produce goods from within Germany would not have any difficulty with even the most technologically advanced product. As stated earlier, Germany has been the world’s top exporter for the past few years. Although growth had stagnated in recent years, it has been showing signs of picking up over the past year. Thus, while growth has slowed, Germany still remains a significant force in the global production of goods (The World Factbook, 2007).
Germany also has a strong legal system with protection for intellectual property. Contracts are also honored and protected through the legal system (Harrington & Merkl, 2004). This provides a level of security for a country looking to expand into Germany.
Another attractive aspect of Germany is the spending power of the population. Germany imported nearly $916 billion worth of goods in 2006. This spending power provides a tremendous incentive for any corporation not already doing business in Germany to tap into the German market (The World Factbook, 2007).
One of the disadvantages of doing business in Germany is the high-cost of labor and high taxation. While Germany still has a strong manufacturing base, it has been affected by availability of cheaper labor in Asian nations. Any company looking to manufacture goods in Germany will find a highly-educated and skilled workforce, but also an expensive workforce. Furthermore, corporations in Germany are faced with a much higher tax burden than in the United States, which may result in a reduced cash-flow (Country Breifings: Germany, 2007).
Strategies for entry
An organization’s strategy for entering the German market will be dependent upon the goals that the organization wishes to accomplish. A business may want to primarily export products to Germany, or the company may want to manufacture products within Germany for both domestic and international consumption. Furthermore, a business may simply want to license or franchise intellectual property for use within Germany. The primary motivation for entering a market is typically to capitalize on potential demand for an organization’s products or services (Arnold, 2003).
A common strategy often used when exporting products to Germany is to set up a partnership with an existing local distributor. Although this may reduce the initial profit levels, the local distributor will provide access to a market that may not be immediately accessible. This also limits the initial risk in entering a new market, and gives the organization an opportunity to assess demand and make adjustments. However, this strategy will also result in a loss of control and the organization may not be able to gain access to important information on its new customers. The alternative is for an organization to take the costly step of setting up its own distribution network in Germany, which greatly increases the overall risk (Arnold, 2003).
Franchising and licensing is another way of entering the Germany market. Fast food companies such as McDonalds have already found success in Germany by tweaking their offering in order to suit local tastes. Licensing intellectual property such as a product design or a technology also provides an effective way to enter the German market. This method allows a company to expand internationally, without necessarily taking on the risk of setting up and maintaining a new manufacturing facility (Arnold, 2003).
Potential organization structures
If a corporation does attempt to set up and maintain a physical presence in Germany, it will most likely need to adopt a German style organizational structure, particularly if German employees will constitute a percentage of the workforce. An effective organization in Germany will most likely be hierarchical and highly structured, with clearly defined roles and departments (Gorrill, 2004).
Conclusion
Overall, Germany provides a very strong environment for doing business. It is a stable country with a sophisticated economy and an advanced infrastructure. Germany has been the world’s top exporter for the past few years and the economy looks to be improving after an extended slump. Germany also has a solid legal system and protections for intellectual property.
Although Germany has a highly skilled and educated workforce, high labor costs may prevent some organizations from relocating inside of Germany. Furthermore, the German government places a heavy tax burden on both business and individuals within the country. For many manufacturing businesses, it may be more cost effective to produce goods outside of Germany for export into Germany.
Culturally, Germany shares many similarities with the United States, making it a relatively easy transition for an American corporation doing business in Germany. In terms of cultural dimensions, the most striking difference is in Germany’s high ranking in the uncertainty avoidance index. This has a significant influence on the way in which Germans approach business deals and negotiations. As a result, Germans tend to be very slow and thorough in their decision-making process, and require extensive factual data to back up any claims or proposals.
In terms of communications, Germans businesses tend to be much more formal and serious than American businesses. Germans tend to be very private, and make a clear distinction between work and home. Furthermore, Germans are much more influenced by a person’s credentials than by their personal connections. This is in contrast to many Middle-eastern and Asian countries, which are much more relationship oriented. It is not uncommon for a German to ask for a person’s credentials upon meeting for the first time in a business situation.
For a business looking to export goods into Germany, the most likely scenario for market-entry would be to develop a relationship with a local distributor. While this may result in loss of control over marketing decisions and customer data, it also provides a low-risk way of entering the German market without incurring high upfront capital expenses. Franchising and licensing can also be effective strategies for entering the German market, and have been done successfully in the past by companies such as McDonalds.
In conclusion, Germany is a highly sophisticated economy that continues to be an attractive market for businesses. Thus far, Germany has been able to maintain a relatively strong manufacturing economy even under the threat of global competition. It will be important to watch how Germany continues to respond in the future to the increasing pressure of globalization.
