Note: Exports of goods across borders. The top 10 exporting countries in 2014 (excluding re-exports). Source: WTO

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Section 2 Factors and elements of expansion of regional industries and exports in Germany and other countries. 1.Changes in exports by major countries First, we will look at changes in exports by individual countries since the 1990s. While China and other emerging countries have enhanced their competitiveness, the United States and Germany have increased their exports significantly in line with the expansion of the world economy and have remained No. 2 and No. 3 in terms of the value of exports to the rest of the world, after China (Figure II-3-2-1). Figure II-3-2-1 (Trillion dollars) 2.5 2 1.5 1 0.5 Changes in exports by top exporting countries China US Germany Japan Netherlands France ROK Italy UK 0 1990199219941996199820002002200420062008201020122014 Russia Note: Exports of goods across borders. The top 10 exporting countries in 2014 (excluding re-exports). Source: WTO In the case of Germany, it is true that as a result of the creation of the euro single currency in 1999, exporting to the euro area became easier, but the country has increased exports not only to other EU member countries but also to non-eu countries since the middle of the 2000s (Figure II-3-2-2). 511

Figure II-3-2-2 Changes in exports by major countries (as for the EU, only exports to outside the EU are covered) (Index) 380 330 280 230 180 130 Germany UK Spain Italy France Netherlands Japan US 80 1999 2001 2003 2005 2007 2009 2011 2013 Note: Index deeming the value in 1999 as 100. As for the EU countries, only exports to outside the EU are covered. Source: Eurostat (on the euro basis) and WTO (on the dollar basis) There is a high probability that Germany s exports have grown because it has become possible for the country to export products in an environment of weak currency relative to the actual strength of its economy. However, the labor cost of the German manufacturing industry is higher than that of Japan, and although Germany s real effective exchange rate 79 has declined compared with other euro-area countries rates, the decline is moderate. Therefore, it is presumed that Germany s export competitiveness has grown due to factors other than cost (Figure II-3-2-3). 79 A real effective exchange rate based on a country s consumer prices, exchange rate and value of trade is often used as an indicator of the price competitiveness of the country s trade goods. 512

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Figure II-3-2-3 Changes in real effective exchange rates in major countries (Index) 130 110 90 70 50 Japan Germany France UK 30 US Italy Note: 1994 =100. Real effective exchange rates. Source: Bank for International Settlements (BIS) 2. Factors and elements supporting Germany s regional industries and exports (1) Employment and regional inequality in Germany In Germany, not only has the value of exports been growing in most states as described earlier, but the value of value added by the manufacturing industry has also increased in all but one state, 80 indicating the presence of a vigorous manufacturing industry supporting robust exports (Figure II-3-2- 4). 80 Compared with 2002, value added by the German manufacturing industry increased in all states, and compared with 2003, it decreased slightly in Bremen (Figure II-3-2-4). 513

Figure II-3-2-4 Changes in value added by industry (states of Germany) 81 (Index: 2003=100) (%) 160 3.5 150 140 3 130 2.5 120 2 110 100 1.5 90 1 80 70 0.5 60 0 Manufacturing industry Services industry Growth rate (right axis) Note: The figures for each industry are the total of value added (in terms of index) in 2013. The growth rates are the average annual growth rates of each state s total nominal value added from 2003 to 2013. Source: Federal Statistical Office of Germany Although the employment growth rate is much lower than the growth rate of value added, the growth is high in the states of Württemberg-Baden and Bavaria, whose scale of export is large, and employment has recently increased in many states (Figure II-3-2-5). 81 The German states represented by the abbreviations in the figure are as follows: NRW= North Rhine- Westphalia; BW= Baden-Württemberg; RP=Rheinland-Pfalz; SH=Schleswig-Holstein; MV=Mecklenburg- Vorpommern. 514

Figure II-3-3-5 Employment growth in the manufacturing industry in Germany (from 2010 onward) (Index: 2010=100) 115 110 105 100 95 90 85 2010 2011 2012 2013 2014 BW Bayern Berlin Brandenburg Bremen Hamburg Hessen MV Niedersachsen NRW RP Saarland Sachsen Sachsen-Anhalt SH Thuringen Note: Number of employees in "industry" (excluding the construction sector) aged from 15 to 64. Source: Eurostat While employment in the manufacturing industry has been stagnant, employment increased in all states on an all-industry basis, including the services industry, between 2000 and 2012 (Figures II-3-2- 6, II-3-2-7 and II-3-2-8). It may be said that in Germany, regional economies have kept themselves up and achieved development by making a shift in employment from the manufacturing industry to the services industry while enhancing the competitiveness of the manufacturing industry. 515

Figure II-3-2-6 Growth rates of value added and the number of employees in the manufacturing industry in Germany Note: Growth rates from 2000 to 2012. The number of employees is the total number of employees and job trainees. The size of the bubbles represents value added by the manufacturing industry in 2012. Source: Eurostat and Federal Statistical Office of Germany Figure II-3-2-7 Growth rates of productivity and the number of employees in the manufacturing industry in Germany 82 82 The German states represented by the abbreviations in the figure are as follows: NRW= North Rhine- Westphalia; BW= Baden-Württemberg; RP=Rheinland-Pfalz; SH=Schleswig-Holstein; MV=Mecklenburg- Vorpommern 516

Note: Growth rates from 2000 to 2012. Productivity is calculated by dividing value added by the manufacturing industry by annual working hours. The number of employees is the total number of employees and job trainees. The size of the bubbles represents value added in 2012. Source: Eurostat and Federal Statistical Office of Germany Figure II-3-2-8 Comparison of the growth rate of productivity and the growth rate of the number of employees in the whole German industry Note: Total of the industry (including the construction sector) and the services industry. Growth rates from 2000 to 2012. Productivity is calculated by dividing value added by annual working hours. The number of employees is the total number of employees and job trainees. The size of the bubbles represents value added in 2012. Source: Eurostat and Federal Statistical Office of Germany Moreover, in Germany, both economic inequality between regions and regional imbalance in the number of employees are small compared with other major European countries. It may be said that jobs are widely distributed across the country (Figures II-3-2-9 and II-3-2-10). 517

Figure II-3-2-9 Regional disparities in GDP per capita (European countries) 40 35 30 25 20 15 10 5 0 Note: The data is as of 2011. Regional disparities are expressed as the total of the gaps (in absolute terms) between each region s GDP per capita (purchasing power parity) and each country s GDP per capita (purchasing power parity) weighted by the region s population. NUTS2 refers to regions with a population of approximately 0.8 to 3 million. The average population of the covered regions in Germany and France is about 2 million. Source: Eurostat Figure II-3-2-10 Regional imbalance in the number of employees (major European countries) 3.5 Manufacturing 3.0 2.5 2.0 Information and communications 1.5 1.0 0.5 0.0 Germany France Italy Spain UK Specialized and scientific technologies, management support Wholesale and retail trade 518

Note: The above figure shows each country s variation coefficient (standard variation/average) concerning the share of employees in each region (at NUTS2 level) in the country s total number of employees. The data is as of 2013. Source: Eurostat (2) Factors and elements supporting regional industries and exports (A) Innovation in Germany Major elements of export competitiveness include not only cost competitiveness as represented by low business costs, including low labor costs and corporate tax rates, but also innovations necessary for creating differentiated products and efforts in securing efficient sales channels. In developed countries, some companies are relocating manufacturing bases to foreign locations due to high domestic business costs, while the labor cost in emerging countries has been rising in recent years. As a result, it is said that the high labor cost in emerging countries has become a greater factor than before, prompting some manufacturing companies to reshore their business bases. In particular, in Germany, exports have significantly increased despite the heavy burden of wages and social security costs on companies, indicating that factors other than cost competitiveness are making major contributions to the export increase (Figures II-3-2-11 and II-3-2-12). Figure II-3-2-11 Wages per hour in major countries (manufacturing industry) 180 160 140 Converted using the exchange rate Converted using the purchasing power parity 120 100 80 60 40 20 0 Japan US UK Germany France Note: Japan=100. Manufacturing industry. The data is as of 2012. Source: Databook of International Labour Statistics 2015 (Japan Institute for Labour Policy and Training) 519

