Location strategies of spinoff entrants: Implications of clustering and staying close to the parents

Abstract

The research on agglomeration posits that co-locating in a cluster with industry rivals benefits the firm because of its proximity to resources including suppliers, labor, and knowledge spillover from rivals. Although it’s often assumed that co-location benefits new entrants, more recent research finds that stronger entrants gain less from co-location. Spinoff entrants—the organizational descendants of ongoing established firms—are comparatively stronger entrants because of the product, market, and industry knowledge they inherit from their parents. They may gain less from co-location, because the competitive pressures exerted by their parents and other industry rivals are higher when they are more proximate. For the spinoff entrants that locate farther away, the inheritance from their parents may be portable and thus do not decay with distance. Our paper examines the performance implications of whether spinoff entrants are located inside a cluster and staying close to their parents. Specifically, we conduct an event history analysis estimating the amount of time it takes a spinoff entrant to reach six entrepreneurial milestones. We find that being located inside a cluster and staying close to the parents are beneficial to spinoffs only when the industry has a single dominant cluster, as we observe in the semiconductor industry. When the industry has many clusters widely dispersed across the country, as we observe in the pharmaceutical industry, co-location is associated with worse performance. Our findings suggest that the dispersion of clusters in an industry is one condition where the assumption about new entrants benefiting from co-location is invalid.