Bottom line: they have a system.

Germany does a better job on innovation in areas as diverse as sustainable energy systems, molecular biotech, lasers, and experimental software engineering. Indeed, as part of an effort to learn from Germany about effective innovation, U.S. states have encouraged the Fraunhofer Society, a German applied-science think tank, to set up no fewer than seven institutes in America.

True, Americans do well at inventing. The U.S. has the world’s most sophisticated system of financing radical ideas, and the results have been impressive, from Google to Facebook to Twitter. But the fairy tale that the U.S. is better at radical innovation than other countries has been shown in repeated studies to be untrue. Germany is just as good as the U.S. in the most radical technologies.

What’s more important, Germany is better at adapting inventions to industry and spreading them throughout the business sector. Much German innovation involves infusing old products and processes with new ideas and capabilities or recombining elements of old, stagnant sectors into new, vibrant ones.

Germany’s style of innovation explains its manufacturing prowess. For example, many, if not most, of the Chinese products we buy every day are produced by German-made machinery, and the companies that make them are thriving.

It also explains why Germany’s industrial base hasn’t been decimated, as America’s has. Germany is better at sustaining employment growth and productivity, while expanding citizens’ real incomes. Even with wages and benefits that are higher than those in the U.S. by 66%, manufacturing in Germany employed 22% of the workforce and contributed 21% of GDP in 2010. The bottom line: German manufacturers are contributing significantly to employment growth and real income expansion.

In the U.S., by contrast, fewer and fewer people are employed in middle-class manufacturing jobs. In 2010, just under 11% of the workforce was employed in manufacturing, and manufacturing contributed 13% of GDP. Inequality is on the rise, and the country’s balance of payments is getting worse.

Three factors are at work here:

• Germany understands that innovation must result in productivity gains that are widespread, rather than concentrated in the high-tech sector of the moment. As a consequence, Germany doesn’t only seek to form new industries, it also infuses its existing industries with new ideas and technologies. For example, look at how much of a new BMW is based on innovation in information and communication technologies, and how many of the best German software programmers go to work for Mercedes-Benz. The U.S., by contrast, lets old industries die instead of renewing them with new technologies and innovation. As a result, we don’t have healthy cohesive industries; we have isolated silos. An American PhD student in computer science never even thinks about a career in the automobile industry — or, for that matter, other manufacturing-related fields.

• Germany has a network of public institutions that help companies recombine and improve ideas. In other words, innovation doesn’t end with invention. The Fraunhofer Institutes, partially supported by the government, move radical ideas into the marketplace in novel ways. They close the gap between research and the daily grind of small and medium-size enterprises. Bell Labs used to do this in the United States for telecommunications, but Fraunhofer now does this on a much larger scale across Germany’s entire industrial sector.

• Germany’s workforce is constantly trained, enabling it to use the most radical innovations in the most diverse and creative ways to produce and improve products and services that customers want to buy for higher prices. If you were to fill your kitchen and garage with the best products that your budget could afford, how much of this space would be filled with German products such as Miele, Bosch, BMW, and Audi?