Figure II-3-2-12 Employers' social security burden rate in major countries (%) 30 25 20 15 10 5 0 France Germany Japan UK US Note 1: Ratio of social security costs, including those for employment, nursing, healthcare and pensions, to the amount of wages. The data is as of 2014. Note 2: The burden rate in Japan is the total of the premium rate for insured under an employees pension plan, national average premium rate given by the Japan Health Insurance Association, premium rate for secondary insured persons (those aged from 40 to 64) under the long-term care insurance program, and burden rate of employment insurance (for ordinary businesses). Note 3: The burden rate in France is the total of the burden rate of pension premiums for employees with an annual salary of 37,548 euros or less, premium rate for medical insurance, and burden rate of pension premiums for employees with an annual salary of 150,192 euros or more. Note 4: The burden rate in the United Kingdom is the pension premium rate for employees with weekly income of 153 pounds or more and 805 pounds or less. Note 5: The burden rate in the United States is the total costs of pension premiums, costs for Medicare Part A and employment insurance tax paid by employers in the total value of wages (estimation). Source: Databook of International Labour Statistics 2015 (Japan Institute for Labour Policy and Training) According to the World Bank s Doing Business index, which ranks countries with respect to the ease of doing business, Germany is ranked lower than the United States and the United Kingdom but higher than Japan. A comparison between Germany and Japan concerning the component items of the ease of doing business under this index shows that Germany is ranked higher than Japan with respect to tax payments and ease of trading across borders (Figure II-3-2-13). 520

Figure II-3-2-13 Comparison of the ease of doing business in major countries (Based on the ranks. US=100) 60 40 20 0-20 -40-60 -80 UK France Germany Japan Paying tax Trading across borders Starting a business Ease of doing business (overall) Note: The above figure shows the difference in ranks compared with the US. When a country s rank is higher than that of the US, the difference is expressed as a positive value, and when lower as a negative value. Source: Doing Business 2016. According to the Global Innovation Index of the World Intellectual Property Organization (WIPO), which ranks countries in terms of innovation, Germany is also ranked lower than the United Kingdom and the United States but higher than Japan. Germany is ranked higher than the United States with respect to such component items of the index as the state of cluster development, R&D financed by foreign capital and logistics performance (Figure II-3-2-14). 521

(US=0) 60 50 40 30 20 10 0-10 -20 Figure II-3-2-14 Comparison of major countries in terms of innovation State of cluster development R&D financed by abroad University/industry research collaboration Distribution Innovation (overall) -30 UK France Germany Japan Note: Innovation (overall) is the difference in ranks compared with the US. When a country s rank is higher than that of the US, the difference is expressed as a positive value, and when lower as a negative value. As for other indices, the differences from the values of the US are shown as rates (figures for state of cluster development, R&D financed by abroad, university/industry research collaboration, and distribution are calculated by the following formula: (Value of each country Value of the United States)/Value of the United States)). Source: Global Innovation Index 2015 (WIPO) It is said that innovation is created out of a diversity of industries and races/ethnicities. 83 What is notable about regional clusters in Germany is that several industries are concentrated in a particular region. It is also said that in some states, companies are easily connected with each other because of the clustering of different industries, a situation which makes it possible to achieve innovation. Regarding the high ratio of R&D programs financed by foreign capital, possible background factors include the large proportion of foreign companies in Germany due to the active expansion of U.K. and U.S. companies into the country since the end of World War II and German universities openness to cooperation with foreign companies. In Germany, the number of patent applications per capita (per resident) in many states is higher than the average in Europe (Figure II-3-2-15). As the growth rate of value added by the manufacturing industry tends to be higher in regions where the number of patent applications is larger, it is possible that there is a positive correlation between patent application and industrial competitiveness (Figure II- 3-2-16). 83 Fujita (2005). 522

Figure II-3-2-15 80% 70% 60% 50% 40% 30% 20% 10% 0% Ratio of cities or states in Europe where the number of patent applications per capita is high 50 45 40 35 30 25 20 15 10 5 0 Germany UK France Spain Italy Cities Total number of cities (right axis) Regions (states, etc.) Total number of regions (right axis) Note: Ratio of the number of cities (or regions) where the number of patent applications filed at the European Patent Office (number of applications per million residents) is higher than the average of the cities and regions of the major five countries. Regions at NUTS1 level. Average annual value from 2008 to 2012. Source: Eurostat Figure II-3-2-16 Number of patent applications and growth rate of value added by the manufacturing industry in states of Germany Growth rate of value added by the manufacturing industry (2008-2013) 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% 0 100 200 300 400 500 Number of patent applications (average from 2008 to 2012) Note: Number of patent applications filed at the European Patent Office per million residents. The growth rate of value added is the average annual growth rate of nominal value added. 523

Source: Eurostat and Federal Statistical Office of Germany In addition, employees in the science and technology sector have a large share in the labor force in Germany, and regional inequality in the share is smaller than in other countries (Figures II-3-2-17 and II-3-2-18). This suggests the possibility that the widespread distribution of human resources in the science and technology sector is contributing to the development of regional industries. Figure II-3-2-17 Share of employees in the science and technology sector in the labor force (major European countries) (%) 40 35 30 25 20 15 10 5 0 Employees in the science and technology sector University graduates Employees in the science and technology sector with a university degree Germany France UK Note: Average share in the labor force in each region (NUTS2 level). The data is as of 2014. Source: Eurostat Figure II-3-2-18 Regional inequality concerning employees in the science and technology sector (major European countries) 0.25 0.20 0.15 0.10 0.05 Germany France UK 0.00 Employees in the science and technology sector University graduates Employees in the science and technology sector with a university degree 524

Note: Variation coefficients (standard deviation/average) concerning the shares in the labor force in each region (NUTS2 level). The data is as of 2014. Source: Eurostat Major possible factors behind the limited inequality in innovation include (i) the presence of some kind of industrial foundation in each region due to the historical fact that what is now Germany was comprised of several monarchies until the latter half of the 19th century, (ii) the presence of facilities of Fraunhofer-Gesellschaft, 84 a research institution intended to conduct research on industrial applications, across various regions, and (iii) the presence of state-run research institutions and institutes of technology in regions. Regional facilities of Fraunhofer-Gesellschaft and many regional institutes of technology have strong connections with industry. Innovations achieved in regions are supported by a cycle whereby universities and research institutions select R&D themes suited to industry s needs and technology transfer is implemented efficiently because of the personal connections with industry. <Example case: Universities cooperation with industry through the use of human resources (Aachen University in NRW)> Aachen University in the state of North Rhine-Westphalia (NRW), which forms part of a healthcare cluster, has set 19 priority fields, in which an industry-academia partnership within the university is accelerating the transition from research to commercialization. 85 In particular, Aachen University is implementing an efficient project under which not only researchers but also manufacturing engineers, quality control officers and blood lab staff are working together by taking advantage of its strength, namely the possession of the most advanced knowledge in the mechanical heart field in Germany. Students in the second semester of a doctoral program or later stages work together with employees of venture companies aiming for commercialization based on seeds created by the university in implementing the companies projects, and they receive remuneration paid out of external funds collected by the university s teaching staff. Aachen University is also developing close relationships with industry, as the staff of its engineering department move between the university and companies during the process of climbing the career ladder, with the result that the contents of projects reflect business needs. In order to efficiently contribute to business in its areas of strength, the university is making efforts to speed up projects by establishing a system for using human resources in specific professional fields and cooperating with industry through the network of personal connections of the university s staff, including professors. (A) Companies business location in regions and universities and research institutions 84 Fraunhofer-Gesellschaft has 67 research institutions in Germany. http://www.dwih-tokyo.jp/ja/research-germany/research-organisations/fraunhofer-gesellschaft/ 85 Refer to the website of RWTH Aachen University. (http://www.rwthaachen.de/cms/root/wirtschaft/campusprojekt/~eli/forschungsschwerpunkte/lidx/1/) 525

