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Developing new ideas: Spin-outs, spinoffs, or internal divisions

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  • Nikolowa, Radoslawa

Abstract

This paper proposes a theory of how employee-driven innovations are developed. An employee with private information about the value of his idea can create a spin-out, work in a division of the parent firm, or work for a spinoff of the parent firm. Developing an idea in a spinoff allows the parent firm to offer a performance-based contract, which mitigates the adverse selection problem but also decreases the firm's incentives to invest in the project. Therefore, inefficient spin-outs are driven by the informational asymmetry and the endogenous investment of the parent firm. The characteristics of the innovation, the employee's managerial talent, and the firm's performance in its core activity affect the likelihood a spin-out is created. The implementation of employees’ ideas in turn affects the innovation process. Ideas with a lower probability of being good are more likely to be explored by an employee within the firm than by an outsider.

Suggested Citation

  • Nikolowa, Radoslawa, 2014. "Developing new ideas: Spin-outs, spinoffs, or internal divisions," Journal of Economic Behavior & Organization, Elsevier, vol. 98(C), pages 70-88.
    • Handle: RePEc:eee:jeborg:v:98:y:2014:i:c:p:70-88
    DOI: 10.1016/j.jebo.2013.12.001
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    Cited by:

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    2. Ekinci, Emre, 2022. "Employee entrepreneurship and signaling role of corporate venturing decisions," Labour Economics, Elsevier, vol. 79(C).
    3. Fontana, Roberto & Zirulia, Lorenzo, 2023. "How far from the tree does the (good) apple fall? Spinout creation and the survival of high-tech firms," Journal of Economic Behavior & Organization, Elsevier, vol. 213(C), pages 26-49.
    4. Natarajan Balasubramanian & Mariko Sakakibara, 2021. "Incidence and Performance of Spinouts and Incumbent New Ventures: Role of Selection and Redeployability within Parent Firms," Working Papers 21-27, Center for Economic Studies, U.S. Census Bureau.
    5. Chang, Shih-Chung & Han, Nan-Wei, 2023. "Spin-offs or sell-offs: The dynamics of corporate divestitures," Finance Research Letters, Elsevier, vol. 58(PA).

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