This chapter has been published in K. Bluhm, and R. Schmidt, (eds.): Change in SMEs: Towards a new European capitalism? (pp. 58-76). Palgrave: Basingstoke.

Corporate financing, management, and organisation in

small and medium-sized manufacturing firms: An Anglo-

German comparison

By Mike Geppert and Bernd Martens

1. Introduction

In this chapter we will analyse corporate financing,

management and organisation of manufacturing small and

medium-sized enterprises (SMEs) from a comparative angle.

Our comparison of German companies with its counterparts

British proves to be quite important, as this method

helps us to better understand the direction and depth of

the current changes in Germany and what is more to put

these in a broader international perspective.

There is an ongoing debate about whether national

institutions retain their importance to understand what

is going on inside business firms or whether they are

declining, especially through the increasing impact of

internationalisation of capital markets and corporate

financing, in recent international management research.

Besides economic and technological pressures, the rise of

global institutions is seen as leading to convergence of

at level of the nation state. Related to the idea of

global isomorphism, it is assumed that organisations and

1

organisational structures are becoming increasingly

similar across borders. In the centre of debate is the

future of coordinated market economies, as Germany, where

a transformation of core features, such as company

financing by banks, is predicted. Thus, some scholars,

e.g. Höpner (2003), Beyer and Höpner (2004), and Lane

(2006), see the influence of ‘shareholder value’ as

crucial to understand the current institutional change in

coordinated market economies such as Germany. Especially

changes in the German financial sector, it is argued,

have irreversible effects on the German business system

as a whole. It is assumed, in other words, that Germany

moves closer towards ‘shareholder value’ capitalism and

that this has already knock on effects on other features

of the societal system, as e.g. on the industrial

relations system, especially on the role of Mitbestimmung

(direct workers participation) in firms, the educational

system, and accordingly on the organisation of German

firms.

What is striking is that most of the arguments about

internationalisation and increasing ‘shareholder value

pressures’ on the German production model, are often not

representative enough to generalise across industrial

sectors and company sizes. Many arguments about changes

of the ‘German model’ of capitalism are based on recent

strategic decisions of large firms. For example Höpner’s

convergence thesis about the ‘Durchkapitalisierung’

2

(marketization) of former non-market organised processes

in Germany (2003: 229) are based on the analysis of

changes of career patterns, bank monitoring, management

pay, and industrial relation issues in the 40 largest

stock-market listed companies in Germany. There have

rarely been any systematic studies, however, about how

small and medium-sized enterprises (SMEs) react to recent

capital market pressures, especially in Germany and, what

is more, the knowledge about corporate financing of SMEs

in the UK is also rather limited. One important issue

addressed in this chapter is whether German SMEs become

more similar to their British counterparts due to

institutional change in the financing sector. By taking a

comparative angle we are going beyond the debate mainly

concerned about institutional isomorphism and diffusion

of shareholder value practices. Insofar we respond to

Arndt Sorge’s concern who is stressing that it is

‘extraordinary […] that rigorous international comparison

has gone into decline just as “globalization” has become

conceptually more and more prominent’ (Sorge, 2005: 226).

The focus of the debate about institutional change is

clearly on recent developments in so-called coordinated

market economies such as Germany. However, there is also

an ongoing discussion about the effects of

financialization and deregulation on British capitalism.

This research highlights the strengthening of ‘short-

termist culture’ as a major effect that causes ‘skill

shortages’ (Hughes, 1992), ‘recruitment difficulties’

3

(Johnson, 1991) and ‘borrowing’ and ‘financing

difficulties’ (Mullineux, 1994), especially in SMEs.

In contrast to the majority of studies undertaken to

date, our cross-national comparison uses a) both

quantitative survey data and qualitative interview

materials; b) compare Germany with England, putting

German institutional changes in a much-needed broader

context. Accordingly, we will discuss how far and deep

the move towards Anglo-Saxon mechanisms of corporate

financing of German SMEs has gone, compared to recent

developments in the matched sample in the UK. Based on

these comparisons, we will argue that, despite

(isomorphic) financialisation pressures, corporate

financing and management patterns of SMEs in both

countries remain significantly different.

