German SMEs retreat from international markets amid challenging conditions

German SMEs retreat from international markets amid challenging conditions
Banking & Financial Services
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Sybille Bauernfeind Spokeswoman | KfW Group

Many small and medium-sized enterprises (SMEs) in Germany are reducing their international operations, according to a new report by KfW Research. In 2022, approximately 880,000 of the 3.8 million SMEs were active abroad, but this number dropped to around 763,000 in 2023. The share of SMEs engaged in international activities decreased from about 23% to 20%, falling below the pre-pandemic long-term average.

Despite this reduction in numbers, those SMEs that continued operating internationally increased their foreign turnover's share of total revenue. On average, these businesses generated 29% of their turnover outside Germany, which is an increase of two percentage points from the previous year. The absolute foreign turnover for these enterprises rose by approximately 12% to over EUR 1 million on average.

However, this increase was insufficient to counterbalance the decline in internationally active businesses. Overall international turnover for German SMEs fell by 0.4% nominally to EUR 698 billion and declined by a more significant -6.5% on a price-adjusted basis.

"The conditions for external trade have deteriorated significantly," stated Dr Dirk Schumacher, Chief Economist of KfW. He noted that geopolitical tensions in Ukraine and the Middle East, competition from Chinese exporters, and US protectionist policies are impacting export outlooks. Additionally, many SMEs see domestic conditions as increasingly detrimental to competitiveness.

A January 2025 survey by KfW Research showed continued weakness in SME international activities. While 21% reported growing foreign turnover in 2024, a larger portion (25%) saw decreases. Looking ahead three years, only one percent anticipate strong growth internationally; meanwhile, twenty percent expect declines and eight percent foresee sharp drops.

Concerns are particularly high among enterprises with US ties; currently about sixteen percent have connections there through customers or suppliers. Of these firms, thirty-four percent predict negative impacts from US policies even before President Donald Trump announced new tariffs.

In terms of markets for German products in 2023: Austria and Switzerland topped sales destinations followed by Benelux states and France while Brexit led to plummeting exports to the UK; Scandinavian importance diminished likely due partly due exchange rate shifts; most firms exited Russia leaving just one percent exporting compared against eleven percent eight years prior.

The KfW Internationalisation Report draws on data from recent surveys conducted between February-June last year plus supplemental information gathered January this year—part initiatives helping guide federal government support programs available online at [link].