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

Author

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  • David G. McKendrick

    (Durham Business School, Durham University, Durham DH1 3HP, United Kingdom)

  • James B. Wade

    (McDonough School of Business, Georgetown University, Washington, DC 20057)

  • Jonathan Jaffee

    (Marshall School of Business, University of Southern California, Los Angeles, California 90089)

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.

Suggested Citation

  • David G. McKendrick & James B. Wade & Jonathan Jaffee, 2009. "A Good Riddance? Spin-Offs and the Technological Performance of Parent Firms," Organization Science, INFORMS, vol. 20(6), pages 979-992, December.
    • Handle: RePEc:inm:ororsc:v:20:y:2009:i:6:p:979-992
    DOI: 10.1287/orsc.1090.0480
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    Cited by:

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    3. Walter, Sascha & Heinrichs, Simon & Walter, Achim, 2013. "Hostile Parent Firms and Child Firm Performance," EconStor Preprints 68592, ZBW - Leibniz Information Centre for Economics.
    4. Gjerløv-Juel, Pernille, 2019. "Executive turnover – Firms’ subsequent performances and the moderating role of organizational characteristics," European Management Journal, Elsevier, vol. 37(6), pages 794-805.
    5. Bahoo-Torodi, Aliasghar & Torrisi, Salvatore, 2022. "When do spinouts benefit from market overlap with parent firms?," Journal of Business Venturing, Elsevier, vol. 37(6).
    6. David Tan & Christopher I. Rider, 2017. "Let them go? How losing employees to competitors can enhance firm status," Strategic Management Journal, Wiley Blackwell, vol. 38(9), pages 1848-1874, September.
    7. Forough Zarea Fazlelahi & J. Henri Burgers & Martin Obschonka & Per Davidsson, 2023. "Spinoffs’ alliance network growth beyond parental ties: performance diminishing, then performance enhancing," Asia Pacific Journal of Management, Springer, vol. 40(2), pages 743-773, June.
    8. Ji Youn (Rose) Kim & H. Kevin Steensma, 2017. "Employee mobility, spin-outs, and knowledge spill-in: How incumbent firms can learn from new ventures," Strategic Management Journal, Wiley Blackwell, vol. 38(8), pages 1626-1645, August.
    9. Gjerløv-Juel, Pernille & Guenther, Christina, 2019. "Early employment expansion and long-run survival," Journal of Business Venturing, Elsevier, vol. 34(1), pages 80-102.
    10. Egle Vaznyte & Petra Andries & Sarah Demeulemeester, 2021. "“Don’t leave me this way!” Drivers of parental hostility and employee spin-offs’ performance," Small Business Economics, Springer, vol. 57(1), pages 265-293, June.
    11. Robert P. Garrett & Chao Miao & Shanshan Qian & Tae Jun Bae, 2017. "Entrepreneurial spawning and knowledge-based perspective: a meta-analysis," Small Business Economics, Springer, vol. 49(2), pages 355-378, August.
    12. Pearce, John A. & Patel, Pankaj C., 2022. "Reaping the financial and strategic benefits of a divestiture by spin-off," Business Horizons, Elsevier, vol. 65(3), pages 291-301.
    13. Heinrichs, Simon & Walter, Sascha, 2013. "Don’t Step Into Your Parent’s Shoes – How Exploitation and Exploration Affect Spin-out Growth," EconStor Preprints 68591, ZBW - Leibniz Information Centre for Economics.
    14. Chila, Vilma, 2021. "Knowledge dynamics in employee entrepreneurship : Implications for parents and offspring," Other publications TiSEM a1f5d18c-783b-4af6-8414-6, Tilburg University, School of Economics and Management.
    15. Saras D. Sarasvathy, 2021. "The Middle Class of Business: Endurance as a Dependent Variable in Entrepreneurship," Entrepreneurship Theory and Practice, , vol. 45(5), pages 1054-1082, September.
    16. Veldhoven, Joris & Cloodt, Myriam & Vanhaverbeke, Wim, 2008. "Modeling the set-up and management of a spin-out: Evidence from a case study," MPRA Paper 26489, University Library of Munich, Germany, revised 2010.
    17. Sascha G. Walter & Simon Heinrichs & Achim Walter, 2014. "Parent hostility and spin-out performance," Strategic Management Journal, Wiley Blackwell, vol. 35(13), pages 2031-2042, December.
    18. Agarwal, Rajshree & Shah, Sonali K., 2014. "Knowledge sources of entrepreneurship: Firm formation by academic, user and employee innovators," Research Policy, Elsevier, vol. 43(7), pages 1109-1133.
    19. Bruno Cirillo, 2019. "External Learning Strategies and Technological Search Output: Spinout Strategy and Corporate Invention Quality," Organization Science, INFORMS, vol. 30(2), pages 361-382, March.
    20. Christian Cordes & Peter Richerson & Georg Schwesinger, 2014. "A corporation’s culture as an impetus for spinoffs and a driving force of industry evolution," Journal of Evolutionary Economics, Springer, vol. 24(3), pages 689-712, July.
    21. Ioannis Ioannou, 2014. "When Do Spinouts Enhance Parent Firm Performance? Evidence from the U.S. Automobile Industry, 1890–1986," Organization Science, INFORMS, vol. 25(2), pages 529-551, April.
    22. Romel Mostafa & Steven Klepper, 2018. "Industrial Development Through Tacit Knowledge Seeding: Evidence from the Bangladesh Garment Industry," Management Science, INFORMS, vol. 64(2), pages 613-632, February.

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