In many ways, Germany couldn’t be a better launching pad for new companies or technologies. It is a rich country, offering young people an excellent practical and academic education, and its central position in the increasingly integrated European market provides easy access to suppliers and customers, thanks mainly to a highly efficient infrastructure and a modern communications network.

Yet Germany has one big weakness in building high-tech industries: a decades-old entrepreneurial gap. Compared with Silicon Valley, where 73 percent of all companies that have annual sales of more than $50 million were established after 1985, the share of such companies in Munich and Stuttgart is only 17 percent and 20 percent, respectively (Exhibit 1). Except for the software powerhouse SAP, no company founded in Germany since the early 1970s has become a global leader in a new technology. This deficit is all the more unfortunate because technology companies are the most likely to grow at above-average rates and—in contrast to most established businesses—to raise employment levels.

A climate for entrepreneurship

There is light on the horizon, however. An entrepreneurial culture is growing, prompted by the developing market for venture capital. This market’s most important stimulus has been the Neuer...