Despite intense study as an attractive model for adjustment to slower worldwide growth and increasing competition from low-wage producers, the sources of German institutional comparative advantage remain controversial, particularly with regard to the role of the national state. This paper argues that the national state plays a key -- though mainly indirect -- role in supporting the modernization of industry. On the one hand, the national regulation of labor markets has discouraged price competition and imposed a "productivity whip" on companies; on the other hand, through the supply of resources to sub-national and sectoral actors, the federal government has supported the investments in skills, R&D and capital equipment needed for industrial modernization. This support of an institutional infrastructure is particularly important for the large and modern SME sector (the Mittelstand). The 1990s illustrate both the continued success of this infrastructure in supporting adjustment and the ultimate dependency of these institutions on strong domestic political support and adequate international demand for high quality, medium-tech products.
