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Because the manufacturing industry creates 23 percent of Germany's gross domestic product (GDP), an industry-friendly environment is crucial for Europe's biggest economy. A study released by the Cologne Institute for Economic Research (IW) on Monday (22.10.2012) reveals Germany has moved closer to its global industrial rivals in terms of its attractiveness to industrial companies.

The IW survey took a look at the leading 45 world economies, ranking Germany in fifth place, which was a considerable leap from the 14th place it held in a similar 1995 study.

The institute regarded the United States as the best industrial location, as companies faced the lowest level of red tape. Sweden, Denmark and Switzerland also outdid Germany in the rankings.

However, Germany was closing the gap on these countries, IW director Michael Hüther told a news conference, stressing that Germany was "strong and growing" like hardly any other traditional economic power in the Western world.

German pros

According to the IW survey, Germany's strongest points were its stable supply of energy and raw materials, its advanced infrastructure, high education levels and reliable legal framework. Moreover, a competitive industrial environment fosters innovation, while open markets prevent the emergence of monopolies, IW said.

However, Germany's industrial advantages were facing a risk of being overshadowed by rising costs for energy, notably for electricity.

Costly cons

Hüther said he saw cost pressure arising from the German government's drive to replace conventional power generation with renewable forms of energy in the course of the next decade. Furthermore, the country's cost structure - including labor costs, taxes and environment levies - was an ongoing weakness.

"The cost index for Germany is 29 percent worse than the average of all 45 industrialized countries, and definitely needs improvement," he said.

Strong backbone

IW found that Germany, Japan and South Korea were the three countries in the world where industry played the most significant role in national wealth creation. Unlike most Western nations, the institute said, Germany had resisted efforts to increase the services sector to the detriment of the manufacturing industry.

"This has made it possible for Germany to stabilize and develop its industrial base, which is made up of small and medium-sized companies rooted in strong networks and industrial clusters in their home regions," the IW report said.

Small and mid-sized companies provide for four out of five Germany industry jobs and are often described as the backbone of the German economy. In recent years, more and more of them have successfully ventured out into international markets.

However, Germany's strong dependence on exports was described by IW as a risk. Should the global economic climate continue to cool in the next month, the institute said, the German manufacturing industry was bound to suffer too.