Pre-entry knowledge base complexity and post-entry growth: evidence from Italian firms

Abstract

Abstract Knowledge is largely recognized as a key driver of survival and growth of new entrants. Previous literature on the role of pre-entry knowledge in post-entry performance has focused on entrepreneurial and managerial capabilities and education and on knowledge incorporated in material and immaterial resources. In this paper, taking to the firm level the intuition behind the notion of economic and technological complexity of countries, we hypothesize that post-entry performance of new firms may be explained by their knowledge base complexity, which captures the reinforcing mechanism between variety and creation of new valuable knowledge. We provide a measure of firm-level complexity derived from the analysis of textual content of patents and exploit it to examine the empirical relation between pre-entry complexity of knowledge and post-entry growth in a sample of Italian firms entering the market in 2009-2011. Baseline results show a significant and positive association between knowledge complexity and post-entry growth, even after controlling for firm characteristics and year, sector, and region fixed effects. Robustness analysis reveals that this positive effect is more significant over the medium run than in the initial years after entry, while relatively weaker for the so-called Innovative Small and Medium-Sized Enterprises.