EXPLAINED: The surprising parts of Germany where new businesses are blooming

The number of new businesses being launched in Germany is falling. But a few surprising districts have a lot of entrepreneurial spirit, according to a new study.

A view of Görlitz. The eastern German city has seen a positive trend in the number of new businesses.
A view of Görlitz. The eastern German city has seen a positive trend in the number of new businesses. Photo: picture alliance/dpa/dpa-Zentralbild | Sebastian Kahnert

When it comes to startup culture and founding new businesses, Berlin is considered Germany’s stronghold.

And although the capital undoubtedly has a thriving entrepreneurial scene, a new ranking has found that some smaller regions are ahead of Berlin when it comes to founding new businesses. However, the study also found that the number of new ventures is going down across Germany.

What does the big picture show?

The number of commercial business startups in Germany has dropped sharply. In 2003, 507,000 new businesses were logged, while in 2019 there were 266,000, the report by the Institut für Mittelstandsforschung (IfM) Bonn found. 

It means that the average startup intensity has decreased from 92 start-ups per 10,000 working-age people (in 2003) to 47 (2019). The number of people starting new commercial ventures, however, varies considerably across districts.

The IfM evaluated official stats to look at the startup dynamics and the development in Germany’s 401 districts and cities. They found that the average annual rate of change in startup intensity in districts and cities has fallen by 4.3 percent.

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But a few places stood out, including the district of Görlitz in Saxony on the Polish border. It disproves the assumption that you have to be in or near a large booming city to be at the forefront of innovation.

“We were able to observe a positive trend in the annual rate of change in five regions: in the districts of Görlitz, Marburg-Biedenkopf and Teltow-Fläming as well as in the cities of Leverkusen and Mülheim an der Ruhr,” said project manager Dr Rosemarie Kay. “Overall, the start-up intensity was above the average in about 40 percent of the districts.”

The town of Zittau in the Görlitz district.
The town of Zittau in the Görlitz district. Photo: picture alliance/dpa/dpa-Zentralbild | Daniel Schäfer

Why are the number of commercial startups falling?

In general, entrepreneurship and self-employment have been dropping in Germany for years. While researchers recorded more than 500,000 startups at the beginning of the century, in 2019 – the last year before Covid-19 hit – only 266,000 people made the decision to start their own business.

“We have observed that startup activity in the commercial sector has been declining for years,” said Kay, who headed up the study and is deputy managing director of IfM Bonn. 

The researchers blame a combination of factors for the general decline. One is the improvement in the situation on the German job market. Two decades ago the unemployment rate in Germany was over nine percent, and about four million Germans were looking for work. 

That led to more people becoming creative and starting their own businesses. The unemployment rate now is currently around 6 percent. Today more industries are talking about a shortage of skilled workers, and are trying to recruit employees. 

But age also plays a role. Older people are generally less inclined to take the risk of starting a business. The more the average age in Germany shifts upwards, the fewer startups can be expected.

The the Covid-19 pandemic has further dampened the momentum, even if there were signs of a countertrend in the first half of 2021, at least in the short term. On average, there have been four percent fewer startups every year for two decades.

READ ALSO: Booming startups draw expats to Germany

Why are new businesses booming in some parts of Germany?

In about 40 percent of the districts, the start-up intensity developed better than the national average. The number of new startups per 10,000 working age people in the district of Görlitz was 117.6. The performance of Görlitz is particularly surprising, as its average age of 49.5 years is one of the highest in the country.

However, the city on the Neisse is innovative in many respects. In 2019 and 2020, for example, people were able to find out for themselves whether Görlitz was a suitable place for them to live and work – or as a business location – under the “Testing the City” project.

“The project was primarily aimed at people who can work from any location, for example self-employed people and freelancers. They were able to use flats and work spaces free of charge for their stay,” the city said.

By contrast, the increase in startups around the metropolis of Berlin is no surprise. The capital itself is home to a large number of startups and other foundations, many of them in the service sector; industry does not play a major role here.

The table below by the IfM shows the top 20 districts and cities in Germany with the highest number of new businesses launched in 2019 per 10,000 working-age residents.

Table shows the top 20 districts and cities with the highest number of new businesses launched in 2019 per 10,000 working-age residents.
Table shows the top 20 districts and cities with the highest number of new businesses launched in 2019 per 10,000 working-age residents. Source: IfM

The number of commercial businesses launched in 2019 in the districts varied between around 80 in the Sonneberg district in Thuringia, which is small in terms of population to around 24,000 in Berlin.

Besides Berlin, Hamburg stands out among the frontrunners with 10,000 startups, followed at a considerable distance by the cities of Cologne (4,700), Munich (4,200), the Hanover region (3,900), and the cities of Frankfurt am Main (3,700) and Düsseldorf (3,100). The cities of Essen, Bremen, Dortmund, Stuttgart, Duisburg and the district of Munich also had more than 2,000 commercial startups.

