Human capital, parent size and the destination industry of spinouts

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Author Information : Mariko Sakakibara (University of California, Los Angeles)
Natarajan Balasubramanian (Syracuse University)

Year of Publication : Strategic Management Journal (2019)

Summary of Findings : Where individuals form spinouts is associated with their level of human capital and the size of their employer ("parent").

Research Questions : 1. Where do entrepreneurs form spinouts? Close to their parent? Far from the parent?
2. Does the destination industry of entrepreneurs differ depending on (a) their level of human capital, and (b) size of their parent?

What we know : Many studies have examined why founders choose to found new firms, but detailed studies of entrepreneurial destination are, to our knowledge, rare.

Spinouts have received extensive attention from researchers in management, economics and finance, partly because many industry studies find that spinouts perform better than other types of new ventures. In these studies, parents are typically regarded as sources of knowledge for the founders. However, parents can also deter spinout formation, which has not been studied widely.

Novel Findings : Our results highlight the economic importance of "where" in the entrepreneurial process. Our results strongly suggest that how far from the parent industry entrepreneurs go is affected by both their human capital and parent size. We find that individuals with higher human capital are more likely to form spinouts in their employer's industry than in other industries, but as the size of their employer increases, such individuals are less likely to form spinouts in the employer's industry and more likely to form spinouts in distant industries.

Thus, our study suggests that working at large employers may be a double-edged sword for potential spinout founders; although the founders can gain from the employers' knowledge and resources, they may also face a greater deterrent effect with regard to entrepreneurship from such employers.

Implications for Policy: We want highly capable entrepreneurs to start new firms where they can best utilize their capabilities. To the extent employers of potential founders can impede entrepreneurial activities in their industry and influence the destination industry of entrepreneurs, then relevant policy measures may be called for.

Implications on Research: From a strategy perspective, much like any fundamental discussion of competition in an industry pays particular attention to firms entering from other industries (diversifying firms), it is important to consider new firms that are formed by founders from other industries and to study what factors affect the formation of such firms.

Full Citations : Sakakibara, M. and Balasubramanian N. Human Capital, Parent Size and the Destination Industry of Spinouts (Forthcoming at the Strategic Management Journal)

Abstract : We examine how the ability of potential entrepreneurs affects whether they found a startup in the same industry as their employers (‘parents’) or in a different industry, and how that choice relates to the size of the parents. We find that founders with high ability are more likely to form a startup in the parents’ industry. However, as the parent size increases, they are more likely to form a startup in a different industry. These findings suggest that while high-ability founders want to benefit from their industry expertise by forming a startup in the parents’ industry, some of them are dissuaded from doing so either because large parents try to retain high-ability founders or because such founders want to avoid potential competition with large parents.

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Where individuals form spinouts is associated with their level of human capital and the size of their employer (“parent”).

Natarajan Balasubramanian

Professor Balasubramanian is an associate professor of management whose research interests are in competitive analysis, organizational learning and innovation.
Natarajan Balasubramanian
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