Stefan Fritsch* Technological innovation, globalization ... · Technological innovation, globalization, and varieties of capitalism ... the paper argues that it was the intro-duction

Bus. Polit. 2015; 17(1): 125–159

Stefan Fritsch*Technological innovation, globalization, and varieties of capitalism: the case of Siemens AG as example for contingent institutional adaptationAbstract: Contemporary discussions in the comparative political economy of innovation revolve specifically around the question of globalization’s impact on the observable diversity of innovation patterns, institutionally grounded com-parative advantages of firms and countries as well as their evolution over time. The paper develops the concept of “contingent institutional adaptation” to trace institutional evolution at the firm level. It advances the idea that contingent adaptation can cause institutional hybridization, an evolutionary path defined by change and continuity, thereby offering a more nuanced concept of institu-tional evolution over time. In a historic single-case study the paper investigates the German Siemens AG and its efforts to remain on the cutting-edge of major information and communication technologies in two time periods (1847–1914; 1989–2013), both marked by institutional adaptations resulting in hybridization. Ultimately, institutional hybridization led to Siemens’ retreat from all informa-tion and communication technology sectors.

DOI 10.1515/bap-2014-0020Previously published online February 19, 2015

1 IntroductionThis paper is concerned with institutional change in the face of techno-economic globalization. Specifically, it aims to better understand how firms of different national political economies handle the challenge of achieving a “fit” between a range of possible contingencies and the firm’s institutions and strategy over time. Much Comparative Political Economy (CPE) research on innovation assumes

*Corresponding author: Stefan Fritsch, Assistant Professor of International Relations and Comparative Government, Department of Political Science, Bowling Green State University, 116 Williams Hall, Bowling Green, OH 43403, USA, Tel.: +419-372-7338, e-mail: [email protected]

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homogenous frameworks of political-economic institutions across countries, which reproduce and – according to some accounts – even deepen comparative advantages of firms and countries in the face of globalization. Accordingly, firms specialize in those technological sectors that are compatible with their country’s respective political-economic institutions. Hyper-globalists, on the other hand, predict a convergence of “national capitalisms” towards a neoliberal or Anglo-Saxon ideal, a process driven by externally generated deterministic requirements of an increasingly interdependent world economy.1

Contrary to both perspectives, this paper defines the ability of firms to succeed as the result of “contingent institutional adaptation” to globalized, and increas-ingly trans-nationalized, technological challenges. Contingent institutional adap-tation, a concept borrowed from Organization Studies (OS), is a process during which existing institutions impact firms’ perceptions of new challenges as well as reactions to them, but are also principally open to adaptation. Adaptation can range from stasis on the one end to partial and incremental change to broad and radical change on the other end. At the same time, continuity, defined as historical institutional path-dependencies, impacts the range of firms’ options for strategic and institutional adaptation in reaction to various contingencies. The theoretical approach offered in this paper represents a “middle ground” based on an interdis-ciplinary combination of insights from CPE and OS. It provides a more nuanced analysis of the interrelationship between technological dynamics and institu-tional adaptation to better account for the actual variation in firms’ institutional characteristics and emerging strategies within sectors, countries, and the global economy. It thereby avoids the cultural/institutional determinism and assumed homogeneity across national economies, which is often implicitly present in much CPE work. It also provides an institution-based counter-perspective to the techno-logical and structural determinism of OS’ classic contingency theory.

In a single-case study, this paper investigates the German Siemens AG and its efforts to remain on the cutting-edge of major information and communica-tion technology (ICT) sectors from its formation in 1847 through the early 2000s. Siemens’ long-term engagement in various ICT-sectors, as well as its early mul-tinationalization strategy, represent a challenge to several predominating CPE postulates regarding assumed fits between institutional environment, technology-specific characteristics and comparative institutional advantages. The Siemens case offers the opportunity to empirically illustrate the concept of “institutional hybridization,” which is one potential result of contingent institutional adapta-tion and has been a defining characteristic of Siemens’ evolution since its for-mation. As Siemens transformed its corporate culture during the early 1990s to

1 Ohmae (1990); Reich (1991); Fukuyama (1992); Albrow (1996).

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address a variety of contingencies, management-initiated efforts to “Americanize” Siemens’ corporate identity and culture were only partly successful, but neverthe-less resulted in extensive changes to corporate culture, governance and strategy. While Siemens’ ultimate retreat from all ICT-sectors could be justified with the institutional incompatibility between coordinated market economy institutions and the institutional requirements of ICTs, the paper argues that it was the intro-duction of a more pronounced profit-orientation and related business strategies in combination with Siemens’ historic risk-aversion and incremental cultural change that ultimately caused the end of its ICT-businesses. Since Siemens’ new corporate culture now also guides its remaining divisions, which are more in alignment with CPE assumptions about comparative technological specializations in coordinated market economies like Germany (medical, energy and transportation technology), it is considered representative of institutional hybridization.

The paper begins with an overview of theoretical discussions in CPE and OS regarding the impact of institutions on firms’ and countries’ technological inno-vation capacities. This is followed by a section, which develops the concept of contingent institutional adaptation for the purpose of providing a more nuanced and historically informed firm-level analysis of the contingency-fit problematic. The concept is then applied to the case study by tracing major developments and turning points in Siemens’ ICT-related business history, culminating in its ulti-mate retreat from all ICT-sectors.

2 Capitalist diversity, globalization and techno-logical innovation

The CPE literature on capitalist diversity and technological innovation patterns has grown rapidly over the last two decades.2 A vast body of scholarly work locates the reasons for persistent cross-national diversity in innovation activity in the market’s embeddedness in country-specific cultural, socio-economic, political and legal institutions.3 It identifies combinations of country-specific institutions as the prime source of national political economies’ comparative advantages, which further determine their technological innovation characteristics.4 Such institutions are often closely linked to culture and cannot easily be transferred to

2 Piore and Sabel (1984); Streek (1991); Hodgson (1996).3 Hollingsworth, Schmitter, and Streek (1994).4 Archibugi and Michie (1997); Dosi et al. (1988); Edquist (1997); Freeman (1987); Hollingsworth and Boyer (1997); Lundvall (1992); Nelson and Winter (1977, 1982); Nelson (1993); Whitley (1994, 1998, 1999); Hall and Soskice (2001).

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other socio-cultural settings.5 The Siemens case will demonstrate the difficulties associated with the transformation of existing firm institutions and their cultural foundations by introducing new or foreign institutional elements in reaction to new contingencies.

