Unable to innovate or just bad circumstances? Comparing the innovation system of a state-led and market-based economy

Abstract

State socialism failed due to its inner contradictions. Despite huge investments into industrial modernization, the soviet-type economy collapsed in 1989 in Germany, and the market-based system prevailed. We compare the two parallel existing innovation systems in Germany to shed light on the success and failure of the state-led innovation system. Based on newly created indicators from archive data we show in a natural experiment setting that modernization investment was much bigger in the socialist as compared to the market economy. These achievements, however, could not fully unfold in favor of economic growth due to obstacles related to research priorities, innovation incentives, and knowledge flow.