Employer Size and Spinout Dynamics

Abstract

Most new firms are founded by former employees of existing firms – spinouts. This paper documents how employer size shapes the entry and post-entry dynamics of spinouts. Using micro-data from Mexico, I show that employees from small firms are more likely to form spinouts than employees of large firms. In addition, spinouts from large employers start at a larger scale and grow faster than spinouts from small employers. I argue that this results from employees learning from their employers and develop a model of occupational choice and firm dynamics which operationalizes this theory. Using a calibrated version of the model, I analyze the aggregate implications of the link between employer size and spinout dynamics for macroeconomic outcomes both within and across economies. First, I argue that learning efficiency – interpreted as management quality – not only accounts for differences in spinout formation between the U.S. and Mexico, but also explains a sizeable share of the variation in the firm size distribution and output per worker. Second, I show that employee learning has meaningful and long-term implications on the creation of new firms in response to policies that target existing firms. Taken together, this paper establishes a connection between incumbent and entrant firms and shows that it is important for aggregate outcomes.