In Germany, there are clusters comprised of different industries not only in some particular regions but across various regions. Presumably, some clusters comprised of different industries or of companies with different nationalities have originated in universities and research institutions spread widely across various regions. Generally speaking, if a region is to be selected as a location by a company possessing R&D functions, the preconditions other than such incentives as low levels of labor costs and business costs, including taxes, are (i) good prospects for technology transfer from a university or a research institution, (2) the presence of a market, and (iii) the availability of labor. If a successful business location case emerges in the region, other companies will locate their operations there based on their expectations for innovation, leading to gradual clustering of companies. In Germany, universities and research institutions of a certain level or higher are located in various regions, and many of them have clearly indicated readiness to contribute to industry, encouraging companies to establish regional business bases. For example, the Fraunhofer model, under which grants from the government to finance basic operational expenses increases in proportion to the amount of funds obtained from industry, has been adopted not only by Fraunhofer-Gesellschaft but also by institutes of technology engaging in industrial applications. Moreover, in many cases, professors in engineering departments have experience working in industry, which means that research activities useful for business are likely to be adopted, and this is considered to speed up the transfer of research results to business. Many universities are actively engaging in research cooperation not only with domestic companies but also with foreign companies, and this is a factor behind the presence of business bases of many foreign companies, including Japanese ones, in Germany. As university graduates usually find a job in their home regions, the proportion of young people who leave for outside regions is said to be low. In addition, universities of applied sciences are notable for their practical education, producing young workers with theoretical and practical capabilities who can immediately make contributions to companies, and as a result, it is relatively easy for regional companies to secure labor. State governments in Germany are choosing the location of universities from the perspective of industrial policy, thereby developing an environment to support companies business expansion. Consequently, it can be said that there is a virtuous circle of economic development in the establishment of regional business bases that encourage young people to find jobs at regional companies (Figure II-3-2-19). 526

Figure II-3-2-19 Establishment of innovation companies through universities in German states (conceptual diagram) Source: METI <Example case: Industrial structure changes originating in universities and clusters (NRW) 86 > The state of North Rhine-Westphalia (NRW), where Bonn, the capital of former West Germany, is located, has the largest population among the German states. NRW is a state where universities are particularly heavily concentrated compared with other German regions. Therefore, NRW has the largest number of university students and has been recording one of the highest growth rates of the number of students since 2005 (Figures II-3-2-20 and II-3-2-21). NRW s main industries are machinery, chemicals, steel, metals, automobiles and energy, but the state, whose industrial roots are in coal and steel, has been continuing to change the industrial structure since the second half of the 20th century. Against the backdrop of its relatively high unemployment rates compared with other former West German regions, NRW is striving to enhance the regional competitiveness of selected priority industries in order to create more regional jobs (Figure II-3-2-22). 86 According to a hearing survey conducted with the Ministry of Economic Affairs, Energy and Industry of the state government of NRW (Accenture (2016)), a hearing survey conducted with NRW Japan K.K.), and the website of the same state government. 527

BW NRW Bayern Berlin Hessen Niedersac Sachsen Hamburg RP Brandenb SH Thüringen Sachsen- Bremen MV Saarland Figure II-3-2-20 Number of universities in German states 87 80 70 60 50 40 30 20 10 0 Universities of applied sciences Universities Note: FY2012/2013. Source: Education and Research in Figures 2014 (German Federal Ministry of Education and Research (BMBF)) Figure II-3-2-21 Changes in the number of students in states of Germany (Index) 200 180 160 140 120 100 80 1999 2001 2003 2005 2007 2009 2011 2013 BW Bayern Berlin Brandenburg Bremen Hamburg Hessen MV Niedersachsen NRW RP Saarland Sachsen Sachsen-Anhalt SH Thüringen Note: Index deeming the value in FY1998/1999 as 100. Figures until FY2014/2015. Source: Federal Statistical Office of Germany 87 The German states represented by the abbreviations in the figure are as follows: NRW= North Rhine- Westphalia; BW= Baden-Württemberg; RP=Rheinland-Pfalz; SH=Schleswig-Holstein; MV=Mecklenburg- Vorpommern. 528

Bayern BW RP Hessen SH Niedersachsen Hamburg NRW Saarland Thüringen Bremen Brandenburg Sachsen Sachsen-Anhalt MV Berlin Figure II-3-2-22 Unemployment rate in individual German states (%) 10 9 8 7 6 5 4 3 2 1 0 Note: Unemployment rate for the population aged from 15 to 64. The light-blue bars are the regions that belonged to the former East Germany. The data is as of 2014. Source: Eurostat After the coal and steel industries that had supported the regional economy declined in the 1960s, the state government of NRW established NRW.INVEST GmbH in order to protect regional jobs and strived to change the industrial structure. Furthermore, in the 1970s, NRW established its first university of applied sciences in order to achieve economic development through the development of superior human resources and enhancement of the knowledge base. Some comprehensive universities established around that time 88 were intended to encourage young people to learn and work within the region and provide theoretical and practical education. Universities of applied sciences were established to provide vocational training to young people at the university level, 89 creating education opportunities for children born to families of coal workers. This method maintaining regional jobs by preventing the families of workers in a declining industry from losing out by providing them with the knowledge and skills necessary for young people in new industries is regarded as a successful case of industrial structural change. Intensive efforts have continued to be dedicated to industrial structure change since then. In the 88 University of Siegen, University of Wuppertal, University of Essen, University of Duisburg and University of Paderborn (website of University of Siegen). 89 http://www.wissenschaft.nrw.de/hochschule/hochschulen-in-nrw/fachhochschulen-in-nrw-staerken/ 529

2000s, the state government of NRW determined eight priority fields 90 (Leitmarkte) which were considered to contribute to the people and industries of the state based on debates between ministries and agencies. In each field, superior innovative projects are selected and implemented through a competitive research fund award project (Leitmarkte contest). In NWR, there are 16 clusters, 91 mainly in the eight priority fields, in which vigorous activities are being conducted, including participation in the Leitmarkte contest. In the health-related field in particular among the eight priority fields, enhancing competency has been set as an important challenge amid the growing healthcare needs due to the aging of society, and clusters across the state are conducting brisk activity in this field. A healthcare cluster in Bochum, located in the Ruhr region where the aging of society is advancing, has been established mainly by Ruhr-University Bochum and includes facilities intended for labs of SMEs and healthcare-related companies. In addition, Health Campus Bochum was opened in 2009 to provide sites for universities, research institutions, healthcare-related administrative organizations, and companies. In order to achieve innovations meeting the international standard in the field of healthcare and medical R&D, administrative organizations are located near companies in the campus, and this is expected to facilitate the administrative approval process and coordination concerning institutional problems, thereby accelerating the transition from research to business. Healthcare University, 92 which was opened within the Health Campus Bochum in 2010, is notable for its provision of courses in which both vocational qualifications and degrees can be obtained in such fields as occupational therapy, speech therapy and nursing care, and it has been fostering workers with vocational skills for which the needs are growing against the backdrop of the aging of society. (B) Securing sales channels with emphasis on business matching and supporting international expansion In many cases, export support initiatives in German regions are intended to promote business matching. German chambers of commerce and industry, which are represented in 90 countries, support individual companies in securing foreign business partners, and in some states, overseas contact points of the state governments provide specific support for regional companies to secure foreign sales channels. As for state-level initiatives, the ministry of economy in the state of Bavaria is engaging in more than 10 various initiatives to promote exports by SMEs, many of which support exhibiting in domestic and foreign trade fairs and business matching (Table II-3-2-23). 90 The eight fields are: machine and plant engineering; new materials; mobility and logistics; information and communication; energy and environmental sciences; media and creative industries; healthcare; and life sciences. 91 According to UT Research Institute, a regional cluster refers to a group of various industrial, governmental and academic entities which are geographically close to each other, in which valuable elements such as knowhow, expertise and standards have been accumulated and the component elements are linked through networks of information and cooperation (UT Research Institute (2003)). 92 http://www.gc-bo.de/en/location/healthcare-campus-nrw/ 530

