Hidden champions: a review of the literature & future research avenues

The first field of research that this review introduces, revolves around the internationalization strategies of hidden champions. Research on family firms points out that risk-aversion and a focus on their local communities lowers the propensity of family firms to internationalize their sales (Zahra 2003). On the contrary, a strong focus on internationalization is typical for hidden champions. World-market leadership of highly specialized niche markets requires to meet large parts of the global demand (Landau, Karna and Täube 2016). The data sample that underlies this review averages the revenues that hidden champions generate through export at 70%. The fewer substitutes that exist for a niche product, the greater the dependence of buyers on the niche company. Niche markets are narrow, as the monopolists in niches have only a few customers (in comparison to mass-markets), which is due to a highly specialized demand. That illustrates why hidden champions are able to serve the world-market as Born-Globals shortly after their foundation (Witt 2015). It is the demand for the highly specialized technology of hidden champions that drives the conquest of foreign markets. To illustrate this with an example, when the Mountain Resort of Lesnaya Skazka, Kazakhstan, was opened in 2018, the choice for a supplier of chairlifts, which is a niche market, was strongly limited. Doppelmayr (Austria) is the world-market leader for chairlifts and has been opening up the foreign market of Kazakhstan, because a highly specific demand for its product had emerged within the respective foreign market. This example of internationalization is typical for hidden champions. At first sight, it seems somewhat exceptional that a company residing in a rural town of only 8,600 inhabitants (Wolfurt, Austria) is able to serve world-markets and establish its market dominance in a country as far as Kazakhstan. Yet, this becomes less of a peculiarity, after having analysed the industry for chairlifts and the internationalization strategies of hidden champions. After the demise of the Soviet Union, Kazakhstan experienced an incredible economic boom averaging its annual GDP growth of 6.63% between 2000 and 2018. In light of its growing tourist sector, the country began to designate new mountain resorts. Attracting winter sports indeed seems like a complementary strategy to the country’s climatic conditions and geographic landscape. The temperature averages minus 20 °C during Kazakh winters and its highest mountain peaks at 7010 m (Khan Tengri). In order to build the mountain resort, an aerial lift system is essential, for which the region’s council was likely to announce a public tender. The market for aerial lifts is a typical niche market and is characterized by a complex and demanding technology and for obvious reason needs to maintain high quality and safety standards. Moreover, the market for aerial lifts exhibits strong monopolization, which is typical for niche markets. While Leitner (Italy) and Pomagalski (France) control 30% together, the world-market leader Doppelmayr Garaventa (Austria) controls 60% of the market and won the public tender for Leznaya Skazka (Doppelmayr 2019).

While Simon (2009) argues that foremost the global mindset of hidden champions would enable their internationalization and building of market-coverage, Audretsch et al. (2018, 2021) point to the character of the niche market that drives the hidden champions’ internationalization strategy. The authors elaborate that in a market of only a few suppliers, technology dependence is the main reason to match demand and supply. A global mindset instead is a characteristic that rather seems to be important in mass-markets, where suppliers need to adapt to local tastes and other cultural traits (Nummela et al. 2004; Ramsey et al. 2016). Competition, for hidden champions, exists mainly within the oligopoly and potentially through entrants into the niche market. Yet, the latter is unlikely due to high barriers of entry (technological edge, specific human capital base of the workforce, strong use of patents, long-term, and close-customer relations etc.). The market concentration of niche markets exerts pressure on the incumbents to not lose market share to the few competitors, as this could drive the incumbent out of the market (crowding out in oligopolies, see McEachern 2011). A niche strategy therefore naturally involves intense internationalization for each market that exhibits a need for the product. Consequently, the psychological, cultural and physical distance to the foreign market plays a subordinate role in niche markets, because the dependence on the often sole producer matches the market and thus drives the patterns of internationalization. In this respect, hidden champions differ significantly from other family businesses and thus represent an anomaly to the literature on family businesses, which states that family firms typically internationalize less extensively, as described above. In support of these considerations, several studies have analysed the internationalization strategies of hidden champions (Fryges 2006; Witt 2015; Audretsch et al. 2018).

