The German Mittelstand - Antithesis to Silicon Valley entrepreneurship?

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Abstract and Figures

Whilst internationally, the Mittelstand in Germany is admired and many countries try to emu-late it, the current debate in Germany praises the Silicon Valley model of entrepreneurship, contrasting the Mittelstand as low-growth, low-tech and non-innovative – in short: as a hin-drance to Germany’s economic future. We therefore ask whether the Mittelstand actually is the antithesis to Silicon Valley entrepreneurship. We show that Mittelstand is more about more than just small and medium enterprise size, identifying as its distinctive features the identity of ownership and management and a sense of belonging. In this regard, we also discuss the influence of historical paths and current institutional settings of the Mittelstand. Asking to what extent the Mittelstand is distinctive, we address its diverse contributions to economy and society. We suggest that the Mittelstand is an excellent example of everyday entrepre-neurship and a vibrant segment of the economy which is also competitive, innovative, and growth oriented, albeit in different ways compared to Silicon Valley entrepreneurship. In concluding, we outline ideas for future research and implications for policymakers. In our view, future research and policies should stand back from dichotomies such as “Mittelstand versus Silicon Valley entrepreneurship” and acknowledge the vibrant diversity and heteroge-neity of entrepreneurship.
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The German Mittelstand: antithesis to Silicon Valley
André Pahnke &Friederike Welter
Accepted: 16 August 2018 /Published online: 13 September 2018
#Springer Science+Business Media, LLC, part of Springer Nature 2018
Abstract While internationally, the Mittelstand in
Germany is admired and many countries try to em-
ulate it, the current debate in Germany praises the
Silicon Valley model of entrepreneurship, contrast-
ing the Mittelstand as low growth, low-tech and
non-innovativein short, as a hindrance to
Germanys economic future. We therefore ask
whether the Mittelstand actually is the antithesis to
Silicon Valley entrepreneurship. We show that
Mittelstand is about more than just small and medi-
um enterprise size, identifying as its distinctive fea-
tures the identity of ownership and management and
a sense of belonging. In this regard, we also discuss
the influence of historical paths and current institu-
tional settings of the Mittelstand.Askingtowhat
extent the Mittelstand is distinctive, we address its
diverse contributions to economy and society. We
suggest that the Mittelstand is an excellent example
of everyday entrepreneurship and a vibrant segment
of the economy which is also competitive, innova-
tive, and growth-oriented, albeit in different ways
compared to Silicon Valley entrepreneurship. In con-
clusion, we outline ideas for future research and
implications for policymakers. In our view, future
research and policies should stand back from dichot-
omies such as Mittelstand versus Silicon Valley
entrepreneurshipand acknowledge the vibrant di-
versity and heterogeneity of entrepreneurship.
Keywords Mittelstand .Context .Everyday
JEL classifications L26 .M13
1 Internationally praised, nationally doomed?
Le MittelstandFrances blind spot(Walter and Mey
2017), Can the Brittelstandrival Germany?(Ellyat
2014), Why Mittelstandis important for Korea(Da-
ye 2013)not only the French, British, and Korean
governments, many more officials around the world
are interested in understanding Germanyssecret weap-
on,itsMittelstand (Ross Range 2012), while aca-
demics are analyzing how to support similar success
models in their own countries (Logue et al. 2015).
However, despite its international attention and praise,
the discussion in Germany has recently settled on the
perceived backwardness of the Mittelstand.Thisisfired
by reports and headlines that refer to continuing and
statistically observable declines in the number of inno-
vators (Zimmermann 2017) that call attention to the
seemingly dying species of entrepreneurs (DIHK
2013), a steadily decreasing number of new businesses
(DIHK 2017), and, in international comparison,
Small Bus Econ (2019) 52:345358
A. Pahnke (*):F. Wel ter
Institut für Mittelstandsforschung (IfM) Bonn, Maximilianstrasse
20, 5 3111 Bonn, Germany
F. Wel t er
University of Siegen, Siegen, Germany
Content courtesy of Springer Nature, terms of use apply. Rights reserved.
