Cultural, Political, Economic, and Legal Aspects of Doing Business in Germany
Germany is a thriving EU state with a buoyant economy, vibrant political system, and population of over 80 million people. The country’s economy was rapidly developing throughout the 20th century. The fall of the Berlin wall in 1989 and subsequent reunification of the country gave a powerful impetus to German economy, which henceforth grew at an exponential rate, reaching a comfortable 4th slot in the list of the world’s largest economies on the cusp of the new millennium (Audretsch & Lehman, 2015). Today, the UK is poised to overcome Germany as the largest European economy in the nearest future, but that does not vitiate Germany’s business potential and its appeal to entrepreneurs and investors. In fact, businesses in Germany have grown commensurately to the overall economic growth. As of 2015, Germany occupies the 15th slot in the World Bank’s Ease of Doing Business report, being surpassed only by the US, Australia, New Zealand, Singapore, South Korea, Hong Kong, and a handful of European states (World Bank Group, 2015). Tucked in between Ireland and Georgia in this ranking, Germany boasts transparent rules and absence of byzantine bureaucracies. However, while companies eyeing expansion into Germany do not have to navigate through the thickets of suffocating bureaucracy, they need to take cognizance of some other particularities of doing business in Germany. This paper seeks to explore cultural, political, economic, and legal aspects of doing business in Germany. Overall, doing business in Germany is rewarding, but not very easy; it requires proper spadework on the part of those unfamiliar with its culture, as well as political, economic and legal systems.
When discussing cultural peculiarities of doing business in Germany, emphasis should be put on the psyche of a typical German citizen. Indeed, Germans are noted for their unparalleled punctuality. A quick scan of the Internet, combined with personal observations, shows that Germans plan their business projects with pinpoint accuracy. Respecting schedules and agendas is something of a hollowed tradition for Germans. This timeliness can be witnessed everywhere: trains arrive on time, bills are paid on time, and people turn up for their appointments early. When a train in Germany is late, this train is most certainly an international one and the delay is most certainly caused by irregularities beyond the ken of Germans themselves. The Germans have a nice word to describe their excessive punctuality: uberpunktlichkeit (Micheloud, 2008). It cannot be translated into English without impoverishing its meaning, but its very existence in the German language attests to the exactitude and precision characteristic of this culture. In European business quarters, “German punctuality” is an oxymoron.
Most importantly, German punctuality invariably manifests itself in business environments. Turning up for appointments late is a sure recipe for offending susceptibilities of a typical German businessperson and, hence, for failing to strike a deal with them. Taken to extremes, German punctuality means that residents of this country are often antipathetic even to positive changes in business transactions. Business is a serious thing that does not tolerate humor, surprises, or other unrelated matters (Schroll-Machl, 2013). It is also rigidly separated from personal life.
Dress-code is yet another crucial aspect of doing business in Germany. Unlike many Americans, who do not fret too much over their clothes even when attending an official levee, Germans treat dress-codes seriously. No matter what position a German employee holds or what meeting he or she is attending, Germans like to dress neatly. In business settings, appearance of the counterpart can exercise substantial influence over German entrepreneurs. Even when clad in informal attires, Germans strive to look tidy and conservative, avoiding ostentatiousness like the plague. Formal dress-codes should be observed even in warm weather (Schroll-Machl, 2013). The overarching advice for entrepreneurs trying to make a positive impression on their German counterparts is to eschew what is called “a fashion statement”.
Political aspects of prosecuting business in Germany are legion. However, German’s perception of corruption is, perhaps, the most noticeable of them. According to the report by Transparency International, Germany is the 12th least corrupt country in the world as well as one of the doughtiest fighters against bribery in the EU (Transparency International, 2014). Interpreted loosely, this means that Germany is not entirely clean and some degree of tolerance for corruption persists. For example, public procurement and construction sectors are the most susceptible to corruption in Germany (Schroll-Machl, 2013). This information should not be taken as a guideline for action by guileful readers of this paper because the German government takes consistent steps to eradicate both domestic and foreign corruption. Overall, nonetheless, Germans frown upon graft and bribery.
