The Fraunhofer Institute is a leading applied research organisation based in Germany, supporting innovation, technology transfer and industrial competitiveness through a decentralised network of 75 institutes and research units. Its activities focus on translating research into industrial applications, particularly in manufacturing and other R&D-intensive sectors, with a strong emphasis on SMEs. Fraunhofer combines federal and state base funding, publicly funded research projects and industry revenue, helping ensure both financial stability and alignment with business needs. Closely embedded in university-industry ecosystems, it plays a central role in contract research, collaborative innovation, commercialisation and spin-off creation. The model illustrates how applied research organisations can support SME innovation, strengthen industrial upgrading and facilitate the diffusion of new technologies across the economy.
The Fraunhofer Institute (Germany)
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Introduction
The Fraunhofer Institute (hereafter Fraunhofer) is a leading applied research organisation consisting of a network of 75 institutes and research units primarily based in Germany but with additional locations in Europe and around the world. Founded in 1949 it plays a central role in advancing the German research and innovation ecosystem by focusing on applied research on key technologies and knowledge transfer to strengthen the German industry. The main activity of Fraunhofer consists in conducting contract research for German industry, particularly for SMEs, to translate academic research into commercial products and industrial processes.1
Delivery arrangements
The Fraunhofer Institute operates as a decentralised organisation. Each institute specialises in a specific sector or technology covering all relevant industrial sectors including ICT, mechanical engineering, manufacturing, energy, health, life sciences and materials. Each institute cultivates its own market presence and manages its own budget. Nevertheless, the Fraunhofer institutes are embedded in broad, overlapping networks of universities, companies, research organisations, and trade associations, which are structured around scientific disciplines and thematic interests. Therefore, collaborating with Fraunhofer provides partners access to this extensive ecosystem which enables them to benefit from expertise for joint research, consortia, and development initiatives.
Despite its decentralised organisation, Fraunhofer follows a unified strategy guided by its governing bodies and committees. The Executive Board defines science and research policy priorities and oversees the budget. The Senate of the Fraunhofer serves as both a supervisory and advisory body to the Executive Board. It is composed of 26 representatives from science, industry, and the public sector, which are elected by an annual general assembly of Fraunhofer members. Thereby, the actions of the Senate, approved by official members and supporters of Fraunhofer, play a key role in shaping the strategic direction of research activities. This unified strategy has facilitated the creation of a long-standing brand which positively contributes to Fraunhofer’s visibility.
Fraunhofer experienced a 14% increase in its workforce since 2019, reaching approximately 31 900 employees by 2023. Of this total, 74% were research, technical, and administrative staff. Notably, around 25% of the workforce were university students which shows Fraunhofer’s strong affiliation with German universities. By employing talented students as part-time researchers, Fraunhofer provides them with hands-on experience in market-oriented applied research. The cornerstone of this close collaboration is the joint appointment of outstanding senior researchers who simultaneously hold professorships at partner universities and serve as directors of Fraunhofer institutes. This dual role strengthens the transfer of knowledge and technology between academia and industry.
Fraunhofer’s core activities is contract research, including for private sector, with SMEs making up around 65% of its commercial clients. Studies highlight Fraunhofer’s pivotal role in bridging the gap between research and commercialisation, especially in advancing emerging technologies. Consistent with its mission, this impact is mostly present in knowledge-intensive sectors such as chemicals, electronics, mechanical engineering, and vehicle manufacturing.
In addition to collaborations with established companies, spin-offs are a key pillar of Fraunhofer’s strategy for exploiting industrial property rights (i.e. protected intellectual property (IP), such as patents and related rights). Fraunhofer leads nationally in invention disclosures and new patent applications. In 2023 alone, the organisation established 23 new spin-offs and held equity investments in a total of 83 high-tech companies.
This box illustrates Fraunhofer’s governance via the Fraunhofer IPT and two SME-focused collaborative projects.
Governance and SME-targeted activities of the Fraunhofer IPT
The Fraunhofer IPT in Aachen, with around 490 employees, develops adaptive production systems to boost efficiency and reduce energy use. The institute is closely linked to the RWTH Aachen University through its director and board members who also serve as professors chairing university departments.
