The Penrosean Spinout: A New Spin on the Theory of the Entrepreneurial Firm

Authors:
Roger Koppl, Whitman School of Management, Syracuse University; Fabian Parada Diaz, University of Louisville; Maria Minniti, Whitman School of Management, Syracuse University

Journal:
Journal of Business Venturing (2027)

Summary:
Employees in the trades and other low-tech industries often learn how to run a business simply by doing their jobs, and when the owner will not expand or the two sides cannot agree on terms, that hidden managerial know-how leaves as a new competitor. This helps explain why these industries stay fragmented and why employers lean on noncompete agreements and licensing.

Research Questions:
1. Can employees start companies based on general business know-how rather than a new product or idea?

2. When does the presence of such an employee lead the existing firm to grow, and when does it lead the employee to leave and start a new firm?

3. What does this spinout mechanism imply for the structure of low-tech industries and for the widespread use of noncompete agreements and occupational licensing among low-wage workers?

What we know: 
Spinouts, new firms founded by former employees of an existing firm, are an important route to new business creation, and in high-tech industries they tend to outperform other new entrants. Existing research explains them mainly through technical knowledge acquired from the parent firm and through disagreements between employer and employee about the value of a specific idea.

Yet most entrepreneurial activity is not high-tech. One widely cited estimate puts low-tech activity at about 80 percent of the total, and little theory explains how new firms emerge from existing ones in those settings. A related puzzle concerns noncompete agreements, which are common among low-wage workers even though these workers hold little proprietary technical knowledge to protect.

This matters to owners of small businesses, to workers who aspire to run their own firms, and to policymakers deciding how to treat noncompete agreements and occupational licensing.

Novel Findings:
1. We identify a previously unrecognized type of new venture: the “Penrosean spinout.” This is a new firm created to use the managerial capacity (the skill to manage resources and relationships) that an employee has developed within a parent company. This idea builds on economist Edith Penrose’s argument that on-the-job experience builds managerial capacity, which normally drives the original company's growth. We show that this same capability can instead leave the firm. Consequently, new technological or market breakthroughs are not the only drivers of employee spinouts.

2. We help to explain why low-tech sectors remain divided into many competitors. If management skills keep building up in employees and regularly leave when they start spinouts, low-tech industries will naturally lean toward having many small firms rather than merging into a few large ones.

3. We offer a new explanation for noncompete agreements and occupational licensing. Because management skills regularly leak out of a company, established firms have a constant reason to restrict them. This helps explain why restrictions are placed even on workers who hold few proprietary technical secrets.

Implications for Practice:
1. Owners: Managerial capacity builds up in employees as an unavoidable byproduct of work, including in employees who never hold a management title. Owners can plan for this rather than be surprised by it and channel the capacity into growth.

2. Limits of negotiation: Even when keeping the employee is better for everyone, talks can break down over how to divide the gains. Owners with modest growth ambitions may find that facilitating a complementary (a new firm that serves a different niche rather than directly competing) spinout is more productive than resisting one.

Implications for Policy:
1. If noncompetes are banned, other barriers to entry may become more valuable to existing firms. States have been moving to limit noncompete agreements. Our analysis suggests noncompetes may serve existing businesses more than the public, which supports that movement. However, when noncompetes are limited, other barriers that keep new competitors out, such as licenses, registrations, and certifications, become more valuable to established firms. Policymakers weighing limits on noncompetes should watch for a shift toward these other barriers.<

2. Informality: When the government makes it too hard or expensive for low-wage workers to start a legal business, they often start unlicensed, under-the-table businesses instead—and this may be happening a lot more than official data or experts actually realize.

Implications for Society:
Many people become business owners without venture capital, formal credentials, or a new technology, relying instead on what they learned by working alongside an owner. Contractual and regulatory restrictions that block such spinouts may close off one of the more accessible paths to ownership for workers in the trades and other low-tech sectors.

Implications for Research:
The paper gives researchers testable predictions and suggests how to test them.

1. Survey or linked employer-employee data in the trades could test whether the likelihood of founding rises with the gap between an employee’s accumulated managerial capacity and the owner’s growth ambitions.

2. Varying state laws on occupational licenses and noncompete contracts act like a real-world experiment and can help show how government roadblocks affect people trying to enter skilled trades.

3. Field studies of everyday entrepreneurship are especially needed because these ventures leave few written records of their origins.

4. Open questions include whether the same mechanism operates in high-tech settings such as the video game industry, what motivates low growth ambitions in the first place, and how richer models with ambiguity, power dynamics, and information asymmetries change the results.

Full Citation:
Koppl, R., Parada Diaz, F. and Minniti, M. The Penrosean spinout: A new spin on the theory of the entrepreneurial firm, Journal of Business Venturing 2027, 42, 106663. 

Abstract:
We integrate Penrose’s (1959) theory of firm growth with the spinout literature to identify a previously overlooked type of new venture: the Penrosean spinout. Penrose identified the accumulation of managerial capacity as a natural byproduct of routine firm operations and a catalyst of firm growth. However, managerial capacity may also accumulate in non-managerial employees, particularly in low-tech sectors such as the trades, where workers readily observe and absorb the full range of activities required to run an enterprise. When it does accumulate, excess managerial capacity may catalyze not firm growth but new firm formation—a spinout. In a pure Penrosean spinout, employer and employee need not disagree about the product, the market, or the production process; they disagree about whether to expand the business, and on what terms. Our framework makes three contributions. First, it identifies an endogenous mechanism of entrepreneurial entry: the seeds of new firm formation are sown continuously in the normal course of business, not only in response to technological disruption or novel market insight. Second, it explains persistent industry fragmentation in low-tech sectors as a structural consequence of the routine leakage of managerial capacity through spinouts. Third, it offers a novel account of why noncompete agreements and occupational licensing are prevalent among low-wage workers who possess little proprietary technical knowledge. By extending spinout theory beyond high-tech contexts, we contribute to a more comprehensive understanding of the emergence of entrepreneurial firms.


Web URL for the Article:
https://www.sciencedirect.com/science/article/pii/S0883902626000935