Behind Germany's Success Story in Manufacturing

Public-Private Research Institutes Drive Exports of High-Tech Manufactured Goods—and Are Model for New U.S. Initiative

As the Obama administration tries to move toward greater government-industry collaboration on high-tech manufacturing, Germany is showing what that approach can accomplish.

President Barack Obama has requested $1 billion from Congress to help fund a nationwide network of research institutes—the National Network for Manufacturing Innovation—that would work with companies and universities to develop manufacturing technology. The plan envisions at least 15 such institutes, funded by government and private-sector money. So far, four have been announced or set up, including one in Youngstown, Ohio, focused on 3-D printing.

One model for the Obama plan is the Fraunhofer Society, a network of government-backed research institutes that has helped make Germany one of the leading exporters of high-tech manufactured goods, despite the country's relatively high wages and high levels of regulation.

"As one of the biggest and oldest innovation networks for advanced manufacturing, Fraunhofer was a key starting point when we began designing the NNMI," says Mike Molnar, director of the U.S. program.

The Fraunhofer institutes play a crucial role in translating the latest research insights into innovations for German businesses, providing applied research in a variety of fields. Most famous for helping to invent the MP3 audio format, Fraunhofer has thousands of patents under its belt.

The network is particularly important for the small and medium-size companies that make up the backbone of the German economy. These companies are often global players but still produce locally, selling specialty products that can command premium prices around the world.

"Fraunhofer supports an ecosystem for manufacturing innovation that has helped keep Germany an exporting juggernaut," says Sujai Shivakumar, a specialist in innovation policy at the National Academies in Washington.

Practical Approach

The Fraunhofer Society takes its name from Joseph von Fraunhofer (1787-1826), who not only made scientific discoveries in astronomy but also started a successful telescope business. The society started with one institute in 1954 and has expanded to 67 institutes across Germany.

The Fraunhofer institutes research everything from algorithms and other aspects of computing to cell biology and wood technology. They focus mostly on short-term research projects with immediate business applications.

For instance, German companies specializing in technology for the life sciences have worked with Fraunhofer's Institute for Applied Informatics in St. Augustin to develop new data-management tools and scanning technology at the molecular level. Construction companies have worked with Fraunhofer's Institute for Building Physics in Stuttgart to develop new noise-canceling materials and to learn how to design buildings more efficiently based on hygrothermal analysis—how heat and moisture move through structures.

The deep scientific knowledge that Fraunhofer has accrued over the years has kept a number of small and medium-size companies competitive and producing in Germany, says Mr. Shivakumar. He adds that keeping manufacturing in Germany, instead of designing products there and producing them abroad, has helped drive innovation. "The knowledge crucial to innovation falls apart if you're not actually producing stuff yourself," Mr. Shivakumar says.

The institutes have helped bolster regional economies all around Germany by working with established local companies and attracting new businesses.

The city of Jena, for example, has a tradition in optics going back centuries. After German reunification in 1990, Fraunhofer established an Institute for Applied Optics and Precision Engineering in Jena that worked with newly privatized firms like Carl Zeiss AG to build on existing know-how in optical lenses and precision cutting.

In a pair of modern glass buildings on the campus of Friedrich Schiller University, the Jena Fraunhofer does research in fields such as lasers, photonics (using light for computing and communications applications) and nanotechnology. Over the past 20 years, the institute has developed advances using lasers for measurement as well as developing materials resistant to light and lasers. One result is an industrial cluster based on these technologies that is home to more than 40 companies.

In one case, Mahr GmbH, a maker of precision measurement instruments, asked the Jena Fraunhofer institute to help it develop new products for its Jena facility in 2012. Using its laser expertise, the institute developed a device that can quickly measure objects in 3-D. Mahr bought the licensing rights, and the product has become part of the company's portfolio.

Making Companies

The German government contributes about two-thirds of the society's annual budget of about $2.75 billion, through grants and contracting its own research needs to the institutes. The rest of the budget is covered by contracts with private industry.

Management of the institutes is dominated by engineering professors with years of industry experience, and Ph.D. students account for 30% of Fraunhofer's 22,000 employees. Many of those employees eventually move on to management positions at some of the country's most prominent companies. "Look at the executives at Porsche or Audi. Many of them started at Fraunhofer," says Bernd Venohr, a management consultant.

Others start their own companies. Employees are encouraged to found startups to sell the technology the institutes develop—an important draw for talent. The Fraunhofer in St. Augustin has had five startups take technology developed in research projects directly to market in recent years. The founders pay a license fee to use patented discoveries for commercial use.

"It's the most market-friendly approach to government-led research there is," says Ulrike Flach, a former German parliamentarian and innovation policy specialist.

Mr. Gummer is a reporter for The Wall Street Journal in Frankfurt. He can be reached at chase.gummer@wsj.com.