Table II-3-2-23 The state of Bavaria s initiatives to promote exports by SMEs Name of major programs Go International Key technologies in Bavaria Trade fair participation program Trade mission led by Minister or Vice Minister Business Trips Visit of foreign delegations Bavaria Fit for partnership Solutions Made in Bavaria Bavarian foreign representative offices Assistance in winning international contracts Financing aid for international contracts Outline Support for the overseas expansion of startups and small enterprises (covering consulting fees) Business matching through the sharing of a company information database Active participation in trade fairs (120 trade fairs in 2016) Paying travel expenses (50%) for companies participating in a trade fair for the first time The Minister and Vice Minister visit various countries with companies representatives. (limited to those with the power to make final decision) Companies visit various countries. Acceptance of overseas delegations (from South America, China, etc.) Accepting visits by specific companies. Covering a part of travel expenses Representatives of emerging countries visit Bavaria to solve social issues in their countries. Financial support Establishing foreign representative offices (25 offices in 23 countries) Foreign representative offices support contract-related matters. State bank LfA Förderbank Bayern finances export costs. Note: Items in red letters are measures for supporting business matching Source: Survey on the Influence of the Rise of Innovative Industries on Trade and Investment Patterns around the World (a survey commissioned by METI) (Accenture) (original source: Der Außenhandel Bayerns 2014 (Bavaria s Foreign Trade 2014) and interviews) In Germany, the birthplace of trade fairs, exhibiting in trade fairs is regarded as an opportunity not for introducing companies to visitors but for conducting business negotiations, so people representing exhibiting companies are mainly decision-making officials. According to a questionnaire survey 531

conducted by IfMBonn with German companies, around 30% of all companies replied that exhibiting in trade fairs is important as a means for expanding export markets (Table II-3-2-24). In particular, the percentage of companies that replied so was high, at around 40%, among companies with a workforce of 10 to 49 employees. Table II-3-2-24 Questionnaire survey with German companies (means for expanding export markets) Micro enterprises Small enterprises Middle-sized enterprises Large enterprises Overall Customer demand 82.4 81.7 79.5 78 82 Initiatives by the management board 53.2 68 74.6 67.3 58 Participation in trade fairs 24.2 42.5 33.4 36.8 29 Visiting foreign countries 23.7 27.4 21.7 16.9 24.2 Online stores 18.8 17.1 12.6 10.7 17.8 Social media 20.5 11.8 6 4.3 17.5 Note 1: The respondent companies evaluated each item based on a scale of 1 Not important to 5 Very important. The above figure shows the proportion of companies that responded either 4 Important or 5 Very important. Note 2: The company sizes are classified based on (1) the number of employees and (2) annual sales, following the definition by IfMBonn. (For micro enterprises, (1) 9 or less and (2) 2 million euros or less; for small enterprises, (1) 49 or less and (2) 10 million euros or less; and for middle-sized enterprises, (1) 499 or less and (2) 50 million euros or less.) Note 3: As of autumn in 2012. Source: Survey on the Influence of the Rise of Innovative Industries on Trade and Investment Patterns around the World (a survey commissioned by METI) (Accenture) (Original source: "Internationalisierungsgrad von KMU. Ergebnisse einer Unternehmensbefragung" (IfM Bonn)) Meanwhile, among all sizes of companies excluding large ones, more than 20% replied that overseas visits made by companies are important. It is presumed that support for exhibiting in domestic and foreign trade fairs and overseas visits by companies is helping German companies, particularly SMEs, find business partners and secure sales channels. In Germany, regional clusters are also performing the business matching function. Cluster policy was started in Germany in the 1990s, and major clusters were established mainly in the late 1990s, earlier than in other European countries. As of 2011, Germany had the largest number of clusters recognized by the EU as meeting a certain standard among the EU member countries. In various regions across Germany, clusters are conducting brisk activities. According to a report 93 prepared by the European Commission in consideration of a survey conducted in 2012, a relatively large proportion of clusters in Germany is placing management emphasis on business matching, the sharing of information and experiences, joint technology development, and technology transfer within clusters. 93 European Secretariat for Cluster Analysis (2013). 532

According to this report, the private sector accounts for a large portion, or slightly below 60%, of the financial sources of major German clusters, 94 and membership service revenue accounts for 40% of the funds from the private sector. Clusters can earn such revenue because the contents of the services provided are appropriate. This is considered to suggest that efficient services are provided in terms of activities on which clusters place management emphasis, such as business matching, sharing of information and experiences and technology transfer. In Germany, in many cases, it is arranged so that the annual amount of public funds provided to clusters is gradually reduced in order to encourage them to become independent, 95 and this may be contributing to the improvement of member services provided by clusters. Regarding business matching within clusters, cluster managers, who are responsible for managing clusters and keeping track of the activities of a wide range of companies in relevant regions and industries, are highly appreciated for efficiently linking contacts points within and outside their clusters in accordance with the needs. From the results of several hearings, in addition to accelerating companies business expansion as the key of domestic and foreign networks, cluster managers gather information at the same time as actively developing networks outside their regions and outside Germany and provide up-to-date information to member companies. Cluster managers responsible for performing such roles are individuals in some cases and organizations in others. In many cases, cluster managers apparently have experience working in both industry and academia, maintain a neutral stance, possess expertise concerning relevant industries and business management knowledge, and are equipped with high business promotion capabilities. While state governments place emphasis on the selection and evaluation of cluster managers, cluster management is left to the discretion of cluster managers in some cases, indicating their importance. Industrial changes in recent years, such as the shift to a module approach and the growing importance of knowledge possessed by universities, are increasing the need for companies to engage in flexible cooperation with each other and for universities and research institutions to cooperate with companies and external personnel with professional expertise. Under these circumstances, networks developed by cluster managers and cluster organizations are considered to be contributing to the acceleration of companies business expansion. In business matching promoted by clusters, in the past, emphasis was apparently placed mainly on matching within clusters, but in recent years, the federal government of Germany has emphasized the importance of the internationalization of clusters. According to recent reference materials prepared by the Federal Ministry of Education and Research, cluster internationalization projects will be selected in 2016 and later and a maximum of 4 million euros will be provided in subsidies to each selected project over a five-year period. 96 At the state level, as well, following the achievement of some degree of maturity in internal cluster management, some state governments have recently shifted emphasis to the 94 The questionnaire survey in this report covered a total of 60 clusters from among Kompetenznetze (competence networks) and leading edge clusters as examples of excellent clusters. 95 Institute for Innovation and Technology (2009). 96 https://www.bmbf.de/de/cluster-netzwerke-international-547.html 533

