Growth and inventiveness in technology-based spin-off firms

research policy ELSEVIER

Research Policy 26 (1997) 331-344

Growth and inventiveness in technology-based spin-off firms O

Asa Lindholm Dahlstrand * Industrial Management and Economics, Chalmers Universit3' of Technology, S-412 96 GOteborg, Sweden

Abstract

This study focuses on technology-based spin-off firms that have had their initial product idea originated in the previous employment of the founder. Such entrepreneurial spin-offs (ESOs) arise when an entrepreneur leaves an organisation to start a firm of his own. Using the data from 60 small Swedish technology-based firms, 30 such entrepreneurial spin-offs are identified. It was found that as many as two-thirds of the spin-offs had originated in private firms, and only one-sixth from universities. In this paper, the background and the performance, in terms of growth and inventiveness, are compared for the spin-off and the non-spin-off firms. It was found that, after an initial ten-year period, the spin-offs were growing significantly faster than the non-spin-offs. However, no significant difference in the inventiveness was found between the two groups. Neither the growth nor the inventiveness could be explained by pre-spin-off variables, but it is speculated that the earlier employment within the spin-off parent has indirectly influenced the performance of the spin-off firms. © 1997 Elsevier Science B.V.

I. Introduction

Traditionally, innovation research, as well as policy debate, has focused greatly on whether large or small firms are the most frequent, effective a n d / o r efficient innovators, rather than on the nature, causes and effects of interaction between these firms. However, large and small firms interact in several ways, e.g., through different types of ownership changes. Lindholm (1994, 1996a) analysed ownership changes in the forms of technology-related acquisitions and spin-offs. The essential idea of that study was that an economic system consisting of large and small firms which interact through technology-related acquisitions and spin-offs is, under certain conditions, highly conducive to overall innovativeness and long-term growth. Based on this work, the causes and the

* Corresponding author.

performance (in terms of growth and inventiveness) of technology-related spin-offs will be further analysed in the present paper. Usually, a large technology-based firm encompasses several technologies within its existing product areas, and it may have a potential advantage in a relatively large amount of technology development. The technologies may also have a potential for innovation outside the existing product areas of the large finn. It is, however, common that a large firm does not encourage potential innovations outside its existing product areas. Thus, the large firm may often have a neglected potential as a source of radical new innovations. By spinning off this potential for external development, the large firm can act as an important source of innovation. Oakey (1995) has argued that the two major sources of new high-technology small firm entrepreneurs are higher-education institutions and well-established industrial firms. By definition, such entrepreneurial spin-off (ESO) arises when

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an entrepreneur leaves a company to start a firm of his own (Lindholm, 1994). To be a spin-off, this must also include the transfer of some rights, e.g., assets or knowledge, from the existing legal body to the new firm or body. ESOs themselves can be categorised depending on what legal body, or organisation they are spun off from, and on where the entrepreneur has gained his background experience. The classification of Lindholm (1994) subdivides ESOs into: (1) university spin-offs (USO) and (2) corporate spin-offs (CSO). Naturally, there can also be entrepreneurial spin-offs from organisations other than universities and corporations, which are called (3) institutional spin-offs. An entrepreneur can also have several sources of background experience, i.e., there may be an 'incubator system'; but in this paper the ESO concept is subdivided with respect to the latest employer, i.e., the 'main incubator' or 'spin-off parent'.

2. The literature on entrepreneurial spin-offs From the existing literature, it is clear that few systematic, empirical studies of technology-related spin-offs have been made. Moreover, the studies made of entrepreneurial spin-offs most often focus on university spin-offs, while very few analyse corporate spin-offs. In the US, Roberts (1968), Roberts and Wainer (1968) and Cooper (1971) were among the first to study spin-off ventures. These ventures are characterised by high growth and survival rates and by a high degree of technology transfer into new markets (Utterback, 1974; Oakey, 1995). In the studies by Roberts (1968) and Roberts and Wainer (1968), the ventures analysed are new companies started as spin-offs from other organisations, especially from MIT. The findings of the characteristics of the entrepreneur himself and of the technology transfer from the source organisation were further developed and statistically tested by Roberts (1991a,b). In these studies, university spin-offs are primarily analysed, but also corporate spin-offs from two industrial companies are included. The works of Cooper (1971, 1973, 1984), on the other hand, focus on CSOs. Although the two kinds of entrepreneurial spin-offs (ESOs) have a lot in common, there are considerable

differences. For example, while a private company often tries to keep research and technology within the firm, a university often encourages the transfer of the results to be used outside the university. Such differences ought to influence both the nature and the characteristics of the newly established ESOs, and perhaps also the subsequent performance of the spin-offs. Further, because of the large dissimilarities between the parent organisations, it seems natural that the continued relation between the USO and the university, compared to the CSO and the private firm, is necessarily quite different. For example, a CSO can easily be a potential customer or a subcontractor to its parent firm, while this is more difficult for a USO. Similarly, it ought to be more common for the CSO to develop a competitive relation to its parent organisation. In the following, earlier studies of ESOs will be summarised. This literature survey focuses on firms that are being spun off. Hereby, a number of studies and research on various forms of technology transfer (e.g. from universities) have been excluded from the description. The works of both Roberts (1968, 1991a,b) and Cooper (1971, 1973, 1984) will be important, but some additional studies will be included. Most earlier studies deal with the background characteristics of ESOs. Very few studies have analysed the effects on performance, such as growth and inventiveness. Among the background characteristics are issues related to the spin-off entrepreneur himself (see, e.g., Stanworth et al., 1989; Storey, 1994; Chell et al., 1991), to the incubator organisation or spin-off parent, and to the industry. Findings about the contributions from the incubator organisation to the ESO firm mainly involve issues of technology transfer, but sometimes other kinds of cooperation and competition are included. Cooper (1971) does not provide an exact definition of a spin-off, but his discussion of the concept has great similarities to the definition of the CSO used here. First, " a technologically based firm is defined as a company that emphasizes research and development or that places major emphasis on exploiting new technical knowledge" (page 3 of Cooper, 1971). Second, Cooper argued that spin-offs are often started by a group of founders from the same parent company. The spin-offs are usually related to this firm, and it is not uncommon for a