CPE scholarship broadly differentiates between liberal market economies (LMEs) and coordinated market economies (CMEs). LMEs, such as the US, Great Britain or Australia, are defined by a Fordist production system that relies on the production of standardized goods with highly specialized equipment and less skilled labor. LMEs’ labor markets offer high flexibility and firms have little incen-tive to invest in their employees’ continuous skill-acquisition. Employees are trained in broad and generalizable skills, which improve transferability between employers. Firm capitalization in LMEs is primarily organized via well-developed stock or securities-markets, which in turn results in management’s emphasis on short-term profit maximization over long-term growth perspectives in order to satisfy impatient investors. Inter-firm relations are governed by non-cooperative arms-length market exchanges and formal contractual agreements, indicating a general lack of institutions to foster trust, information exchange, technology transfer and cooperative deliberation among firms. Public policies focus on guar-anteeing the free market’s functioning through strong anti-trust legislation and the weakening of other forms of collective action.6

In contrast to LMEs, CMEs, such as Germany, other continental European countries or Japan, are defined by flexible quality production regimes that man-ufacture highly specialized goods with the input of highly skilled labor. Their labor markets are characterized by long-term employment and worker loyalty in exchange for continuous firm-investments in skill-development. Financial rela-tions are still dominated by banks, even as the role of stock or securities-markets increases, which in turn enables management’s stronger long-term growth and market-share orientation. Inter-firm relations are based on well-developed col-laborative networks, information sharing, deliberative bodies and technology-transfer facilitated by cross-shareholdings, active industry associations, etc. Public policies are generally supportive of such non-market coordination mecha-nisms.7 Based on their respective “comparative institutional advantages” as well as the specific requirements of various technologies,8 the literature draws the

5 Johnson (1992).6 Hollingsworth (1997); Hall and Soskice (2001). 7 Hollingsworth (1997); Whitley (1999); Hall and Soskice (2001).8 Kitschelt (1991) differentiates technologies based on their degree of asset-specificity, the local or rather global character of learning processes and the general degree of uncertainty they in-volve. While some technologies are determined by radical and rapid innovation, others proceed in more incremental evolutionary steps.


general conclusion that firms in LMEs specialize in technology sectors marked by radical innovation, which is characteristic of telecommunication, semi- conductors, software or biotechnology, whereas firms in CMEs have advantages in sectors defined by incremental innovation, such as machine tools, production equipment, durable consumer goods, energy, transportation, etc.9

3 Organization studies, technology, and institutional evolution

The dominant LME-CME dichotomy in combination with the assumption of deepening institutional comparative advantages and institutional path-depend-ency complicates the analysis of empirical cases such as Siemens, whose insti-tutional and organizational characteristics as well as evolutionary paths defy this dichotomy. OS can intervene here with relevant insights, to help refine CPE’s perception of contingencies, obstacles to institutional change as well as the pos-sible outcomes of institutional adaptation firms have to cope with. Contingency Theory was developed within OS to understand how a wide range of organi-zations address the problem of matching their organizational structures with emerging contingencies.10 Theoretically, any variable that impacts the relation-ship between organizational characteristics and performance can be considered a contingency.11 Potential contingencies range from organizations’ environment12 to their size,13 strategy14 and technological innovation.15 Although Contingency Theory differentiates between external and internal contingencies, it ultimately focuses its analysis on internal contingencies as expressions of external ones. Organizations seek to attain a fit between their structures and evolving con-tingencies to enhance performance. Misfit between contingencies and organi-zational structures require adaptation to re-establish fit. Thus, Contingency Theory is a theory of organizational change that analyzes organizations’ struc-

9 Dore (1986); Archibugi and Pianta (1992); Hall and Soskice (2001).10 The term organization denotes the managerial-administrative and structural properties governing the process of planning and arranging different parts of a firm. See, for example, Blau and Schoenherr (1971); Burns and Stalker (1961); Lawrence and Lorsch (1967); Pennings (1992); Pfeffer (1982).11 Donaldson (2001).12 Child (1975); specifically for MNCs see Ghoshal and Nohria (1993).13 Blau (1970).14 Chandler (1962, 1990, 2001).15 Burns and Stalker (1961); Hage and Aiken (1970); Woodward (1965).

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tural adaptation over time as they move out of and back into fit in reaction to a variety of contingencies.16

Considering that managers can never have perfect information about the contingency-fit relationship, their decisions are based on what Simon (1976) described as “bounded rationality.”17 Due to management’s limited knowledge about which components of a firm’s organization have to adapt to match evolving contingencies and what direction this adaption should take, the theory postu-lates that firms can remain in a quasi-fit for extended periods of time. Quasi-fit narrows the gap between a firm’s actual structure and necessary adaptations that would result in complete fit with its contingencies.18 Incomplete fit still allows for a relative satisfaction of performance expectations. Technological innovation in particular creates task uncertainty, since companies have to structurally react to innovation-driven contingencies. Low rates of technological innovation are com-patible with mechanistic and hierarchical firm structures characterized by verti-cal information flow, centralized decision-making and tightly prescribed roles on subsidiary management levels. High innovation rates require an organic struc-ture emphasizing flexibility, decentralized decision-making and employee initia-tive.19 The Siemens case falls outside this dichotomy, since Siemens innovated in ICT-sectors while, for most of its history, maintained a famously mechanis-tic structure. Those organizational structures as well as institutional properties like the foundational “Siemens culture,” allowed for long-term quasi-fit, which only became undone by mounting contingencies since the late 1980s. Galunic and Eisenhart (1994) point out that Contingency Theory scholarship has done little research on how specifically firms achieve innovation and which factors shape a firm’s innovation efforts.20 As soon as technology itself is problematized, as is done by the institutionalist approach in OS, institution-related contingen-cies such as absorptive learning capacities are shown to impact firms’ abilities to collaborate with outside partners in R&D, to react efficiently to organizational decline or to determine in which sectors a firm can be competitive.21

Contingency Theory’s perception of the adaptation process as a perfectly manageable process underplays the possibility of achieving better fit via continu-ous incremental adaptation steps, a process that has been termed “logical incre-mentalism.”22 According to Quinn (1980), the fit between a firm’s strategy and

16 Donaldson (2001).17 Simon (1976).18 Channon (1973); Fligstein (1985); Palmer, Jennings, and Zhou (1993).19 Burns and Stalker (1961); Hage and Aiken (1970); Woodward (1965).20 Galunic and Eisenhart (1994).21 Chandler (2001); Mone, McKinley, and Barker (1998); Tsai (2009).22 Donaldson (2001).


structure might actually tighten during equilibrium periods, thereby increasing the likeliness of resistance to change23 as in the case of Siemens during the early 1990s. Resistance to change then has to be addressed by management through “punctuated change.”24 Galunic and Eisenhart (1994) also highlight the possibil-ity of meeting multiple contingencies simultaneously and redirect attention away from structure to the actual adaptation processes.25 This would move Contingency Theory beyond its functional-deterministic strategy-structure model including its deterministic conception of the institutional adaptation to technology, which is uncritically assumed to continuously develop towards greater efficiency.26

Contrary to Contingency Theory, the institutionalist approach to OS empha-sizes the complex multidimensionality of any institutional adaptation process, irrespective of its drivers. While Contingency Theory explains organizational diversity, Insitutionalism explores the reasons for the “startling homogeneity of organizational forms and practices,”27 something, which requires stronger focus on the social psychological foundation of social macro-structures.28 According to DiMaggio and Powell (1994), the “new institutionalism in organization theory and sociology comprises a rejection of rational-actor models, an interest in insti-tutions as independent variables, a turn toward cognitive and cultural expla-nations, and an interest in properties of supraindividual units of analysis that cannot be reduced to aggregations or direct consequences of individuals’ attrib-utes or motives.”29 In the sociological tradition, institutions are perceived as both a “phenomenological process by which certain social relationships and actions come to be taken for granted,” as well as a set of circumstances that enable shared beliefs into definitions of “what has meaning and what actions are possible.”30

Instead of being the result of rational decision-making to address contin-gencies, the institutionalist perspective sees adaptation as shaped by coercive, mimetic, and normative processes whose goal is to generate legitimacy via

23 Quinn (1980).24 Tushman and Romanelli (1985: p. 171); see also Miller and Friesen (1984); Mintzberg and McHugh (1985).25 Galunic and Eisenhart (1994). Further critical voices questioned the employed quantitative measurements of the technology-structure relationship, which might result in a statistical un-derrepresentation of technology-based contingencies, thereby lending more support to size as the major contingency. Overall, the predominating technology conceptions are too simplistic and summary given the actual complexity of contemporary industrial technology (see Child and Mansfield 1972).26 Mumford (1934); Ellul (1964); Smith and Marx (1994).27 DiMaggio and Powell (1983: p. 148).28 DiMaggio and Powell (1994: p. 16).29 Ibid (p. 9).30 Zucker (1983: p. 2).

