Shades of a Socialist Legacy? Innovation Activity in East and West Germany 1877-2014

The unification of the East and West German states in 1990 initiated theintegration of two distinct innovation systems. In this process, the poorlyfunctioning socialist system of East Germany adopted the formal institutions andorganization of West Germany, a western-style market economy. We investigatethe effect of this integration on patenting activity by applying a difference-indifference approach. While patenting activity increased in both parts of thecountry until recently, the gap between East and West Germany widenedconsiderably over time. This divergence in innovation activity suggests thatcurrent East-West differences may be indirectly rooted in this socialist legacy andthe sudden shock transformation that occurred upon reunification. We also findthat the similarity of the technology profile of the East and West Germaninnovation systems is crucial to understand the divergence. So, East Germaninnovation activity fell behind especially in technologies where both East andWest Germany were specialized in before re-unification. The same applies totechnologies where only West Germany was specialized in. Our findings indicatethat integrating the two innovation systems mainly benefitted the West