When Do Spinoffs Enhance Parent Firm Performance? Evidence from the US Automobile Industry 1890-1986

Abstract

Spinouts – entrepreneurial ventures founded by ex-employees of incumbent firms within the same industry – have emerged in numerous industries. Some existing literature argues that they typically have a negative association with their parents’ performance due to the loss of human capital, the disruption of organizational routines and subsequent adverse competitive effects. More recent work though, suggests that such negative effects may have been overstated and argues that there are conditions under which spinouts may be linked to enhanced performance of the parent. I contribute to this literature by theorizing about and empirically testing for such conditions. In particular, using data from the US automobile industry (1890-1986), I find evidence that spinouts are associated with enhanced parent performance when they increase the parent’s corporate coherence either via the core competencies and capabilities domain, by refocusing the parent’s resources on the core, or through the cognitive path, by resolving a conflict at the top level of the parent’s hierarchy. I discuss implications for both research and practice.