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institutionally acceptable organizational forms.31 Coercive processes are based on power relations and legitimacy concerns – i.e., who determines the outcomes of institutional adaptation and how can adaptation measures be justified internally to employees, management and workers. Mimetic processes refer to the impact of uncertainty on a firm’s likeliness to imitate its peer organizations. Uncertainty can be triggered by changes in technology, the environment, management’s inability to define a problem’s cause, or unclear solutions,32 often resulting in adaptation of already existing or cheap solutions.33 Normative pressures can stem from col-lective struggles to define commonly acceptable standards and methods of doing things.34 As CPE has ably demonstrated, a society’s socio-cultural and norma-tive values shape the institutional framework of national political economies and the firms operating within and between them. Socialization processes lead to a sharing of joint cognitive frameworks, which infuse initially instrumental pro-cesses with value as intrinsic worth, through which contingencies are identified and analyzed. Institutionalist scholars such as Scott (1995) therefore argue that organizational adaptation is often primarily driven by internal legitimacy rather than efficiency concerns.35

Besides normative beliefs, the members of organizations also share culturally defined cognitive frameworks and understandings of means-ends relationships that help to define intra-organizational purpose and to turn the environment as well as employees into resources. Shared meaning and purpose also enable the presumption of a “unified sovereign” that gives coherence to organizational functioning.36 Together, these processes enable the development of a technicist mentality that permeates organizational methods and management practices.37 Organizations are built around a conceptualization of technology-based pro-cedures that enable reliable performance as well as the social construction of institutionalized beliefs that help to assure accountability.38 Moreover, the envi-ronmental conditions of a firm at the time of its creation are especially vital in understanding the firm’s structure. The socio-cultural environment imprints itself onto the firm and tends to persist over time while it becomes institutional-ized.39 As will be shown later, this is clearly observable in the case of Siemens

31 DiMaggio and Powell (1983).32 March and Olsen (1976).33 Cyert and March (1963).34 Larson (1977); Collins (1979).35 Scott (1995).36 Meyer (1983: p. 265ff).37 Ellul (1964).38 Hannan and Freeman (1984).39 Stinchcombe (1965); Kimberly (1975).


during the first decades of its existence. With regard to the relationship between technological evolution and a firm’s adaptation need, institutionalist scholarship displays clear social constructivist leanings. Technology in this context is per-ceived as a highly politicized and socially constructed phenomenon, rather than a neutral tool or instrument.40 For Social Constructivists, technological impera-tives are refracted through the firm’s organizational structures, strategies and institutional characteristics, which determine the direction of organizational and institutional evolution, rather than representing a rational process determined by a quasi-independent technology. On the other hand, though, Social Constructiv-ists as well as Institutionalist OS might underestimate issues such as technologi-cal path-dependency, imperfect information about technological alternatives, unintended consequences of new technologies, the growing cost-factors related to increasingly transnational research and development, and production.41 How can these different perspectives and levels of analysis be integrated to jointly generate a more refined understanding of the interrelationships between contin-gencies and institutional adaptation? The following chapter proposes a way to integrate these different perspectives to analyze institutions as contingencies in themselves and develop the concept of “contingent institutional adaptation” as well as one potential outcome, namely institutional “hybridization.”

4 Towards an integrated approach of contingent institutional adaptation

The relative strengths of each perspective above can be integrated to further this paper’s concepts of “contingent institutional adaptation” and “hybridization.” In this context, several issues have to be addressed. First, with regard to the levels-of-analysis subject, Contingency Theory remains soundly focused on the firm level. Institutionalist OS and much of CPE scholarship expand their focus beyond the firm onto sectoral, local, regional and national levels of analysis and their institutionally grounded incentive structures for particular innovation activi-ties.42 So far, little research has been conducted within CPE on the impact of firms’

40 Kranzberg (1986); Pinch and Bijker (1987).41 Gereffi, Humphrey, and Sturgeon (2005); Hughes (1969, 1983, 1994); Patel and Pavitt (1997); Penrose (1985); Rosenberg (1994); Phillips (2000); Winner (1977, 1986).42 Breschi and Malerba (2006); Hall and Soskice (2001); Malerba (2002); Pavitt (1984); Porter (1990). Hall and Soskice (2001: p. 16) argue that the national level of analysis remains the most relevant, since many institutions have either directly been established or maintained on the na-tional level or depend on national regulations.

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cross-border activities on national economic governance structures. However, as pointed out by a growing number of scholars, the relationship between multina-tional corporations (MNCs) and home as well as host countries is complex and varied and can result in mutual absorption of new technology, know-how and a wide range of other material and immaterial factors in a highly dynamic manner.43 That is, a sole focus on the national level is increasingly deemed insufficient to fully capture the intricate and often complementary relationships between local, national and global networks of knowledge creation, application and diffusion.44 In this context, Hollingsworth (2000) promotes a multi-level approach, because it enables us to better understand the interrelationships between interconnected institutional levels.45

Second, Institutionalism and Contingency Theory differ with regard to their respective perception of institutions. Contingency Theory’s emphasis of the rela-tionship between performance, internal contingencies and functionalist-struc-tural adaptation largely ignores firms’ institutional embeddedness as irrelevant. Although contingencies can hypothetically take many forms and organizational environments are often mentioned as relevant, Contingency Theory predomi-nantly focuses on technology and size as main explanatory variables. As the Siemens case demonstrates, a firm’s institutional environment and corporate culture are equally important contingencies. Until recently, CPE scholarship pre-dominantly perceived institutions as rather stable constraints on actors, their interests and strategic behavior. Differences among CPE scholars emerged over the question of how and to what extent institutions restrain or condition actor behavior and how they evolve over time in reaction to external transformation pressures while being defined by – at least partially – historic path-dependencies. While some scholars originally assumed that institutional comparative advan-tages would persist or even deepen in an increasingly globalized economy,46 others argue for a more flexible evolutionary understanding of institutional settings. Institutional adaptation could then be understood as open-ended and contin-gent on technological imperatives, societal preferences, institutionally grounded

43 Cohen (2007); Kogut and Zander (1993); Verbeke (2003).44 Archibugi and Michie (1995); Casson, Pearce, and Satwinder (1992); Fransman (1997); Yoon and Hyun (2009).45 Hollingsworth (2000: p. 601) identifies five interrelated components ( levels) of institutional analysis, which differ in terms of permanence and stability (from stable and long lasting to more volatile): 1) Institutions embodied as societal norms, rules, and habits 2) Institutional arrange-ments such as markets or states, etc., 3) Institutional sectors such as training and education, financial or innovation systems, etc., 4) Organizations, and 5) Outputs and performance.46 Whitley (1998); Hall and Soskice (2001).


incentive structures or political decisions.47 Possible outcomes could range from institutional stasis to radical transformation. Arguably, a more flexible concep-tion of institutional evolution would avoid deterministic assumptions about the convergence of national responses and mediation processes in reaction to regional integration, liberalization and the transnationalization of knowledge creation, innovation and production in the form of MNCs.48 In this process, “nothing is auto-matic” and “sustained variations in national capitalism on a global basis” seem very likely.49 In this context, the LME-CME dichotomy has recently been challenged by empirical work that found no significant differences in the innovation output between the two systems, once the US – which might be considered a major outlier in the class of LMEs – is excluded from statistical analysis.50

