It's not news to anyone that some of Germany's industrial companies are having problems these days. Burdened with excessive costs at home, they are steadily losing share in the global marketplace. But it is not too late for a turnaround. A good number of leading companies are restructuring to achieve a competitive cost base from which they are beginning to expand aggressively in Europe or even worldwide.

Cost-cutting alone will not be enough, however. If German companies want to recapture their lost share of world sales, they must also find new sources of revenue. Geographic expansion will help, but innovation is equally important—especially if the changes needed throughout industry are to be carried out in a socially responsible way. By 2000, for example, restructuring of European telecommunications is likely to have eliminated as many as 75 percent of the 200,000 jobs that existed in the industry in 1990. Without new, innovative businesses, employment in many sectors has nowhere to go but down.

Besides losing its well-trained workforce, a company that neglects new product development is likely also to lose its competitiveness. One leading German electronics manufacturer, for example, drew about 70 percent of its revenues in the late 1970s...