2. The data

We conducted a telephone survey among English1 small and

medium-sized companies in summer 2005. The aim was to

survey the first hierarchical level, principally managing

directors of firms with 50 to 1,000 employees in the

manufacturing industry. The companies were randomly

chosen on the basis of the KOMPASS database. Key topics

of the questionnaire were:

corporate governance: financing and the role of

management concepts;

1 Our British survey did not cover Northern Ireland, Scotland, and Wales.

4

company design: human resources, organisation and

control, market strategies;

characteristics of staff: qualifications;

managerial orientations: management styles, employee

participation in decision making, socio-political

attitudes.

The structure of the English questionnaire was comparable

to the one used in Germany. The English survey was

conducted as similarly as possible to two surveys in

Germany in 2002 (Martens/Michailow/Schmidt 2003) and in

2005. In England the response rate was about 10 per cent

per cent, while it was higher in Germany (20-25 per

cent). The response rate in England, however, is

comparable to similar surveys by the Centre for Business

Research in Cambridge (Cosh and Hughes, 2003) and the

Federation of Small Businesses (Carter et al., 2006),

which both had a response rate of about 13 per cent per

cent. The number of companies participating in the

English survey was 131. The sample size of the survey

2005 in Germany was higher and comprises 762 cases,

matching the features of the English ones.

The surveys in England and in Germany were accompanied by

expert interviews. In England this included 12 with

managing directors and 2 with financial experts.. In

Germany a total of ca. 50 qualitative interviews were

conducted during the period 2002-2007.

Table 1: Distributions of the three mentioned surveys.

5

Industrial sector

Cambridge Survey 2002

Surrey survey 2005

Jena survey 2005

Chemicals, man-made fibres, rubber and plastics

13.1 15.3 13.7

Metal manufacture and metal goods

16.2 16.1 26.6

Electrical and electronic engineering

17.8 28.8 13.2

Food and beverages

5.1 0 6.0

Textiles, leather, footwear and clothing

7.4 5.1 4.7

Timber, furniture, paper and printing

21.1 5.9 8.9

Mechanical engineering

12.6 28.8 19.4

Other manufacturing

6.9 0 7.5

An initial comparison of the data sets from both

countries shows that the size of the companies is only

slightly different: small firms (10-99 employees) 50.4

per cent (GB), 51.1 per cent (G); medium firms (100-499)

45.5 per cent (GB), 43.6 per cent (G); 500 employees and

more 4.1 per cent GB), 5.3 per cent (G). The size of the

industrial sectors in each sample is not always matching.

6

Strong industrial sectors are chemical, metal

manufacture, electrical, electronic, and mechanical

engineering (Table 1). However, the distributions of the

founding decades of the company reveal some interesting

features. In particular the West German companies are

rather old: almost 29 per cent of them are older than 65

years, and more than 60 per cent were founded before

1970. The comparable number for the English firms was

only 35.2 per cent. It seems that the English sample is

to some extent affected by the deregulation policies of

the Thatcher government, which, on the one hand, led to

the dismantling of large manufacturing firms, job losses

and unemployment, but also encouraged some self-

employment and entrepreneurial activities. This might

explain higher founding rates of businesses, especially

in the 1980s (see e.g. Johnson, 1991). The strong

presence of the West German firms in former decades,

however, clearly illustrates the long tradition of these

companies in the manufacturing sector. The East German

sample, with its peak of founding years in the beginning

of the 90s, reflects deregulation after the collapse of

the GDR economy, which, interestingly enough, matches the

developments in the 1980s in England after the Thatcher

government took power.

3. The findings

7

We present below the empirical findings of our

comparative project along the dimensions of 1. corporate

financing and 2. management and organisation in SMEs.

3.1 Recent developments in corporate financing of SMEs

compared

There are at first sight, some similarities between

English and German SMEs. In both countries, banks are the

main source of external funding. There are hardly any

signs in either country that outside equity or venture

capital as sources of finance have gained large

influence. Thus, compared to large companies, the stock

market has less direct influence on the corporate

governance and management of the firms analysed.