Audretsch et al. (2018) investigate the internationalization strategies of hidden champions through the lens of property rights theory. The authors point out that a strong vertical integration is necessary for hidden champions to protect themselves from knowledge drain and to keep quality standards. Vertical integration is essential to reduce the number of contracts concluded over the market to a minimum (Grossman and Hart 1986; Demsetz 1988; Holmström and Tirole 1989; Hart and Moore 1990, 2005; Brynjolfsson 1994; Roberts 2007). Market transactions are pareto-inferior to transactions within the boundaries of the firm, whenever firm assets and their investments are highly specific. Considering the incompleteness of contracts, potential contingencies with market-based contractual parties then could only be averted at great expenses. For this reason, the internationalization of hidden champions foremost takes place by means of direct export and a large number of entirely owned subsidiaries (Haussmann 2003; Witt 2010), since the specificity and thus the technological intensity of the assets make it necessary to secure unequivocal property rights (Acemoglu et al. 2010; Antràs and Chor 2013). Fryges (2006) adds to that and investigates the anomaly that hidden champions export very strongly despite the fact that they are SMEs. In his study, he finds that neither a low firm age nor a small firm size is an obstacle to emulate a high export intensity. What distinguishes hidden champions from other SMEs are firm-specific assets that they use to overcome obstacles of foreign market entry. For the development of the firm-specific assets, it is necessary to invest more than non-hidden champions in R&D, to buy technologies from other companies or to hire managers, with a high experience in the internationalisation of companies. Finally, Witt (2015) analyses the internationalization strategies of British and German hidden champions and the form of market entry into foreign markets. According to Witt, no hidden champion within her sample, follows the Uppsala model, while 43% can be characterised as Born Globals and are already active worldwide shortly after their foundation. All of the Born-Global hidden champions prefer direct export as mode of market entry (Witt and Carr 2013). Relying on their own assets grants them to retain high degree of control, which is essential to protect their technological advantage and the high quality of their products. Her study shows that 20% of her sample of British and German hidden champions can be categorized as Born Again Globals (BAG). This implies that firms initially serve domestic markets until a critical exogenous shock spurs “belated accelerated internationalisation” (p. 285). 37% prove to be hybrid arrangements between the latter modes of entry.

Drawing a conclusion, the literature on the internationalization strategies of hidden champion agrees on the high importance of vertical integration, when entering foreign markets. Hidden champions rely on the boundary of the firm to safeguard the incentive for specific investments. In doing so, hidden champions are better able to internalize the quasi-rent within their own hierarchy and thus largely avoid contracting over markets. Subsidiaries and direct export grant independence from less third-party involvement, which allows to enforce the corporate strategy and protect knowledge and quality standards. The high value-added strategy allows to circumvent the incompleteness of contracts and its threat of hold-up and renegotiation (Coase 1937).

Apart from the internationalization strategies of hidden champions, most studies on hidden champions analyse their R&D and innovation strategies (Venohr and Meyer 2007; Yoon 2013; Rammer and Spielkamp 2015, 2019a). The reason why research mostly examines the latter fields is obvious. The niche strategy of hidden champions places innovation and internationalization at the forefront, as both fields are key to their competitiveness and determine market-leadership (Zastempowski 2011). Hidden champions tailor technologically demanding and knowledge-intensive products, mostly in B2B markets. Technology leadership is key to keep their position as a market-leader. Their strategy of innovation thus can be described as rather incremental than radical (Henderson and Clark 1990). To this effect, the framework of Henderson and Clark allows to classify various types of innovation according to the novelty of the innovation. The authors distinguish between architectural, radical, modular and incremental innovation. Radical innovations are characterized through a strong overall novelty of the product. The novelty of the latter manifests itself in a new design, relies on new components, and needs to be implemented through a newly built system architecture. Of course, moving into uncharted waters requires a higher risk to be borne. Hidden champions instead have no need to disrupt their own markets and rather pursue incremental innovation. The incremental innovation refers to the development of individual components of a core concept that remains unaltered otherwise. Technological improvements are primarily made to satisfy customer needs, to increase customer loyalty, and to safeguard technology leadership (Voudouris et al. 2000; Riisalu and Leppiman 2013).