... Such research can instigate meaningful policy debates about institutional change and complementarities within a specific context (Caliendo, Kunn & Weissenberger, 2020;Hipp, Bernhardt & Allmendinger, 2015;Valdez & Richardson, 2013). Entrepreneurship scholars are also being increasingly asked to widen their perspective (Economidou, Grilli, Henrekson & Sanders, 2018;Pahnke & Welter, 2019;Zahra, Wright & Abdelgawad, 2014;Zahra & Wright, 2016), juxtapose theoretical modelling with reality (Fayolle, Landstrom, Gartner & Berglund, 2016;Su, Zhai & Karlsson, 2017) and provide more systematic, policy-relevant research (Audretsch, Colombelli, Grilli, Minola & Rasmussen, 2020;Block, Fisch & van Praag, 2017). Policymakers and researchers are encouraged to consider social implications of macroeconomic policies due to rising inequalities, especially within Europe (Istituto per la Ricerca Sociale, 2016;OECD & European Union, 2017). ...
... Consequently, some measures of entrepreneurship only focus on innovation and growth, suggesting that these ventures represent "real" entrepreneurship and include only billionaires such as Bill Gates (Henrekson & Sanandaji, 2018). Taking this approach produces a bias for greater attention towards and investment in highly visible technology firms and activities in the more obvious regions, like bigger cities (McCann & Ortega-Argilés, 2015; Pahnke & Welter, 2019). ...
... Campbell & Mitchell (2012) draws attention to the example of an innovative use of a legal laws and loopholes that allow an individual to profit but at a cost to competitors and customers. Instead, attention could be better placed on the many hidden champions, who though market leaders, are largely unknown but contribute significantly to economic and social prosperity by creating jobs and maintaining sustainable ventures (Lehmann, Schenkenhofer & Wirsching, 2019;Pahnke & Welter, 2019). In their extensive review of innovative entrepreneurship, Block et al. (2017) recommends that focusing on the number and quality of jobs created can better identify productive entrepreneurship. ...
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Entrepreneurship has the potential to drive economic development and social advancement. The European Commission implemented entrepreneurship policy as a pragmatic response to its economic and social challenges, especially after the 2008 financial crisis. Institutional changes to promote entrepreneurship and enable individuals to directly contribute to economic growth, job creation and society were introduced to create an entrepreneurial Europe. This study undertakes a systematic review to examine the implications of entrepreneurship policy within Europe. Examining and understanding the impacts of entrepreneurship policy and institutional changes are particularly relevant because of the billions of Euros invested and the impacts on the working lives of European citizens. By examining a broad range of existing literature, the study finds that the entrepreneurial Europe envisioned by policymakers has not been fully realised. Instead, entrepreneurship activity has skewed towards poor quality, necessity entrepreneurship. The European institutional context has also shifted away from the social model on which it was founded, increasing the exposure of European workers to social risks. To promote sustainable growth, wellbeing and well-functioning labour markets, researchers and policymakers are reconsidering the role of social protection. Social protection also has the potential to promote quality entrepreneurship. Based on the review of literature, seven testable propositions about how social protection can promote quality entrepreneurship have been developed for future empirical testing. This study advances knowledge in entrepreneurship research and contributes to debates in policymaking and practice. It also provides a sound basis for subsequent empirical research.
... The "Mittelstand" is often characterized by family ownership and leadership [9]. Whilst business owners hold control over company decisions over its trajectory, they equally carry the responsibilities that come with entrepreneurial ventures [39] engendering a pronounced emotional attachment and personal commitment to the company [88]. This conservative mindset also materializes in strong social bonds between owners and employees and company strategy which are guided by paternalism and longing for multi-generational continuity [9]. ...
... On the one hand, it is tied to the leadership figure of the business owner, or entrepreneur ("Unternehmer"): to "do good" was, and often still is, a religiously motivated virtue among prominent German business leaders, and it includes treating workers well, and increasingly a concern for environmental protection [9,10]. Owners of small and medium sized firms are often locally involved in philanthropic efforts [67,88]. The responsibility of the entrepreneur ("Unternehmerverantwortung") is directly linked to the principle of the social market economy, installed in postwar Germany, which seeks to tame capitalism and capitalists by way of social policies and regulation to maintain a functioning welfare state [45,118]. ...
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Within the current AI ethics discourse, there is a gap in empirical research on understanding how AI practitioners understand ethics and socially organize to operationalize ethical concerns, particularly in the context of AI start-ups. This gap intensifies the risk of a disconnect between scholarly research, innovation, and application. This risk materializes acutely as mounting pressures to identify and mitigate the potential harms of AI systems have created an urgent need to assess and implement socio-technical innovation for fairness, accountability, and transparency. Building on social practice theory, we address this need via a framework that allows AI researchers, practitioners, and regulators to systematically analyze existing cultural understandings, histories, and social practices of ethical AI to define appropriate strategies for effectively implementing socio-technical innovations. Our contributions are threefold: 1) we introduce a practice-based approach for understanding ethical AI; 2) we present empirical findings from our study on the operationalization of ethics in German AI start-ups to underline that AI ethics and social practices must be understood in their specific cultural and historical contexts; and 3) based on our empirical findings, we suggest that ethical AI practices can be broken down into principles, needs, narratives, materializations, and cultural genealogies to form a useful backdrop for considering socio-technical innovations.