However, compared to Germany, British SMEs are more

dependent on a single bank (72.6 per cent), whereas in

Germany firms usually have relationships with several

banks (57.3 per cent), and only 39.2 per cent are the

customer of a single bank (survey 2005). These findings

reflect the ongoing structural differences in the banking

sector. While the German banking sector is still

decentralised and cooperative and savings banks,

especially in the case of the SMEs play a much larger

role (cf. Bluhm and Martens in this volume)—the British

banking system is highly concentrated and dominated by a

few big commercial, high street banks. In Britain the

four big high street banks control 80 per cent of the SME

8

financing market (Lane and Quack, 2002: 8/9). If one also

takes into account that about one third of English firms

are dependent on one customer, compared to West Germany

where this is the case only for 10 per cent (15 per cent

in East Germany), we see that English SMEs face a double

handicap when economic performance and the market

situation declines. This means, in other words, that in

terms of resource dependency theory (Pfeffer and

Salancik, 1978) British SMEs are more ‘vulnerable’ and

less autonomous as their German counterparts.

From a dialectical perspective it can also be argued that

the reluctance of British managers to deal with more than

one bank cannot just be understood in reference to

external resources and institutions. These findings

indicate also a strong institutionally supported mistrust

by local managers about the role of banks as a reliable

partner. Another significant difference between German

and UK SMEs is indeed the managers’ relationship with

their banks. Our research confirms former findings of

Vitols (1995) that, with regard to ‘insider’ influence of

banks local company management, Germany and Great Britain

seem to remain rather opposite. Thus, even when the

survey findings about the role of short- and long-term

credits in SMEs shows only slightly more short-termist

financing in the British cases, we found a strong

reluctance by British managers in qualitative interviews

when we asked about their bank relationship. Especially

qualitative interviews revealed the problem of British

9

firms to get closely engaged with banks or what is to

have any relationship with banks at all.

Therefore, in line with former studies (Johnson, 1991;

Mullineux, 1994; Vitols, 1995; Sorge, 2005) we come to

the conclusion that for manufacturing SMEs in England

‘relationship banking’ remains rather unknown. It is also

important to notice that our English firms, compared to

Germany, are more dependent on overdraft credits from

their banks (see e.g. Cosh and Hughes, 2003; Hughes,

1997), and some contractual elements of the relationship

can be more short-termist or more long-termist.2 Thus, our

qualitative interviews give evidence that the strong

reliance on overdraft financing not only makes business

more vulnerable, but also means that managers as company

owners are at high personal risk of going bankrupt if

their business fails.

The relations of bank managers with their clients are

much more impersonal and arms-lengths in the English

context. Thus, one company manager complained about the

‘high turnover’ of bank managers dealing with his company.

He stressed that bank managers are replaced so quickly

that it is hard ‘to keep track of who is responsible’ for his firm.

This confirms the findings of e.g. Mullineux, who found

2 We refer to Vitols’ research findings emphasising that ‘banks prefer to give SMEs short term credits in the form of overdrafts (authorizations to overdraw checking accounts up to a certain limit) which are renegotiated periodically […] While overdrafts are often “rolled over” to finance long-term investments in equipment, the fluctuation of overdraft interest rates according to market conditions renders the costs of financing uncertain over the medium- and long-term’ (1995: 13).

10

that British SMEs seemed to ‘want “transaction banking”

in booms and “relationship banking” in recession’ (1994:

25). This raises the question, however, whether long-term

finance is regarded by UK SMEs as too expensive (in

comparison to overdraft-based financing) or ‘whether it

reflects a lack of education/training on part of

potential borrowers’ (ibid: 26), an issue we will come

back to in the next section. However, it seems that banks

are also not interested in getting too closely involved

in SME business affairs and if they get involved it is

limited to ‘transaction banking’, and only as long as the

firms perform well. UK banks are less willing to provide

long-term credits to companies (Lane and Quack 2002:

8/9)) and see industrial companies to a great extent as

an ‘incalculable risk’ (Sorge, 2005:207) and therefore

are generally reluctant to invest in manufacturing

businesses. One manager describes his situation by

stating: ‘They give you an umbrella when the sun’s shining and take it

away when it’s raining…’ (MD, Advance CS).

It is stressed in various other studies (Binks, 1991;

Hughes, 1997; Mullineux, 1994), that the British

financial system is not supportive, especially for

capital-intensive manufacturing firms, and that this

becomes even worse when they are small. In an interview a

British bank manager stressed:

11

‘The problem of SMEs is that they are often too big for smaller banks and too

small for large or medium-sized banks’ (Relationship Manager, A-

Bank).