Although a hidden champions’ product invention, obviously, was a radical innovation, hidden champions focus on incremental innovation afterwards. Their innovation strategy is driven by the close-customer relationship and the strong interdependence inherent in the market relationships to their customers. The high interaction rate and technological specialization allow customers to intensively contribute to the innovation process with their own knowledge about the hidden champions’ product (Baloh 2013; Rant 2013b). Lending from the property rights perspective further above, the hidden champions’ strategy of differentiation both explains the important role of R&D and innovation and why hidden champions are vertically integrated to a great extent (Rant and Cerne 2017b).

The technological complexity of the hidden champions’ niche offer requires to tailor products to the specific use of customers. These knowledge intense industries (mechanical engineering, electrical engineering, chemicals, medical engineering etc.) imply that hidden champions need to protect their intellectual property both through vertical integration and strong patenting efforts. Both is essential to defend their leading market position. Differentiation strategies aim at technological leadership and offering quality products to highly specialized customers. This explains why hidden champions continually foster incremental innovation. The vertical integration therefore is necessary for quality control, as hidden champions largely avoid to depend on market transactions and third party influence (Voudouris et al. 2000; Baloh 2013; Riisalu and Leppiman 2013).

Especially within this stream of research, some studies not only collect samples of hidden champions, but additionally form a control group to compare the innovativeness of hidden champions to other firms. The groups are compared in statistical tests to derive implications regarding the peculiarities of hidden champions compared to other family firms and SMEs. Examples include the studies by Rammer and Spielkamp (2015, 2019a) and Schlepphorst et al. (2016). Rammer and Spielkamp (2015) examine the innovation strategy of German hidden champions. In contrast to most other empirical studies on hidden champions (bottom-up sampling), Rammer and Spielkamp (2015) use a top-down approach to form their own sample of hidden champions. As described above, they use their own (and broader) definition of hidden champions and find 1,583 hidden champions in Germany within their 2015 sample. With propensity score matching, a control group is built to test their assumptions. The findings show that hidden champions innovate more than the control group. In their second study on hidden champions (2019a), again, they use a top-down approach to obtain their sample of hidden champions, where the total number of hidden champions in Germany is extrapolated in a stratified random sample. Within this estimation approach, they find 1,800 hidden champions, building their base to work out distinct success factors regarding the hidden champions’ business strategy and innovation management. The authors conclude that hidden champions pursue an innovation-based business strategy, and that the hidden champions’ global market leadership is based on technological superiority and high customization. Contrary to Simon’s analysis, hidden champions do not spend more on R&D than the control group, but still emulate a higher level of innovation. Rammer and Spielkamp conclude that hidden champions achieve a particularly efficient use of resources, and that this strength is based on four factors: a high focus on the development of their technology, open innovation and strategic networking of their knowledge base, a complementary management of their intellectual property, and finally high investments in the human capital base of their employees.

In another study, Schlepphorst et al. (2016) investigate determinants that distinguish hidden champions from other firms. They form their own sample of German hidden champions by selecting from a large database of companies in which they separate hidden champions from non-hidden champions by criteria similar to Rammer and Spielkamp. Among other factors, they base their selection on the companies' own statements as to whether they are market leaders in Europe or among the top three global market leaders in their segment. Finally, they apply logistic regressions to test factors that distinguish whether a company is part of the hidden champions sample and not part of the control group. On the basis of 60 hidden champions and 346 non-hidden champions, they find that research and development, international business activities, and a great ambition to maximise market shares are characteristics that significantly distinguish hidden champions from other companies.

Venohr and Meyer (2007) examine the long-term evidence of the hidden champions’ leadership, development and strategies over a period of ten years and base their analysis on Simon's set of German hidden champions. They find empirical evidence that hidden champions are especially characterized by family ownership and a family cooperative culture that often is combined with outside professional management, a global market dominance pursuing a niche market approach, and thus the exploitation and enhancement of resources and capabilities on a global scale. Finally, they find that hidden champions are intensively occupied with increasing their operational effectiveness of major processes and functions. These factors altogether explain the organizational fit of hidden champions for their innovative product output and the technological leadership. Yet, another example is Yoon (2013), who examines the R&D and innovation strategies of hidden champions in Korea and finds that hidden champions have more market initiative, technology competence and internationalize stronger than non-hidden champions. Among his sample of hidden champions, he divides between born and acquired hidden champions and finds that born hidden champions show higher innovation, internationalization and patent rates compared to acquired hidden champions. Yoon bases his findings on his own sample of Korean hidden champions and performs t-tests to test his hypotheses against the control group of medium-sized non-hidden champions. Adding to Venohr and Meyer (2007) and Yoon (2013), Kaudela-Baum et al. (2014) examine the determinants of the hidden champions' high innovativeness. They attribute the strong innovativeness of hidden champions primarily to their corporate culture, which motivates employees to develop ideas and pro-actively pass them on to the management. The decentralization of decision-making creates incentives for employees to pro-actively initiate product development. Thus, employees in hidden champions are more involved in the innovation process than in other companies, creating an organizational climate that particularly encourages innovation.

