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At the close of the Napoleonic Wars in 1815 Prussia was an industrial backwater. By the mid 1860's Prussia had achieved a considerable degree of industrialization. In a sense, her economy had “taken off.” The turning point dates from around 1840 and was closely related to railroad building. Before 1840 industrial investment grew haltingly. The combination of inadequate markets and the lack of supporting enterprise made industrial investment—particularly in those lines in which Europe's industrial leader, England, was already specialized—too risky and/or its anticipated yields too low for most potential investors, who preferred to invest in real estate, commerce, and in foreign government bonds. As leading Prussian entrepreneurs argued, the country's industrial development required public investment in river improvements, roads, canals, railroads, banks, and other facilities which would generate external economies and make private investment, for example in metalworking enterprise, more profitable. Theoretically, such public investment could have been financed by curtailing other governmental expenditures, by taxing unproductive consumption, and/or by borrowing. The technical proficiency required by such investments was either domestically available or could be readily borrowed from abroad. Even Prussian political economy, through its interpretation of the Classicists, reflected these conditions and called for state assistance. The will, the means, and a rationale for a program of public investment were at hand: one could truly speak of an abundance of “advantages of backwardness” in Prussia after 1815.

The external growth of a sample of large German enterprises for the 1880–1913 period is here investigated. External growth, defined as acquisition of existing firms and measured by the reported value of their assets, is found to have accounted for no more than one-fifth of average overall enterprise growth in the period. An examination of individual examples, however, reveals that external growth was frequently decisive for the growth of survivor enterprises and, in some sectors, a significant contributor to concentration. Some quantitative tests suggest that financial factors, and particularly stock prices, significantly influenced external growth. The paper concludes by comparing German with British and American findings.

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