... We targeted the online survey to German Mittelstand firms. Mittelstand firms represent an ideal setting for our research objectives, as these firms are often characterized by long-term and trusting relationships between buyers and suppliers, but at the same time often face automation and globalization issues (De Massis et al., 2018;Heider et al., 2021;Pahnke & Welter, 2019;Pahnke et al., 2022). Besides, many Mittelstand firms are owner-managed, not stock-marketlisted, and are typically smaller than listed firms. ...
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Stable relationships with suppliers have been portrayed in the literature as having several economic and sustainability benefits. However, while a buyer firm’s transformational leadership can be theorized to improve stable supplier relations, recent global business trends such as automation and globalization may endanger this stability. In this study, we therefore analyze the relationship between a buyer firm’s transformational leadership and supplier relational stability and examine whether it is moderated by the buyer firm being affected by automation and globalization. We test our assumptions using data from a survey of German Mittelstand firms and confirm the moderating roles of automation and globalization. Our study therefore provides an updated and more nuanced understanding of how transformational leadership can affect supplier relational stability. Our findings also provide indications of how sustainable supplier relations can be achieved.
... In the United States, Bush Brothers and Company are pioneers in emphasizing sustainability and philanthropy in the food industry. Overall, family businesses are known to merge the pursuit of commercial objectives with a commitment to addressing societal challenges that have direct consequences for the neighborhoods, cities, communities, and regions of which they are parts (e.g., Lumpkin & Bacq, 2019;Pahnke & Welter, 2019;Ruf et al., 2021). ...
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CALL FOR PAPERS Journal of Family Business Strategy, 2021 Impact Factor: 6.114 Special Issue: Inbound and Outbound Theorizing on Family Business in Shaping Industries and Innovation
... This goes hand in hand with a long-term orientation, high innovative strength, and flexibility in response to market change through highly skilled personnel (Welter, 2018;Parella and H ernandez, 2018). In this context, some of these mediumsized companies even play on the international stage as "hidden champions" (Audretsch et al., 2018) and are being compared to entrepreneurship as seen in Silicon Valley (Pahnke and Welter, 2019). ...
... This goes hand in hand with a long-term orientation, high innovative strength, and flexibility in response to market change through highly skilled personnel (Welter, 2018;Parella and H ernandez, 2018). In this context, some of these mediumsized companies even play on the international stage as "hidden champions" (Audretsch et al., 2018) and are being compared to entrepreneurship as seen in Silicon Valley (Pahnke and Welter, 2019). ...
Purpose This paper aims to provide insights into the role of project management associations for the projectification of society from an institutional theory perspective. Design/methodology/approach The paper is based on a mixed methods approach. It draws on the research propositions of a recently conducted qualitative study and builds on them by analyzing the empirical data of a quantitative case study. Findings The results indicate that the projectification of society in Germany is well advanced and continues growing. The economy plays a leading role, which resonates with other sectors of society. The actions of project management associations have only an indirect influence on the projectification of society, which cultural–cognitive institutions are mediating. Both findings are novel compared to the literature. Practical implications Taking an overall view of the findings, project management associations gain a better understanding of the projectification process and important guidance on their role. Social implications The results offer all people interested intriguing insights into the contemporary phenomenon of the projectification of society, along with its current state and future evolution. Originality/value The application of institutional theory to the projectification of society in the framework of this case study enables an in-depth analysis of the underlying social processes and interactions between the regulative, normative and cultural–cognitive activities of project management associations on the one hand, and institutions on the other hand, at the societal level. This opens up new and promising perspectives for further research.