The lack of bank interest in SMEs is also reflected in an

interview with a company manager who stated:

‘When we used to borrow money…we had a good relationship friendly, they

used to take me out to cricket matches… I am caught in my business cos they

are not making money out of us in those days’ (MD, Wood A.).

In Germany we find a much more differentiated banking

system where large commercial and investment banks are

dealing with larger firms, and a relatively high density

of cooperative and savings banks that are specialised in

offering various services, forms of credits, and

financial advise to medium-sized and smaller firms,

especially in the traditionally strong and, compared to

Britain, much larger manufacturing sector (see also the

chapter of Bluhm and Martens in this volume for a more

detailed discussion about the structure of the German

bank system and current modifications).

Another striking societal difference is the role of

company ratings. As already illustrated above, at first

sight we seem to have found similar patters across

national borders. Both surveys indicate that firms in

both countries possess experiences with some form of

ratings (69.8 per cent England, 65.9 per cent Germany).

However, when having a closer look and when trying to

12

interpret the data we found that the term ‘company

ratings’ has different connotations in England and

Germany, a common problem of cross-national research (see

e.g. Maurice, 2000 and Sorge, 2005 for a more detailed

discussion). In Germany ratings were clearly connected to

new control mechanisms of company performance by banks.

In England, however, bank ratings seem not to be common for

SMEs. When asked, the interviewees connected this issue

with active or passive ‘rating’, of e.g. the

perforamce/quality, of the companies by

clients/customers.

Ratings of SMEs by banks, however, have become a usual

procedure in Germany. Compared to the past when mutual

trust, personal relationships and networking helped to

reduce risks by ‘getting closer’ (Deeg, 2006: 40) the

increasing importance of bank ratings shows that German

banks are more interested in assessing risks based on

impersonal economic figures and performance (cf. Bluhm

and Martens in this Volume). The percentage of companies

that have had experiences with such credit ratings rose

in the time period 2002/05 from 47.8 per cent to 65.9 per

cent. Additionally, a statistical correlation between a

‘bad’ development of the equity ratio and ratings exists:

Our panel data (only firms which answered twice in the

period 2002/05) depict that 75 per cent of the companies

with constantly low capital resources (the equity ratio

is less than 25 per cent during the time frame in

13

question) was also rated by banks more frequently,

whereas only 48 per cent of the firms with constantly

high equity ratio (more than the average) reported

similar experiences.

In contrast to common quality management measures, which

are often used in relation to customers or suppliers

(e.g. as marketing instruments), it seems that bank

ratings do not have the same function in Germany. They

are confined to their primary purpose as contemporary

measures of solvency and creditworthiness. Our German

data also show some effects of ratings which up to now are

rather unusual for the German Mittelstand. It can be proved

that negative and undecided results of ratings are

related with more efforts in controlling. If the rating

is positive, 40.7 per cent of the companies reported more

controlling activities during the three years before the

survey took place (data set 2005). The percentage of

restructuring activities for negative and undecided

rating results however is 58.2 per cent (Chi², p < 0.00).

The findings about increasing controlling activities in

‘bad’ performing German firms do match with experiences

of managers in our British sample. In qualitative

interviews, managers in both countries who experienced

performance problems in the past describe situations

where the banks increased their pressure and influence on

the business by asking for detailed monthly reports. In

Germany, a company with a bad reputation in the past

14

developed a monthly management information system, to

which the bank had access. According to the managing

director, the new transparency of the firm’s operating

figures change its image fundamentally (interview 1).

Similarly, one of the interviewed British manager states:

‘... we had a bank manager who used to insist with our management about

reports, that we gave some commentary, on how the business was

performing, the strengths. I mean the habit I’ve kept up, I mean, it is useful

when, you know what’s going on in the business, and um, but um, they said to

us they were increasing the interest rate, Um because we weren’t performing

well, […]’ (MD, Outsource E.).

Thus, we see that external control of banks has some

learning effects for ‘bad performers’. It leads to the

implementation of accounting measures which were not in

place beforehand.

By contrast, in Germany, despite the increasing

monitoring activities by banks for some companies, we see

no general patterns of emerging difficulties of SMEs to

gain solid corporate financing In the qualitative

interviews we find some hints that managers recombine the

‘new rules of game’, imposed by banks, with established

behavioural patterns. Here are selected story lines

illustrating these learning processes:

A managing director talks about the monitoring system

of the firm which is capable of computing many

different indices. In the new era of bank ratings the

company’s reports ‘have totally gone down well by the banks […] it

15

is a factor which guarantees a relatively good rating’ (interview

38).