To sum up the literature on the R&D & innovation behaviour of hidden champions, the niche market approach entails that hidden champions produce highly specialised products with a high focus and relatively low product diversification. This specialization requires the development of a deep knowledge base, which is generated through R&D and the collaboration with long-term customers. On average, hidden champions patent significantly more than the companies listed on the German DAX30 index, with 31 patents for every 1000 employees, DAX30 companies on average have only 6 patents per 1000 employees (Simon 2009). Are hidden champions therefore really more innovative than large corporations and other family-owned businesses?

The answer to this question is not unequivocal. Just because companies patent more, does not prove that they actually are more innovative. There are good reasons why companies do not patent despite of being highly innovative. Patents formalize knowledge and thereby make knowledge public for other companies and potential market-entrants. Market incumbents thus may even risk their market leadership. Therefore, comparing innovativeness with mere patent figures is not entirely reliable, because the measurement of innovation through patents can suffer from shortcomings (Shepherd 1979; Acs and Audretsch 1989). Nevertheless, hidden champions face only little competition within their market niche. Thus, they indeed could patent more than other companies, as the threat of product imitation in niche markets is limited. However, Venohr and Meyer (2007) argue that their markets are contestable in the long run. As long as substitutes are available, new competitors can enter the niche market, as soon as it becomes profitable for them. Still, this holds only partly, especially since the narrow market provides too little volumes for large corporations and thus market entry would be rather likely for young and small companies. What distinguishes hidden champions from other Mittelstand and family-owned companies is that they are technology leaders in their product niche. The continuous development of their technology is often carried out in close cooperation with the needs and suggestions of the customers. In narrow niche markets, suppliers and customers are exposed to a high degree of interdependence and thus often work together on a long-term basis and in close ties. As a result, customers have a large share in the ongoing development of the product through their expertise of highly technological products. Hidden champions spend an average of 5% of their sales on R&D, which is even higher compared to the manufacturing companies in the Global Innovation 1000 (4.5%), an index that tracks the most innovative and R&D companies worldwide (Venohr and Meyer 2007; Simon 2009). Technology leadership in niche markets is a key factor that explains why hidden champions offer products of both high quality and prices and thus differentiate themselves from many other Mittelstand companies. Although patent statistics do not necessarily prove innovativeness, the niche approach, the technology leadership and high R&D spending suggest that innovativeness is a specific characteristic of hidden champions.

A third and still rather small field of research explores the geographic distribution of hidden champions. So far, the analysis has centred on the historical origins of Germany’s Mittelstand (Audretsch et al. 2018), the system of vocational education (Lehmann et al. 2019; Audretsch et al. 2021), the inheritance tax regime, the system of corporate boards, and geographic economics (Audretsch et al. 2021) to study the worldwide distribution of hidden champions. Finally, another study investigated the dual system of higher education and the regional distribution of hidden champions in Germany (Schenkenhofer and Wilhelm 2020).