Vigorously enforced anti-corruption legislation applies to economic activity of all kinds on the German soil. However, until the end of the 20th century, a reunified Germany was a European center of legal corruption. Even before that time, Germany was not awash in systemic corruption, but, as the Bloomberg journalist put it, “fuzzy lines were crossed in the routine of doing business” (“Germany, where bribery is tax deductible,” 1995, p. 1). The thing is that bribes in private business, ranging from air tickets and hotel rooms for business counterparts to construction work on their homes, were tax deductible up until 1999 (“Germany, where bribery is tax deductible,” 1995, p. 1). By ratifying the 1998 Convention on Combatting Bribery of Foreign Public Officials in International Business Transactions, Germany further tightened its grip of venal entrepreneurs, thereby contributing to the establishment of a truly transparent and level playing field for all companies conducting business in its territory. Signing several other important international anti-corruption conventions and initiating a thorough overhaul of its domestic tax legislation, Germany successfully abolished the tax write-off of kickbacks. It also took embarked on a “crackdown on tax evasion and insider trading” and on a campaign to “boost shareholders rights, disentangle banks from large corporate shareholdings, and slash the jungle of regulations governing even store hours” (“Germany, where bribery is tax deductible,” 1995, p. 1). With the benefit of hindsight, the Bloomberg journalist’s prediction that the “payoff from clearer rules and aggressive enforcement” would tally up fast proved correct as Germany now reaps benefits of its low tolerance for corruption (Germany, where bribery is tax deductible”, 1995, p. 1).
On the positive side, Germany’s stabs at strengthening corporate oversight, increasing penalties for bribery and eliminating cartel-like pricing of contracts, have indeed leveled the playing field for overseas businesses. The crackdown on price-fixing by firms vying to win public contracts means that foreign companies seeking to enter the market will have greater chances to succeed. The crackdown on bribery means that these foreign companies will be unfettered in their freedom to choose contractors in Germany. Likewise, low tolerance for corruption acts as a magnet dragging foreign business into the country. At the same time, Germany’s sophisticated anti-corruption legislation presumes tightening of rules for public tenders. Even so, honest foreign contractors will certainly find it beneficial that Germany does not tolerate corruption. The advice is that firms and individual entrepreneurs entering the German market should beware of graft and other similarly venal practices in their commercial endeavors.
This low-to-nonexistent tolerance for corruption, which is a political aspect per se, is so deeply-entrenched in the German society that it has already metamorphosed into a cultural aspect. Indeed, the public generally condemns the practice of gift giving in business settings. Government officials are at a particular risk when they decide to accept a bribe or gratuity. Overall, however, both public figures and private businesspersons are cautioned against accepting bribes in the form of gifts because prosecution is inevitable.
From the economic standpoint, doing business in Germany is not much different from doing it in other developed countries, but there are several important peculiarities, of course. Germany’s free market economy is generally characterized by the laissez-faire principles, but the government still retains and, for that matter, commonly uses the right to regulate the workings of the market. This relative abstention of the German government from interfering with businesses, which at the same time guarantees legal protection, allures foreign contractors. Similarly, Germany’s enormous consumer market and even huger volumes of trade make it an even more appealing destination for foreign firms.
Like everywhere else in the developed world, there is a rich choice of corporate forms for companies that do not yet have any presence in Germany: limited liability company, joint stock company, general partnership, limited partnership, limited partnership with limited liability, multifarious subsidiaries, and branches (Lubinski, Fear, & Fernandez Perez, 2013). Determining which kind of corporate entity to establish is an important decision that lies within the bounds of law.
One important thing to remember is that small and medium-sized firms rather than large corporations form the linchpin of Germany’s business. According to the report made by Lex Mundi (2014), “more than 99% of all businesses subject to VAT are small or medium-sized, which makes German industry very flexible, multifaceted and competitive” (p. 5). Employing usually no more than 500 workers and having an “annual turnover of no more than €50 million”, the Mittlestand firms operating in Germany account for about 40% of the country’s GDP (Lubinski et al., 2013, p. 74). Referred to in German as the Mittlestand, these small to medium-sized firms are often owned by a single family with a dominant leader. Such firms take pride in the exceptional quality of their goods and treat their employees with dignity, if not benevolence. Germans’ continued concern about the quality of their products, best exemplified in the workings of the Mittlestand, explains why the brand “Assembled in Germany” is the best hallmark of quality. The German government extends substantial protection to its small and medium-sized companies, cushioning them against the buffetings of the world market competition. Some critics, including Adam Posen, suggest that this pampering will impair the German economy in the long run (Schettkat & Langkau, 2008), but their predictions have proved invalid so far.
