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

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.