A.L. Dahlstrand / Research Policy 26 (1997) 331-344

spin-off firm to become a direct competitor with the 'incubator organisation' that the founders have left. However, omitted by Cooper are sponsored spin-offs, in which a parent firm voluntarily establishes and holds stock in a newly formed company intended to perform some of the business of the sponsoring firm. Roberts (1968, 199 la) and Roberts and Wainer (1968), used a different definition of spin-offs including all firms where the founder had previously worked for the laboratory being studied. The spin-off frequency is often discussed in terms of type and size of organisation, creating different kinds of spin-off frequency (Chap. 7 of Stanworth and Gray, 1991). In page 6 of Bollinger et al. (1983), it is argued that "conflicting views have been offered on the subject, with some claiming that large incubator enterprises are more favourable to new firm formation, while others contend small businesses are more likely than their big competitors to produce spin-offs." In the study by Cooper (1971), it was found that firms with less than 500 employees and small subsidiaries had about ten times as high ESO rates as large firms. He also found that the principal incubators had been industrial firms. In line with these findings, Bruno and Tyebjee (1984) found in a study of high-tech start-ups, that for the most recent employer, 42% of the respondents had been at a company with less than 400 employees, and 23% at a firm with more than 1000 employees. In the study by Cooper (1971), the nonprofit organisations served as incubators for only a small percentage of the new firms, in total for slightly less than 3% of the new technology-based firms (NTBFs). In a later study Cooper (1984) found that industrial firms were the incubators for 75% of the new firms, while, taken together, universities and hospitals accounted for 25%. Cooper (1971) compared these figures with the findings of Roberts (1968), concluding that MIT and its laboratories appear to have had much higher ESO rates. However, even if this is true, the different definitions used ought to boost these figures. Besides Roberts (1968, 1991 a,b), Dorfman (1983) studied the development of high-tech firms in the Boston area. She found that, after MIT, the second main source of founders of new firms is other hightech firms. Together, these two sources account for almost all founders of new high-technology enterprises. She also found an "explosive tendency for

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successful new enterprises to spin-off from other newly established firms," which thus ought to be ESOs themselves. Further, she argued, Massachusetts' advantage springs from two facts: it is rich in the origins of new entrepreneurs, and entrepreneurs tend to set up shop near their origins. Taken together, the findings of Cooper (1971, 1973, 1984), Dorfman (1983) and Bruno and Tyebjee (1984) suggest that a primary source of technologyrelated ESOs is other small technology-related ESOs. Also, successful new ESOs, and entrepreneurs, indirectly encourage new founders to establish new ESOs, e.g., from a nonprofit organisation. Naturally, the entrepreneur's motive for establishing a new firm is important, and has been investigated in several earlier studies (Stanworth et al., 1989; Cheli et al., 1991). Smilor (1987) argued that those who opt to leave companies usually do so because they cannot get the support or resources to start their venture within the company. The entrepreneurs may build companies that serve as suppliers or customers (Curran and Blackburn, 1994), or companies that provide a viable equity investment opportunity for the larger company (Smilor, 1987). Such an ESO is similar to sponsored spin-offs. These ESOs ought also to be important for developing new technologies and products which fall outside the main stream of a large company's business. Thus, the sponsored spin-offs may provide a vehicle for the large firm to engage in promising new areas outside the direct, existing scope of the company, but with a potential future interest. Moreover, the established organisation appears to influence the motivations of the entrepreneur (Cooper, 1973). Thus, when the incubating organisation takes an active part in the establishment of a new ESO, it should be able to influence the future business to a great extent. Cooper (1973, 1984) argued that the incubator organisations provide the setting within which founding teams can be formed. As was mentioned earlier, the incubator organisation also affects the location of the new firm. Moreover, it influences the nature of the new business started; most new firms serve the same general market or utilise the same general technology as the parent company. Further, the characteristics of the incubator appear to influence the nature of the new firms which might be started and, to some degree, their subsequent patterns of success.

