The development of decentralized supplier networks in East Germany: a challenge to the German model of industrial organization

The paper examines the relationship between supplier network organization and regional economic development. A distinctive feature of the German economy is theexistence of a large and productive base of small and medium companies,commonly called the Mittelstand. Chambers of Commerce, trade associations, local research institutes and other para-public institutions provide a public infrastructure helping groups of Mittelstand companies develop research and development, quality control, training and other important competencies that they are too small to invest in individually. The paper argues that sophisticated firms must also engage these institutions if they are to function. Case studies of the newest East German car production networks show that final assemblers are creating supplier chains with minimal technical collaboration with local suppliers and the delegation rather thansharing of contracting risks. As a result, few sophisticated companies are engaginglocal para-public institutions, with negative consequences for the development of local Mittelstand companies in the two regions.