Third, the role of firms in the innovation process is also evaluated quite differ-ently. While earlier CPE literature identifies the firm as one among many relevant actors in national business systems,51 the Varieties of Capitalism (VoC) approach proposed by Hall and Soskice (2001) explicitly aims to bring the firm back into the center of analysis as central strategic key player in the national political economy. Firms interact with other strategic key players to further develop their dynamic capabilities and maximize their interests.52 However, as Allen (2004) argues, the VoC approach rather than being actor-centered ultimately represents a structural approach since it assumes institutions to be uniformly spread across the firms of a country’s political economy.53 Moreover, VoC’s rational-actor based methodo-logical individualism largely ignores constitutive elements of institutions such as trust, loyalty and other traditional principles inherent in a social system of production.54 The Siemens case highlights the possibility that such constitutive cultural elements themselves become contingencies if they are deemed incom-patible with technological or market imperatives, intensified by changing public policies. While CPE generally identifies the institutional setting as primary determinant of firms’ technological activities,55 its system approach, though, underplays firm agency and runs “the risk of getting caught in a functionalist and determinist universe where it is impossible to locate the source of change

47 Allen (2004); Streeck and Thelen (2005); Deeg and Jackson (2007).48 Hay (2004); Hall and Thelen (2009); Lane (2008); Patel (1995); Bloch and Metcalfe (2011); Whitley (2012).49 Wilkins (2010: p. 645).50 Taylor (2004).51 Hollingsworth, Schmitter, and Streek (1994).52 Hall and Soskice (2001).53 Allen (2004).54 Casper, Hollingsworth, and Whitley (2005).55 Dosi (1982); Nelson and Winter (1982); Pavitt (1984).

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[and] firms are conceived as puppets on institutional strings.”56 To counter the perceived statism of CPE’s understanding of institutions, recent suggestions hold that institutions should not only be viewed as constraints, but also as “resources providing opportunities for particular types of action, and especially for collective action.”57 Contingency Theory’s rationalistic-functional understanding of firm adaptation supports this pro-active approach by highlighting the fact that firms are actively engaged in performance evaluations, search for new markets, obser-vation of competitors, technological innovations, etc. They adapt their structure and strategies to accommodate new contingencies. Yet, what the Siemens case will demonstrate is the need to include contingencies such as corporate identity and culture to generate a more contextualized and flexible perspective on why and how companies adapt and what forms institutional changes can take.

Finally, differences also exist with regard to the perception of technology and institutional adaptation itself. For a majority of the CPE and Institutionalist OS literature, technological innovation is determined by country- or organization-specific institutional combinations and comparative advantages, to which firms adapt with the development of specific technological capabilities. Ultimately, firms’ technological capabilities are culturally determined by socially constructed norms and values.58 Contingency Theory, on the other hand, emphasizes the tech-nological imperatives of innovation to which firms have to adapt.

5 Case selection and methodologySiemens AG, one of the oldest continuously existing firms in the world,59 was chosen for this case study because of its characteristics as a diversified German high-tech MNC that historically covered most ICT-sectors from its start-up days in the 1840s until its gradual retreat from ICTs beginning in the early 2000s. The case study selectively analyzes two time periods of Siemens’ company history: 1848–1914 and 1989–2013. During its first 60 years, Siemens evolved from a start-up to one of Germany’s largest corporations. From its outset, Siemens displayed a multifaceted expansionary strategy that was driven by the technological char-acteristics of its products, domestic and international market opportunities and (initially) limited human resources. Structural adaptation can be traced as a result of growth and diversification efforts as postulated by Contingency Theory.

56 Meus and Oerlemans (2005: p. 61).57 Hall and Thelen (2009: p. 10).58 Whitley (2000).59 De Geus (1997).


In the process, Siemens’ evolution displayed an interesting mix of calculated risk-taking paired with financial prudence, an emphasis on technological leader-ship via high-quality engineering, rapid product diversification and geographic expansion. However, from an institutional perspective, Siemens is also represent-ative of the German innovation system with its traditional emphasis on sophisti-cated science and engineering, high product quality and incremental innovation. The start-up phase therefore offers the opportunity to retrace the evolution of the founder’s business philosophy that would shape Siemens’ corporate culture, employment polices and customer-relations for decades and increasingly turn into a contingency during the 1990s. After World War II, Siemens developed into a textbook example of a “national champion” who thrived in international, yet state-controlled ICT-markets.60 The period between 1989 and 2013 highlights the difficult adaptation of innovation capabilities, corporate culture and firm-strat-egy in reaction to accelerated technological change associated with the intro-duction of digital technologies such as PCs, computer chips or mobile phones, changing financial relations, and growing market dynamics fueled by telecom-munication liberalization since the early 1990s. During this turbulent phase of uncertainty, institutional factors such as corporate identity as well as governance aspects moved out of fit with technological and market imperatives. Institutional-ist analysis can help us to define and analyze these issues as pivotal contingen-cies to which answers had to be formulated and implemented.

Methodologically, the present case study applies process-tracing, i.e., the carrying out of “within-case analysis based on qualitative data.”61 According to Gerring (2006), process tracing invokes a logic that is “analogous to detective work, legal briefs, journalism, and traditional historical accounts. The analyst seeks to make sense of a congeries of disparate evidence, each of which sheds light on a single outcome or a set of related outcomes.”62 From a purely historical point of view, Siemens AG represents a rather well studied enterprise, especially when compared to many of its global competitors. The empirical analysis is therefore based on a quite solid body of secondary literature such as historical business and journalistic accounts, autobiographical literature published by various members of the Siemens family, newspaper articles, annual company reports, data pro-vided by UNCTAD’s World Investment Report and interviews conducted in 2004. These more practical considerations represent another reason for this paper’s analysis of Siemens AG. Although the available amount of qualitative data would offer the opportunity to produce a very long and detailed historical narrative, this

60 Chandler (2001); Peterson and Sharp (1998). 61 Collier (2011: p. 823). See also Fenno (1977); George and Bennett (2005); Mahoney (1999, 2010).62 Gerring (2006: p. 178).

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is not necessary to strengthen the theoretical arguments presented. Of central importance is “the quality of the observations and how they are analyzed […] that is relevant in evaluating the truth claims of a process-tracing study.”63 The following historical case study will demonstrate the importance of institutional configurations that, in combination with external institutional factors, shape long-lasting corporate cultures and self-understandings, which in the case of Siemens turned into an obstacle for strategic adaptation from a German to an increasingly “global” corporation. It therefore had to be transformed to regain fit with emerging contingencies that ranged from accelerated innovation cycles to public policies, new investor and market relations as well as newly dominating profitability concerns.