Everyday ventures are important engines of economic and social development around the world. These types of ventures tend to be resource constrained, focused on regional service areas, and rely almost exclusively on replicative approaches to business. Despite their prevalence, these types of ventures receive far less attention in the literature than their innovative, growth-focused counterparts. Thus, there is still much we do not know about how the entrepreneurs behind these types of ventures approach strategy and measure their success. In this qualitative study, we utilize self-determination theory to interpret interview data and illustrate how venture launch and strategic choice allow everyday entrepreneurs to self-fulfill their psychological needs through their business. Doing so, our research answers questions related to: 1) everyday venture launch; 2) the strategies everyday entrepreneurs pursue to position their venture in the market; and, 3) the metrics by which everyday entrepreneurs measure the success of their venture. We find that everyday entrepreneurs self-fulfill their needs for autonomy, relatedness, and competence by launching their ventures and making specific strategic choices regarding competition. More specifically, we find that everyday entrepreneurs primarily rely on differentiation strategies focused on high-quality offerings coupled with a premium customer service experience, while measuring success using an approach similar to the balanced scorecard. We conclude with a discussion of the implications for theory and practice.
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Based on large representative German household survey data, we compare incomes of the self-employed with those of paid employees. We find that the entrepreneurial income gap is largest for those holding a tertiary degree, but in two directions: positive for employers (self-employed with further employees) and negative for solo entrepreneurs. Entrepreneurs holding a tertiary degree also face the greatest income variation. However, some solo self-employed earn more than their employed counterparts, in particular those with a university entrance degree as the highest level of education.
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Abstract Prior findings are inconclusive concerning the innovation output of family and non-family SMEs. The study at hand takes one step back and examines the drivers of innovation output. Applying a contextualized approach, we use data of 1.870 SMEs located in Germany, arguing that the main characteristic of family SMEs is the unity of ownership and leadership. These specific elements affect both the drivers and the output of innovation leading to a more detailed understanding of family firm innovation. Our results indicate that a long-term perspective positively affects innovation output in small family firms. We also show that family firms are better able to preserve the knowledge of the workforce through lower fluctuation rates which leads to higher levels of innovation output. Finally, the succeeding generations of family firm leaders seem to be more risk averse than the founder generation. As a result, the innovation output continuously decreases from generation to generation. Full-text-view:
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German Mittelstand Champions have a distinct management model that dovetails strategy, leadership and governance principles, with core processes in a unique blend, creating a finely tuned whole. We argue: the worldwide success of German Mittelstand companies is not only a result of outstanding products and services; but it also it rests on a very specific management model. In many aspects, this model is a counterexample to the US-dominated mainstream model of management taught in business schools worldwide. It differs in two core elements: a focus on long-term customer relationships rather than competing transactionally at arms-length on anonymous markets, and a focus on long-term survival driven by family ownership, instead of short-term financial focus .
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German Mittelstand firms are globally recognized for their innovation, especially regarding product, process, and service innovation. So what can scholars and managers across the globe learn from the success story of German Mittelstand innovation? Drawing on information collected on innovative Mittelstand firms and extant knowledge on innovation, the resource-based view, and family firm research, the authors investigate how these highly innovative firms flourish and achieve high innovation performance despite the severe financial and human capital resource constraints they face as compared with larger corporations. The authors then present a model identifying and integrating six salient traits of such firms that allow them to efficiently orchestrate their resources to innovate and outcompete their competitors in the global market, enabling those firms to overcome their resource-related weaknesses and turn them into strengths. Specifically, these traits are: niche focus and customer collaboration, globalization strategy, preference for self-financing, long-run mindset, superior employee relations, and community embeddedness. The power of this Mittelstand approach takes full effect only when all six traits operate in an integrated fashion, and the proposed resource-based model serves as a starting point for a more holistic and comprehensive understanding of firm ability to innovate and successfully compete within a specific context. The article outlines the implications of the model of German Mittelstand innovation for research conducted in different fields including innovation, entrepreneurship, strategy, dynamic capabilities, ecosystems, and family business. Finally, the article proposes a future research agenda aimed at improving current understanding of the German Mittelstand "innovation strategy " and its transferability to other contexts, and outlines practical implications for owners and managers worldwide wanting to emulate the German Mittelstand innovation model.
