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Corporate investment in research and development appears to produce an inadvertent outcome: employees leaving to start their own entrepreneurial ventures. Those startups, in turn, enjoy a significant advantage in attracting venture capital investments, according to a recent National Bureau of Economic Research working paper.
“When corporate R&D increases at innovative firms, it seems to serendipitously produce ‘extra’ growth options, and employee entrepreneurship is an unintended consequence,” the paper, “Entrepreneurial Spillovers from Corporate R&D,” finds.
In short, corporate R&D investment increases employee departures to startup entrepreneurship, according to researchers Tania Babina, assistant professor at Columbia Business School, and Sabrina T. Howell, assistant professor at NYU Stern, who used U.S. Census Bureau data from 1990 to 2008 and statistics on patents, venture fundraising and large corporations to reach their findings.
They focused on R&D investments at publicly traded firms.
“The ideas or skills that spill into startups seem to benefit from focused, high-powered incentives; for example, R&D-induced startups are much more likely to receive venture capital,” they write.
“The effect also seems to reflect ideas or skills that are poor complements to the firm’s assets. As human capital is inalienable and portable, and startups are crucial to economic growth, R&D- induced labor reallocation to startups appears to be a novel channel of R&D spillovers,” the researchers conclude.
The pair measured the share of a company’s employees who leave and then land among the top five earners of a business founded within three years, a figure that captures founders and early employees – “the group most likely to contribute new knowledge and crucial skills to the startup.”
A 100 percent “within-firm” R&D increase leads to an 8.4 percent increase in the employee departure rate to entrepreneurship relative to the sample mean, according to the paper, which also notes that sample firms with above-average compared to below-average R&D changes yielded nearly 8,300 additional employee-founded startups.
Employees “create a porousness to the firm’s boundary, providing an avenue for R&D outputs to leak to other firms,” the researchers find. Their R&D-induced startups “are more likely to be high-risk and potentially high-growth,” and “seem to reflect projects rejected by the firm because they are far from existing activities and the firm faces costs to diversification.”
The researchers suggest that this spillover effect from an active R&D program environment stands in contrast to the situation in which a less-inventive company forms an in-house venture capital arm to outsource innovation by investing in startups in its own industry.
The Kauffman Foundation partly funded the research.
December 30, 2018 at 03:32PM
Forbes – Entrepreneurs