A Good Riddance? Spin-Offs and the Technological Performance of Parent Firms

Abstract

How do spin-offs—new ventures created by former employees of an incumbent firm—affect the technological performance of their parents? Conventional wisdom holds that spin-offs hurt parent firms: the parent loses key staff, routines are disrupted, and performance declines. Although having some basis in fact, we think the negative effects are overstated. We argue that spin-offs can enable parent firms to realign with their environment, thereby avoiding the oncoming obsolescence arising from the combination of organizational inertia and environmental drift. Using data from the hard disk drive industry, we find evidence that although the main effect of having a spin-off on a parent firm's technological performance is positive, the overall impact of a spin-off depends upon the technological sophistication of the spin-off and the time since the spin-off occurred. Indeed, parent firms of technologically sophisticated (successful) spin-offs initially suffer poorer technological performance, but over time they outperform firms that had no spin-offs. Both effects are amplified to the extent that the spin-off is more successful, which we attribute to both increased environmental realignment and the positive signal that successful spin-offs transmit to the broader labor market about the parent organization's reputation as an incubator of entrepreneurs and a desirable place to work.

Parent hostility and spin‐out performance

“…In fact, the spin‐out process can be prone to conflict, especially when tension between the former employee and employer is part of what has led to spin‐out formation in the first place (Hellmann, ). Many spin‐outs not only disrupt ongoing innovation processes and general social organization, but they also result in the parent losing critical firm‐specific skills, routines, and other resources (McKendrick et al , ; Phillips, ). Concerns about resource misappropriation can lead parents to view spin‐outs as “predators that steal their ideas and innovations” (Klepper and Sleeper, : 1305).…”

“…Conceptualizing hostility as an attitude rather than as a behavior has two distinct advantages. First, hostile behavior may take many forms, including denial of direct support, lawsuits, or moves to discredit the spin‐out, (Klepper and Sleeper, ; McKendrick et al , ) that to date have not been well researched. Such behavior, however, presupposes a hostile attitude (Ajzen, ), and an attitude can be conceptualized more parsimoniously.…”

Heroes Today - But What about Tomorrow? Gazelles and Their Long-Term Performance

“…These hypotheses and the preceding argumentation contribute to the previous line of arguments that despite the potential benefits of high employment growth, such as economies of scale and the inflow of new knowledge, networks, perspectives and ideas (Garnsey et al, 2006;McKendrick et al, 2009), initial high employment growth and concurrent high employee turnover have negative effects on firms' long-term performance.…”

“…Some employee turnover might actually be beneficial if companies use it to eliminate poor performers. Moreover, employee inflow increases the company's competences and refreshes its knowledge base, especially in terms of innovation purposes (McKendrick et al, 2009;Eriksen, 2011). Although this effect certainly holds for mature firms, we claim that, during organizations' early days, the harm of high inflow rates, and thus high turnover, is potentially equal to the aforementioned intuitively perceivable negative effects of employee outflow.…”

“…Firms might utilize high employment growth rates to realize economies of scale, and growth can thus conduce further growth (Garnsey et al, 2006). Moreover, firms benefit from newly hired employees, as they contribute new knowledge, networks, and new perspectives and ideas to the company, thereby strengthening and renewing the firms' competences (McKendrick et al, 2009;Eriksen, 2011). This resource inflow further enhances a company's resource base so that it can identify and realize additional growth opportunities (Penrose, 1995;Garnsey et al, 2006).…”