Audretsch et al. (2018) show that hidden champions predominantly belong to those industrial sectors that served as the leading sectors during the German industrialization in the second half of the nineteenth century. The technological development and innovations of this time established technology and thus world-market leadership, which has been maintained in the respective industries ever since (in particular mechanical engineering, the chemical industry, electrical and medical engineering). Lehmann et al. (2019) focus on the centralization of vocational systems and point out why the specific human capital of vocational apprentices proves to be complementary for hidden champions. The authors show that in centralized VET systems, human capital investment is provided publicly and thus employees are incentivized to invest in their stock of specific human capital. In decentralized VET systems, public spending on vocational education and training is limited, which is one reason for a rather low number of hidden champions. The authors thus attribute the distribution of hidden champions to the availability of an economy's stock of complementary (firm-specific) human capital. Centralized VETs reduce the underinvestment of employees in their specific human capital. By investing in firm-specific human capital, employees lock themselves in with the employer and thus reduce their outside opportunities with other firms in the labour market. Therefore, employees commonly are reluctant to invest in their specific-human capital base. Contrary to that, if training is organised by the state and the investment publicly funded, employees are more willing to invest in their specific human capital base. Moreover, a centrally organized certification system also leads to a reduction of lock-in effects and a higher transferability of labour, which likewise increases investments in an economy's stock of specific-human capital. A further study within this field of research is by Audretsch et al. (2021). In their context-choice model, Audretsch et al. (2021) explain the emergence of niche entrepreneurship within national economies around the world. In their model, the authors describe various context variables, such as soft inheritance taxation, dualistic corporate board systems, civil law regimes and therefore underdeveloped traditional and venture capital markets, the low cluster intensity of a country’s economic geography and the centralization of the VET system as complementary to the organizational choice variables of niche entrepreneurs. They substantiate their assumptions through negative binomial regressions for 217 countries. Finally, Schenkenhofer and Wilhelm (2020) examine the geographical distribution of hidden champions in Germany and find that Baden-Württemberg concentrates most of the hidden champions in Germany. In this context, the authors examine the system of dual higher education in Baden-Wuerttemberg and its capability to stimulate the stock of specific human capital in Baden-Wuerttemberg. Another promising subfield within the stream of economic geography examines the importance of innovative businesses such as hidden champions for the development of small towns in peripheral locations (Vonnahme et al. 2018; Lang et al. 2019; Vonnahme and Lang 2019) and for regional economic development (Benz et al. 2021).

A good number of other publications cannot be categorized easily within the typology of this literature review and rather present marginal topics, as Table 3 shows. Plenty of articles within this fourth field of hidden champions research explore the concepts of Simon and test empirically how certain countries’ hidden champions compare to Simon’s German sample. The authors usually build a sample of local hidden champions and use surveys to analyse their country’s case. The conclusions are derived from mostly descriptive analyses and are interpreted in comparison to Simon’s findings. The study by Voudouris et al. (2000) is a typical example of early empirical works within the research field of hidden champions, as it sets up a new sample of world-market leaders for a certain region (Greece in this case) and empirically investigates the success factors that are key to their business strategy. They find that Greek hidden champions are constituted mainly by their high degree of specialisation in narrow market segments, a high commitment to customer service, a culture that fosters innovation and the adaption of new technologies and finally a strong leadership and a healthy organizational climate. Similar to the study by Voudouris et al. (2000), a few studies from the Southeast European region, Russia and Kazakhstan investigate hidden champions descending from emerging markets (McKiernan and Purg 2013a). They use Simon's questionnaire to examine the core characteristics of the identified hidden champions in their countries and compare them with Simon's findings. In total, researchers from 18 countries participated in the survey and found 165 hidden champions, with a much younger average firm age of only 19 years. The export rates of the samples are almost identical to those of Simon's sample (Table 1). Examples of these studies are Brkic and Berberovic (2013a, b) or Lebedev (2013). Brkic and Berberovic (2013a, b) study the marketing strategies of hidden champions of the CEE region and find that hidden champions are able to secure a quality brand position without the usual trade-off between rapidity and quality. Hidden champions achieve to transfer the brand value from their customers to their own brands within B2B markets. Lebedev (2013) studies the financial strategy of hidden champions of the CEE region. In contrast to Simon's sample of German hidden champions, hidden champions in the CEE region need more external finance for growth, which still rests in an early-stage phase. The underdeveloped financial markets prove to be the major economic obstacle for hidden champions within the CEE region.

Other exemplary studies that focus on more marginal aspects of hidden champions research are Kirner and Zenker (2011) or Garaus et al. (2016). Kirner and Zenker (2011) investigate the role of knowledge angels for the corporate success of hidden champions. Knowledge angels contribute special expertise to the company and thus combine internal and external knowledge, which is particularly beneficial for the technological advantage of hidden champions. Garaus et al. (2016) analyse ambidextrous Human Resource Management systems using case studies of hidden champions. They find that integrative employment practices support the integration of knowledge within the organization.