5.1 The early developments (1847–1914): dreaming of a family world empire

The Siemens and Halske (S&H) telegraph company was established in 1847 as a joint venture between Werner Siemens and Johann Georg Halske that initially produced modified versions of the Wheatstone-telegraph as well as gutta-percha isolated wire cables.64 Soon, S&H expanded into the construction of telegraph networks beginning in Prussia in 1849 which resulted in the most advanced national telegraph system in Europe.65 Due to limited domestic business volume, but also to secure its impregnable technological base via foreign patents, the young business constructed and serviced lines in Poland, the Baltic, Finland and Russia66 and eventually established its first foreign subsidiary in Russia.67 Great Britain, eager to establish telegraph lines throughout its global empire, emerged as the next attractive market for foreign telecommunication companies.68 S&H successfully entered the lucrative, yet risky, Mediterranean undersea cable busi-ness and founded a sea cable manufacturing plant in London.69 In 1870, Siemens completed the Indo-European cable line between London and Calcutta, followed by the first transatlantic cable in 1874 and further expansion into the Habsburg Empire beginning in 1879.70 Siemens became known for its technical expertise

63 Ibid (p. 180).64 Feldenkirchen (2003).65 von Weiher and Goetzeler (1984).66 Siemens (1892/2008); Kirchner (1986).67 Hertner (1986).68 Headrick (1988); Hugill (1999); Jones (1988).69 von Weiher (1970).70 Siemens (1892/2008).


and ability to execute projects successfully, contributing to its growing brand image.71

By the 1860s, the company’s rapid growth created severe organizational contingencies, which were mainly caused by the founder’s personality, his busi-ness philosophy and family politics. Werner von Siemens, the “liberal patriarch,” preferred to entrust family members or close family friends with management functions at home and abroad. His management style relied primarily on per-sonal ties and trust.72 His brothers’ respective business interests in Russia and GB repeatedly clashed with the Berlin office and forced Werner to re-emphasize the priority of common business over particularistic interests as well as the marginal role outsiders should play in the management of the various foreign branches.73 When Werner finally agreed to a new firm-structure, comprising of an equal-profit sharing partnership between the three brothers based on three independ-ent houses in St. Petersburg, Berlin and London, he reaffirmed his values:

My leading idea to this suggestion was to found a lasting firm that perhaps later could become, under the leadership of our sons, a world firm like the Rothschilds among others and could bring fame in the world for our name.74

Werner was convinced that the path to successful innovation required an ever-growing store of knowledge and experience, which could only be guaranteed by a family-owned business.75 The industrialization process in Prussia was heavily influenced by close relationships between government, civil bureaucracy and private enterprises.76 Having served in the Prussian army – while receiving tech-nical and scientific training as well as intensifying his personal scientific explo-rations – von Siemens himself represented the close institutional relationship between state (military) and ensuing private scientific and business endeavors.77 Furthermore, and similar to other German companies, S&H employed a sub-stantial number of former civil servants who “brought bureaucratic patterns, styles, and values with them into the growing enterprises. […] Their favorable public image denoted power, general education, a sense of duty, and security.”78

71 Kaerner (2010).72 von Weiher (1970).73 Sabean (2011).74 Quoted by Sabean (2011: p. 240). Halske did not approve of these growing and increasingly risky activities abroad and demanded that Siemens and his brothers manage their business op-erations separately from Halske’s part of S&H. 75 von Siemens (1892/2008: p. 359).76 Kocka (1981).77 von Siemens (1892/2008: p. 56ff). 78 Kocka (1971: p. 136).

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However, during periods of rapid foreign expansion, increasingly complex research, development and production processes, a family-based management strategy showed clear limitations, as did the prevailing distribution system that was based on independent agents who distributed Siemens products at their own risk.79

Besides size-related organizational contingencies, the company also had to address its over-concentration in its volatile core business of telegraph cables. Siemens’ modified business-strategy, to cover every sector of the rapidly growing electro-technical industry, became a company mantra until the early 1990s.80 The diversification goal was facilitated by Siemens’ discovery of the dynamo-elec-trical principle combined with heavy current technology, which allowed high-volume generation and distribution of electricity, triggering the company’s and Germany’s “second” industrial growth phase.81 The transition from workshop manufacturing of small series to machine production was realized with the help of “American workshop” technology in the form of newly imported automatic machine tools from the US.82 These new production methods altered labor rela-tions, an emerging contingency the young company had to address.

During this period Siemens as well as other industrial leaders realized that industrial capitalism’s new production methods needed a better-developed social component to address potential labor unrest. Siemens was among the first companies to set up a pension scheme for all workers and employees. Staff “with at least ten years service with the company qualified for life assurance or invalid-ity benefit.”83 Although records indicate that Siemens genuinely felt responsible for his workers’ lives, he also admitted that it “is of utmost importance to create a permanent workforce, all the more so as work becomes more diversified and mechanized. This should be achieved in large measure by means of our pension fund.”84 Even more telling of the high demand for technically skilled labor, returning employees received hiring priority at S&H. Siemens increasingly also influenced the company’s legal environment. For example, to improve intellec-tual property protection, lift the international status of German industrial prod-ucts and provide a unifying institution for the scientific and entrepreneurial class of the young German Reich, Siemens promoted a strong patent law, which was passed by the German Reichstag in 1879, largely following his recommendations.

79 Kocka (1971, 1981); Chandler (1977).80 Feldenkirchen (2008).81 Landes (1969); Hughes (1984).82 von Weiher and Goetzeler (1984).83 Ibid (p. 22).84 Quoted in von Weiher and Goetzeler (1984: p. 22).


He also became a driving force behind the establishment of Germany’s first university chairs for engineering as well as the Physikalisch-Technische Reich-sanstalt in 1887 to further basic research and standard-setting for the benefit of broader economic growth.85

While weak current devices such as the telegraph and – since the late 1870s – a modified version of Bell’s telephone were often produced by manual labor, heavy current technology required large-scale industrial machinery. Recogniz-ing the almost endless applications of these new technologies for urban lighting systems, electrified mass transportation and electrical motors, S&H adapted its production and distribution organization through forward and backward integra-tion, thereby addressing organizational contingencies related to scale and scope. These structural measures resulted in Siemens’ early adoption of the M-form together with a bureaucratic model of systematic management.86 Huge initial investment costs for the electrification of cities and whole countries as well as ambivalent market forecasts forced S&H to expand their activities from produc-tion and distribution of generators and grid technology to electricity production and delivery as well as the preliminary financing of these activities.87

Meanwhile, due to the widespread electrification of Germany, the demand for telephones grew so fast that von Siemens complained about “this telephone racket, which is making life a burden.”88 He was concerned with the increasing quality gap between American and German telephone networks, particularly with regard to the introduction of microphones, two-line communication and improved switchboards to which S&H reacted in 1909 by introducing an automatic switchboard that could simultaneously serve 2500 customers. Heavily favored by German leadership, S&H and Walther Rathenau’s Allgemeine Elektricitäts Gesells-chaft (AEG) founded Telefunken in 1903 to capitalize on Marconi’s revolutionary invention of wireless telegraphy, which played an important role in the naval warfare of World War I. Worried about British leadership, the German Emperor and his military wanted to break GB’s quasi-monopoly on wireless communica-tion and supported the firms’ strategic alliance.89 While competitors such as AEG pursued aggressive and capital-market financed expansion strategies, S&H “gave high priority to technical innovations themselves rather than to their actual appli-cation.”90 S&H continued to pursue a defensive investment strategy and avoided

85 Siemens (1892/2008).86 Loewendahl (2001).87 Wengenroth (2010).88 Siemens (1977: p. 130).89 Feldenkirchen (1999).90 Ibid (p. 139).