internationalization of clusters by moving on to a new stage of overseas expansion, which has not until now been an priority. 97 <Example case: Cluster manager in the state of Bavaria> Bio M, managing the Biotechnology Cluster in Bayern, is a networking agency since it was established in 1997 to meet the goals of the Munich winner project in the federal "BioRegio 98 contest in 1996. In 2006, Bio M additionally took over the role of the cluster management of the newly formed Bavarian biotechnology cluster including 5 local clusters in Bayern, as well as the previous activities in Munich 99. Bio M can be said an example that the networking function is the obvious key role of cluster management and it offers several member services for the purpose of networking (participation to international trade shows / business matching of enterprises in and out of the cluster / database service for the networking of enterprises, R&D associations, and universities / web service to match job seekers in the area of manager, scientist, engineering etc.) In Bayern, the role of cluster managers can be said to be considered something important, as the government entrusts cluster managers with the knowledge, experiences, capabilities and networks of cluster managers. In particular, the head of Bio M is said to energetically maintain his activities as a key point of the network, being familiar with the industry, with great communication skills. On the back of the great network function and a lot of prominent universities and research associations in the region, a project managed by Bio M, m4 Personalized Medicine for the region of Munich won in the Leading Edge Cluster Competition of the federal government in 2010; the employment in the Bayern Biotechnology cluster has increased from 24,529 in 2009 to 26,476 in 2013 (Figures II-3-2-25 and II-3-2-26). 100. 97 State of Bavaria. 98 A project competition organized by the Federal Ministry of Education and Research of Germany that is intended to enhance the biotechnology industry s competitiveness. Three existing cluster regions were adopted (refer to the Mitsubishi Research Institute (2014)). 99 The website of BioM (http://www.bio-m.org/en/about-biom/history.html). 100 Cluster Biotechnology Bavaria (2014) and a hearing survey conducted with BioM (Accenture (2016)). 534

Figure II-3-2-25 Example of internal and external networks connected by the cluster manager (conceptual diagram) Source: Survey on the Influence of the Rise of Innovative Industries on Trade and Investment Patterns around the World (a survey commissioned by METI) (Accenture) Figure II-3-2-26 Example of a career model for cluster managers <Example case: Personalized Ambassador system of a cluster in the city of Hamburg> The city of Hamburg, like Berlin, is a city-states that has the same powers as a state. A number of companies are concentrated around Airbus final assembly plant in Hamburg, forming a major aircraft industry cluster, and aircraft-related exports account for more than half of overall exports from the city. A renewable energy cluster in Hamburg that is led by the aircraft-related industry was established in 2010. This cluster is taking advantage of the region s characteristics, such as the presence of universities and research institutions close together and the concentration of R&D and service facilities related to renewable energy. A total of around 180 companies, universities and research institutions are located in the cluster (as of February 2015). The cluster, which had already been active in developing its network with countries around the world, received 30 delegations from 15 countries in 2012 and established the Personalized Ambassador (PA) system in 2013 through the personal connections established through the delegations in order to promote 535

exports by companies within the cluster. PA is a system under which people with some connections with Hamburg will serve as contact points abroad in Hamburg s network, which is currently comprised of 35 ambassadors covering 58 countries (as of February 2016). This makes it easy to gain access to partners and customers abroad necessary for exports and overseas business expansion by companies in the cluster and gather information abroad. In order to support ambassadors activities and maintain their connections with Hamburg, an annual meeting of ambassadors is held in Hamburg. Based on the idea that the market trend is constantly changing rapidly, the city government of Hamburg does not set any particular target market. Regarding the PA system of the renewable energy cluster, one of its objectives is diversifying risks by possessing a network linked with many countries without a bias. While aircraft-related products account for more than half of overall exports, the export destinations are not limited to other countries within the EU but also include the Middle East and Asia (Figure II-3-2-27). 101 Figure II-3-2-27 Major export destinations of the city of Hamburg (Billion euros) 14 12 10 8 6 4 2 0 Spain Brazil Poland Denmark Netherlands China US UK UAE France Note: The data is as of 2015. Source: Survey on the Influence of the Rise of Innovative Industries on Trade and Investment Patterns around the World (a survey commissioned by METI) (Accenture) (Original source: Federal Statistical Office of Germany) (3) Use of highly-skilled professionals in Germany 101 A hearing survey conducted with the Ministry of Economy, Transport and Innovation of the Free City of Hamburg (Accenture (2016)). 536

So far in this section, we examined goods exports in Japanese regions. In the comparison with exports from German states, we pointed out that as regions across Germany are increasing their exports, regional economies are prospering without concentration of economic strength in a particular region. As factors supporting exports by companies contributing to regional economies in Germany, we examined, in the previous paragraph, German initiatives related to changes in the industrial structure, the roles of universities and research institutions, the clustering of companies, and business matching. In addition to these factors, acquisition of highly skilled foreign professionals by industry is also considered to be a major factor supporting the German industry. As shown in the comparison between Japan and other countries in terms of the acquisition of highly skilled foreign professionals in Part II, Chapter 1, Germany has acquired particularly many such professionals among non-english-speaking countries. There are two patterns of acquiring highly skilled foreign professionals fostering domestic workers and attracting highly skilled professionals from abroad and Germany is apparently relatively active in attracting highly skilled professionals from abroad as well. Below, we will gain suggestions for Japan by examining example cases of use of notable institutional systems, public research institutions human resource strategy and internationalization of universities in consideration of the background to and the present status of the German initiative to attract highly skilled foreign professionals. (A) Growing interest in attracting highly skilled foreign professionals As was mentioned in the previous paragraph, Germany is said to have been particularly successful in acquiring highly skilled foreign professionals in Europe, where there is a high degree of cross-border movement of workers. Below, we will describe the background to the success. After the end of World War II, Europe, mainly Germany, the United Kingdom and France, accepted immigrants in order to meet the rapidly growing labor demand due to postwar reconstruction. During this process, successive waves of immigrants came to Europe from former colony countries because of language compatibility. However, following the economic recession triggered by the oil crisis in the 1970s, measures were taken to restrict the flow of immigrants. The restriction measures were started to be relaxed in the late 1990s. In Germany, the Schröder government, which was inaugurated in 1998, launched the policy of accepting highly skilled foreign professionals. It is said that this trend was caused by such factors as companies calls for globalization of human resources due to the advance of internationalization and increased labor demand concerning some occupations, including advanced professional occupations, in various countries. In the 2000s, Germany developed residency status qualifications through the establishment of the immigration law and consolidated administrative work concerning foreign nationals and immigrants by establishing the Federal Office for Migration and Refugees, with the aim of more smoothly attracting foreign nationals. In 2008, Germany introduced an ordinance concerning the German version of the Green Card, becoming an early starter in Europe in promoting the acquisition of engineers with IT skills (Table II-3-2-28). 537

Table II-3-2-28 History of the measures for the acceptance of foreign workers in Europe Germany EU Countries in Europe accepted many foreign workers to cover the shortage in 1960s labor force for reconstruction after the war. Countries limited or suspended the acceptance of foreign workers due to Oil shock economic recession. In response to requests from industry, the Schröder administration introduced a new program to promote the acceptance of highly skilled foreign workers to cope with globalization 1998 (established a coalition government with the Greens, which was promoting the easing of regulations on the long-term stay of foreign workers). The Immigration Act was enacted. Visa and other procedures were simplified. (2005) The Federal Office of Migration and Refugees was established to integrate operations concerning foreigners and immigrants that had been assigned to different ministries and 2000s agencies. (2005) The Green Card System was introduced. Introduction of the EU Blue Germany was one of the countries that started to Card System (2008) promote the acquisition of foreign engineers at the earliest time in Europe. Highly skilled workers from outside the European economic area were allowed to stay up to five years. (2008) Based on the amended Recognition of Foreign Professional Qualifications Act, Germany simplified the procedures to obtain a qualification within Germany for foreigners who have 2010s obtained similar qualifications outside the EU. (2012) A law for EU Blue Cards was enacted. Blue Cards are granted to people from outside the EU with an income over a certain criteria. (2012) Source: Political Measures for the Acceptance of Foreign Workers with a Focus on Highly Skilled Workers in Various Countries: Comparative Study of Denmark, France, Germany, United Kingdom, EU, United States, Republic of Korea and Singapore (2012) (Japan Institute for Labour Policy and Training) 538

