East German industry is still not over the wall

Geographic balance is, relatively speaking, a strength of German business. Whereas London and Paris dominate in Britain and France, Germany's great companies are spread across the country, north, south and west.

But not so much east. Twenty-five years after the Berlin Wall fell on Nov. 9, 1989, eastern Germany has closed much of the macroeconomic gulf that once separated it from the west. Gross domestic product per inhabitant has grown from 33 percent of the western average in 1991 to 67 percent in 2013. But entrepreneurship is still finding its feet in the "new states," as they are officially referred to.

East Germany's legendary, clunky little car, the Trabant, has long ceased production, but West German carmakers have built factories in the eastern states of Saxony and Thuringia. Many eastern businesses were taken over by western ones after the wall fell. But just as no eastern football club plays in the elite Bundesliga, none of Germany's biggest 30 listed companies, which make up the DAX stock index, is based in the east. Headquarters matter. The people at a company's heart are its biggest brains and highest earners. Headquarters also attract professional services: accountants, lawyers and consultants.

Berlin, situated in the east but divided during the Cold War, is an exception. Before World War II it was a big banking and industrial center. Wartime destruction and postwar division pushed big companies like Deutsche Bank and Siemens to friendlier West German locations. Called "poor but sexy" by its own mayor, it is getting less poor. Artists and designers have made the city attractive for programmers and professionals. Air Berlin and Deutsche Bahn (the national rail operator) are based there, as is Axel Springer, a publisher.

Going digital

These old companies are now joined by Berlin's digital start-ups. Rocket Internet, a builder of e-commerce businesses, and Zalando, one of Rocket's firms, both went public in September. Other digital darlings include ResearchGate, a social network for academics; SoundCloud, a music-sharing service, and Wooga, a games-maker.

Outside Berlin, the picture is patchy. The rapid productivity gains eastern workers made after reunification have stalled: they are still only 76 percent as productive as western ones. That is partly because the east German economy is concentrated in less productive industries, like construction and agriculture. But even in others, like finance, eastern workers have made smaller productivity gains than westerners.

But the stereotype of the easterner as nostalgic, lazy and bolshie is outdated. Easterners work longer hours and participate in the workforce at higher rates than westerners. They're more likely to consider their wages unfair (about 44 percent, against about a third of westerners), according to the German Institute for Economic Research. But they are more likely to rate reunification a success.

Eastern unemployment is down to 9.7 percent, though that is largely due to young easterners going west in search of work. That migration has nearly stopped, but another demographic shock is approaching: The east's birthrate has slipped to well below the replacement rate, and a shrunken generation is now hitting working age. Some skilled labor is in short supply. Many companies complain about their ability to find and keep the best workers.

A happy exception is the town of Jena, in Thuringia. Carl Zeiss founded an optics business there in 1846. When Jena ended up in the postwar Soviet-occupied zone, U.S. troops hauled most of Zeiss' machines and scientists to Oberkochen, in western Germany. The rump wound up in one of the East German Kombinate, or state conglomerates.

After the wall's fall, parts of the Kombinat became Jenoptik, a world-class maker of such things as lasers, while the rest rejoined the western Carl Zeiss company. Cluster effects in Jena have produced new successes, such as Asphericon, founded in 2001. It is one of the few companies to export to Mars: its lenses are onboard NASA's Curiosity rover, now crawling across the red planet.

More start-ups needed

The east needs more Asphericons. Germany's small and midsize companies are its economic backbone. Western companies snapping up eastern assets seemed a good idea at the time, but this may have stifled the blossoming of entrepreneurship.

Eastern Germany's business landscape may still look different from the west's as it matures: a narrower range of industries, concentrated in a few innovative cities. And perhaps, as Berlin's start-ups suggest, they will also be more "disruptive." Germans like to use that English word, but few of them master the underlying idea. The cleverest eastern Germans, with less to lose from challenging the status quo, may yet have something to teach their western cousins.

Copyright 2013 The Economist Newspaper Limited, London. All Rights Reserved. Reprinted with permission.