Brandenburg benefits from Berlin

In fact, according to calculations by the German state-owned investment and development bank KfW, 181 out of every 10,000 people of working age start a self-employed business in Berlin on average each year. Out of the federal states, Berlin is in the lead. By way of comparison: in Hamburg, the second-placed federal state, there were 129. In Bremen, the third city state, there were only 41.

The dynamism in Berlin is also sweeping the surrounding area, although this may also have something to do with the fact that the capital has become too expensive for many founders. “The above-average start-up activity in Berlin has spilled over to the periphery in recent years, from which Brandenburg has benefited directly,” KfW economist Georg Metzger told German daily Welt. 

Since Brandenburg has a relatively small population of only 2.5 million people, every start-up here has a high statistical weight. In the KfW ranking, Brandenburg had even risen to second place after Berlin for a while, but then fell back to fifth place during the Covid shutdown period.

Schleswig-Holstein, which is in third place with 120 startups per 10,000 working age people, likely benefits from its location near to Hamburg. Bavaria is fourth with 109 startups per 10,000 people of working age.

In principle, large cities have some locational advantages over the countryside from the point of view of startups, especially if it is not a manufacturing business.

“Startups in metropolitan areas are characterised by short distances and a high density of people and companies,” said Metzger.

Type of new business depends strongly on region

The sector in which the founders are active often depends on the respective economic structure of the region. For example, startup activity in Hamburg and Berlin is strongly fed by the media and IT sectors with their high number of freelancers.

“An industrial character, on the other hand, tends to go hand in hand with lower startup activity: large companies typically have attractive jobs to offer that are also interesting for potential founders,” said Metzger.

However, there are exceptions. A technological upheaval in the manufacturing sector, such as electromobility, can lead to jobs suddenly becoming insecure in an established industry and specialists decide to do their own thing.

For instance, the innovative champion Leverkusen is known as a chemical location; the Dax corporation Bayer, among others, has its headquarters in the North Rhine-Westphalian city. In addition, there are – often medium-sized – automotive suppliers, plastics and metal processors. Many of these business models are directly affected by the technological upheaval resulting from climate protection.

People walk in the town centre of Leverkusen.
People walk in the town centre of Leverkusen. Photo: picture alliance/dpa | Oliver Berg

The city of 164,000 inhabitants itself advertises that “a well-networked structure of companies that offer business-related services in particular” has formed around the manufacturing industry. The location is one of the most attractive in Germany, says the city of Leverkusen, referring to a study by the consulting firm Contor.

Where a network of small and medium-sized enterprises is lacking, founders have a particularly hard time. This explains why the rural areas of the eastern German states are at the bottom of rankings.

IfM researchers recorded the fewest start-ups in Thuringia, namely in the Kyffhäuserkreis, Wartburgkreis and Sonneberg areas. For every 10,000 people of working age, there are only 23 to 25 new businesses per year, about one-fifth of the number in Leverkusen or Görlitz.

“In these regions, lower average purchasing power weighs on startup activity,” said KfW economist Metzger. But the older population also has a dampening effect.  Kyffhäuserkreis and Sonneberg are among the regions with the highest average age of the population.

In Görlitz in Saxony, however, this has not changed the fact that momentum is high there. So demography doesn’t always have to be the deciding factor when it comes to self-employment and entrepreneurial lifestyles.

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7 tips for how to survive as a freelancer in Germany

Taking the decision to go it alone and freelance in Germany can be a daunting prospect. But, if you do it right, it can be an exciting and liberating path. Here are some of our top tips on how to survive.

7 tips for how to survive as a freelancer in Germany

1. Get a tax advisor

The German tax system is complicated, even for Germans. All the associated paperwork uses the Amtsprache (authority language) which is more like legalese than ‘normal’ German, and mistakes when filling out tax forms can cause you, at best, a massive headache and, at worst, a costly fine. So it’s best that you employ someone who knows what they’re doing to help you out.

That person is called a Steuerberater (tax advisor) in Germany. They will help you register with the tax office, correspond with them and submit your tax declarations.

Be aware that, in Germany, different deadlines apply for tax returns depending on whether you employ an official tax advisor or not. If you are doing the tax return on your own, the deadline for submitting your annual tax return is earlier than if you use a tax advisor’s services. 

READ ALSO: What NOT to do when you’re freelancing in Germany

When looking for a tax advisor, a top tip is to use your network to get recommendations. Ideally, you want someone who will do more than just fill in the forms for you, but who will actually advise you on how best to manage your business finances so that you can make tax savings.

2. Keep your accounting in order

The better you keep your own accounts in order, the easier it will be for your tax advisor to compile your tax declarations and therefore the cheaper their services will be.