and FY2014 Study on Industrial Technologies (Study on the Precedents Overseas for the Creation of Industrial Innovations in Japan through the Acceptance of Highly Skilled Foreign Workers) (2015) (METI) (commissioned to the Japan External Trade Organization) These revisions are considered to be a factor that led to an increase in the number of highly skilled foreign professionals immigrating to Germany. It is said that at the time of the Schröder government, calls from industry for accepting foreign workers and companies actual needs for workers were factors of the increase in highly skilled foreign professionals. (a) Increased demand for highly skilled foreign professionals As was confirmed in Part II, Chapter 1, Section 3, Germany s level of accepting highly skilled foreign professionals is similar to France s level among non-english-speaking countries. The rise in the acceptance level coincides with the institutional reforms in Europe that were examined in the previous paragraph (Figure II-1-2-1; indicated earlier). Figure II-1-2-1 (Reshown) Changes in the ratio of the inflow of workers who have completed tertiary education to the population 6% 5% 4% 3% 2% 1% 0% 2000 2005 2010 Germany France Japan UK US Note: Figures for Japan are calculated based on the number of workers who have not obtained Japanese nationality. Source: DIOC 2005/06 and DIOC 2010/11 While the acquisition of highly skilled professionals from abroad may be complementing the human resources in the advanced sectors of German industry, export-oriented companies demand for highly skilled professionals is expected to continue to increase in the future. 539

Figure II-3-2-29, which shows the results of a survey conducted with export-oriented German companies by the Association of German Chambers of Commerce and Industry (DIHK), summarizes replies given in response to a question asking what are their biggest risks in economic development. In the February 2011 version of the survey, around 30% of all respondents pointed to a lack of skilled workers. In the February 2016 version of the survey, the percentage of companies pointing to a lack of skilled workers rose to 43%. The results indicate that a lack of skilled workers is recognized by many companies as one of the most important challenges, and demand for skilled workers may affect highly skilled professionals as well (Figure II-3-2-29). Figure II-3-2-29 Results of a survey with export-oriented companies concerning the risks for their economic development (%) 60 50 40 30 20 10 0 2011 2012 2013 2014 2015 2016 Financing conditions Labor costs Lack of skilled workers Exchange rate Prices of energy Economic policy conditions Note: Based on the survey results in February of each year. Source: "Economy remarkably robust" (February 2016) (Deutscher Industrie- und Handelskammertag(DIHK)) Looking at a portal site called Make it in Germany, which is operated by the Federal Ministry for Economic Affairs and Energy, in order to examine demand for highly skilled foreign professionals among German companies, we can see that many job offers for highly skilled foreign professionals are being posted there. 102 102 Make it in Germany (http://www.make-it-in-germany.com/en; external link) is a portal site operated by 540

(b) Attracting foreign students from a broad range of fields Amid expectations for an increase in the number of highly skilled professionals attracted to Germany, the importance of attracting foreign students who are expected to become highly skilled professionals in the future and encouraging them to stay in Germany in the long term has been pointed out. Figure II-3-2-30 shows the proportion of foreign students in Germany among students who undertook full-year courses that continued through both summer and winter semesters at tertiary education institutions (including universities, graduate schools and universities of applied sciences). In Germany, the proportion of foreign students has risen close to 10% in the past 10 years, suggesting that the country has been successful in its efforts to attract foreign students (Figure II-3-2-30). Figure II-3-2-30 Proportion of foreign students among students at universities, graduate schools and universities of applied sciences (10,000) 50 45 40 35 30 25 20 15 10 5 0 2003 2013 Foreign students German students Proportion of foreign students (right axis) 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Source: Federal Statistical Office of Germany Next, we will examine the composition of foreign students in Germany. Although the hurdle for moving to Germany is low for students from within Europe and the EU geographically, many students come not only from within Europe (43.6%) but from a broad range of countries in Asia (32.7%), Africa the Ministry of Economic Affairs and Energy of Germany for highly-skilled professionals and companies wishing to employ such professionals. At the site, recruiting information can be searched concerning seven sectors (more detailed search is also possible), including Mechanics, energy and electronics and IT, data processing, computing. In addition, searched information can be automatically translated into 104 languages. 541

(8.3%) and Latin America (5.1%). By major, many students major in science-related subjects, including engineering/architecture (25%) and sciences (15%), as well as in humanities (19%) and social sciences (26%). It was found that Germany has been also successful in attracting students who major in sciencerelated subjects, who are considered able to contribute to the R&D field and innovation in the future (Figure II-3-2-31). Figure II-3-2-31 Composition of foreign students in Germany (by nationality and by major) [By nationality] 7.6% 2.4% 5.1% 32.7% 0.3% 8.3% 43.6% North America Latin America Europe Africa Oceania Asia Others 2% 1% 2% 6% 5% 25% 15% [By major] 19% 26% Education Humanities Social sciences Sciences Engineering/architecture Agriculture Health Services Unknown Source: OECD stat As described above, Germany has been successful in attracting students of a variety of nationalities in a wide range of academic fields. Having doing so is presumed to increase the chance to meet companies various human resource needs. According to a survey conducted by the Expert Council of German Foundations on Integration and Migration, around 80% of foreign students studying in a master s course and around 67% of those studying in a doctoral course in Germany replied that they would like to stay and find a job in Germany 542

after graduation (Figure II-3-2-32). 103 Figure II-3-2-32 Proportion of foreign students in Japan and Germany that intend to remain in the country after their graduation (%) 90 80 70 60 50 40 30 20 10 Master s course Doctoral course 0 Germany Japan Source: Figures for Germany are based on Train and Retain 2015 (Expert Council of German Foundations on Integration and Migration) and figures for Japan are based on FY2013 Survey on the Facts Concerning Privately-Financed Foreign Students Lives (Japan Student Services Organization). According to the above-mentioned report, 104 more than 90% of all companies have experience in employing foreign nationals possessing a medium to high level of skills, 105 indicating the presence of many highly skilled foreign professionals in Germany s labor market and German companies willingness to employ them. From the above, it is clear that Germany is attracting highly skilled foreign professionals and foreign students receiving tertiary education who are expected to become highly skilled professionals in the future and that German companies are employing them. It is possible that acquiring superior human resources in this way will make it easier for the German industry to adapt to global competition and trigger new innovations. (B) German initiatives to acquire and utilize human resources As was confirmed in the previous paragraph, Germany is promoting not only the acquisition of highly skilled foreign professionals already possessing professional knowledge but also students with 103 A survey conducted with foreign students coming from outside the EU area. 104 DIHK (2016). 105 Economy remarkably robust, February 2016, Deutscher Industrie- und Handelskammertag (DIHK). 543

promising potential. Below, we will describe German initiatives to acquire such high-quality human resources. (a) Use of a residency system that encourages workers to stay in the long term In Europe, countries implement strategies for acquiring human resources individually at first. Later, the EU as a whole started to consider initiatives to acquire human resources, and as a result, the EU Blue Card system was established. 106 The EU Blue Card is a residence permit issued to people from outside the EU. 107 If EU countries are to use this system, they need to develop relevant domestic legislation. Germany developed legislation to implement the EU directive concerning highly qualified foreign workers in 2012, 108 resulting in a significant increase in the number of users of the system. The number of Blue Cards issued in Germany rose from 2,584 in 2012 to 11,580 in 2013, accounting for around 90% of all Blue Cards issued in the EU (the proportion was around 89% in 2013 and around 87% in 2014) (Figure II-3-2-33). Figure II-3-2-33 Number of Blue Cards issued by country 16 14 12 10 8 6 4 2 0 2012 2013 2014 Others Austria Romania Luxembourg Italy France Germany Source: Eurostat The conditions for the issuance of the EU Blue Card in Germany are as follows. 109 (i) Have an academic achievement equivalent to a university degree or higher. Applicants must be persons who have graduated from a German university in Germany or from a comparable foreign university. (ii) Have a prescribed level of income (an annual income of 49,600 euros or higher as of March 2016) 106 COUNCIL DIRECTIVE 2009/50/EC on the conditions of entry and residence of third-country nationals for the purposes of highly qualified employment. 107 Fukuko Watanabe Germany: Legislation to implement highly qualified foreign workers (http://dl.ndl.go.jp/view/download/digidepo_3507785_po_02520109.pdf?contentno=1). 108 BGBl. I S.1224. 109 The website of the Federal Foreign Office of Germany. http://www.auswaertigesamt.de/en/einreiseundaufenthalt/120731-bluecard-node.html Persons to whom the Blue Card is issued are required to be those who come from outside the EU area. 544