One of their many projects targeting manufacturing SMEs was the federally funded research project ESPRI (Efficient and demand-oriented creation of IT security concepts for manufacturing SMEs), running from 2020 to 2022. Industry and research partners of the project jointly developed a software to monitor internal data flows, identify tailored IT security solutions for manufacturing SMEs and reveal economic potentials of production optimisation through establishing cross-company networks.
Project example: High-Performance Center for Electronic Systems, LZE and its “SME springboard” (Fraunhofer IIS, Fraunhofer IISB and FAU university)
The High-Performance Centre for Electronic Systems (LZE) is a joint initiative of the Fraunhofer Institute for Integrated Circuits (IIS), the Fraunhofer Institute for Integrated Systems and Device Technology (IISB) and the Friedrich-Alexander-University Erlangen-Nuremberg (FAU), established in 2015 due to the strong presence of electronic systems research activities in the region of Erlangen-Nuremberg.
The LZE is a co-operation and knowledge platform to facilitate the translation of research into advanced electronic products and systems. In 2021, the LZE launched the KMU-Springboard ("SME Springboard") initiative to establish a dedicated transfer platform for future electronic system technologies tailored to the specific needs of SMEs. In the IIOT4KMU sub-project, Fraunhofer, FAU, and industry partners developed shared interfaces to help SMEs adopt IIoT (Industrial Internet of Things) technologies more easily and quickly.
Budget
In 2025 Fraunhofer’s overall budget reached EUR 3.6 billion, 27% higher than in 2020. According to the most recent detailed figures from the 2023 Annual Report, the majority of Fraunhofer’s EUR 3.4 billion budget in 2023, approximately EUR 3 billion, came from contract research activities. The rest of the funding originates from long-term research activities outside of this scope, e.g., defence-related research (EUR 249 million in 2023) as well EU, federal and state government funding for major infrastructure capital expenditure (EUR 164 million in 2023) such as building projects, or the purchase of equipment for research facilities.
In 2023, the EUR 3 billion budget from contract research was allocated as follows:
EUR 824 million (27%), was provided through base funding from the German Federal Government (90% of base funding) and state governments (10% of base funding).
The largest share – EUR 1.3 billion (43%) – came from publicly funded research projects. This share of the budget experienced a steady increase since 2019, with a notable 19% rise from 2022 to 2023. The growth is largely driven by increased project funding from the German government, the European Union, as well as contributions from foundations, universities, and other research institutions – keeping in mind that part of this rise was offset by inflation.
Industrial revenue from contract research increased, up to EUR 836 million (28%) in 2023, marking a rise of around 15% since 2019. This revenue is divided between EUR 679 million of research contracts and EUR 157 million in license-fee revenue from industry.
Fraunhofer’s funding model has provided a sustainable financial foundation over the past years, enabling balanced reliance on these three major revenue streams of base funding, publicly funded research projects and substantial income from industry. The continued growth in the industrial revenue highlights the ongoing relevance and direct applicability of Fraunhofer’s research. The strong industry orientation and long-term stability of funding can be considered a core strength of the funding model.
Outreach
Due to the decentralised organisation and multiple forms of collaboration between Fraunhofer and firms which are not all traceable, system-wide numbers on annual industry outreach are not available. However, a recent microdata report analysing firm-level co-operation with Fraunhofer uses data from internal sources, the ORBIS database and the German Manufacturing Survey to estimate the relative outreach across sectors and firm sizes.2 The data from the report also serve to calculate a broad estimate of around 5 000-6 000 firms that Fraunhofer reaches annually.3
Sector-wise (NACE 1-digit), the majority of firms that co-operated with Fraunhofer between 2015 and 2019 are located in the manufacturing sector (40%), followed by professional, scientific and technical service providers (20%), wholesale and retail trade (10%) and information and communication services (8%). The internal analysis also highlights a consistently high share of co-operation with manufacturers in recent years. From 2012 to 2018 Fraunhofer reached every 10th small manufacturer in Germany (20 to 49 employees) for co-operation, mostly through publicly funded joint research projects rather than direct contract research.4 This highlights that publicly funded research projects seem to be more accessible to SMEs, possibly to lower financial barriers and SME-focused outreach for publicly funded research projects.