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external influence from banks and other companies. The 1890s witnessed radical concentration processes in the German electro-technical market from which AEG and S&H emerged as the two largest survivors.91 AEG’s competition finally forced a change of S&H’s legal status. Founded as a general partnership, S&H morphed into a limited partnership in 1897 and – with assistance from Deutsche Bank – trans-formed 3 years later into a publicly traded stock company in which the Siemens family held a majority stake.92 In 1900, S&H merged with its competitor Helios and in 1903 with the beleaguered Schuckert & Co. to form two new companies.93 Sie-mens-Schuckert Werke (SSW) specialized in heavy current products, while S&H focused on weak currency devices.94 A management secretariat was established in 1907 to coordinate business activities on behalf of both companies’ boards.95

Specific production and market contingencies associated with ICTs (economies of scale and scope and initial investment vs. market size) required Siemens to seek new markets via Foreign Direct Investment (FDI) early on. Although still managed from home, these foreign investments, according to Jones (2005), “were not large investments, but their real significance was that they were sustained.”96 By the turn of the 19th century, Siemens had therefore evolved into the M-form based manu-facturing multinational that represented the increasing internationalization of cor-porate business activities during the first wave of globalization, which came to a temporary halt in 1914.97 Siemens therefore neither represents what Herriegel (1996) called Germany’s decentralized industrial order, composed of mainly small and medium sized firms, nor the autarkic industrial order represented by large, vertically integrated firms, due to its already advanced multinationalization.98 Multinatinali-zation required the adaptation to different regulatory, socio-economic and cultural environments. From a CPE point of view, though, Siemens simultaneously also dis-played characteristics typical for the evolving German business system, such as 1) a collectivist group identity with strong paternalistic traits, 2) an emphasis on research and engineering, 3) technological (over-) sophistication, 4) long-term growth over short-term profit maximization, 5) the promotion of stable labor relations at home and abroad via comprehensive benefits policies, 6) financial independence while simultaneously maintaining long-term relations with Deutsche Bank and 7) close relations with governments and public service providers at home and abroad.

91 Czada (1969).92 Feldenkirchen (1999).93 Chandler (1990).94 Highman (1996).95 Feldenkirchen (1999).96 Jones (2005: p. 20).97 Held et al. (1999).98 Herriegel (1996).


Siemens was twice able to re-establish these favorable conditions after devastat-ing World Wars I/II, which both brought the firm close to failure. This stable envi-ronment provided the structural as well as institutional foundations on which the company would thrive between the 1950s and late 1980s. By the early 1990s, Siemens had evolved into an internationally active diversified multi-divisional conglomerate defined by bureaucratic centralization, formalization and strong normative-cultural integration among its divisions, still largely based on the founder’s principles.99

5.2 The transformation of Siemens’ domestic and global institutional environment

In the late 1980s Siemens still enjoyed stable business relations with many cus-tomers, such as Deutsche Post, who were either large nationalized companies or companies with substantial governmental influence. The modification of East Germany’s desolate public and private communication networks provided new government contracts, which were welcomed in a period of weak global economic prospects.100 Increasingly, though, management realized that global circumstances changed quickly. In 1988/1989, Siemens initiated first programs, designed to improve flexibility, customer-service, productivity, profitability and innovation rates in segments such as public communication networks, telephone manufacturing, semi-conductors and computers.101 However, the still prevailing broader socio-political and economic structures representative for Germany and many other CMEs as well as the specific Siemens culture complicated radical insti-tutional adaptation in multiple ways. First, highly protected domestic markets and stable customer-producer relationships between European companies such as Siemens and public sector ICT-customers had reduced competitive pressures for decades.102 Therefore, many companies faced hitherto unknown challenges by the broad liberalization of telecommunication markets, first initiated in the US and Great Britain during the 1980s, and later during the early 1990s by the European Union (EU), the World Trade Organization (WTO) and the International Telecommunication Union (ITU).103 Siemens was institutionally unprepared

99 Ghoshal and Nohria (1993).100 Siemens AG (1990).101 Die Zeit, 1988, 22 January 1988, “Geld brennt kein Loch in die Hose.”102 Skolnikoff (1993).103 Aronson and Cowhey (1988); Drake and Noam (1997); MacLean (1999); Sandholtz (1993); Schiller (1999); Interview with representative of ITU Telecom Office, Geneva/Switzerland, 1 June 2004; interview with representative of Information Society Directorate General (European Com-mission), Brussels/Belgium, 29 June 2004.

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to manage the volatile demands of liberalized ICT-consumer markets. Second, the German electro-technical industry, with its traditional focus on technologi-cal issues and engineering, often ignored rapid shifts in market and consumer demand.104 Third, the stability- and consensus-oriented societal environment in Germany paired with a corporatist system of employee representation in corpo-rate governance structures forced management to search for consensual solu-tions, sometimes slowing down the ability to react quickly to changing market situations.105 Fourth, Siemens also had to adapt to transforming investor relations. Close relations between German banks and businesses emphasizing patient capital, insider information and long-term growth were at least partially replaced by a stronger role of capital markets, transparent communication and corporate reporting practices and focus on shareholder value.106 Finally, the Siemens fami-ly’s continuing influence paired with the founder’s corporate value-set created an interesting mix between conservatism, emphasis on continuity and incremental technological evolution through sound engineering as well as socially responsi-ble corporate stewardship to guarantee the company’s independence.107 Despite growing sales revenue, profit margins remained unsatisfying, mainly because of unfavorable exchange rates, shorter innovation and product cycles and higher R&D spending.108

5.2.1 Changing the Siemens culture

Internally conducted McKinsey studies showed that Siemens’ average unit costs were 25%–50% above those of its competitors. Siemens products were over-engineered and over-equipped, resulting in higher production costs.109 Dramatic price collapses for communication-equipment, semiconductors and passive ele-ments could not be compensated by higher output.110 Cost disadvantages also affected white-collar engineering and software tasks.111 Through Time Optimized Processes (TOP), Siemens tried to emulate the radical restructuring processes that had been implemented by main competitors such as GE and ABB since the early 1980s. Following GE-CEO Jack Welch’s principle to fix, close or sell ailing

104 Decurtins (2002).105 Vitols (2001); Schmidt (2002).106 Deeg (1999); Höpner (2005).107 Decurtins (2002).108 Feldenkirchen (2003).109 Decurtins (2002).110 Siemens AG (1991; 1992).111 Siemens AG (1993).


business divisions, GE and ABB had shrunk their workforce, sold off divisions that did not belong to their “core competency,” and trimmed their conglomerates towards profit maximization and shareholder value. Their organizational struc-tures transformed from vertically integrated hierarchical organizations to rather horizontally organized global networks.112 Between 1993 and 1997, Siemens spent 8 Billion DM for restructuring, cost reductions, productivity increases and the elimination of 40,000 jobs primarily in Germany.113 However, continuing global price declines and unfavorable exchange rates canceled out any TOP-related cost-reductions.114 The intended culture shock, implemented by management in a top-down fashion, produced mixed results. The self-understanding of many Siemens employees hinged on technical sophistication, product quality, careful business strategies, strict bureaucratic hierarchies and operational separation of business divisions rather than profit maximization or shareholder value.115 Reacting to unexpected losses in the semiconductor business in 1998, growing pressure from financial investors and the unfulfilled goal of a radical culture change, Siemens’ management decided on more drastic measures.116

The follow-up program, TOP-Plus, introduced new benchmarks for Siemens’ ability to generate enough revenues to cover or exceed operative costs as well as invested equity and borrowed capital,117 thereby breaking with most of Siemens’ deeply embedded traditions. The program emphasized the transition to a stronger profit-orientation of individual business units and the end of cross-subsidization, more customer-orientation and the expanding role of interna-tional stock markets in the company’s performance evaluation.118 From now on, management compensation packages as well as employee-evaluations included incentives for more entrepreneurial risk-taking and initiative, which neverthe-less still clashed with the old overcautious “Siemens mentality.” Via TOP-Plus, management addressed issues ranging from potential divisional re-organizations and a review of Siemens’ business portfolio with optional acquisitions to improve capital structure, financial reporting based on US-GAAP rules in view of an initial public offering in the US, and higher cash reserves for optional restructuring.119 Unfortunately, the intended culture change coincided with broader market devel-opments which undermined Siemens’ competitiveness in ICT-markets as shall

112 Harrison (1994); Philips (2000).113 The Economist, 23 November 1996, “Wake Up or Die: Business in Europe Survey.”114 Siemens AG (1994).115 The Economist, 7 November 1998, “All at Siemens.”116 The Economist, 21 November 1998, “Restructuring Corporate Germany.”117 Siemens AG (1998).118 Decurtins (2002).119 Siemens AG (1998).