Hence, when contemplating expansion into Germany, businesses should carefully think about the best possible corporate structure of their new outlets.
Moving to the market challenges and market opportunities that Germany offers, it is necessary to note that opportunities outweigh challenges. Still, there are several inherent challenges that overseas businesses would encounter in Germany. For example, restrictions imposed on biotechnological agricultural products imposed by Germany in conformity with the European Union’s Common Agricultural Policy may prove inconvenient for a business based in non-EU states, including the US (Audretsch & Lehmann, 2015). Other bureaucratic procedures can be sometimes complex in Germany, making it more difficult for the business to set in. Although not discriminatory in nature, Germany’s regulations may put well-established local firms at a preferential position. Likewise, strict and rigorously applied environmental and safety standards often prevent foreign firms from entering the German market.
Despite these and other untoward economic factors, including a higher cost of transacting business in this country, Germany nonetheless remains one of the most alluring destinations for overseas companies. The reasons do not require explanation: skilled manpower, high quality of products, envious productivity, cutting-edge infrastructure, and the country’s advantageous geo-economic location at the crossroads of Europe.
Being one of the founders of the European Coal and Steel Community, that is, the first harbinger of today’s EU, Germany adheres to the body of the European Community law “either directly or by incorporation” (Lex Mundi, 2014, p. 5). Likewise, Germany abides by “a number of international treaties and conventions, including more than 130 bilateral investment treaties and the UN Convention on the International Sale of Goods” (Lex Mundi, 2014, p. 5). Put together, this means that companies operating within EU member-states and other states that have concluded bilateral deals with Germany are better equipped – from the standpoint of law, at least – to conduct business in Germany or with German contractors.
However, even for firms based in the EU doing business in Germany may be a tricky task. While Germany is one of the most favorable places on the planet for doing business, starting a business in this country is not actually easy. Indeed, while it occupies leading positions on the World Bank’s list in terms of enforcing contracts, resolving insolvency, getting credit, trading across borders, and obtaining construction permits, it lags behind on the same list in terms of starting a business, registering property, and protecting investors (World Bank Group, 2015). For example, it occupies only the 107th slot in the list of countries by ease of starting a business. The reason for this is a set of several complex legal procedures that the new companies are required to complete. For example, it is incumbent on new legal entities to constantly report to local chambers of commerce, commercial registers, office of business, standards, and other pertinent agencies (Audretsch & Lehmann, 2015).
Overall, while some of the legal procedures in Germany are efficient, others are laden with bureaucracy and may take a lengthy period of time. To streamline the procedures, it is imperative to hire a legal adviser who is thoroughly enlightened on Germany’s business law.
Germany is a developed economy that boasts the highest GDP in Europe, vast consumer market, and an unfathomable bounty of resources lying under its terrains. Most important, however, Germany’s skilled labor force has earned the country an international reputation of a reliable manufacturer. Indeed, the brand “Assembled in Germany” is a well-recognized hallmark of quality. Ranking in the top-20 of the world’s countries by ease of doing business, Germany opens up a cornucopia of opportunities for overseas business and attracts them in droves. Nonetheless, to be able to set in, these overseas firms need to take cognizance of some crucial, cultural, political, economic, and legal aspects of this country. Thus, Germany is a culture of punctilious pedants, described best by the German term uberpunktlichkeit. For Germans, planning is a serious matter. Politically, Germany is a country that has passed all the way from tolerating bribery deductions on a legal level as recently as in the late 1990s to eradicating corruption in most of its forms in the early 21st century. This poses both challenges and opportunities to overseas companies eyeing expansion into Germany. Economically, Germany has some restrictions that can militate against non-EU-based companies, but as long as they observe the rules, no problems should occur. Apropos legal aspects, Germany does not impose too many obstacles on new businesses, but some bureaucratic restrictions, such as those connected to starting a business and registering property, can be annoying.