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As I am looking for a PhD scholarship in Germany, I've come across an internet site which contains a database of scholarships. One of the questions asked there is whether I am pursuing "interne Promotion" or "externe Promotion".

According to my colleague, the internal doctoral studies might mean that I am fully occupied at the university, whereas the external studies would occur if I were employed in industry and had to visit the university occasionally for getting feedback from my professor.

Is the explanation of my colleague correct? Are there any further nuances?

Also, why would it be asked for a scholarship?

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one general point

This answer won't cover the situation at any German university and can't reflect all possible variations of PhD programs, due they can strongly vary from university to university. There is (in exception to the rest of this over-regulated national state) no regulation or law about how universities have to offer PhD programs. They are free to decide what to expect from a doctoral candidate. This also means, that offering external doctorates is optional for the universities, there exists no legal claim to force a university to accept external candidates.

German "Mittelbau"

Usually in an internal doctoral study you are affiliated with the university as a kind of assistant of your supervising professor inside the so called "Mittelbau" (translation via dict.cc: non-professorial teaching staff). This means the university may expect you to work in a laboratory or teaching (e.g. holding seminars for in substitute to your supervisor). As @Aeismail pointed out this is mostly connected with a labor contract with the professorial chair or an institute. To reflect @O.R. Mapper's comments: I do not mean that someone becomes the professors lapdog.

universities' interests

One problem I experienced: It's difficult to join such a "Mittelbau" position as a person from outside a given university. These staff positions are particularly founded by third party (e.g. industry) funding and particularly from the public foundation of the (state-)university. In result the expectation toward the professorial chairs or institutes often is to fill open positions with own graduates/alumni. Some universities try to privilege internal candidates to "breed" their own scientific juniors with any legal option they find.

As @DCTLib pointed out in his/her comment: The universities know their own (master-) students better: their working performance, interests and so on. Compared to unknown external candidates this is less obvious. For a board committee it's harder to evaluate someones value for an internal university staff position compared to an alumnus that is well known.

Another factor is that the funds run out at some point of time. One external (even foreign) applicant could fit well into a research project that enables funding of a doctoral position, in case his research field and experiences match the needs of an open position. In such a situation the chances to be employed as a candidate from outside the university may rise.

external = more personal responsibility

The track of an external doctoral study leaves you alone in some points:

  • teaching: Some universities will expect a doctoral candidate to prove teaching experience. As an external candidate you're not involved in the university teaching, so you need to provide proof of teaching skills in another way.

  • funding: You have no labor contract with the university, so you have to find another way to cover your living expenses, conference fees, travel & accommodation for yourself. Scholarships can be one way, but difficult to gain as long as you and your topic are unknown to the scientific community.

  • matriculation optional: You may not need (in some cases you won't be allowed) to matriculate at the university in an external doctorate. Without matriculation you cannot benefit from a student's status (public travel, discounts e.g. for conference fees). With a current matriculation you cannot receive German social transfer benefits in case you get unemployed during your doctoral phase (if you are a valid to receive them at all...).

internal = often more structure

A lot of universities offer structured graduation programs available to the members of the "Mittelbau" (internal candidates). These programs include for example:

  • workshops and tutorials (scientific writing, intercultural training, good scientific practice etc.)
  • covering of conference costs (fees, accomodation, travel expenses)
  • summer schools (for international exchange)

visual help

visual distribution model of doctoral candidates

The ideas this images tries to visualize are the following:

  • internal candidates have less affiliation to their universities (maybe no affiliation with the exception of the mentoring of your doctor-father/mother)
  • internal and external (here called affiliation) and structuredness are like two dimensions of doctoral programs
  • most internal candidates join a structured program (but not all)
  • most external candidates work more on their own like independent researchers
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    To readers unfamiliar with German universities, "assistant of your supervising professor" may sound very misleading (at least for some fields). Or maybe it's just me to whom "assistant of your supervising professor" sounds like someone who tags along wherever the professor goes, cleans the blackboard, and does not do a single movement without being instructed to do so, etc. ;) – O. R. Mapper Jul 27 '15 at 16:13
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    On a more serious note, the second paragraph in your answer comes as a bit of a surprise (in terms of text structure), given that the topic of structured programs was not asked about (at least in my understanding of the question), and also, it seems a bit incomplete unless the distinction of structured vs. unstructured doctoral studies is explained. In a way, structured vs. unstructured programs are orthogonal to internal and external doctorates. – O. R. Mapper Jul 27 '15 at 16:18
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    Allow me to state an alternating oppinion to the "Picky universities" section. In many cases, external applicants (especially from abroad) are more wanted than the local ones. The problem lies elsewhere: The "local" Master students typically have already participated in the lectures of a research group they later join - this helps a lot with getting started with research quickly. Also, the research group leader knows already what to expect from them, so they are "safe hires". For external candidates, this is less obvious. Also, in some cases where third-party funding is used .... – DCTLib Jul 28 '15 at 9:12
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    ... the money expires at some point, so often positions are to be filled "as soon as possible". Future PhD students from countries from which a working visa for Germany is required however need a lot of time for this preparation. Finally, because the course of study are different in every University, it is hard to suited as well for the respective research project as a "local" applicant. Yet, applicants who come from elsewhere but are a good for a third-party-funded project anyway shouldn't miss the chance to apply. – DCTLib Jul 28 '15 at 9:13
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Keep in mind that most German PhD positions are not funded through "scholarships" but instead through standard labor contracts. Consequently, any listing of "scholarships" will likely include all forms of funding for graduate students. Filtering by internal or external positions will allow the database to select if you are being "employed" by either a university (internal) or a company (external).

There may be some nuances and particular issues depending on the school and faculty with respect to residence time, composition of your thesis committee, and format of the defense (among other issues) according to whether you're doing an interne Promotion or an externe Promotion. However, it's hard to say in advance if you'll run into this or not.

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