(iii) The income threshold is set at a lower level for foreign doctors and other professionals specialized in such fields as mathematics, IT, natural sciences and engineering than for foreign workers in general in order to more effectively attract highly skilled workers in particular (an annual income of 38,688 euros or higher as of March 2016). People who came to Germany from outside the EU area and who graduated from tertiary education institutions in the country benefited particularly from the establishment of the EU Blue Card system. Previously, such people needed to meet the requirements under the residency qualification system if they were to obtain a job in Germany after graduation. However, for them, it has now become easier to obtain a residency qualification and stay in Germany in the long term because of the Blue Card System. As a result, it is expected that foreign workers who would previously have left Germany will stay in the country. Moreover, the maximum allowable period of job search after graduation has been extended from 12 months to 18 months. A survey conducted by the Federal Office for Migration and Refugees of Germany 110 shows that foreign students in Germany tend to obtain a Blue Card. According to the survey, which followed up on the situation of former foreign students in Germany, 40.5% of the Blue Card holders in fields where there was a labor shortage were former foreign students. The results suggest that the Blue Card System, which enables foreign students to work after graduation with a clear prospect for the future, is a factor encouraging foreign students to obtain a job and stay in Germany in the long term (Table II-3-2-34). Table II-3-2-34 Proportion of former foreign students among holders of a resident permit for highly skilled foreign professionals 111 Highly skilled professionals 10.4% EU Blue Card General 21.8% Fields with a labor shortage 40.5% Permanent resident status 28.0% Source: International Student Policy and High Skilled Migration Policy in Germany: Their Implications to Japan (Yuriko Sato) Another notable feature is that regarding the residency requirements for foreign students, the number of days when they are allowed to engage in a part-time job while studying at university has been extended from 90 days to 120 days so that increased engagement in part-time jobs may encourage foreign students to stay in Germany after graduation. 110 Hanganu & Hess 2014 111 Fields with a labor shortage refer to fields for highly-skilled foreign professionals with expert skills related to mathematics, IT, natural sciences and engineering as well as doctors. For professionals in these fields, the income criterial for obtaining the EU Blue Card has been relaxed in order to attract more highlyskilled foreign professionals in particular. 545

(b) Industry-government-academia cooperation and increased mobility of workers Below, we will provide an overview of Fraunhofer-Gesellschaft, a public research institution in Germany. Fraunhofer-Gesellschaft has branches across the world. It is acting as a catalyst for cooperation between industry and academia by conducting various activities as an applied research institution, including commercializing research results, creating spinoff ventures and supplying young researchers to industry. With 24,000 staff members, Fraunhofer-Gesellschaft is cooperating with SMEs in Germany and foreign companies and universities with respect to applied research in all science and technology fields. In recognition of its contribution to innovation creation, Fraunhofer-Gesellschaft was selected as one of the top 100 global innovators in 2015 for the third consecutive year. Fraunhofer-Gesellschaft, with its ideal of conducting commercialization research activities that contribute to society, is contributing to the acquisition and production of a variety of human resources in order to achieve commercial results in applied research and development. For example, around 30% of its staff are young workers including researchers. It is also actively engaging in internship and is willing to accept foreign researchers. Fraunhofer-Gesellschaft has established representative offices engaging in marketing and other activities and project centers conducting research in and outside Germany. The staff members of representative offices are acting as a bridge between Fraunhofer- Gesellschaft, industry and academia, while project centers are involved in research activities at regional universities, thereby acting as a bridge between Fraunhofer-Gesellschaft and the universities (For the details, refer to Hitorigachi no Doitsu kara Nihon no chihō/chūshō kigyō e no shisa Doitsu genchi chōsa kara, pp. 16 17, by Koichi Iwamoto, senior fellow at the Research Institute of Economy, Trade and Industry). The creation of such connections between industry and academia is presumed to be promoting the mobility of workers and helping to foster and secure workers with higher skills. In addition, support for the development of an attractive research environment and career development useful for the future may become a factor that attracts researchers from within and outside the country (Figure II-3-2-35). Figure II-3-2-35 Composition of workers at Fraunhofer-Gesellschaft 25 (Thousand) 20 15 10 5 0 2010 2011 2012 2013 2014 Researchers, engineers and managers University, graduate and other students Source: "Fraunhofer ANNUAL REPORT 2014" 546

(c) Enhancement of universities preparedness to accept foreign students Regarding the improvement of the residency qualification system and the use of Fraunhofer- Gesellschaft, which were described above, challenges have been pointed out in Germany. For attracting foreign students who may become highly skilled professionals in the future, initiatives conducted by universities accepting students are important. Here, we will provide an overview of the internationalization initiative of Technische Universitat Munchen (TUM), which is actively improving the environment to attract foreign students. TUM is a prestigious university which has been recognized for an excellent initiative. It is a comprehensive university devoting efforts to the development of human resources in science fields and to the promotion of research and development. Of TUM s students, 22% come from abroad, including Asian countries, such as China and India, as well as Italy, Turkey, Greece and Iran (Figure II-3-2-36). Figure II-3-2-36 Composition of students at TUM 3% 2% 1% 1% 1% China 13% Austria India Italy Turkey Foreign students: 21.4% 79% Other foreign countries Germany Source: "Daten und Fakten 2014/15" (Technische Universitat Munchen) TUM has overseas offices across the world, including in Beijing, Mumbai, Cairo, Sao Paulo and San Francisco, which serve as points for direct contact between the university and foreign countries in recruiting of foreign students. At the Beijing office, an entrance examination is held, for example. Conducting special initiatives for foreign students, including providing care and support, may improve the university s public image by enhancing the quality of active and former students. TUM provides a variety of services for foreign students, such as a preparatory course concerning language and tutoring as well as buddy programs, which provide support for foreign students in 547

starting life in Munich, including housing search. The university encourages German students to support the buddy programs by issuing a certificate accrediting the contributions of supporting students. German students are proactively involved in the planning of activities for foreign students. Thus, both the university and German students are providing special care to foreign students. One challenge for foreign students is acquiring language proficiency. In TUM s case, many lectures are given in English, and the teaching staff possess global capabilities, with most professors having international experience. (C) Summary Above, we examined the background to and the current status of the acquisition of highly skilled foreign professionals supporting German industry and initiatives to acquire such professionals. Attracting many highly skilled foreign professionals is considered to have the potential to trigger innovations that make it possible to win global competition by facilitating the conduct of business with countries from which they come and promoting exchange between diverse human resources. In Japan, as well, demand for globally competent human resources associated with companies international business expansion is growing, so acquiring highly skilled foreign professionals is a challenge that should continue to be debated in the future. In addition, it is necessary to develop institutional systems to encourage highly skilled foreign professionals to stay in Japan, to develop an employment environment to enable them to make successful contributions to companies, and to make Japan an attractive country for them. (4) Implications for Japan In Germany, exports in various industries are growing in almost all states. The export growth is underpinned by the improvement of the innovation environment made through cooperation between industry, government and academia and by support provided for SMEs to secure sales channels primarily through business matching. In addition, the idea that selecting and placing priority on sectors likely to become areas of strength for regions instead of continuing to depend on some particular industries is necessary for the sustainable development of regional economies is presumably helping to maintain export competitiveness. Moreover, efforts to attract many highly skilled foreign professionals may be providing support for innovation and efforts to secure sales channels amid global competition. In Japan as well, securing foreign partner companies and trading companies is considered to be the first challenge faced by companies starting export, according to a questionnaire survey conducted with SMEs, confirming the need to provide support for efforts to secure sales channels through business matching, among other measures (Figure II-3-2-37). 548

