Inherited competence and spin-off performance

ABSTRACT

In this paper we extend the hereditary theory of spin-off formation, developed by Klepper, by relating the concept of inherited competence to two different types of spin-offs—university and private sector spin-offs—and two different types of inherited competence—R&D competence and innovation competence. We then utilize this extension of Klepper's framework to study the evolution of a science-based industry—the biotech industry. Using the Irish biotech industry as a case-study, we find that differences in pre-entry experience manifest themselves most markedly in terms of the firm's capacity to attract venture capital, with private sector spin-offs considerably outperforming university spin-offs. We argue that the superior performance of the private sector spin-offs is explained by the nature of their inherited competence in that they are characterized by higher levels of innovation competence.

KEYWORDS:

• Industrial evolution
• inherited competence
• spin-off
• biotech

Acknowledgements

The authors would like to thank the participants of the eighth European Meeting on Applied Evolutionary Economics (EMAEE), held at SKEMA Business School, Sophia Antipolis, France, in June 2013, for their helpful comments.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. The concept of ‘business model' is defined by Shafer, Smith, and Linder (2005) as ‘a representation of a firm's underlying core logic and strategic choices for creating and capturing value within a value network', where ‘core logic' refers to how a firm articulates and makes explicit key assumption and cause-and-effect relationships and the internal consistency of strategic choice, while ‘creating and capturing value' refers to a firm's ability to do things in way that differentiate them from their competitors.

2. ‘FAME' is a database of UK and Irish companies which provides accounts data for 2.8 million public and private companies. See http://www.bvdinfo.com/Products/Company-Information/National/FAME.aspx.

3. In 1992 the chief financial officer of Trinity Biotech noted that funding for start-up ventures such as Trinity Biotech was simply not available in Ireland at that time, either from the banks or from venture capital companies (McGrath, 1992).

4. See www.hea.ie for further details.

5. Employment data for nearly all firms under consideration are available from the FAME dataset. Where not available, the research relied on the knowledge of industry experts—notably current and former staff at Enterprise Ireland, the Irish Government agency responsible for supporting Irish businesses.

6. The focus of this paper is on the inherited competence of spin-off firms. While we differentiate between two types of spin-offs (those originating from universities and private sector), we do not distinguish between de novo start-ups and diversifiers and refer to them collectively as ‘private sector start-ups’.

7. This research considers venture capital from both private and state sources combined.