Germany's AI Investments: An Economic Imperative

Recently, the government of Germany announced plans to invest $3 billion into Artificial Intelligence R&D through 2025 in order to increase the company’s competitiveness on the global stage. Investments in AI will be critical to drive productivity and economic growth in coming decades, and Germany has lagged world leaders in development of AI. Over the next five years, France plans to invest 1.5 billion euro in AI, and China has plans to create a state-funded $150 billion industry by 2030. 

Investments mark emphasis on digitalization of an industrial economy

Germany – and Europe’s economies are still heavily concentrated in industrials. An Ernst and Young study found that 55 of Germany’s top 100 companies by sales are in industrial sectors, while in the US 20 of the top 100 companies are in tech and media. IT and tech are also rewarded by investors with 5 of the top 6 US companies by market cap in the tech sector (as of September 30, 2018). Apple, Amazon, Alphabet, Microsoft and Facebook are all actively investing in AI while only Berkshire Hathaway is not a tech-focused company. 

Germany plans to present its digital strategy in early December which embraces five areas: Digital competence, which involves educating citizens of all ages about digitalization; infrastructure, which will include high-speed Internet nationwide by 2025; innovation and digital transformation applied to business around the “Industrie 4.0.” concept; digital impact on society, including ethics and jobs; and digital government, replacing paper based processes and bureaucracy.

Why AI is so important to economic growth

A pair of recent studies from McKinsey Global Institute (MGI) and PwC highlight the potential value-add that artificial intelligence can create for the global economy. According to the McKinsey Global study, artificial intelligence has the potential to increase economic output by 16% or roughly $13 trillion by 2030, which equates to an annual average increase of 1.2% to productivity growth percent between now and 2030. This finding is consistent with a recent report by PwC, which found that AI technologies and applications could increase global GDP by up to 14% through 2030.

The MGI study found that AI has the potential to increase competitiveness gaps between countries.  According to the study, the (mostly developed) countries that establish themselves as AI leaders could capture an additional 20-25% in economic benefits compared with today, while emerging economies may capture only half their upside.

Investing for gains to catch up

China and the US lead the world in terms of AI-related R&D, at least among commercial companies. The U.S. is the global leader in terms of R&D, with over 15,000 patents filed between 2010 and 2014, nearly double second place China. Chinese companies Baidu, Tencent, JD.com and other firms continue to invest heavily in machine learning and AI technologies, aided by support from Chinese government (although there are concerns about the Chinese government’s use of technology to control its citizens). In the U.S. private investment accounts for over 60% of AI R&D, led by companies including Amazon, Apple, Microsoft, IBM, Facebook and others. In addition to software, the US is home to more companies creating specialized hardware for AI processing, notably Nvidia. Other countries investing actively include Canada, the UK, France, South Korea, and Japan. Germany’s announcement is a significant move by a leader across several industrial sectors of the need to invest in AI to advance digitalization, building on the efforts of leading firms including Siemens and SAP to expand its footprint for the future.

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