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 this liability by learning vicariously from the knowledge of incumbent firms. But how can entrants learn from external knowledge when they lack the prior related knowledge that forms the basis of absorptive capacity? We theorize that the process of internal experiential learning facilitates learning from external knowledge, particularly for entrants. To test this theory, we examine learning using a comprehensive set of U.S. commercial banking firms, including a full census of entrants. Our estimates suggest that the share of vicarious learning realized in the process of experiential learning is twice as large for entrants as for incumbents. In this sense, entrants enjoy an “advantage of newness” in learning.