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Hidden champions and unicorns: a question of the context of human capital investment

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Abstract

The Silicon Valley model of high-tech entrepreneurship has been placed in the spotlight by academics in the past at the expense of the plenitude of Main Street businesses — businesses beyond the high-tech and ICT sector and the highly scalable platform economy. This study aims at resolving this one-sidedness contributing to unexplained aspects of entrepreneurship theory. Our focus lies on a subgroup of Main Street companies, known as hidden champions, as the counterpart of Silicon Valley high-growth firms, the unicorns. In spite of a worldwide distribution, just as unicorns are highly skewed to a few countries and regions, so are hidden champions. On a snapshot, it appears that unicorns and hidden champions are substitutes rather than complementary to one another. We illustrate that the emergence and skewed distribution of these two types of firms can be explained by the institutional context, in particular the provision of human capital. In an explorative approach, our line of reasoning puts forward that the centralization (public provision) vs. decentralization (individual investment) in organizing the accumulation of human capital helps to explain the different and path-dependent evolution of both, the Silicon Valley and the Main Street models of entrepreneurship.

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Notes

  1. Source: own calculation based on Fortune’s unicorn list (available at http://fortune.com/unicorns). Accessed 07 January 2017.

  2. DG Trade Statistical Guide (June 2017). World Trade in Goods, Services, FDI. Available at http://trade.ec.europa.eu/doclib/docs/2013/may/tradoc_151348.pdf.

  3. See Fleming (2017) for a detailed and precise analysis of this human capital controversy in the 1960s.

  4. This directly follows from the famous Stiglitz and Weiss (1981) model on credit rationing. While the expected profits increase with the riskiness of the firm’s project, this also leads to adverse selection (high-risk firms) and moral hazard (gambling for resurrection) effects. The equilibrium is an interest rate at a given level of riskiness, which leads to credit rationing for higher risk firms. Since creditors could not benefit from the “upside risk” (when firms overperform) but bear the downside risk (the costs of failure and bankruptcy) they could not trade off these costs and benefits. Equity investors however could trade off the risk and benefits of their investment by increasing their portfolio.

  5. This is reflected by the takeover waves of hidden champion firms in Germany, France, and Italy in recent years, by Chinese and US companies. The takeover of Grammer, a hidden champion in the automotive sector, by TESLA in 2016 drastically reflects the deep roots of the buyer-supplier relationships, when former key clients of the target company are now becoming rivals to the merged company.

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  1. Faculty of Business and Economics, University of Augsburg and CCSE (Augsburg/Bergamo, It), Universitaetsstr. 16, 86159, Augsburg, Germany

    Erik E. Lehmann

  2. Faculty of Business and Economics, University of Augsburg, Universitaetsstrasse 16, 86159, Augsburg, Germany

    Julian Schenkenhofer & Katharine Wirsching

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  1. Erik E. Lehmann
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Correspondence to Erik E. Lehmann.

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Lehmann, E.E., Schenkenhofer, J. & Wirsching, K. Hidden champions and unicorns: a question of the context of human capital investment. Small Bus Econ 52, 359–374 (2019). https://doi.org/10.1007/s11187-018-0096-3

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