June 26, 2019. Friederike Welter & André Pahnke on: The German Mittelstand: an antithesis to Silicon Valley entrepreneurship? GLO Research for Policy Note No. 2

Since 2013, GLO Fellow Friederike Welter is head of the Institut für Mittelstandsforschung (IfM) Bonn, a policy-oriented independent research institute on small business and entrepreneurship issues (www.ifm-bonn.org). She also holds a professorship at the University of Siegen. Friederike Welter has broad experiences in applied and policy-related research on entrepreneurship and small business, much of it in an international context. She is a member of several policy-related advisory boards for federal and state ministries and for international bodies. She was President of the European Council for Small Business and Entrepreneurship (2007-2009). For her work on small business and entrepreneurship, she has been honored as ECSB Fellow (2011), as Wilford L. White Fellow of the International Council of Small Business (ICSB, 2014) and she recently received the Greif Research Impact Award (2017). The Frankfurter Allgemeine Zeitung regularly lists her among the most influential economists in Germany.

André Pahnke has studied economics at the Leibnitz University Hannover. First, he worked as a research fellow at the Institut für Arbeitsmarkt- und Berufsforschung, Nuremberg. Since 2011, Dr. Pahnke is a researcher at the Institut für Mittelstandsforschung (IfM), Bonn. His main research fields are International Comparative SME Research, Finance and Apprenticeship Training.

GLO Research for Policy Note No. 2 – Theme 3. Future of work

The German Mittelstand: an antithesis to Silicon Valley entrepreneurship?

by Friederike Welter & André Pahnke

At the international level, many policy makers, academics and business observers are interested in understanding Germany’s “secret economic weapon”, its Mittelstand. It is therefore not at all surprising that foreign officials and business people are making pilgrimages to Germany to learn from the Mittelständler. At the same time, German politicians, journalists, and entrepreneurs travel to the Silicon Valley, to learn from what they perceive to be a vibrant start-up ecosystem, fostering the seemingly endless creation of highly innovative, technology-orientated, venture capital-backed gazelles and unicorns. In meetings with policy makers, one of us is regularly asked why Germany could not have its own Microsoft, Google, Amazon or Facebook. Such statements reflect a current debate in Germany: some perceive the German Mittelstand as a low growth, low-tech and non-innovative approach while in contrast the Silicon Valley entrepreneurship is regarded as the salvation for a doomed German economy. In our recent paper (Pahnke and Welter, 2019), we therefore set out to critically review the assumption of the Mittelstand as an antithesis to Silicon Valley entrepreneurship. We suggest that future research and policies should stand back from dichotomies such as “Mittelstand versus Silicon Valley entrepreneurship” and instead acknowledge the vibrant diversity and heterogeneity of entrepreneurship.
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What we should know

