@article{3076f5e301c847898df13f11fadef6d0,
title = "Human capital, parent size, and the destination industry of spinouts",
abstract = "Research Summary: We study how spinout founders' human capital and parent size relate to founders' propensity to stay in the same industry as their parents or to go outside the industry. Individuals with high human capital face a higher performance penalty if they form spinouts outside the parent industry, but they also face greater deterrence from large parents if they stay in that industry. Using matched employer–employee data on spinout founders and their coworkers, we find that individuals with higher human capital are less likely to form spinouts in distant industries than in the parent's industry. Further, we find that as parent size increases, such individuals are less likely to form spinouts in the parent's industry and more likely to form spinouts in distant industries. Managerial Summary: We examine how the ability of potential entrepreneurs affects whether they found a startup in the same industry as their employers (“parents”) or in a different industry, and how that choice relates to the size of the parents. We find that founders with high ability are more likely to form a startup in the parents' industry. However, as the parent size increases, they are more likely to form a startup in a different industry. These findings suggest that while high-ability founders want to benefit from their industry expertise by forming a startup in the parents' industry, some of them are dissuaded from doing so either because large parents try to retain high-ability founders or because such founders want to avoid potential competition with large parents.",
keywords = "competition, entrepreneurship, human capital, industry-specific knowledge, spinout",
author = "Mariko Sakakibara and Natarajan Balasubramanian",
note = "Funding Information: This research uses data from the Census Bureau's Longitudinal Employer Household Dynamics Program, which was partially supported by the following National Science Foundation Grants SES‐9978093, SES‐0339191 and ITR‐0427889; National Institute on Aging Grant AG018854; and grants from the Alfred P. Sloan Foundation. Any opinions and conclusions expressed herein are those of the authors and do not necessarily represent the views of the U.S. Census Bureau. All results have been reviewed to ensure that no confidential information is disclosed. We would like to thank the Associate Editor Martin Ganco and two anonymous referees for their valuable advice and suggestions. We also thank Rajshree Agarwal, Marvin Lieberman, Sonali Shah, seminar participants at Purdue, Cornell and the University of Michigan, and participants and reviewers at the annual meetings of the Academy of Management, Strategic Management Society, the Census Bureau 2017 Research Data Center Conference, and the Kauffman Entrepreneurship Scholars Conference for their helpful comments. We gratefully acknowledge the financial support of the Kauffman Foundation, the Harold Price Center for Entrepreneurial Studies at UCLA Anderson School of Management, the Academic Senate of the University of California, Los Angeles and the Whitman School of Management at Syracuse University. Studies have examined the effect of parent size on new firm formation in general, finding that small firms spawn more new firms than large firms do (e.g., Elfenbein, Hamilton, & Zenger, ). This literature argues that potential entrepreneurs sort (by ability or preference) into working for small parents because small firms provide autonomy and tighter pay‐for‐performance, or working for small firms provides experience that will be useful for entrepreneurship. Briefly, we assume K t + 1 = θ K t dα where K is the knowledge stock, θ is human capital, α < 1 reflects diminishing returns, and d ≤ 1 is depreciation due to industry distance. When switching industries, individuals compare the marginal benefit of staying in the old industry (and increasing their knowledge stock) with the marginal benefit of switching to the new industry, which has a higher wage per unit of knowledge but a lower relevance of knowledge stock. Note that our argument is about specialization based on industry specificity of human capital, not specialization based on occupation, a la Lazear ( ). For instance, individuals may build different functional skills (e.g., in marketing and manufacturing) in the same industry if they want to become entrepreneurs. A mathematical formalization of this argument is provided in Section 8 of Appendix S1 . There were a few instances of parent‐year‐quarters with multiple types of spinouts, typically with very large parents. In these cases, we randomly assign a separate group of 100 coworkers to each set of founders and accordingly adjust our sampling weights downward. This sampling strategy follows the logic of a conditional logit model that includes parent‐time fixed effects. Such a model will drop all parent‐time observations that do not generate any spinouts. This is because the lack of within‐group variation in our variable of interest (founder vs. coworker) among such parents implies that they do not contribute information to the estimation. An alternative approach is to draw a random sample of workers from all firms, not just firms that spawn spinouts. However, our interest is in comparing founders and coworkers exposed to a similar parent environment. Hence, we adopt the current approach over the alternative. Funding Information: This research uses data from the Census Bureau's Longitudinal Employer Household Dynamics Program, which was partially supported by the following National Science Foundation Grants SES-9978093, SES-0339191 and ITR-0427889; National Institute on Aging Grant AG018854; and grants from the Alfred P. Sloan Foundation. Any opinions and conclusions expressed herein are those of the authors and do not necessarily represent the views of the U.S. Census Bureau. All results have been reviewed to ensure that no confidential information is disclosed. We would like to thank the Associate Editor Martin Ganco and two anonymous referees for their valuable advice and suggestions. We also thank Rajshree Agarwal, Marvin Lieberman, Sonali Shah, seminar participants at Purdue, Cornell and the University of Michigan, and participants and reviewers at the annual meetings of the Academy of Management, Strategic Management Society, the Census Bureau 2017 Research Data Center Conference, and the Kauffman Entrepreneurship Scholars Conference for their helpful comments. We gratefully acknowledge the financial support of the Kauffman Foundation, the Harold Price Center for Entrepreneurial Studies at UCLA Anderson School of Management, the Academic Senate of the University of California, Los Angeles and the Whitman School of Management at Syracuse University. Publisher Copyright: {\textcopyright} 2019 John Wiley & Sons, Ltd.",
year = "2020",
month = may,
day = "1",
doi = "10.1002/smj.3108",
language = "English (US)",
volume = "41",
pages = "815--840",
journal = "Strategic Management Journal",
issn = "0143-2095",
publisher = "John Wiley and Sons Ltd",
number = "5",
}