Research has shown that contrary to what was thought from previous studies, spin-outs don’t systematically set up shop near their parent companies. To stay or to leave, what’s the best strategy?
“I was really surprised, when doing this research, to find that 50% of spin-outs don’t necessarily establish themselves near the parent company,” observes Christopher Tucci from EPFL. He demonstrated that new companies often also choose to set up shop thousands of kilometers, or even continents, away from their parent companies. He looked at U.S.-based international companies specializing in hard disk technology, drawing upon a database of information on 400 U.S. counties. Tucci is familiar with these constant changes taking place in the business environment, because he has been studying them for many years. So why do these companies choose to either stay close to home or head for the horizon?
In the early 2000s, the so-called “agglomeration theory” from evolutionary economics hypothesized that an entrepreneur always chooses to stay in proximity to the parent company, in order to tap into group advantages. This decision allows a new company working in the same sector to benefit from the stability and solidity of the parent company and from on-site provider and client networks. “Our study shows that companies who choose not to move away have more aggressive strategies, and to succeed, they need to maintain local relationships. We also found that those who decide to stay within a restricted perimeter are technologically much more advanced than other spin-outs, but financially quite similar,” Tucci adds.
Why move away?
Companies who decide to leave aren’t banking on technological innovation, but instead are looking for new markets. “Thanks to this study, we now understand better how spin-outs position themselves in the market. In both cases, the companies from which they have spun out often become their principal clients.”
Another theory, not confirmed by the study, is the “spillover” theory. It hypothesizes that stronger companies don’t want to establish spin-outs in industrial clusters because of “spillovers:” they fear that their ideas or technologies will spill over and be stolen by neighboring competitors. “But this effect can’t be clearly seen from the database we used in this research,” notes Tucci.
He also observed that the spin-outs that stay typically generate new spin-outs themselves. Tucci points to the case of IBM: “Almost all the big hard disk companies came from IBM.” Its first spin-out was Seagate Technology, created in 1978 by Al Shugart and Finis Conner, a company that manufactured embedded hard disks in Sony’s PlayStation 3 and Microsoft’s Xbox. It set up R&D sites in Silicon Valley and then branched out to Northern Ireland and Singapore. Interestingly enough it has also, in turn, generated several spin-outs of its own.