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Organisations which have spun off many entrepreneurs seem to have done so most often during times of internal conflicts and change. One implication is that organisations which are good at recruiting ambitious people, but which are then afflicted with internal mismanagement or turmoil, may be the most likely to spin off entrepreneurs (Cooper, 1984). On the other hand, also people who have their ideas for new products or processes rejected, or who see a technology-related opportunity that their company does not want to pursue, are likely to champion spin-out activities (Dietrich and Gibson, 1990). Thus, the circumstances at the previous employment, the new potential market opportunities, as well as the founder's personal motives are likely to influence the establishment of new spin-off firms. Smilor (1987) found indications that incubators can assist in providing benefits to a tenant spin-off company, concluding that new business incubators do seem to provide a management system conducive to the development of technology-based ventures. He argued that they can provide a practical mechanism for risk-taking and risk-sharing in the early and most uncertain stages of business development. There should be several other ways in which an incubator can, initially but also later on, help a new spin-off company. Besides the transfer and support of different kinds of knowledge, an incubator can support the spin-off firm with physical assets. Here the CSO can be assumed to hold an advantage compared to the USO. For example, production machinery is more likely to be found in a private corporation than in a university. Similarly, developed products, marketing channels, customer and supplier contacts and so forth, ought to be more common in the private organisation. Thus, the private corporation can help to support the spin-off firm in various ways. However, whether or not the incubator chooses to do so might vary with respect to the incubator's own interest and potential in developing the technology or product itself, i.e., whether it is within the scope of the incubator's own business and technological area. The transfer of personnel from the incubator to the spin-off firm could be an equally important contribution to the new firm. Naturally, an incubator may not like its most competent personnel to leave the firm for employment in a spin-off. Even so, it is possible, e.g., in times of staff cuts, that a private incubator

will encourage personnel to transfer to a spin-off. Granstrand and Al~inge (1995) argued that there are several reasons to believe that the spin-off mechanism induces efficiency in that: (1) it provides a new degree of managerial freedom, and (2) large companies are becoming increasingly important sources of new ideas and new technology, which can be exploited within product areas outside the immediate interest of the companies. Bruno and Cooper (1982) have observed (in a small sample) that small technology-based firms (STBFs) acquired by very large firms tend to have spun off from large companies. Partly, this is supported by Granstrand and Al~inge (1995), who found that five out of eight spin-offs were later acquired by a larger corporation, and that these acquired spin-offs played a role in diffusing and developing technology from one actor to another. Thus, Lindholm (1994) suggested that technology-related acquisitions and spin-offs influence each other. In line with the findings and argumentation by Cooper (1971), the acquisitions ought to be important for the establishment and financing of other new spin-offs. Also, as argued by Granstrand (1992), a market for corporate control with a suitable acquisition mechanism might compensate for a possibly too high or misdirected spin-off propensity and too much fragmentation of industry.

3. Method and data The sample used in this study (the ESO study) is 'the MIT Center for Policy Alternatives sample' (the 'CPA sample'), identified and used by Utterback and Reitberger (1982) and Utterback et al. (1988). It consists of 60 new technology-based firms established in Sweden between 1965 and 1980. Utterback and Reitberger (1982) estimated that the CPA sample covers half the Swedish population of new technology-based firms (established during this period), and that it allows some generalisations about Swedish industry in general. Their selection criteria included requiring that the firms should have partly or wholly developed their own major products, should be wholly and independently owned within Sweden, and should have at least 5 MSEK in sales and 20

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employees in Sweden in 1980. ~ By eliminating those with ownership either outside Sweden or by larger publicly held firms in Sweden, the 60 NTBFs in the CPA sample cannot be divestments or joint ventures. There is a risk that some 'sponsored spinoffs,' e.g., where the spin-off parent holds a minority share, are underrepresented in the sample, even though other kinds of sponsored spin-offs can be assumed to have been included. The sample was used statistically to analyse the questions about the background of the firms, the growth and inventiveness in ESOs, as well as explanatory variables influencing changes in growth and inventiveness. Moreover, the CPA sample has a strength since it allows comparison with non-spin-offs. The firms were asked about the origin of the product idea that led to the establishment of the firm. If this idea derived from the previous employer (a university, a private firm or another organisation), the firm was categorised as an ESO. If the idea had been generated by the founder himself, an external inventor, or an organisation which was not the former employer, the firm was characterised as a non-spin-off. Further data on the background of the firms are presented in Section 4.1. Not least important in the selection of the CPA sample are the time and resource advantages of using a sample analysed earlier. In the original study by Utterback and Reitberger (1982), personal interviews were made in all the 60 NTBFs. The coded answers of these interviews resulted in a database of 476 variables, describing the development of the firms. 2 Some of them could be directly used in the ESO study, while others helped in the formulation of a questionnaire. Additionally, the CPA sample was

A few firms were included in the sample (Utterback and Reitberger, 1982), even though they did not meet all criteria. -' Included here are data on: (a) basic description, (b) company overview--1980, (c) economic performance, (d) growth objectives, (e) the entrepreneur, (f) equity, (g) bank financing and :elations, (h) venture capital, (i) government loans, (j) start up motives and forces, (k) knowledge and skill transfer, (I) own production concepts, (m) government relations, (n) labour relations, (o) marketing and customer interaction, (p) key events, (q) product development and technical contribution, (r) network and communications, and (s) summary views. In the ESO study, all of these answers and variables were available. Here, the help and cooperation received from Professor Clas Wahlbin and Lennart EIg, NUTEK, are gratefully acknowledged.

