Knowledge inheritance and performance of spinouts

Evidence about the performance of entrepreneurial ventures shows that “spinouts” – new firms started by former employees of established companies – are usually more successful than other start-ups. This is particularly the case when the new venture is started in the same industrial sector where the founder’s former employer operates. The main reason for this superior performance is that spinout founders bring to the new venture specific organizational and technological knowledge acquired while working for their former employers. This unique knowledge increases the likelihood that spinouts are more efficient and innovative than other start-ups.

Spinouts can also occur across related industries – for instance, those that are in the same vertical chain. New ventures founded by ex-employees of established firms in either an upstream (supplier) or a downstream (user) industry may also “inherit” specific knowledge (for instance, about product specifications and market needs) that will make them more competitive. The present study examines the performance of spinouts from supplier and user industries, contrasting it with the performance of “focal” industry spinouts (meaning spinouts founded by former employees of companies in the same industry as the new firm).

The paper analyzes two Portuguese vertically related industries: molds for plastic injection and plastics (i.e., users of molds). These industries developed outside the main metropolitan centers, in the Marinha Grande and Oliveira de Azeméis municipalities and surrounding areas. Using detailed data on worker mobility and firm performance for 1987-2009, the paper finds that spinouts originating from user and supplier industries perform better than focal industry spinouts. Spinouts originating from suppliers (i.e., molds into plastics) underperform those originating from users (i.e., plastics into molds). All types of spinouts perform better than other start-ups. The results are consistent with user and supplier spinouts possessing specific knowledge that might be more valuable than that of focal industry spinouts.

Click here to go to the paper by Carla Costa and Rui Baptista.