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now be briefly traced for the major ICT-sectors. Historical institutional path-dependencies enshrined in culture and traditions directed contingent adaptation towards selective modification of existing behavior rather than radical replace-ment. Ultimately, Siemens’ “accentuated hesitation”120 was insufficient to cope with the pending technological transformations and consumer dynamics in tur-bulent ICT-markets.

5.2.2 The end of Europe’s last independent computer manufacturer

By 1998, the modestly profitable Siemens-Nixdorf AG (SNI) had managed to make Siemens the no. 1 PC-producer in Germany and no. 5 in Europe.121 However, the merger between the companies was troubled. Clashing corporate cultures limited the economies of scale and knowledge transfer. Market competition and price wars diminished profit margins. The reason for Siemens’ problems was not German salaries, representing just three percent of costs, but limited economies of scale achievable with those sales numbers. Higher profit margins were only realizable through lower component costs, which in turn would have required higher sales numbers.122 This could only have been achieved through stronger dis-tribution networks and production facilities in North America and Asia, which Siemens’ management considered too risky. Taiwan’s Acer-company made an initial offer, but retreated due to the Asian Financial Crisis in 1997. Siemens’s solution was a 50–50 joint venture with its proven partner Fujitsu in 1999.123 By 2002/2003, Fujitsu-Siemens was the German market leader in PCs, notebooks, server and mainframe computers. However, low profit margins and sagging sales, mainly caused by the beginning recession in 2008, prompted Siemens to finally sell its 50% share to Fujitsu.124

5.2.3 Passive elements and semi-conductors

Since the 1980s, Siemens struggled to keep pace with the accelerating innova-tion rates as projected by Moore’s Law.125 Massive investments and strategic alli-

120 Naschold (1997: p. 2) (translation by author).121 Die Zeit, 19 April 1998, “Siemens verkauft die PC-Produktion an den taiwanesischen Acer-Konzern.”122 Ibid.123 Chandler (2001).124 Die Zeit, 4 November 2008, “Siemens trennt sich von Computer-Sparte.”125 Der Spiegel,15 April 1986, “Man soll seine Kunden nicht kaufen.” See also Moore (1965).


ances with Matsushita, IBM, Intel and Motorola did not improve profits. However, even before the failed European Unidata project tried to close the growing tech-nology-gap with the United States and Japan,126 Siemens considered microchips a strategic core technology, applicable in practically all of its business areas. Siemens invested in four new chip plants in Eastern Germany, the US, Taiwan and England.127 The main challenge for Siemens’ management was the pressure to invest in new technologies of the following chip generation during the preced-ing downturn that was caused by overcapacities and saturated markets. This goal was not compatible with Siemens’ newly adopted profit-orientation and historic risk aversion.

Sudden losses of $1.2 billion USD in 1998 caused Siemens to close its newly opened English plant after just a year, mainly because prices for its chips had dropped from US$60 to US$1.5.128 This was of particular significance, since the decision to invest in England’s Northeast had been intended to signify Siemens’ transformation into a more “Anglo-Saxon” corporation that was willing to invest globally. Subsequently, Siemens and Matsushita turned their joint venture for passive elements – EPCOS – into a publicly traded company while holding strategic minority shares,129 which Siemens ultimately sold in 2006. Siemens continued its retreat by outsourcing the risky semiconductor business as Infineon Technologies AG through an initial public offering in 1999 while holding a 50%-share. The new-economy euphoria turned Infineon shares into a “Volksaktie” or peoples’ share.130 However, due to the implosion of the new-economy bubble and the terrorist attacks of 9/11, global chip-markets eventually tumbled.131 Anticipating potential market turbulences, Siemens’ top management ordered the company’s pension fund to buy a 13.5% Infineon stake from which it divested completely in 2006.132

5.2.4 Mobile communication: sophisticated technology alone is not enough

Siemens was a latecomer to the rapidly expanding mobile communication markets of the early 1990s. Of the 43 million units sold globally in 1994, only one million were produced by Siemens. Due to its tendency for over-engineering its products with too many sophisticated applications, Siemens consistently trailed

126 Chandler (2001); Peterson and Sharp (1998); Sally (1995); Sharp and Shearman (1987). 127 Siemens AG (1993).128 Siemens AG (1998).129 Die Zeit, 29 December 1999, “Siemens: Der Elektroladen wird saniert.”130 Die Zeit, 12 December 2000, “Bürgerrecht auf Infineon?”131 Die Zeit, 4 May 2001 “Absturz einer Volksaktie.”132 Die Zeit, 6 June 2001, “Sechs Milliarden für die Zukunft.”

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market-leaders such as Nokia, Ericsson and Motorola in the accelerating mar-ketization of new products.133 Moreover, the brand name was not associated with trendy electronic consumer products, but rather with large-scale technology such as trains, nuclear power plants or medical technology. Concerns over technical issues were increasingly overshadowed by efforts to improve Siemens’ image as an innovative and flexible producer of consumer ICTs.

The mobile division embarked on a 2-year restructuring and learning process, marked by large PR-campaigns and priority for marketing considerations over engineering concerns. By 1999 Siemens increased sales to 24 million units, putting it at fourth place globally behind Nokia, Motorola and Ericsson.134 Nokia had pioneered the focus on design and marketing, while outsourcing production to cheaper external suppliers such as Flextronics (Singapore), Solectron (USA) or Celestica (Canada).135 Siemens followed suit by contracting with external sup-pliers and relocating production to Eastern Europe.136 As a result, labor unions criticized the top management for behaving like “Rambos without social con-sciousness.”137 Negotiations resulted in employees agreeing to longer work hours and wage cuts in exchange for job guarantees.138 To compensate for its insuffi-cient mobile-communication R&D capacities, Siemens bought Bosch’s research department facilities.

Service providers’ massive overinvestments for new mobile phone licenses across Europe left many with insufficient liquidity to invest in necessary network infrastructure capable of handling the exploding data volume.139 Moreover, Euro-pean network producers such as Siemens faced increasing competition from US companies such as Lucent or Nortel. Like its competitors, Siemens began to pre-finance the construction of new communication networks, something it also had reluctantly done a century earlier during the construction of telephone and elec-tricity grids.140 Despite management’s public reassurances that it intended to save mobile communications out of concern for its image and its employees, it became obvious that Siemens was searching either for a strategic partner or someone who was willing to buy its unprofitable mobile phone division.141 In July 2005, Siemens

133 Decurtins (2002).134 Die Presse, 25 June 2001, “Überlebenskampf unter Handy-Herstellern.” 135 UNCTAD (2002).136 Der Spiegel, 12 March 2004, “Siemens will 2000 Stellen gen Ungarn verlagern.” 137 Der Spiegel, 1 April 2004, “Protest gegen den ‘Arbeitszeitenrambo’ von Siemens.” Translation by author.138 Der Spiegel, 25 January 2005, “Siemens-Beschäftigte arbeiten länger gegen Garantie.”139 The Economist, 11 October 2003, “Not Just Talk: A Survey of Telecoms.”140 Decurtins (2002).141 Der Spiegel, 21 January 2005, “Siemens-Chef gibt Mobilfunkbereich Gnadenfrist.”


suddenly announced its complete retreat from the mobile phone business. It sold everything including image and brand name rights for 5 years to the Taiwanese BenQ and subsidized the deal with _350 million.142 In 2006, Siemens outsourced its telecommunication networks division into a joint venture with Nokia. Sagging profits, lacking economies of scale and market concentration tendencies through mergers between competitors such as Alcatel and Lucent Technologies were the main reasons for this joint venture, Recently, Nokia’s acquisition of Siemens’s 50% share marked Siemens’ complete retreat from the telecommunication indus-try after more than 160 years of continuous engagement.

