Incidence and performance of spinouts and incumbent new establishments: Role of selection and redeployability within parent firms

Abstract

AbstractResearch SummaryUsing matched employer‐employee data from 30 U.S. states covering 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.Managerial SummarySpinouts, or new ventures started by employees leaving a parent firm, have received special attention because spinouts tend to outperform other types of new firms. This superior performance is typically attributed to the better knowledge and higher‐quality ideas developed by the founders at parent firms. However, parent firms can also select and implement such ideas internally, particularly if they are good quality ideas. We compare spinouts with new establishments formed within parent firms and find that consistent with such a process of selection, the latter outperform spinouts, more so in the case of larger parents. Interestingly, new establishments of parent firms tend to close at a greater rate than spinouts, consistent with parent firms being able to redeploy resources elsewhere within their firms.