As a freelancer, there are a lot of costs you can deduct from your taxes – from train tickets, working materials, to meals out – so it’s best to keep hold of all your receipts and to keep them in good order.

2 euros and 50 cents lie on a receipt in a beer garden. Photo: picture alliance/dpa | Peter Kneffel

In Germany, you’re obliged to keep hold of receipts for two years, in case of a tax inspection, so it’s a good idea to photocopy the type of machine-printed receipts you get from restaurants so that they stay legible for a long time.

There are also a few things to be aware of when writing your own invoices. Firstly, make sure that you include your tax number. This isn’t the 11-digit Steueridentifikationsnummer that everyone gets when registering in Germany, but the 10-digit Steuernummer you get from the Finanzamt after registering yourself as a freelancer. 

Most companies won’t pay you if you don’t have this on your invoices so make sure you include it.

You should also make sure that you number your invoices properly – ideally in ascending order so that you can easily keep track of them. You are not allowed to issue two invoices with the same number and if you do so and the finance office notices, you could face an inspection of your whole accounting system.

There are numerous great accounting software programmes you can use to help you, such as Lexoffice and Sevdesk and, even if you have to pay for them, the costs will be tax deductible!

3. Find out if you’re eligible for financial support

In Germany, there are several opportunities for freelancers to gain financial support and to cut their outgoings, and its worth finding out if you’re eligible for them.

If you’re claiming unemployment benefits under ALG 1 and are thinking about becoming a freelancer, the employment office offers a special type of financial support to help you to get your freelance business off the ground.

Called the Grundungszuschuss (“foundation grant”) the payment is a six-month grant equalling your monthly entitlement under ALG 1 plus €300 towards your insurance costs can be applied for those in receipt of this unemployment benefit.

READ ALSO: Will freelancers benefit from Germany’s €300 energy allowance?

If you are engaged in some form of artistic profession in Germany – which can include journalism to pottery – you may be entitled to membership to the Kunstlersozialkasse (artists’ social insurance).

Being a member of the KSK means you only have to pay half of your health insurance and pension contributions, and the KSK will pay the rest.

4. Work out how much you think you will earn

As with starting any business, you need to have some idea of your expected earnings from the outset.

If you’re just starting out as a freelancer, or have some freelance gigs on the side of an employment position, then it might be worth considering registering yourself as a Kleinunternehmer (“small business”).

As a Kleinunternehmer, you can currently earn up to €22.000 per year without having to charge VAT and having to submit only yearly tax declarations. 

An income tax declaration form lies on a table. Photo: picture alliance/dpa/dpa-Zentralbild | Hans-Jürgen Wiedl

Be aware that if you are registered as this kind of freelancer, you must include the following sentence in your invoices: ‘Gemäß § 19 UStG wird keine Umsatzsteuer berechnet’ which means ‘In accordance with Paragrah19 of the German VAT law, no VAT has been added to this invoice.’

READ ALSO: Everything you need to know about your German tax return in 2022

If you think you will earn more than €22.000 per year, you will need to pay Umsatzsteuer (VAT) and will have to submit tax declarations in advance and more often. Depending on how much you earn, this could be every month or every quarter. 

5. Get your insurance in order

In Germany, it’s a legal requirement to have health insurance.

If you’ve just made the move from employment to being a freelancer and want to keep the same health insurer, you should get in contact with your health insurance provider straight away to tell them about your change of circumstances. They will ask you to re-register and to tell them your projected freelance earnings for the year, so they can amend your monthly fees.

If you don’t keep your health insurer provider updated, you could continue to be charged the higher rate that you had from your previous salary.

The insurance cards of the health insurance companies DAK, AOK, Barmer and Techniker-Krankenkasse TK lie with euro notes under a stethoscope. Photo: picture alliance / dpa | Daniel Karmann

It’s not just health insurance you need to think about as a freelancer. It’s also wise to think about protecting yourself from any sort of claims that could arise as a result of any working mishaps. 

If, for example, you lose your laptop which contains confidential client information, you need to be protected against claims.

That’s why it’s good to have both Betriebshaftversicherung (business liability insurance) and Rechtschutzversicherung (legal protection insurance).

6. Plan your time wisely

All of these bureaucratic obligations take time. So it’s really important that you take account of that when planning your time. For example, planning half a day a week to deal with your invoices, filing, emails to clients, and conversations with authorities can be really beneficial when scheduling your working time. 

7. Grow your network

As a freelancer, networking is absolutely crucial to success. 

Keep an up-to-date profile on websites like LinkedIn and German equivalent XING and keep in contact with anyone you’ve ever worked with, no matter how brief the contact was. 

Having a network is not only about getting more clients, but also about building a support network in your field to exchange advice, tips and generally for your own enrichment. 

Participating in workshops related to your field, going to seminars, and meet-ups, can be great ways of broadening your network.