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analysed earlier by Lindholm (1990, 1996b), and from this study some useful data (e.g., about ownership changes and economic development) could be transferred to the ESO study. Besides these two earlier studies, new information (e.g., about the recent development in the firms) was collected in the ESO study. In 54 of the 60 firms, supplementary telephone interviews were made. Among the missing six firms, two had been liquidated earlier and four did not want to participate. In two other firms, the answers were incomplete due to lack of knowledge (founder was ill). Nevertheless, by including the data from the two earlier studies, the missing data were limited and basic information about all firms is available. The interview data were complemented with publicly available information about the growth and patents of the firms. This information, including the patent frequency and economic information about sales and number of employees, was collected from the Swedish Patent and Registration Office. It was not possible, within the time and resource limits of the ESO study, to collect information about new products or innovations and the sales from new products. Instead, the patent frequency was used as an indicator of the inventiveness of the 60 firms. In turn, the inventiveness can be used as an approximation of the potential innovativeness.

4. Results 4.1. The background and the motit,es The firms in the ESO study have been categorised as spin-off firms when the original product idea, which led to the establishment of the firm, originated in the previous employment of the founder. No distinction was made between different categories of earlier employment organisations, e.g., universities and industrial firms. Out of the 60 firms in the sample, 30 could be considered as spin-off firms, i.e., the product idea originated in the previous employer. Since the sample is estimated to cover approximately 50% of all the new Swedish STBFs, and the distribution can be considered as representative, it can be estimated that half of all new Swedish STBFs are ESOs. In addition, as illustrated in Table 1, in the majority of the ESOs the previous employer was a private firm; in fact half of the incubators were

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Table 1 Origin of product idea that led to the establishment of the 60 STBFs

University Private finn Other organisation External inventor Founder alone Total

ESO

Non-spin-off

5 (17%) 22 (73%) 3 (10%) 30 (100%)

3 (10%) 7 (23%) 5 (17%) 15 (50%) 30 (100%)

manufacturing firms, and an additional seven firms (23%) originated in other private firms. As Table 1 also shows, only a minority of the ESOs originated in a university. The remaining ESOs originated in other kinds of organisations, but none of them in a governmental organisation or institute. Almost 3 / 4 of the ESOs were CSOs, and 1 / 6 were USOs. Hence it can be argued that private industrial firms in Sweden play a major role as a breeding ground for new firms. In addition to these figures, several of the nonspin-offs originated in ideas generated within other external corporations and universities. One fourth of the non-spin-offs were initiated by ideas originating in private firms and three from universities. Also, some firms were established by external inventors introducing the idea. Approximately 50% of the non-spin-offs were established due to the founder's own idea. However, it might be that the number of ESOs is underestimated here, while the number of non-spin-offs established by the founders' own ideas is likely to be overestimated, given the reluctance of some founders to admit that their ideas originated while they were employed by another organisation. For example, in the ESO study, seven of the 15 firms established by the founder's own idea were found to have had a high, or very high, technology transfer from the earlier employer. In another Swedish study (Lagergren, 1994), the spin-off frequency in the same sample was estimated to be about 70%. However, the definition used in that study is different, and to some extent broader, than the definition used here. Lagergren (1994) includes among spin-offs every customer-related, newly established firm founded by former employees. In the ESO study, the initial product idea, which led to the establishment of the firm, originated in the earlier employment of the

founder, a condition not necessary (but, naturally, usual) for the spin-offs in the study of Lagergren. In the ESO study six of the non-spin-off firms (six of the seven 'private firms' in Table 1) arose from ideas originating in earlier customer contacts. If these firms were included as ESOs, 60% of the STBFs would be classified as ESOs. Moreover, if firms with a high technology transfer from the earlier employer were also considered as ESOs, this would result in approximately 70% of the STBFs being ESOs. In earlier research, the entrepreneur's motives for establishing a new firm are usually related to either his personal ambitions or different circumstances within the previous employment (Storey, 1994; Chell et al., 1991). In Table 2a, the circumstances in the previous employment, influencing the founder to start a business of his own, are presented. In Table 2b, the founder's personal motives for establishing the business are presented. The motives of the ESO entrepreneur are also compared to those of the nonspin-off entrepreneur in Table 2a,b. The only significant difference within the previous employment, between the ESOs and the nonspin-offs, is whether or not the founders' ideas were utilised by the previous employers. It seems quite natural to have a higher share of ESOs where the founders' ideas were not utilised by the previous employers, and in 43% of the ESOs the founders felt their ideas were not utilised, while in the non-spinoffs this feeling was found in only 17% of the newly established firms. Moreover, the establishment of a new firm as a result of an internal crisis within the previous employment firm seems to be more frequent among the non-spin-offs than the ESOs. Further, there are no differences between the two groups of firms when it comes to the previous employer being closed down or bought up. As regards the founders' personal motives for establishing the new firms, in Table 2b, the motives of testing one's entrepreneurial ability and of financial reward are more common among the non-spin-offs. In the ESOs, the motive of having the freedom to explore new ideas is more common than to test one's entrepreneurial ability. To enjoy independence and to see things through to completion have been key motives in both groups. The relation between the previous employer and the newly established firm, and whether or not there

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Table 2 (a) Circumstances at preHous employment, influencing the establishment of the new firm

Previous employer closed down Previous employer bought up or thinking of selling Internal crisis Founder's ideas not utilised by previous employer Total

ESO

Non-spin-off

t-test: P > t

6 5 6 13 30

5 7 10 5 27

0.79 0.31/ 0.14 0.05

ESO

Non-spin-off

t-test: P > t

8 19 4 4 18 19 1 7 80

12 15 12 b 10 12 3 10 80

0. I 0 0.82 0.00 0.32 0.14 0.26 0.25 0.19

(b) Founder's motit,e.fbr establishing the new.firm a

Financial reward Independence Test ability as entrepreneur Challenge Freedom to explore new ideas Fry and see things through to completion Family motive Other personal motive total

