Incidence and Performance of Spinouts and Incumbent New Establishments: Role of Selection and Redeployability within Parent Firms

Authors

Natarajan Balasubramanian, Whitman School of Management, Syracuse University

Mariko Sakakibara, Anderson School of Management, UCLA


Journal
Strategic Management Journal



Findings or implications

New ventures started by incumbent firms tend to outperform spinouts, or new ventures started by employees leaving incumbent firms, likely because incumbent firms tend to retain better ideas within their firms.

Research Questions

1) Do new establishments of incumbents outperform spinouts?
2) How do the incumbent parent firm's financial resources and its ability to redeploy resources affect the relative incidence and performance of incumbent new establishments?  
3) How does the industry investment requirement affect the relative incidence and performance of incumbent new establishments?

What We Know 

Spinouts (i.e., new firms started by employees leaving an existing firm) have received special attention in entrepreneurship because spinouts tend to outperform other kinds of new ventures. This superior performance is typically attributed to founders gaining knowledge at their parent firms. However, founders often get their ideas for their new firms at such parent firms, who in turn can implement potential ideas internally rather than have the founders leave with their ideas. So, it is important to compare spinouts to new ventures of parent firms.

Originality/Value - Novel Findings

Using a sample of about 1.6 million new establishments of incumbent firms and spinouts, we find that new establishments of incumbent firms tend to outperform spinouts, and more so if those incumbent parents are larger. This is consistent with a process of internal selection of ideas within parent firms whereby such firms choose good quality ideas for internal implementation. Interestingly, new establishments of incumbent firms tend to shut down quicker, particularly if such firms can redeploy the resources of such establishments elsewhere within the firm.



Full Citation

Balasubramanian N. and Sakakibara M. Selection and Resource Redeployment in the Incidence and Performance of Spinouts. Forthcoming at the Strategic Management Journal.

Abstract 

Using matched employer-employee data from 30 U.S. states that cover a wide range of industries, we compare spinouts with new establishments formed by incumbents (INEs). We propose a selection-based framework comprising idea selection by parents to internally implement ideas as INEs, entrepreneurial selection by founders to form spinouts, and exit selection to close ventures. Consistent with parents choosing better ideas in the idea selection stage, we find that INEs perform relatively better than spinouts, and more so with larger parents. Regarding the entrepreneurial selection stage, we find evidence consistent with resource requirements being a greater entry barrier to spinouts. Parents’ resource redeployment opportunities are associated with lower relative survival of INEs, consistent with their being subject to greater selection pressures in the exit selection stage.