Another interviewed manager says that he exercises

‘complete transparency towards the bank, they [the bankers] get once a

year a forecast of 120 pages’. The interviewer replies that

this is not necessary: in response the managing

director affirms, ‘but I want money from them’ (interview

31).

A managing director who is a member of the board of a

savings bank, relates a change in communication with

banks. ‘It is essential that one knows how banks are thinking. That is

very important. I have learned a lot in connection with this board story.’

He is not using his membership on the board to build

up confidence in the relationship with the bank, but

rather to learn about the needs of creditors

(interview 40).

Another entrepreneur relates a similar experience. He

is also a member of a savings bank board. Colleagues

of his are frequently asking him whether he could

lobby for them in respect of credits which the bank

has rejected. In the interview sequence the manager

adopts the perspective of the creditor and says, if

the bank refused the request, the entrepreneur in

question ought to be very happy, because the bank has

saved the company from a great misfortune. He gives

the advice: ‘They do not approve the loan. […] Then go and hug the

banker, because he has saved you’ (interview 35). The

interviewee is both stressing the necessity of

16

corporate transparency and characterising the

creditor’s perspective as rational and useful.

To sum up, our discussion has shown that SMEs and banks

in England continue to maintain a ‘distant’ relationship.

Compared to England, we found that the traditionally

tight and mutual trust based system of relationship

banking in Germany is becoming more formal, relying more

on quantitative performance indicators and less on good

reputation. A well-known consultant to German SMEs

confirms our findings by writing: ‘The relationship

between customer and bank will increasingly move from an

emotional towards a rational level. That credits will in

the future not be based on a handshake with a deep look

in the eyes, but only on the presentation of a convincing

business plan and corresponding operating figures, is a

sign of increasing professionalization’ (Hennerkes 2004:

367).

.

3.2 Recent developments in management and organisation of

SMEs compared

Compared to Germany, English SMEs seem to be less

interested in restructuring, especially of their accounting

system. The percentages of companies restructuring the

organisation, the accounting system, and the production

are: 74.0 per cent, 6.1 per cent, 12.2 per cent

(England); 65.9 per cent, 48.1 per cent, 61.3 per cent

17

(Germany). German firms particularly revealed activities

in improvement of controlling, which has no counterpart in

English SMEs. The corresponding percentages are 6.1 per

cent (England) and 58.0 per cent (Germany). As we have

discussed earlier, the German case additionally provides

evidence that rating (by banks) and controlling activities

correlates significantly; such activities are not at all

connected in England. Our findings indicate relative

institutional stability of corporate financing of English

SMEs, compared to Germany, where we see a more

institutional and organisational dynamics.

Restructuring of accounting and corporate finance

practices in Germany can be presumably interpreted as

being related in part to emerging ‘regulative’ isomorphic

pressures (Scott, 2001: 51ff) triggered by significant

modifications in parts of the European Union and German

legal systems which led banks to introduce closer

monitoring measures of their assets and companies to

provide more ‘transparent’ financial information to their

banks.3 Similar institutional changes with regard to the

regulating corporate finance of SMEs were not relevant in

the UK, because here banks were historically less engaged

in corporate financing of manufacturing firms and in the

creation of tight social links with the management, as

discussed earlier.

3 See e.g. Lane (2006) and Deeg (2006) who give an overview over these issues.

18

Besides important differences in the focus of

restructuring activities in England and Germany, we found

further evidence of remaining societal differences. As

illustrated above, compared to Germany, British SMEs

focused primarily on organisational structure changes and

significantly less on production and accounting systems.

These findings can be related to other differences in

management and organisation structure of firms in each

country:

1. the percentage of managers compared to the number of

employees is higher in England than in Germany. In

England 9.6 per cent of the whole workforce are

called ‘managers’; in Germany this percentage

amounts to 6.3 per cent;

2. the hierarchies in Germany are slightly steeper; the

average number of hierarchical levels is here 1.9,

compared to 1.3 in England.