~'More than one circumstance is possible. Here only the existence or nonexistence of a motive is noted.

are differences b e t w e e n E S O s and non-spin-offs, are issues important in order to understand the spin-off p h e n o m e n o n . Hereby, the degree o f disintegration can be analysed, which in turn is important for potential externalisation disadvantages caused by the spin-off. In Table 3, the degree o f t e c h n o l o g y transfer, the degree of competition, and the degree of cooperation b e t w e e n the firms are presented. The only significant (at 10% level) difference in the relation with the previous e m p l o y e r , b e t w e e n the E S O s and the non-spin-offs, is the degree of technology transfer. The E S O s h a v e e n j o y e d a h i g h e r degree o f t e c h n o l o g y transfer than the non-spin-offs. This seems quite natural, since all E S O s have b e e n established due to ideas originating from the p r e v i o u s e m p l o y m e n t . M o r e surprising is that the differences are not larger: 2.79 in E S O s c o m p a r e d to 2.17 in non-spin-offs. But, as m e n t i o n e d a b o v e when the

possible underestimation in n u m b e r of E S O s was discussed, there are six non-spin-offs established by contacts with or ideas f r o m earlier customers. These non-spin-offs have in general had a high or very high t e c h n o l o g y transfer f r o m the earlier e m p l o y e r . W h e n these six firms are excluded, the difference b e t w e e n the two groups b e c o m e s more substantial: 2.79 in E S O s c o m p a r e d to 1.88 in non-spin-offs ( P = 0.015). As also discussed above, a m o n g the non-spin-offs are seven additional firms established by the founders' o w n ideas which h a v e had a high or very high t e c h n o l o g y transfer f r o m the earlier employer. Further, as can be seen in Table 3, no significant differences exist b e t w e e n the two groups of firms w h e n the c o m p e t i t i o n and cooperation with the previous e m p l o y e r are c o m p a r e d . It is notable that a m o n g the E S O s , 28% have d e v e l o p e d an o n g o i n g relation with the f o r m e r e m p l o y e r , and that 16% of

Table 3 Relation between the previous employer and the new firm Degree of technology transfer from previous employer (scale: 0-4, 0 = none, 4 = very high) Competition with previous employer (scale 0-4, 0 = none, 4 = direct) Cooperation with previous employer (0 = no, 1 = yes)

ESO

Non-spin-off

t-test: P > t

2.79 ( N = 29)

2.17 (N = 29)

0.08

1.29 (N = 28) 0.28 (N = 29)

I. 14 (N = 28) 0~16 (N = 29)

0~62 0.31

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the non-spin-offs have also developed such a relation. In other words, in almost a third of all the ESOs studied, the externalisation disadvantages of ESOs are limited by cooperation between the ESO firm and the ESO parent. It is natural for a newly established firm to use the contacts developed in a previous employment. However, in the ESO study, contributions from the previous founder are quite unusual. When there are contributions, these are mainly in the form of customer and supplier contacts, as well as industry knowledge; very few ESOs bring any proprietary knowledge or assets. It could have been assumed that a significantly higher degree of cooperation and actual contributions should be found among the ESOs; since they originated in the business of the previous employer, they also ought to be more closely connected with this business. The results are surprising, as they indicate that the potential advantages of the spin-off process are utilised by very few of the ESOs and their parents. Nevertheless, it might be that this potential cooperation is destroyed when the ESO firm and the ESO parent become competitors.

4.2. The effect on growth In this section the growth, and the variables influencing the growth, will be analysed for the 60 technology-related firms, 30 of which are classified as technology-related spin-offs. First, in Fig. I, the growth cycle in sales by the ESOs and the non-spinoffs is presented. As can be seen in Fig. 1, as a group the ESOs have grown more rapidly than the non-spin-offs. Neither of the groups had any significant growth before 1970, when the majority of the firms were

established. Not until they were approximately ten years old did the ESOs start to outperform the non-spin-offs. After 1980 the mean growth 3 was significantly higher ( P = 0.001) in the ESOs, and in 1991 the mean sales in the ESOs were more than double the sales in the non-spin-offs. 4 It is consistent with the literature (e.g., Biggadike, 1979) that significant increases are found first after approximately ten years, as it often takes this long for a product or a venture to be fully developed, showing signs of growth on the market. One may speculate that when the firm finally starts to grow, the ESO, as compared to the non-spin-off, will have a potential advantage from an ongoing relation with the spin-off parent, deriving benefit from a limited disintegration, or quasi-externalisation. These speculations naturally lead to the question of what factors actually influence the differences in growth. The background, motives, transaction, ongoing relation, and potential synergies can all be assumed to include variables affecting both the growth and inventiveness of the ESO firm. In order to elaborate and identify variables influencing the growth of ESOs, a tentative linear growth model was used. However, in a test made of a linear growth model of pre-spin-off variables explaining growth, none of the variables above could explain the differences in growth. Several attempts were made but no variables proved significant, as they could not explain anything at all of the growth of the firms. 5 Thus, it can be concluded that the pre-spin-off variables analysed within this study have no direct influence on the growth of the firms investigated. It is, however, possible that there exists an influence from the previous employment which will affect the later post-spin-off development of the firms, and that

40OO

30O0

2OOO

,

~

It

~

\l

yolr

Fig. 1. The growth cycle in sales by ESOs and non-spin-offs (MSEK adjusted for inflation, 1992 = I).

