This article explains why actors in the German political economy supported incremental change in institutional sectors which the advocates of the varieties of capitalism approach identify as being crucial for the efficient delivery of innovation measures. What causes these gradual shifts by which German capitalism departs from the Rhenish equilibrium? My central thesis is that incremental change has created resources of flexibility which help to sustain strong and traditional industries. In the German case this is especially achieved by dual labour market strategies. Rather than transforming the German model into a liberal market economy, it is intended to keep important features of this system. However, institutional sectors become increasingly fragmented to provide enough scope for flexible action. Consequently, two worlds of capitalism coexist. The old German model remains in its place for a core workforce, which still enjoys regular employment, high payment, and social protection. But this world of production becomes increasingly dependent on another production regime in which workers operate on temporary contracts with much lower salaries and less social protection. The labour force is divided by these unequal socio-economic conditions, a development which is now mirrored in a more pluralized party system.