6 ConclusionTo overcome the widely perceived statism of much CPE work on comparative institutionally-based technological specialization, this paper proposed an inter-disciplinary perspective that would integrate insights from Contingency Theory and Institutionalist OS with the CPE macro-perspective. Interdisciplinarity facili-tates the move beyond predominant static models, which define institutions primarily as constraints of strategic actor behavior, to better understand the complex interplay between institutional adaptation, actor behavior and technol-ogy in the face of globalization. Contingency Theory’s functionalist emphasis on contingency-driven organizational adaptation was combined with Institutional-ist OS’ emphasis on the important role of institutions on firms’ interpretation of contingencies as well as the available range of adaptation options. CPE provided the macro-perspective that embeds firms within broader country-specific insti-tutional settings, which in turn further particular innovation-activities. Based on this functionalist-institutional multi-level-approach, corporate culture and self-understanding were defined as occasionally pivotal contingencies in a firm’s efforts to achieve fit between technological learning capabilities, strategy and structure to improve performance.

Since its beginnings, Siemens’ contingent institutional adaptation has often resulted in “institutional hybridization,” which – as the paper argues – renders a clear categorization along the LME-CME spectrum more difficult. On the one hand, Siemens exerted many characteristics associated with CMEs; incremental techno-logical evolution, based on meticulous engineering, was complemented by stable labor relations, continuing labor-force training, long-term contracts with public ICT-customers, and close relations with banks emphasizing long-term growth

142 Der Spiegel, 6 July 2005, “Börse jubelt über Handy-Abschied.”

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over short-term profit-maximization. The business strategy was based on risk-minimization, culturally typical for CMEs.143 However, Siemens was also a special case due to its early adaptation of US-machine workshop technology, elaborate multinationalization strategies as well as its search for productive opportunities in technological sectors considered rather typical for LMEs such as ICTs. These seemingly contradictory characteristics nevertheless allowed for a long-lasting quasi-fit between Siemens’ culture, strategy and organizational structure within the stable broader institutional environment of the post-war German economy, which lasted until the late 1980s.

The historically rather stable and predictable business environment for Euro-pean ICT-equipment producers such as Siemens changed dramatically between the late 1980s and early 1990s, marked by the “digital revolution” in ICTs (PCs, internet, mobile communication etc.) with ever-shorter innovation rates, higher R&D expenditures, global value-chain-development and digital convergence of previously separated information and media sectors. Liberalization and deregu-lation policies, massive price-drops for ICT-products and services, strong compe-tition from the United States and Southeast Asia and growing investor demands to improve profitability and corporate transparency “clashed” with the traditional bureaucratic Siemens culture of long-term planning, risk-aversion, incremental innovation, and slow adaptation to increasingly consumer-driven and intercon-nected ICT-markets. TOP-Plus Program related changes in corporate culture and governance represented a punctuated, however, only partial top-down-led “Amer-icanization” of Siemens with profitability as new core-factor to evaluate perfor-mance. Remunerative incentive structures for management and employees were meant to encourage entrepreneurial thinking. Implementation of new reporting standards and the end of cross-subsidization between profitable and underper-forming divisions improved corporate transparency and investor confidence. The selling of ICT-related and other divisions as well as organizational restructuring resulted in massive job-cuts. Labor relations in Germany further deteriorated due to growing Siemens investments in other regions such as China and North or South America often turning into a critical political issue at home. Breaking with long-standing company tradition, several recent CEOs were externally hired, instead of relying on a company-insider. Meanwhile, Siemens’ organizational structure shifted towards the N-form accompanied by further multinationaliza-tion.144 The new corporate strategies are rather typical of LME-firms and indicate a partial acceptance of Anglo-Saxon institutional elements such as the emphasis on profitability and shareholder-value. This shift to a more aggressive and global

143 Jones (2005).144 Hilger (2004).


business perspective is further underlined by Siemens’ changing transnational-ity index (TNI), which grew from 32.5% in 1995 to 77.9% in 2012. That is, more than 75% of Siemens’ sales, assets and employees are currently located outside Germany.145

However, in many respects Siemens also maintained characteristics consid-ered typical for the CME-firm, such as a concern for the impact of strategic man-agement decisions on employment in Germany and its public image and strong emphasis on product-quality based on sophisticated engineering. Yet the profit-oriented business model is now uniformly applied throughout the company, thereby representing a “hybridization,” as higher profitability and faster innova-tion rates now have to also be achieved in technological sectors that were tra-ditionally characterized by incremental innovation steps. Siemens’ divestment from all ICT-related divisions left it with a much stronger focus on the production of CME-typical capital goods such as medical, automotive, energy and transporta-tion technologies rather than consumer products. Its concentration of R&D activi-ties at home is still much higher when compared to its main global competitors.146 The institutional limitations of Siemens’ “hybridization” became visible in its inability to achieve a fit between strategy, structure and culture compatible with ICT-related dynamic-capabilities in volatile, risky and mass-consumer-driven ICT-sectors. Following its new corporate self-understanding of profit-orientation in combination with its traditional risk-aversion, Siemens quite rapidly abandoned those primarily ICT-related business areas that failed to contribute to profitability as expected by management and shareholders.

This paper demonstrates the potential contribution of firm-level case studies for the “thickening” and contextualization of the comparative and global political economic exploration of innovation processes. Single-firm case studies should be considered as complementary to meso- or macro-analyses on the sectoral, national and global level by exploring the impact of intra-firm institutions on the interpretation and negotiation of contingency-driven adaptation processes, which, as the Siemens case demonstrates, can result in the recognition of corpo-rate culture – an institutional factor – as a performance-undermining contingency in the face of external environmental changes. Hybridization is not synonymous with convergence towards a contemporary neoliberal ideal, but rather captures the complex, and often messy, adaptation of existing institutions in the process of combining newly introduced institutional components with pre-existing ones to improve performance. As demonstrated throughout the case study, hybridization

145 UNCTAD (1995, 2012).146 Meyer-Krahmer and Reger (1999); Interview with member of Siemens’ Investor Relations Team (innovation and technology), Salzburg/Austria, 6 July 2004.

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has always been a defining feature of Siemens’ business history. Therefore, single case studies might help us to balance the drive towards the categorization of firms as obvious representations of specific varieties of capitalism and their related comparative technological specialization.

Acknowledgments: Research for this paper has been generously supported by a EU Fulbright Scholarship, the University of Salzburg, the Division of Global Affairs, Rutgers University-Newark as well as by a PhD-scholarship from the Austrian Academy of Sciences (ÖAW). The author would like to thank Allie Terry-Fritsch, the anonymous reviewers and the editors for their insightful comments and encouragement. The library staff of the European University Institute, Flor-ence/Italy was crucially helpful in tracking down and organizing access to impor-tant literature pertaining to the project.

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