3 Mean value of relative growth (i.e., I / N Y'[(sales year(n + l)/sales year(n)-1], n = 1980 to 1991) after 1980: in E S O = 66%, in non-spin-offs = 7%. 4 In the non-spin-offs it is 74 MSEK and in the ESOs 185 MSEK, i.e., 2.5 times higher. 5 Furthermore, attempts were made to explain the growth variation in the ESOs and the non-spin-offs separately. However, none of these models could explain any of the growth differences within the groups, and none of the pre-spin-off variables had a significant influence on growth (R 2 varied between 0.45 and 0.30, but adjusted R 2 values were always = 0, and F > 0.8).

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several of the potential explanatory variables in the post-spin-off development can be affected by the previous employment. For example, a founder of an ESO may feel more familiar and comfortable with working in a large company. From the results it can be concluded that, after a ten-year period, the ESOs were growing significantly faster than the non-spin-offs. It was further found that none of the potential explanatory pre-spin-off variables analysed could explain the growth of the ESOs. Rather, the growth was influenced by variables in the post-spin-off development phase. As illustrated in Table 4, most important for the growth of the ESOs was the internationalisation of the firm, especially a high degree of internationalisation but also an early intemationalisation. The ESOs might have technically sophisticated products, which in turn increases the importance of internationalisation. However, even though they are quite uncommon, foreign subsidiaries for R & D affected the growth negatively, perhaps because they divert resources away that could otherwise have been used to increase growth. While the number of own acquisitions had a negative effect on growth, technology-related acquisitions contributed positively. It is possible that technical sophistication in the ESOs enables them to manage the technology-related acquisitions. Finally, early minority investments in the ESOs were found to contribute to growth, and it can be speculated that such investments help the ESOs with, for example, early intemationalisation. 4.3. The effect on im, entil~eness

Measuring innovativeness can be complex, and it is often easier to measure the inventiveness, using

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Table 5 Inventiveness in the ESOs and non-spin-offs: patent frequency and total number of patents Mean values

ESO

Non-spin-off

Patent frequency (patents/year) Total number of patents/finn Patent frequency after 1978 Total number of patents after 1978

0.1 I 2.73 0.17 2.40

0.12 2.64 0.16 2.18

this measurement as an approximation of potential innovativeness. Further, the number of patents, or patent frequency, is often used as an indicator of inventiveness. It is also relatively easy to measure. Therefore, in the ESO study, the granting of patents is used to represent the invention frequency-inventiveness-which might indicate a future innovation potential of the firms. In Table 5, the differences in patent frequency and total number of patents are compared between the two groups. In Table 5, there are no significant differences in inventiveness between the ESOs and the non-spinoffs. On the contrary, the firms show quite similar patent performance. No firm had any patents at all before 1971, and after 1978 the ESOs held a slightly higher number of patents. Moreover, having only a bit over two patents per firm could suggest that these firms are not highly inventive, but here it should be noticed that about half of the firms (17 of the ESOs and 14 of the non-spin-offs) are not involved in patenting activities and do not hold any patents at all. In addition, taken together, the non-spin-offs benefiting from a high technology transfer from the earlier employer are holding more than half the number of patents held by this group (seven of these 13 firms together hold 39 of the 74 patents in the non-spin-off group).

Table 4 Linear regression model of ESO growth: post-spin-off variables (N = 28, R 2 = 0.94, adjusted R 2 = 0.84, F = 0.000)

Constant Age when selling minority shares Internationalisation (number of foreign subsidiaries) Age when internationalising (age when establishing the first foreign subsidiary) Foreign subsidiaries for R& D Number of own acquisitions made Technology-related acquisitions made

Standard coefficient

P (two-tail test)

0.000 0.27 1.75 0.37 -0.92 - 0.48 0.28

0.536 0.043 (/.O00 0.007 0.000 0.004 0.018

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In the time period after 1978, there is a positive correlation between growth and inventiveness (Pearson correlation coefficient = 0.34 significant at P = 0.01). This can be explained by higher correlation in the ESOs and a lack of correlation in the non-spinoffs. Despite this correlation, it is obvious that the growth of the ESOs is not met by a similar increase in the patenting activities. Rather, the ESOs show a declining number of patents/sales (or employee), instead suggesting that the ESOs are focusing on expansion of their businesses. The differences in inventiveness, between ESOs and non-spin-offs, are by no means as large as the differences in growth. Similar to the growth models above, linear regression models may be used in order to identify variables influencing the inventiveness of the firms, as well as to analyse potential differences between the ESOs and non-spin-offs. However, as for the tentative linear growth models above, the pre-spin-off variables of the ESO study cannot explain inventiveness in any detail. Also, it is further underlined that the inventiveness is not affected by whether the firm is an ESO or not. In the pre-spin-off model, only one of the variables in the model has a significant influence on inventiveness: when the founder is 'pushed' away because his ideas are not utilised within his previous employment, this has a serious negative effect on the inventiveness (Storey, 1994). This indicates either that the founder himself was unsuccessful in utilising his own ideas, or that the ideas were actually no good or not patentable. As also speculated in earlier studies (e.g., Roberts, 1991a), founders with defensive motives are not likely to take advantage of new technology and business opportunities. In addition (despite the seven non-spinoffs with both a high number of patents and a high degree of technology transfer), the technology transfer did not contribute significantly to the inventiveness. It may be that the complexity of the technology is even more important for inventiveness than the amount, or degree, of transferred technology. However, this question must be left for future research to clarify. It should be remembered, too, that there was a delay of several years before the inventiveness, as well as the growth, within the ESOs started to increase. It is possible that the ESOs benefit from earlier inventive work in the previous employment,

