Spin-outs: knowledge diffusion through employee mobility

Abstract

In many industries, one important method of diffusion is through employee mobility: many of the entering firms are started by employees from incumbent firms using some of their former employer's technological know‐how. This article explores the effect of incorporating this mechanism in a general industry framework by allowing employees to imitate their employers' know‐how. The equilibrium is Pareto optimal because the employees “pay” for the possibility of learning their employers' know‐how. The model's implications are consistent with data from the rigid disk drive industry. These implications concern the effects of know‐how on firm formation and survival.

Disagreements and intra-industry spinoffs

“…Other theories have attributed this to the superior learning environment for employees at better firms (cf. Franco and Filson [2006]), but our theory demonstrates this is not needed to explain the correlation. Our theory readily explains the repeated finding that organizational changes within firms tend to raise the probability of spinoffs.…”

“…10 In disk drives, Agarwal et al [2004] found that firms with better technology had spinoffs with better technology, and firms (of all types) with better technology survived longer. However, in a direct analysis of the relationship between spinoff longevity and characteristics of parents, Franco and Filson [2006] did not find that spinoffs from parents with better technology survived longer (if anything, they survived shorter).…”

“…10 The five regularities are summarized in Table 1 in the order they will be addressed in the discussion of the theoretical model. earlier into the production of new disk drives both positively affect the firm spinoff rate (in Agarwal et al [2004] size also positively affects the firm spinoff rate whereas in Franco and Filson [2006] it negatively, but insignificantly, affects the firm spinoff rate). 7 Mitton's [1990] evidence indicates that among biotechnology firms in San Diego, the spinoff rate increased through age 10, consistent with the patterns found in autos, lasers, and law firms.…”

“…6 These findings could merely be due to better firms being larger and thus having more employees that could potentially found firms. Agarwal et al [2004] and Franco and Filson [2006] test this idea in disk drives using the number of disk drives produced as a measure of firm size. They find that even after controlling for firm size, the quality of a firm's technology and whether it entered firms acquired by non-industry incumbents have higher intra-industry spinoff rates around the time of their acquisition, while in autos and lasers (but not biotechnology or semiconductors) firms acquired by industry incumbents also have comparably higher intra-industry spinoff rates around the time of their acquisition.…”

“…Most of the studies of intra-industry spinoffs examine U.S. manufacturing industries during their first 30 to 35 years when entry is greatest, including automobiles (Klepper [2007a(Klepper [ , 2007b), tires (Buenstorf and Klepper [2007]), semiconductors (Brittain and Freeman [1986], Klepper [2007c]), disk drives (Agarwal et al [2004], Franco and Filson [2006]), lasers (Sleeper [1998], Klepper and Sleeper [2005], Sherer [2006]), medical devices (Chatterji [2008]), and biotechnology (Mitton [1990], Stuart and Sorenson [2003]). A few parallel studies have been conducted for automobiles in Great Britain (Boschma and Wenting [2007]) and automobiles (von Rhein [2008]) and lasers (Buenstorf [2007]) in Germany.…”