An Advantage of Newness: Learning by Entrants and Incumbents in US Commercial Banking

Abstract

Entrants are often viewed as suffering from a “liability of newness” – at founding they rarely possess the knowledge and capabilities necessary to compete and survive. They can overcome such liabilities by learning vicariously from the knowledge of incumbent firms. But how do entrants learn from external knowledge when they lack the prior related knowledge that forms the basis of absorptive capacity? We address this question by theorizing that the process of internal experiential learning facilitates learning from external knowledge. We argue that entrants benefit disproportionately from this mechanism. To test this theory, we examine learning on a comprehensive set of firms in US commercial banking, including a full census of entrants. Our estimates suggest the share of vicarious learning realized via this mechanism is twice as large for entrants as incumbents. In this sense, entrants enjoy an “advantage of newness” in learning.