Similarly to the former discussion about national

differences in SME corporate financing, the higher

proportion of managers in English firms seems to indicate

different institutional logics of how firms are managed

and organised. Thus, the higher percentage of managerial

roles in English SMEs might reflect a more radical shift

towards neo-liberal economic principles which is

discussed by British social scientists under the label of

escalating ‘new managerialism’, an ideology closely

linked to the politics of Thatcher but continued under

New Labour, especially in the public sector (see e.g.

19

Beckmann/Cooper, 2004). For example, Mueller and Carter’s

study (2007) shows that financialization of a former

electricity utility firm led not just to a narrowing of

the firm’s strategy but also to a significant increase of

managers. Many of the previous engineers and other

employees are ‘all called managers now’ (ibid).

Organisational change was mainly driven by newly brought

in financial experts and accountants. In comparison with

much bigger former public owned firms and the SMEs in our

German sample, the English SMEs did not become more

professional.4 In short, SMEs in England employ more

managers in a less hierarchical way, but this seems not

to go hand-in-hand with a greater professionalisation of

managers, an issue we discuss next.

The members of staff, who are in managerial positions in

English SMEs seem to have classical expertise in general

management, if they have a professional background at

all, as indicated in earlier studies (e.g. Child et al.,

1983; Sorge and Warner, 1986). In our English sample in

only 15.1 per cent of the cases did all managers have

such an education; in 36.8 per cent the proportion of

professionally educated managers exceeds 50 per cent; in

42.5 per cent less than half of the managerial staff is

professionally educated; in 5.7 per cent of English

companies no manager fulfils this criterion. In the case

4 Thus, Mueller and Carter (2007: 191) stress that the studied company, ‘CoastElectric employed some 1,000 professional engineers atthe time of the privatisation. The paper shows impressively how all these engineers either transformed themselves into managers or just became victims of ‘managerialist’ changes and lost out.

20

of the German surveys we are lacking figures about the

formal qualifications of the management, but comparative

studies suggest that the figures of our English survey

are representative and that in German management a

professional education is still more common (Windolf,

2003: 317; Walgenbach and Kieser, 1995).

These findings can be related to former cross-national

comparisons stressing that English manufacturing firms

and engineering expertise have a lower status in the

society, in contrast e.g. to Germany (Child et al., 1983;

Sorge and Warner, 1986). This might explain for the lack

of expertise, even in finance and accounting, in smaller

English manufacturing firms. Compared to larger British

firms however, SMEs have also a lower reputation and pay

lower salaries and thus seem not to attract the

increasing numbers of young Business School graduates.

Larger manufacturing companies might be more attractive

for some of them but in particular for significantly

higher paid accountants.5

In addition to societal differences with regard to

overall numbers of managers in SMEs, we also found that

managers in England continue to have less technical or

engineering expertise. However, since the 1980s the

proportion of engineers, relative to managers with other

qualifications, is also continuously declining in the 5 Thus, in a study of British subsidiary management in the heavy engineering sector it is reported that a sales manager, educated as an engineer, decided to do another degree in accounting, because of pay constraints and better career chances in his US owned firm after he has finished his studies (see e.g. Geppert, 2003: 322)

21

Federal Republic of Germany. Managers with an economic

education have become more important (Eberwein and

Tholen, 1990), which is confirmed in our study too.

Interestingly, the percentage of the West German

companies (49.8 per cent) with a high proportion of

engineers now approaches the English (41.6 per cent),

having declined to a remarkable extent during the last

years. According to our survey in 2002, 57.8 per cent of

the managerial staff in the West still had engineering

degrees. This trend is also seen in East Germany, where

the proportion of engineers related to the number of all

managers in the company declined from 77.7 per cent in

2002 to 67.3 per cent in 2005. The following percentages

further clarify these findings: in Great Britain less

than 30 per cent of the interviewed firms had more than

50 per cent engineers, whereas the East German fraction

was 66.7 per cent. The West German sample is situated in

between (44.9 per cent).6

Another indicator of institutional distinctiveness of

British companies is the relatively marginal role of

training and education provided at the firm level, again

a confirmation of investigations conducted more than 20

years ago (e.g. Sorge and Warner, 1986) and new studies

concerned with the performance of British SMEs (e.g. Cosh

and Hughes, 2003). When asked about training and further

6 An explanation for why the figures for East German management are still rather different, is the history of the GDR and its economic transformation in the 90s (see e.g. Salheiser 2006; Pohlmann and Gergs 1997).