Confirming its strong SME-orientation, the data show that the largest share of co-operating firms, almost 50%, are small companies with fewer than 50 employees5. While this also reflects the general distribution of companies in the economy, the high proportion underscores Fraunhofer’s effective outreach to smaller firms and its role in supporting innovation beyond large-scale industry.
Independent external evaluations
A recent study6 assessed the aggregate effect of Fraunhofer through the development of a general equilibrium model. It estimates Fraunhofer’s impact based on two key activities: 1) conducting research that expands the world technology frontier and 2) bringing companies closer to the technology frontier through engagement in research contracts7.
Key results of the study are the following:
Fraunhofer significantly contributes to output, productivity, the world technology frontier and technology adoption levels in Germany in the long run, leading to a GDP 3.65% higher than if the Organisation did not exist.
Fraunhofer increases the long-run level of technology by 13.49% and the speed of technology diffusion8 by 0.36%.
Another evaluation by the University of Strathclyde (UK) underlines the macroeconomic effect of Fraunhofer, pointing to increased investment effects of over EUR 15 billion in the long-run9, with the most important effects found in knowledge-intensive sectors such as chemicals, pharmaceuticals, the computer and electronics industry, and mechanical and automotive engineering.10
Internal evaluations
The recent microdata report by the Fraunhofer Institute for Systems and Innovation Research (ISI)11 analyses firm-level co-operation using data from the German Manufacturing Survey and internal records of contract research projects. It distinguishes between firms that have collaborated with Fraunhofer and those that have not (i.e., the control group). In terms of engagement, the data shows that larger, R&D-intensive firms producing highly complex products are more likely to co-operate, especially through direct contract research activities. In 2018, 36% of large manufacturers (500+ employees) collaborated this way, compared to just 4% of small manufacturers (20-49 employees). However, in 2018, 10% of small manufacturers reported to have taken part in publicly funded joint research projects and almost three quarters of projects were conducted in collaboration with SMEs (up to 250 employees), particularly covering sectors like transport, chemistry, materials, mechanical engineering and IT. Moreover, 95% of all partners belong to the group of up to 5 000 employees.
Overall, the data shows positive economic effects on co-operating firms. A regression analysis by firm size shows that collaborative projects with Fraunhofer tend to be more significant for SMEs than for larger firms. While SMEs predominantly participated in publicly funded joint projects, which typically yield lower short-term economic returns than contract research, they still realised disproportionately high benefits – suggesting higher leverage effects of joint research projects for smaller firms. The study also shows that firms that collaborate more frequently with Fraunhofer tend to be more economically successful over time (as shown by higher profits after tax), and 10.2 % more likely to introduce new products.
Survey findings from another study 12,13 highlight the impact of Fraunhofer’s work on SMEs and confirm that it is primarily R&D- and innovation-driven SMEs that engage in collaboration with Fraunhofer. Results of the interviews with 215 SMEs display a strong reputation of Fraunhofer among SMEs, marked by technical excellence, professionalism, innovation, and international orientation. While 80% of SMEs expressed strong interest in continuing their collaboration with Fraunhofer, the survey also revealed untapped potential. Over half (60%) of SMEs interviewed identified product and technology development, such as product improvements and new product creations highly important, only 27% had actually used the related services of Fraunhofer. Reportedly less relevant areas were services related to intellectual property rights, norms and standards as well as market-related services such as market analysis, training and certification services. Some SMEs reported administrative barriers, including complex contract procedures and difficulties in identifying the appropriate contact person within Fraunhofer. The study concludes that, given the diversity among SMEs, tailored approaches are essential to effectively address their needs.
