Spawning: The Small-Firm Effect

17 September 2008 at 10:34 am 1 comment

| Nicolai Foss |

Entrepreneurs are usually dissatisfied employees from large companies who find their ideas crushed under the weight of the corporate hierarchy, right? No so, say Dan Elfenbein, Barton Hamilton and Todd Zenger in a recent (well, March 2008) paper, “The Entrepreneurial Spawning of Scientists and Engineers: Stars, Slugs, and the Small Firm Effect.” In fact, they point out, “roughly two-thirds of all entrepreneurial ventures started between 1995 and 2001 by scientists and engineers in the US, were founded by individuals employed immediately prior in firms of less than 100 employees” (p. 1). Interestingly, they also find that new ventures founded by employees coming from small firms perform better than ventures founded by employees from large firms. These small firms effects, the authors argue, are not just driven by sorting effects, but also because employees in small firms tend to acquire more entrepreneurial skills. An excellent contribution to the generally interesting spawning literature. Highly recommended.  Here is the abstract:

Using data from a broad sample of US scientists and engineers, we examine the relationship between work experience in firms of different sizes and worker ability on decisions to enter entrepreneurship. We find that workers in small firms are far more likely than others to leave paid employment to found new ventures, and that prior experience in small firms predicts a number of positive performance outcomes in the early stages of entrepreneurship. Additionally, we show that entrepreneurs come disproportionately from the high and low end of the paid-employment ability distribution as reflected in their pay; and we find that small firms are disproportionately populated with such workers. Together our results suggest that heterogeneous preferences alone are not responsible for the relationship between firm size and spawning. Rather the labor market plays a role in sorting those for whom the pecuniary returns to entrepreneurship are likely to be highest into small firms, and it does the same for “misfits”, whose only work alternative may be self-employment. Moreover our results suggest that small firms not only employ individuals who are more likely to become entrepreneurs, they also make these workers better entrepreneurs, particularly those of high ability.

Entry filed under: - Foss -, Entrepreneurship, Recommended Reading.

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1 Comment Add your own

  • 1. Steve Sammartino  |  18 September 2008 at 1:45 am

    I couldn’t agree more with this post. The skill sets in large companies hardly prepare the ex-conglomerate worker for the ‘bootstrapping’ limited resource skill set required for startup success. It’s a totally different mindset. I guess it’s a function of momentum where large companies gain momentum through “mass” not speed – entrepreneurs need to flip their thinking from perfection, research and resources, to imperfection. In return the entrepeneur gains momentum through a focus on “speed” and the immediate revenue chase. A very interesting topic.

    It took me a year to work this out after a failed venture being too slow – i had to ‘unlearn’ my big company thinking.

    Steve – http://www.startupblog.wordpress.com

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Nicolai J. Foss and Peter G. Klein, Organizing Entrepreneurial Judgment: A New Approach to the Firm (Cambridge University Press, 2012).
Peter G. Klein and Micheal E. Sykuta, eds., The Elgar Companion to Transaction Cost Economics (Edward Elgar, 2010).
Peter G. Klein, The Capitalist and the Entrepreneur: Essays on Organizations and Markets (Mises Institute, 2010).
Richard N. Langlois, The Dynamics of Industrial Capitalism: Schumpeter, Chandler, and the New Economy (Routledge, 2007).
Nicolai J. Foss, Strategy, Economic Organization, and the Knowledge Economy: The Coordination of Firms and Resources (Oxford University Press, 2005).
Raghu Garud, Arun Kumaraswamy, and Richard N. Langlois, eds., Managing in the Modular Age: Architectures, Networks and Organizations (Blackwell, 2003).
Nicolai J. Foss and Peter G. Klein, eds., Entrepreneurship and the Firm: Austrian Perspectives on Economic Organization (Elgar, 2002).
Nicolai J. Foss and Volker Mahnke, eds., Competence, Governance, and Entrepreneurship: Advances in Economic Strategy Research (Oxford, 2000).
Nicolai J. Foss and Paul L. Robertson, eds., Resources, Technology, and Strategy: Explorations in the Resource-based Perspective (Routledge, 2000).

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