22

education, they had provided in the last 3 years, only

19.8 per cent of the English sample had done so, compared

to 53 per cent in West and 50.3 per cent in East Germany.

This emphasises the problem of ‘governmentally regulated

deregulation’ which undermines the already weak basis of

vocational training systems in the UK furthermore (see

Almond and Rubery, 2000).

The increased liberalisation of values and norms in

Britain can also be seen at the level of performance

related payment. At first sight, it was surprising that

performance related payment of managers is more common in

German firms than in English ones. 55.4 per cent of the

East German SME directed by East Germans and 68.2 per

cent of the West German firms directed by West Germans

chose such incentive schemes for their managers. But only

26.7 per cent of the English firms pay their managers

according to their performance. Where this is the case,

these payments depend more on individual performance than

on the revenue of the whole company. The latter is more

common in German companies, especially in East Germany

owing to the more difficult economic situation of many

firms there.

Not surprisingly another striking difference between the

two countries is their industrial relations systems,

especially the role and influence of trade unions and

formal workers’ representation. Formalised forms of co-

determination (Mitbestimmung) are traditionally parts of

the German management model which cannot be found in

23

England and which are, according to our surveys, widely

accepted by German management. 68.4 per cent of the West

German firms have a works council (Betriebsrat), the

corresponding figure for the East German cases is 51.5

per cent. A huge majority of managing directors

characterise their relationship to the works council as

‘unproblematic’ or as ‘trustful’ (87 per cent). The

English situation is quite different. There are no formal

works councils in England, though we found unexpected

evidence of employee representative bodies. In 40.5 per

cent of the companies stewards’ committees exist, but

only 17.1 per cent of the respondents see any influence

of trade unions in the industrial sector. If they concede

any union power at all, this is primarily confined—

according to the opinions of our interviewees—to wages,

customers’ issues, and health topics. However, while we

do not know much about the role, influence, and

composition of the employee committees, it is clear that

they have a different function and influence than German

works councils. They are often created by the local

management as vehicle for it to communicate decisions to

staff7. They can also be easily dissolved if managers face

problems. Thus, one manager reports that he decided to do

so, because another local employer was poaching some of 7 Thus, findings of a recent study, exploring employee involvement, which found that European legislation actually led to the implementation of information and consultation measures in many British SMEs. Nonetheless, the study also concludes that manager ‘‘buy into’ a notion of information-sharing and involvement policies which reinforce togetherness, they seem much more reluctant to embrace processes based on consultation as these threaten their prerogative’ (Wilkinson et al., 2007: 1294)

24

the employees of his company and he was concerned about

communicating strategic decisions (MD, Advance CS).

Finally, the analysis of managerial opinions shows that

German SMEs are more positive about the issue of

globalisation, compared with the more negative attitude of

English managers. Combining ‘coordinated’ with ‘liberal

market’ approaches seems to provide a competitive

advantage for most of the firms in our sample. According

to our qualitative interviews, in the German

entrepreneurial discourse, globalisation and competition

are more seen as an opportunity. German managers believe

that they have a variety of corporate strategies and

options at their disposal (for example outsourcing, ‘go

east’, or more internal competition) which can be used

for the benefit of the enterprise. They only seldom

describe global competition as a potential danger for the

existence of the company, seeing it rather as a challenge

for partial organisational restructuring.

Characteristics of discourses reflect differences in

industrial structures and societal institutions. The

German Mittelstand, both manufacturing in general and SMEs

in particularly, are still seen as important

institutional features of the German economy (see e.g.

Köhler, 2006). In the UK, however, the media are full of

praise for the ‘City’ and the strength of the financial

services industry, which are seen as much more important

than manufacturing. The decline of manufacturing

businesses in the country and the increasingly

25

internationally diverse ownership of the economy are

interpreted as signs of successful economic development

(see e.g. Economist, 2007). Thus, no wonder that many

English manufacturing managers referred to banks and the

‘City’ in term of ‘us’ and ‘them’ in interviews,

indicating not just the lack of corporate financing for

SMEs, but also the strong hegemony of the financial

service industry in the British economy. The latter is

interpreted as a main cause for the further weakening of

manufacturing in the UK, explaining why managers are more

pessimistic about global competition and the prospects of

their own firms, compared to their German colleagues.