The following main lessons can be drawn from the description of this programme:
Well-balanced funding has contributed to Fraunhofer’s success in the past. This consists of roughly equal, stable shares from three sources: federal and state base funding, publicly funded research projects, and industry revenues. The high proportion of industry-generated revenue ensures strong practical relevance of Fraunhofer’s work for industrial applications.
The combination of federal and state funding, coupled with a unified strategic framework, gives Fraunhofer strong brand recognition while enabling it to cater services to the specific needs of state economies.
Strong decentralisation via regional institutes creates regional hubs of excellence, which cater to companies also outside of the core region and facilitate outreach to SMEs nationwide. This structure also enables effective transfer of research results from universities to industry, helping companies to move closer to the technological frontier.
Fraunhofer’s technical expertise and service offerings primarily attract firms in R&D intensive sectors and those developing complex products. However, its strong and overlapping networks, including close ties with universities and industry associations, help explain the high SME participation, including over 50% of company clients with fewer than 50 employees.
Empirical evidence highlights the overall positive macroeconomic impact of Fraunhofer’s work. At the firm level, collaboration with Fraunhofer has been shown to be particularly beneficial for SMEs, especially in terms of increasing turnover.
Surveyed SMEs identified the area of product and technology development, such as product improvements and new product creation, as the most relevant areas of support.
Although the administrative costs per company are relatively higher when SMEs are involved in collaborations, their inclusion in industrial research projects remains essential to ensure that smaller firms are not excluded from technological progress. Multiple Fraunhofer initiatives (as shown in the examples ESPRI and the SME Springboard) strive to develop common industrial applications to help SMEs, including those from non-high-tech sectors, adopt new technologies.
Fraunhofer provides a mature reference for a national applied-research network with a unified strategy and decentralised institutes closely embedded in university-industry ecosystems. In the UK, the closest analogue is the Catapult Network, which aim to bridge the gap between research and business and support commercialisation. The balanced revenue mix of Fraunhofer (base public funding, publicly funded projects and substantial industry income) keeps work aligned with industrial needs, while the contract-research core and SME focus (around 65% of commercial clients) demonstrate how applied research can translate into products, processes and supply-chain improvements for smaller firms. A relevant lesson for the United Kingdom is therefore how a Catapult-like model can be strengthened at system level: a stronger network-wide backbone (common routines, shared tools and comparable data across institutes), alongside clearer commercialisation pathways (IP services and spin-offs) that complement existing Catapult services. The model’s additional services (e.g. IP/standards and market-access support) and spin-off activity (23 new spin-offs in 2023; equity in 83 companies) underline routes from research to commercialisation that are pertinent to the UK context.
From a measurement perspective, Fraunhofer combines a set of recurring institutional indicators with rich firm-level microdata, Its annual reporting regularly tracks indicators such as business volume, contract research and the project funding share, while research teams match internal project data with external firm-level datasets (e.g. the German Manufacturing Survey) to analyse patterns of co-operation across firms of different sizes and sectors. This approach illustrates how an applied-research network can sustain transparent, comparable performance reporting and segment outcomes for SMEs. This exemplifies an approach the UK could adapt for the Catapult Network: building on centre-level reporting to strengthen more consistent network-wide performance measurement, using shared definitions and linked microdata to segment SME outcomes and support systematic learning across centres.
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← 1. National Academies of Sciences, Engineering, and Medicine. (2013). Appendix A2: Fraunhofer-Gesellschaft: The German model of applied research. In 21st century manufacturing: The role of the Manufacturing Extension Partnership Program (pp. 195–200). The National Academies Press. https://doi.org/10.17226/18448
← 2. Frietsch, Rainer; Neuhäusler, Peter; Jäger, Angela; Schubert, Torben, (2022), A microeconomic perspective on the impact of the Fraunhofer-Gesellschaft, Fraunhofer Institute for Systems and Innovation Research ISI, Karlsruhe, https://www.fraunhofer.de/content/dam/zv/de/forschung/leistungsangebot/Report-Microdata-2022.pdf .