Innovation policy is undergoing a curious two-fold shift towards regionalism. On the one hand, innovation has become a key concern of poicy-making at the regional and city Ievel, guiding investments and shaping communal self-imagination in ever more pervasive ways. On the other hand, our imagination of innovation today is fundamentally linked to certain regions and institutions that seem to have transcended their own particularity, such as the doublets of Route 128/MIT , Silicon Valley/Stanford, or Israel/Technion. Being an innovative region or institution, it seems, is equivalent to being like one of these places, and competitiveness concems and ambitions for development are increasingly articulated vis-a-vis them. As a result, it has become common practice for policy-makers and institutional leaders to Iook to these supposed innovation Ieaders for "best practices" to be distilled and emulated at home. In this chapter, we aim to interrogate a two-fold re-localization of the global political economy of science and innovation- the almost automatic re-imagination of regions as future innovation hubs on the one hand, and the re-imagination of innovation around the practices of a few select places on the other. We argue that the creation of Cornell Tech and the like speaks to a broader "practice turn" in innovation policy that requires a different kind of theorization than currently available in mainstream innovation theory. This mainstream theory continues to explain and enact innovation in terms of universal models, thus failing to account for how much our notion of what constitutes an innovation model has become interwoven with notions of place and practice (as observed in the circulation of "best-practice models" such as the "MIT model," the "Silicon Valley model," or "Responsible Innovation"). A more productive way of understanding models in contemporary innovation discourse is to see them as Traveling Imaginaries of Innovation. With this term, we elaborate on the concept of sociotechnical imaginaries by adding a dimension of global circulation to capture how innovation policy simultaneously mobilizes local understandings of what constitutes a desirable sociotecluucal future and a set of transnational practices that legitimize innovation as a global policy imperative. What bridges this seemingly self-contradictory duality is the interpretive flexibility of traveling imaginaries. Using a brief comparative analysis of three implementations ofthe "MIT model" in the United Kingdom (UK), Portugal, and Singapore, we demonstrate that societies envision fundamentally different things under the Iabel innovation even when making reference to, and implementing, the supposedly same model. At the same time, actors draw upon a globally certified vocabulary and forms of expertise to articulate local visions, mobilize local resources, and justify local policy changes. ldentifying these multiple layers of practice allows us to explain how the same innovation model- and the notion of"innovation" it encodes - are locally co-produced along with a specific diagnosis of a societal need and a complementary vision of the required remedy, leading to utterly different configurations of the imported model (Pfotenhauer andJasanoff, 2018). In contrast, the prevalent "universalist" approach to innovation, which presupposes a single underlying model, identical systems components, and shared rationales about development,leaves key variations in the rationalization, design, implementation, and performance of regional innovation policy unexplained.
The new Germany provides a once-in-a-lifetime living laboratory in which to explore entrepreneurship and family business. On one hand, established West German family-led firms are responding to generational change and the need for new entrepreneurial leadership. On the other hand, the East must rely on entrepreneurship and new venture creation to rebuild this region of Germany. Thus, this study poses the following general research question: “How similar or different are the entrepreneurial orientations and family forces of East German and West German entrepreneurs]” The study explores three dimensions shaping entrepreneurial characteristics and orientations: (a) sociocultural forces (principally the family and personal alliance networks, capturing characteristics associated with demographics, family involvement, and enterprise profiles); (b) personality characteristics associated with entrepreneurial intensity, sacrifice, and achievement motives, which shape entrepreneurial orientation; and (c) environmental perceptions related to infrastructure obstacles confronting entrepreneurial-led family enterprises. The study draws from a sample of 160 East and West German entrepreneurs. The data isolate the differences and identify similarities between East and West German entrepreneurs, as well as provide valuable insights into the family forces shaping SMEs in the new Germany.
Dazed and confused by the wild hype surrounding gazelles and unicorns, entrepreneurship researchers have focused on the black swans of the entrepreneurial world, even though IPOs and venture capital financing of firms are extremely rare events. Despite their rarity, entrepreneurship conferences and journals have been filled with papers on various aspects of the process of “going public” and “VC networks.” Fortunately, in the middle of the Silicon Valley mania, other scholars have been paying attention to the mundane aspects of business startups – – the ordinary business starts, numbering in the hundreds of thousands each year in the United States for businesses with employees. We point out what we believe to be scholars’ misplaced attention to the extreme and their corresponding neglect of the mundane. Correcting the misperception that has been introduced into the literature by selection biases favoring growing and profitable firms will give scholars and policymakers a more accurate and policy-relevant picture of entrepreneurship in the 21st century.
This book was first published in 2004. National economic growth is fueled by the development of high technology clusters such as Silicon Valley. The contributors examine the founding of ten clusters that have been successful at an early stage of growth in information technology. Their key finding is that the economics of starting a cluster is very different from the positive feedback loop that sustains an established cluster. While 'nothing succeeds like success' in an established cluster, far more difficult, risky and unlikely are the initial conditions that give rise to successful clusters. The contributors find regularities in the start of the successful clusters studied, including Silicon Valley around 1964. These cases contain 'old economy' factors such as competencies, firm building capabilities, managerial skills, and connection to markets, more than the flamboyant 'new economy' factors that have been highlighted in prevailing years.