4. Conclusions

Our Anglo-German comparison has shown that current

developments in German banking and corporate financing

did not lead to significant alteration of the production

system of German SMEs. In Germany we did not find any

signs for push down ‘towards the low pay and low quality

axis’, which is especially seen as a problem for British

manufacturing firms and directly related to the

deregulation of economy which started the nearly 30 years

ago (Almond and Rubery, 2000).

Our empirical findings indicate that British and German

SMEs are still significantly differently in terms of

corporate finance, management and organisation. Compared

26

to Germany, British banks remain distant to their clients

and SME managers prefer to avoid dealing with banks

whenever possible. This, mutual distrust is also

reflected by the preference of British firms for bank

overdrafts, which does not require much commitment of

either side. However, in Germany, the increasing

importance of bank ratings can be interpreted as signs of

financialisation, leading to more ‘transparency’ of

companies and thus greater influence of banks.

Nevertheless, we have seen that societal institutional

change is not just a straightforward isomorphic process,

but moderated and shaped by local actors. The ‘new rules

of the game’ were locally adapted, negotiated and

modified in a way that retains the influence of local

managers. Thus, relationship banking in Germany is not

disappearing or moving in the same direction as England

where SMEs managers prefer to keep banks distant and

avoid close banking relationships.

Moreover, our comparison confirms earlier findings (e.g.

Child et al., 1983) that managerial decisions in English

manufacturing firms are based more on individualistic

values and are more short-termist oriented. In Britain,

we can see evidence of related deeper level changes at

the cultural-cognitive level (Scott, 2001), e.g. a

growing impact of managerialist ideology on firm

behaviour, an issue which is rather unknown in most of

the German SMEs so far. We also see relevant change in

German firms, including an increased importance of

27

financial control measures and a growing importance of

non-engineering expertise. Compared to the UK, however,we

found little evidence of disparaging effects of new

managerialism, short-termist and individualistic

management and leadership styles in German SMEs.

In contrast to their German counterparts, most of the

English SME managers, however, seem to follow more

‘traditional’ leadership styles and more concerned with

keeping their market position and share while rather

reluctant to actively develop strategies of dealing with

increasing international competition in particular from

firms pursuing low cost strategies. Our interviews with

English SME managers seem to confirm that the ongoing

‘market liberalisation’ of the British economy has had

damaging effects on manufacturing SMEs, in contrast to

the neo-liberal discourse widely reflected in the British

media. Compared to Germany, English SME managers are more

pessimistic about the future. In line with other studies

we have some doubts whether the ‘governmentally regulated

deregulation’—started by the Conservatives and continued

under New Labour (Almond and Rubery, 2000)—has helped to

improve entrepreneurship, innovation, and performance in

manufacturing SMEs. Instead, British manufacturing firms

seem to be more conservative and, compared to their

German counterparts, managing by ‘muddling through’,

having rather arms-length relations with their banks and

customers. In contrast to the British context, however,

the future of the Mittelstand in Germany, a social

28

phenomenon which has never been developed in the UK

because of well-described institutional constraints (see

e.g. Lane, 1995; Sorge, 2005; Vitols, 1995), might be

much brighter, as often assumed.

From a theoretical angle, our comparative research shed

more light on the dialectical nature of institutional

change and how it is intertwined with changes in

strategies and cultures at the national societal and

managerial level. From this point of view, the references

to global isomorphism do not seem to explain the whole

story of institutional change. For example, the focus on

global isomorphism and diffusion of certain practices is

only one aspect of institutional change. Further, our

comparison with England has shown that the reconstruction

of the bank-company relationship along with managerial

and organisational change in SMEs, cannot be understood

only in reference to isomorphism and diffusion. As we

have demonstrated, the diffusion of the ‘financial

conception of the firm’ (Fligstein, 1990) is not such a

straightforward process, as often assumed. From an

interpretative perspective, ‘external isomorphic pressure

“is not simply what it is” but what it turns out to be

when filtered trough the domestic understanding of local

actors’ (Sorge, 2005: 45). Our comparison also revealed

how and why local British SME managers remain reluctant

to cooperate with local banks and do not develop the same

29

professionalist approach to corporate finance as their

counterparts in German SMEs.

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