← 3. The estimate was calculated the following way: By matching firm level data from different sources, the microdata report identified around 13 000 firms involved in direct contract research activities with Fraunhofer from 2010 to 2018 (9 years) and around 16 000 firms involved in publicly funded projects from 2015 to 2018 (4 years). Assuming no overlap between companies engaged in both direct contract research and publicly funded research projects, or multiple engagements during the observation period, provides an optimistic estimate of total number of distinct firms collaborating with Fraunhofer of around 5 500 (calculation: 13 016/ 9 + 16 381/ 4 = around 5 500). Additionally, we can assume participation by additional firms (including those outside of Germany) in Fraunhofer events, training programmes, licensing agreements, spin-offs, and other collaborative formats which are not included in the calculation.
← 4. The report derives this estimate based on internal data on co-operation, data from the sample of the German Manufacturing Survey and the overall number of manufacturing firms in Germany from the German statistical office.
← 5. BvD ORBIS, German funding catalog, SIGMA, EPO - PATSTAT, BvD AMADEUS; Fraunhofer ISI calculations published in: Frietsch, Rainer; Neuhäusler, Peter; Jäger, Angela; Schubert, Torben, (2022), A microeconomic perspective on the impact of the Fraunhofer-Gesellschaft, Fraunhofer ISI https://www.fraunhofer.de/de/forschung/leistungsangebot/wirkung-von-fraunhofer-forschung.html.
← 6. Comin, D., Licht, G., Pellens, M., & Schubert, T. (2021). Do companies benefit from public research organizations? The impact of Fraunhofer. Dartmouth College; Centre for European Economic Research (ZEW); University of Lund, https://www.fraunhofer.de/content/dam/zv/de/leistungsangebot/wirkung-von-forschung/the-impact-of-fraunhofer.pdf .
← 7. In this theoretical model the authors use data on performance of firms (i.e. value added) as a proxy for technology adoption. The idea is that interaction with Fraunhofer – for example through a joint research project of companies – transfers know-how to SMEs which in turn increases the companies’ technology adoption level.
← 8. Technology diffusion is described as follows: “The gradual adoption of new technologies creates a diffusion curve that defines the pace at which new technologies penetrate the economy” (p.2). Technology adoption is formally measured as the difference between total available technologies and firm’s currently adopted technologies – multiplied by the adoption rate (relevant equations on p. 6f. of the study).
← 9. In the study this increase of investment refers the long-run effect of Fraunhofer activities on investments, taking investments in 2016 as the baseline year. Thus, it does not refer to a yearly increase but to the point in time where the economy has reached a steady state and fully adjusted to the impact of Fraunhofer activities.
← 10. Fraser of Allander Institute. (2020). The macroeconomic impact of Fraunhofer-Gesellschaft: A CGE approach, using micro-evidence. University of Strathclyde Business School, https://www.fraunhofer.de/content/dam/zv/de/forschung/leistungsangebot/The-macroeconomic-impact-of-Fraunhofer-Gesellschaft.pdf .
← 11. Frietsch, Rainer; Neuhäusler, Peter; Jäger, Angela; Schubert, Torben, (2022), A microeconomic perspective on the impact of the Fraunhofer-Gesellschaft, Fraunhofer Institute for Systems and Innovation Research ISI, Karlsruhe, https://www.fraunhofer.de/content/dam/zv/de/forschung/leistungsangebot/Report-Microdata-2022.pdf .
← 12. Fraunhofer-Gesellschaft (2018), The Significance of the Fraunhofer-Gesellschaft for the German SMEs with which it zperates (Summary), Fraunhofer Center for International Management and Knowledge Economy IMW, Leipzig, https://www.fraunhofer.de/en/research/range-of-services/impact-of-fraunhofer-research.html
← 13. Fraunhofer IMW. (2016). Die Bedeutung der Fraunhofer-Gesellschaft für den deutschen Mittelstand. Leipzig: Fraunhofer-Zentrum für Internationales Management und Wissensökonomie IMW, https://www.fraunhofer.de/content/dam/zv/de/leistungsangebot/wirkung-von-forschung/Studie-Bedeutung-der-Fraunhofer-Gesellschaft-fuer-deutschen-Mittelstand.pdf .