and thus the initial inventive work in the ESOs may not be focused upon to the same extent as in the non-spin-offs, i.e., the ESOs are initially favoured by the R and D work in the previous employment. Only later, for example in later product generations, do the spin-off finns increase their inventiveness. If this is so, it is natural that the ESOs enjoy an advantage over the non-spin-offs, since the ESOs will then initially be able to focus on, e.g., marketing and growth instead of product development and patenting.

5. Summary and conclusions In this paper, spin-offs were compared to nonspin-offs. In the existing sample there was no difference in time regarding the year of establishment of spin-offs and non-spin-offs. Half of the finns in the study were spin-offs, and the other half non-spin-offs. Additionally about 20% of the firms could be considered as ESOs if firms with a high technology transfer from the earlier employer, or finns established by earlier customer contacts, were included as ESOs. The majority of the spin-offs in this study are corporate spin-offs, CSOs, and only 1 / 6 are university spin-offs, USOs. The remaining ESOs were firms spun off from other nongovernmental institutions. In the sample, there are more than four times as many CSOs as USOs. In a British study of 133 high-technology new firms, Oakey (1995) found that 77% were in the same sector as the organisation that provided employment to the main founder, immediately prior to the formation. He found that industrial firms were the source of new entrepreneurs in 56% of the cases, and that the public sector was the source in a further 22%. In his first study, Cooper (1971) found only 3% of the spin-offs to arise from nonprofit organisations, while the corresponding figure in a second study was 25% (Cooper, 1984). Cooper compared this to the findings of Roberts (1968), and argued that in the Boston area, the proportion of USOs seemed to be higher. However, one important distinction between the findings of Roberts (1968) and those by Cooper (1971) and this study is that Roberts' figures include every firm with a founder who had ever worked for the university

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laboratory. That is, Roberts does not analyse the proportion of founders who had been employed in an industrial firm and possibly gained additional key knowledge within that firm. When only the last previous employer is analysed, the finding of 17% USOs, in this study, supports the low figures obtained by Cooper (1971). Nevertheless, the universities may have an important indirect role for spin-offs. Among the non-spin-off firms in the sample, 10% had gained their idea for start-up from a university. Further, the literature reveals conflicting views of t h a t size of company creates the higher share of spin-offs. In some studies the large firms are argued to be more favourable to the formation of spin-offs: in others the small businesses are found more likely to spin off new firms (Cooper, 1971, 1973, 1984; Bruno and Tyebjee, 1984: Dorfman, 1983; Bollinger et al., 1983). Dorfman (1983) argued that, besides universities, a main source of technology-related spin-offs is other technology-related spin-offs. By contrast, in Sweden, Granstrand and Al~nge (1995) found large industrial corporations as incubators in more than half of the start-up companies of their study. In this paper, 50% of the CSOs are spun off from industrial manufacturing firms; and in these, two-thirds of the founders had previously worked in a small company, but only a minority in firms with more than 500 employees. Thus, even though the sample is limited, it supports the suggestion that small firms are the main source of direct ESOs. However, the importance of different incubator syslems, including constellations of 'main' and 'contributory' incubators, has not been analysed. Also, spin-off frequencies are measured only as absolute frequencies, and not as relative frequencies, e.g., as spin-offs per (technical) employee. Considering the vast difference in number of employees between industry and universities in most parts of the world (something that is usually not done in earlier studies, e.g., Bruno and Tyebjee, 1984: Cooper, 1971, 1984), it is not very surprising to find that most new firms are spun off from industry. If instead a relative measure of spin-offs per employee were used, the results might be rather different. For example, it is possible to hypothesise that the majority of ESOs have been spun off from (the very high number of) small industrial firms, but that the employees of the universities are the most productive when it comes to

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establishing new firms. Furthermore, it might be that the most efficient spin-off procedure occurs when the founder has held several earlier positions (in different kinds of organisations) and all of these employers are contributing as incubators. Here is a need for additional research, where the roles of incubators are more fully developed and analysed. Indications about the nature and motives of spinoffs were found both in earlier studies and in this paper. In this study, more than half of the ESO founders have a defensive motive, and are 'pushed' away from the earlier employment. Here, three different reasons are equally frequent fbr pushing the founder to leave: (1) employer has closed down, (2) employer was bought up or was thinking of selling, and (3) an internal crisis within the firm. However, these 'defensive motives' were similarly important for founders of non-spin-offs leaving their earlier employment. Still, in 13 of the 30 spin-offs, the founder left the employment because his ideas were not utilised: in the non-spin-offs this was so in only 1 / 6 of the firms. Of additional interest, indicating a future potential of both the spin-off firm and the parent, is the relation that develops between the two firms after the spin-off, something that only to a limited extent has been analysed in the literature and earlier research (e.g., Lindho[m, 1994, Smilor, 1987). For example, Lindholm (1994) found that among the ESOs an ongoing relation with the parent, including different kinds of cooperation, formal as well as informal, was most often developed after the spin-off. Roberts (1991b) found that 50% of the spin-off founders established their firms while still working full time for their earlier employers. Personal contacts between the spin-off founder and his earlier colleagues continue to be important after spin-off, and sometimes they result in other employees establishing small firms for 'moonlight consulting" in the spin-off firm (Lindholm, 1994). In this paper, it has been indicated that in one third of the spin-offs an ongoing relation develops after the spin-off. Yet, this was not significantly more than in the non-spin-offs, where an ongoing relation with the former employer was developed in 18% of the cases. On the other hand, it is as unusual among the ESOs to become competitors with their former employer, as it is among the non-spin-offs. As was also found by