Figure II-3-2-37 Challenges faced by exporting companies in Japan (2015) Note: As multiple answers were allowed, the figures may not total to 100%. Survey for companies engaging in exports (n=551). Source: Survey on the Growth and Investment Activities of Small and Medium-sized Companies (December 2015) (Teikoku Databank) (A survey commissioned by the Small and Medium Enterprise Agency) Looking at the difference between the outsourcing rates for companies recording export growth and companies recording no growth with respect to individual items of activities, we can see that there is not a significant difference between these two groups of companies with respect to any item in the case of SMEs. On the other hand, with respect to outsourcing of research and development, there is a significant difference between the two groups in the case of large enterprises, and the difference between large enterprises and SMEs is also significant (Figure II-3-2-38). It is generally said that utilizing external resources possessed by customers, universities and others is beneficial for SMEs, whose business resources are limited, 112 and regarding export, too, it is necessary to promote the utilization of external resources possessed by universities and others in research and development in order to capture demand in the rapidly changing global market. 112 Small and Medium Enterprise Agency (2009). 549

Figure II-3-2-38 Difference between the outsourcing rates for companies recording export growth and companies recording no growth 100% 90% 80% 70% 60% Difference from the companies recording export growth Outsourcing rates for companies recording no growth 50% 40% 30% 20% 10% 0% Manufacturing Marketing Design External affairs R&D Manufacturing Marketing Design External affairs R&D SMEs Large companies Note: Proportion of companies that outsourced each item in companies recording direct export growth and in companies recording no direct export growth from 2010 to 2013. Source: Basic Survey of Japanese Business Structure and Activities It is possible that capturing global demand will contribute to the development of regional economies in which domestic demand is declining. It is desirable that exports will expand in various industries through successful use of regions potentials. 550

Column 13 Factors supporting industry and exports in the Rhône-Alpes region 113 in France In 2005, the French government established 71 competitiveness clusters across the country (Column Figure 13-1). This is intended to achieve economic development and enhance France s industrial competitiveness by promoting research and development (R&D) through exchange of innovative ideas and technologies between local companies, universities, research institutions, etc. Of the 71 competitiveness clusters, 17 have been recognized as clusters with a particularly high level of international competitiveness. Column Figure 13-1 Distribution of competitiveness clusters in France Note: Clusters in blue text are competitiveness clusters. Clusters in orange text are competitiveness clusters that are certified as being prominently competitive. Source: Survey on the Influence of the Rise of Innovative Industries on Trade and Investment Patterns around the World (a survey commissioned by METI) (Accenture) (Original source: Competitiveness Clusters in France (General Directorate for Enterprises (GDE)) 113 On January 1, 2016, this region was integrated with Auvergne to form the Auvergne-Rhône-Alpes region. 551

Industries covered by these clusters are wide-ranging, from emerging technology fields (e.g. nanotechnology and biotechnology) to mature industry fields (e.g. automobile and aircraft) An average of 200 members (companies, universities, research institutes, etc.) belong to each cluster, and SMEs account for approximately 86% of all members. The annual budget amount for each cluster is about 1.5 million euros on average. As in the case of German clusters, cluster managers play a significant role at French clusters; and, in addition, emphasis is placed on competition and collaboration between clusters. For example, when the government provides financial assistance to individual clusters R&D projects, evaluation is conducted based on the R&D themes and action plans. In addition, in the case of competitiveness clusters, a review is conducted every three years based on the number of participating organizations (companies, universities, research institutions, etc.), the number of R&D projects and the results achieved. Therefore, although there were a total of 77 competitiveness clusters in France, including 15 in the Rhône-Alpes region in the first year, 2005, clusters related to sports and livestock farming (cows) were abolished as a result of the review, among other factors. As for collaboration relationships, a working group called SYNEA, which covers both competitiveness and regional clusters, was established in the Rhône-Alpes region under the jurisdiction of the local economic area bureau. At SYNEA, all officials responsible for cluster management in the region exchange information with each other every two months. In addition, regarding competitiveness clusters, information-sharing is conducted at a national-level voluntary organization called the French Association of the competitiveness clusters. Through such information-sharing, excessive overlap of research contents is avoided and clusters advantage and priority fields are strengthened. As described above, France has (i) integrated its clusters into a changing industrial structure through the development of an appropriate competitive relationship between clusters. On the other hand, France has (ii) developed a collaboration relationship between clusters by promoting information exchange within and between clusters, and this is considered to have led to the enhancement of clusters competitiveness. <Example case: Lyon Biopôle (hereinafter referred to as Biopôle) (healthcare cluster) 114 > In the Rhône-Alpes region, which is France s second largest region with a population of 6.3 million people and around 4,600 companies, 12 competitiveness clusters have been established by the French government and 11 regional clusters have been established by the regional government, making it a region with an especially heavy concentration of clusters compared with other regions in France. In Lyon, where five of the Rhône-Alpes region s competitive clusters are located, silk fabrics and textiles have traditionally been the major industries. However, amid the commoditization of products, developing international competitiveness in new fields has been regarded as an important challenge from early on. Therefore, Lyon first made an industrial shift to the chemicals industry by taking advantage of its dyeing technology, and it has been subsequently promoting an industrial shift to healthcare and energy. Many industrial clusters have been formed in those fields. 114 Based on a hearing survey conducted with Biopôle (Accenture (2016)). 552

Biopôle, a healthcare competitiveness cluster in Lyon, has a total of 190 participating members, including a major pharmaceutical company and other world-class companies, university hospitals and research institutions, around 80% of which are SMEs (Column Figure 13-2). Column Figure 13-2 Companies and organizations participating in Lyon s healthcare cluster, Biopôle Source: Survey on the Influence of the Rise of Innovative Industries on Trade and Investment Patterns around the World (a survey commissioned by METI) (Accenture) (Original source: Lyon Biopôle) Biopôle supports the processes leading to the market launch of products by developing an ecosystem comprised of a set of services, including support for the formulation of R&D action plans and application for subsidies as well as financial and technical support. Specifically, Biopôle assists promotion of R&D (promotion of application for subsidy programs and joint R&D projects), supports SMEs (introducing relevant companies and experts and providing training), and develops and provides R&D facilities. Biopôle is also engaging in overseas exchange activities, including cooperation with foreign organizations, and participates in eight to ten trade missions each year. Against the backdrop of these activities, Biopôle has obtained budget funds totaling around 870 million euros from regional and national governments and public organizations, including the EU, since 2005 (of the total amount, approximately 350 million euros has been obtained from entities other than the regional government) and has been actively promoting R&D. For example, it has produced 585 research papers, obtained 162 patents and started clinical trials in 28 R&D projects. Moreover, R&D budget funds have led to the creation of 429 new jobs and the establishment of 17 start-up companies, one of which has been listed on a stock exchange. Internationalization support provided to SMEs in the Rhône-Alpes region is implemented by ARDI, which is the regional agency for development and innovation established in 2008 and funded by the regional government. The Rhône-Alpes region is conducting activities from the perspective of cluster development, 553