The impact of different types of spinoffs on firm survival: Evidence from the US automobile industry 1890-1986

Best Paper Proceedings of the Academy of Management

Strategy and Entrepreneurship

Best Paper Proceedings of the Academy of Management 2009

Ioannou I

Ioannis Ioannou

2009

The exit of incumbent firm employees to entrepreneurship within the same industry as the incumbent – a process termed as spinoff activity – has been prevalent in several industries across the US. A lot of research has taken place towards uncovering the sources of superior competitive advantage of these spinoff entities, yet very limited attention has been paid to the impact that the exit of these individuals may have on the parent firm. In this paper, I shed light on this issue by proposing a theoretical model based on corporate coherence, organizational learning and agency theory, that describes the mechanisms via which heterogeneous spinoff activity may impact the survival chances of the parent organization. I argue, in particular, that spinoffs elevate corporate coherence by removing cognitive- or capabilities-based impediments to organizational learning or by imposing managerial discipline at the parent firm. When I test the framework on a hand-collected data set from the US automobile industry, I find that spinoffs that a) locate further from their parents on the capabilities space, b) impose managerial discipline at the parent firm, c) resolve a cognitive conflict at the higher echelons of the parent‘s hierarchy, and d) are initiated by managers, improve the parent‘s performance by reducing its mortality rate. In addition, the econometric analysis shows that having too many spinoffs too frequently is detrimental, calling for a thoughtful strategic management of spinoff activity by the parent.

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