Spin outs & spin offs

1. Spin outs & spin offs Leulescu Aura & Elena Novelli Bocconi University

2. Proposition 1alt • Spin outs strengthen innovation within large firms, since they build on ideas inconsistent with the strategy of the firm and make employment and individual investments in risky innovations more attractive to entrepreneurial employees.

3. Assume versus predict spin-off effects? • On average spin-offs will weaken the performance of their parents by removing an individual with superior information (Klepper and Thompson, 2007) • Spin-offs inherit and expropriate knowledge from their parents as a result of an evolutionary process of imprinting (Klepper and Sleeper, 2005; Agarwal et al, 2004). Thus, smart firms spawn smarter children. • Spin-offs are competing with their parents and sometimes replace their parents in the industry (Bower and Christensen, 1995)

4. (1)Emerging empirical facts – spin-off & inventors ? Focus: Inventors & entrepreneurial parent firms • “One of the reasons I am working in Shell is exactly the environment that allows you to come up with radical ideas. You can do real ‘research’: you assume risks to sustain your ideas, you mainly work in your free time and put your reputation at stake but at the end of the year you are evaluated for being a good scientist.” • Axel Makurat, Shell inventor

5. (1) Background – spin-off & inventors ? • Inventors incentives & Contracts: • Inventors select companies with a higher entrepreneurial prominence (Stern, 2004; Burton et al, 2002) • Companies with a higher propensity for creating spin-offs are more likely to retain their employees (Franco, 2005; Panico & Gambardella, 2008; Hellmann, 2008 ). • Create organizational mechanisms to leverage ‘entrepreneurial’ inventors and create conditions for strategic change (Capron and Mitchell, 2008).

6. (1)Background – spin-off & inventors ? • Individuals- to what extent they really represent valuable resources (VRIN) for the specific firm? • Firm specific capabilities • External versus internal knowledge: even if external, the inventor can still be a source of spillovers and external social capital (Menon & Pfeffer, 2003; Somaya et al., 2008) • Institutional theory: Internal exploitation is several times hampered by social constraints • An underlying misfit of the inventor and conflicts triggered by employees’ projects might outweigh the cost of losing him.

7. (2)Emerging empirical facts – how knowledge transfer affects the parent? Focus: Spin-offs & value appropriation • “Deploying technology through spin-offs is driven mainly by lack of internal expertise, internal resistance. They complement our business by supplying what we need and stimulating innovation among our suppliers.” • Leo Roodhart, Shell GameChanger Lack of internal competences/fit “ The only choice we have is to use spinouts. We revitalize in-house technological research and stimulate competition by forcing our technology providers to innovate” Leo Roodhart, Shell GameChanger Learning

8. (2)Background– spin-off & innovation? • Most spin-offs don’t emerge in core technological areas of the parent (Chatterji, 2008) • Spin-offs occur in areas where the parent develops ‘niche’ technological advantages that depart from its core technological capabilities (Leulescu, working paper). • Spin-offs are developed to exploit unrelated technologies can enable parent to preserve high coherence (Iturriaga et al, 2008)

9. (2)Background– spin-off & innovation? • Fit & Relatedness • Internal development has an opportunity cost (Cassiman and Ueda, 2006) • The value of a technology is idiosyncratic – low technological /business relatedness hampers the ability of the firm to integrate and appropriate value (Nesta and Saviotta, 2005; Teece et al, 1994). • Projects that don’t fit with internal systems might trigger conflicts and hamper internal exploitation (Capron and Mitchell, 2008). • Organizational inertia and resource allocation inefficiencies (Thompson, 1967; Tuhsman and O’Reilly, 1997) – spin-offs to exploit valuable employees ideas.

10. (3)Emerging empirical facts – spin-offs compete or complement ? Spin-offs as complementors • “They complement our business by supplying what we need and stimulating innovation among our suppliers.” • Leo Roodhart, Shell GameChanger “ The only choice we have is to use spinouts. We revitalize in-house technological research and stimulate competition by forcing our technology providers to upgrade technologies” Leo Roodhart, Shell GameChanger

11. (3)Background: spin-offs compete or complement? • Non equity: • Various forms of collaboration based on collaboration and complementarities • Internal versus external knowledge • Use of spin-offs as sources of external knowledge after separation • Spin-offs can become suppliers, customers or any type of complementors

12. (3)Emerging empirical facts: parent-spinoff relationship? Spin-offs-parent relationship Leaders Semiconductors Europe are corporate spin-offs: Infineon (Siemens), Free Scale (Motorola), NXP (Philips) Large firms with organizational mechanisms for encouraging spin-offs: Xerox, Shell, Siemens, Motorola, Nokia, STMicroelectronics • “GameChanger and its technological spin-offs provide the options and Shell chooses which is the new current strategy” • Leo Roodhart, Shell GameChanger

13. (3)Background- spin-offs complement & collaborate? • Equity based relationships • Strategic intent& real options: spin-offs to build strategic options for the future (Kogut&Kulatilaka, 2001) • Organizational design: appropriate structures and incentive schemes to use spin-offs for developing new strategic options and learning tools. (Chesbrough & Rosenbloom, 2002) • Dynamic capabilities- spin-in & dynamics of reintegration (Keil et al, 2008)

14. Proposal -background • Evolutionary view & imprinting effects:Spin-offs occur in anested system - parent firm capabilities and knowledge spillovers play an important role for opportunity discovery and externalization. (Klepper, 2002; Klepper and Sleeper, 2005; Agarwal et al., 2004; Brittain and Freeman, 1986; Gompers et al., 2005; Tushman and O’Reilly, 2003; Chesbrough, 2003) • Fit& leniency effects: relatedness &employee entrepreneurship & corporate venturing (Christensen, 1997; Chesbrough 2003; Burgelman, 1983;Chesbrough, 2003;Aernodaut and San Jose, 2003; Henderson, 1993; 2006)

15. Proposal -background • Spin-offs occurrence is the result of both imprinting effects, which trigger the formation and exploitation of particular technological opportunities, and leniency effects, which are contingent on the relative misfit of the technology within the parent firm. • Relative strength of the parent in the specific technological field compared to competitors (imprinting effects) • Fit with the parent firm capabilities (leniency effects) • Firms develop multiple technologies and can gain technological advantage also outside their mainstream business (Gambardella & Torrisi, 1998).

16. Proposal –main focus • In the end, niche technologies are more likely to lead to the exploitation of the technology through a spin-off. BACKGROUND CORE FIT NICHE MARGINAL LENIENCY IMPRINTING RTA

17. Proposal- further questions • Spin-offs and learning effects: amount and type of learning (knowledge flows) • How technological and business relatedness of the spin-offs impacts on the amount and type of parent learning? • How parent involvement and various organizational designs moderate these relationships?