  • Mittelstand is not just about size. There is some confusion about the meaning of the term “Mittelstand”, not only in the media but also among academia. It is often used as a synonym to Small Medium Entreprises (SMEs). However, the small size of Mittelstand businesses is rather a by-product of other key characteristics. Mittelstand entrepreneurs should be first characterized by their independent ownership. They are typically owned by an individual or a family, who is actively involved in the strategic development and management decision-making of their companies and bears the entrepreneurial risks and liabilities of these decisions. The identity of ownership and management should therefore be seen as a key feature when studying Mittelstand ventures.
  • Mittelstand is a mindset. The ideal business model of the Mittelstand combines ownership, leadership and organizational characteristics with individual value systems and attitudes. Due to a number of positive connotations with the term “Mittelstand” in Germany, even large companies – in which the identity feature of the ownership and management is not present – still perceive themselves as Mittelstand. Therefore, emotions, passion and feelings of belonging, play an important role for understanding the Mittelstand.
  • Mittelstand is important for the economy and the society. The Mittelstand is generally considered to be the backbone of the German economy because of its economic contribution in terms of annual sales, export turnover, net value added, employment generation and apprenticeship training. Many studies illustrate, in addition, its substantial contribution to both the economy and the society. Beyond the provision of employment, goods and services, the specific ownership-management structure of the Mittelstand is associated with high levels of social, inter-generational, and regional responsibilities.
  • Mittelstand is as innovative but often in a different way. Regarding the perceived lack of “innovativeness” in Mittelstand firms in comparison to Silicon Valley entrepreneurship, we argue that this is related to a narrow view of innovation. As soon as we apply a wider understanding of what constitutes innovation, the Mittelstand is by no means less innovative. Mittelstand and Silicon Valley entrepreneurship differ with respect to innovations because of different industry structures and target groups. While Silicon Valley innovations are very consumer-oriented and visible to all of us, Germany’s digital and disruptive technologies are first and foremost “deep tech” hidden in products and processes of other companies.
  • Mittelstand has different patterns of employment growth. Silicon Valley entrepreneurship is generally seen as creating many jobs in a relatively short period of time. In contrast, employment growth in Mittelstand ventures has been slower and happening over a longer period of time; although there are also gazelles in Germany. Such comparisons between the Silicon Valley and the Mittelstand are however problematic: they compare apples (a single high-growth company) to oranges (a whole segment of the German economy).

We need more, not less attention to the Mittelstand!

For obvious reasons, the Mittelstand is often seen as an exclusively German phenomenon: it has deep roots in the German history; it stands for a specific German variety of capitalism; and it is strongly influenced by previous and current institutional arrangements in Germany. In our view, however, the Mittelstand is an excellent example of every day entrepreneurship, demonstrating how entrepreneurship that builds on a deep sense of responsibility and solidarity can shape an economy and society and contribute to its world standing. In this regard, the core characteristics of the Mittelstand stand in stark contrast to Silicon Valley entrepreneurship; although one should not overlook important similarities, too. Overall, the Mittelstand is a vibrant segment of the economy. It is competitive, innovative as well as growth oriented; sometimes by other means that are less visible than the well-known uni- or decacorns from the Silicon Valley.

References

Berghoff, H. (2006). The End of Family Business? The Mittelstand and German Capitalism in Transition, 1949-2000. The Business History Review, https://doi.org/10.2307
/25097190

Fear, J. (2014). The secret behind Germany’s thriving ‘Mittelstand’ businesses is all in the mindset. The Conversation. http://theconversation.com/the-secret-behind-germanys-thriving-mittelstand-businesses-is-all-in-the-mindset-25452.Accessed 28 November 2017.

Gantzel, K.-J. (1962). Wesen und Begriff der mittelständischen Unternehmung. Abhandlungen zur Mittelstandsforschung, 4. Wiesbaden: Springer.

Gärtner, C. (2016). Deep-tech in good old Germany: digitale hidden champions. XING Insider. https://www.xing.com/news/insiders/articles/deep-tech-in-good-old-germany-digitale-hidden-champions-532499. Accessed 28 Nov 2017.

Pahnke, A.; Welter, F. (2019): The German Mittelstand: antithesis to Silicon Valley entrepreneurship?, Small Business Economics,  52 (2), 345-358.

Ross Range, P. (2012). The German Model. Report. Handelsblatt. http://www.handelsblatt.com/politik/konjunktur/report-the-german-model
/6966662.html. Accessed 28 November 2017.

Logue, D. M., Jarvis, W. P., Clegg, S., & Hermens, A. (2015). Translating models of organization: Can the Mittelstand move from Bavaria to Geelong? Journal of Management & Organization, 21(01), 17-36.

The Economist (2014). German lessons: Many countries want a Mittelstand like Germany’s. It is not so easy to copy. http://www.economist.com/news/business/21606834-many-countries-want-mittelstand-germanys-it-not-so-easy-copy-german-lessons. Accessed 28 November 2017.

NOTE: Opinions expressed here are those of the authors and not of the GLO, which has no institutional position.

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