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Roberts (1991 a), there is a higher degree of technological transfer from the earlier employer to the ESOs than to the non-spin-offs. The higher degree of technological transfer indicates that the ESO and the parent are often, at least initially, developing similar technology, but possibly for different applications. This could show a higher potential for (technology) cooperation between the parent and the spin-off, a potential that is currently not always taken advantage of. Lindholm (1994) found indications that the ESO firm, but not the spin-off parent, was often well aware of the advantages (for both firms) of a continued relation with its spin-off parent. It was speculated that it is often the parent's low interest in a continued relation that hinders more substantial cooperation. The only times when spin-offs seemed to be encouraged within the parent firm were when personnel cut-downs became necessary. The negative attitude towards spin-offs may need to change in order to benefit more from potential synergies between spin-offs and spin-off parents. For example, in the works by Roberts (1968, 1991a), he changed his earlier view (Roberts, 1968) that an incubator would suffer from spin-offs, instead encouraging the potential incubator to produce spin-offs (Roberts, 1991a). He argues that the spin-off firm is more often formed from general technological skills (tacit knowledge) than from specific proprietary knowledge (Roberts, 1991a). His argumentation is supported by the findings of this study; very few of the ESOs do bring (or steal) any proprietary knowledge or assets from their previous employers. Besides the degree of technology transfer, there is, surprisingly, little difference between spin-offs and non-spin-offs, in regard to the different contributions from the earlier employer. Neither the ESOs nor the non-spin-offs have received any financing or obtained any marketing or manufacturing contracts. Neither have they brought any patents or licences from their earlier employment; also contributions in the form of personnel, assets and inventories, and agencies are limited. They have only to a very limited extent received customer and supplier contacts, or any industry knowledge. Possibly, the lack of substantial contributions (in the ESOs) may be an additional result of the large firm's negative attitude towards spin-offs. Few studies analysing the total performance of

either the growth, or the inventiveness of ESOs have been noted, even though several authors have found the ESOs themselves to have both a high survival rate and high growth, as well as a high degree of technology transfer (Roberts, 1968; Roberts and Wainer, 1968; Cooper, 1971; Utterback, 1974; Dietrich and Gibson, 1990). Nevertheless, Roberts (1968), Dietrich and Gibson (1990) and Smilor et al. (1988) gave examples where the incubator firm is spinning off new firms, which some years later are (together) more than double the size of the parent. In this paper, it was found that, after a ten-year period, the ESOs were growing significantly faster than the non-spin-offs. After a further ten-year period the ESO firm was on average 2.5 times larger than the non-spin-off firm. Despite this difference, the ESOs and the non-spin-offs have quite similar performance in terms of patents generated. In general, earlier studies focus on discussing different circumstances which can be efficiency-inducing, rather than on analysis of specific explanatory variables. No pre-spin-off variables affecting the performance in ESOs have been identified in earlier studies. Neither, in this study, could very much of the performance in the ESOs be explained by the pre-spin-off variables. Rather, variables in the postspin-off development, such as the internationalisation of the firm and acquisitions made, were much more important for the growth. Restricted access to finance is often perceived as a significant constraint for growing firms (Binks and Ennew, 1996). Here, the suggestion that the firm would benefit from outside minority investment (Bruno and Tyebjee, 1984; Mason and Harrison, 1994) is supported by the findings in this paper. But that the ESO should benefit from the technology transfer from the source organisation (Roberts, 1968; Roberts and Wainer, 1968) is not supported in terms of increased growth. The higher growth of the ESOs (as compared to non-spin-offs) emerges about ten years after the establishment of the firm, and it seems that this increase is not directly influenced by either the spin-off decision or the spin-off parent. Still, it is possible that the earlier employment within the spin-off parent has indirectly influenced the performance in the ESO. Similar to the analysis of growth, factors explaining inventiveness were also analysed in this paper.

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Above, it was argued that the spin-off firms have an advantage of initially more developed products, and of technology transfer, from their earlier employment. These firms would thus initially not have the same need for inventive work, and could sooner have a ready-developed product, which accordingly can contribute sooner to increased growth. Also, the comparatively low need of initial innovative work could free resources to be used in the business development (e.g., marketing of products) and the growth of the firm. The non-spin-offs would have to put greater emphasis upon the initial inventive work before they could start to expand. Hence, the degree of technology transfer from the spin-off parent can be assumed to contribute indirectly to the development and growth of the ESO.

Acknowledgements

The research on which this paper is based was financially supported by the National Board for Industrial and Technical Development (Sweden) and the Ruben Rausing Fund for Research on Entrepreneurship and Innovation. The author wishes to thank the three anonymous referees for many valuable comments and suggestions

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