Subsidiarity as Secret of Success: ‘Hidden Champion’ SMEs and Subsidiarity as Winning HRM Configuration in Interdisciplinary Case Studies

Innovation plays a central role in the economy, both as enginge for economic growth, as Schumpeter identified, and for corporate competitiveness and success. There is a growing literature on the role HRM plays in stimulating innovation based on empirical evidence, but with slim theoretical underpinnings. We contribute to the literature by identifying key secrets to the success of German ‘Hidden Champion‘ SME. Hidden Champions are small and mediumsized enterprises that are global market leaders, despite their limited size and their names being largely unknown, maintaining first, second or third place in terms of global market share in their respective market niche. Germany boasts an unusually large number of such Hidden Champions, significantly ahead of any other country, which contribute to a significant proportion of German exports. These firms are highly competitive, due to above-average innovation. What is the secret of their success? In this paper, we first establish that this is not a post-war phenomenon. Instead, the past two hundred years of high performance have to be considered. We postulate that HRM configurations are likely to provide a key explanation. We identify the Prussian army as the source of early HRM empirical experiments and identify the principle of subsidarity as the key component of a successful HRM bundle delivering high firm performance. As robustness check, we identify a contemporary case study from a different organisational field (public fiscal management) and country setting, and confirm an incentive role of subsidiarity. Our findings provide theoretical underpinnings for the empirical studies on successful SMEs and HRM at Hidden Champions. A final section discusses the findings, areas for further research and policy implications.