Introduction

In recent years interest has grown in the phenomenon of entrepreneurship. One does not have to look beyond Silicon Valley to see the importance of new enterprises, which seemingly have played a key role in the region's vitality. But where do new enterprises come from? Surprisingly, little is known about the origin of entrants, especially new enterprises. This is perhaps a legacy of the way entry is typically modeled in theories of competition. It has always been assumed that if entry is profitable, it will occur. It is not at all clear, though, whether such confidence is justified [Geroski (1995)].

Recent work suggests that entrants are quite diverse at birth, and their pre-entry experience persistently affects their performance [Carroll et al.(1996), Geroski, Mata, and Portugal (2002), Klepper (2002a, 2002b), Klepper and Simons (2000), Thompson (2005)]. One class of entrants that perform distinctly well in some industries are firms founded by employees of incumbent firms in the same industry] Klepper (2002b), Agarwal et al. (2004), Walsh, Kirchhoff, and Boylan (1996)]. We shall call these firms spin-offs. While in some instances spin-offs are sponsored or linked to their “parent” firm, generally the founders of spin-offs do not maintain any link to their prior employers.

In some industries, spin-offs are legion. Indeed, in the semiconductor industry so many spin-offs can be traced back to one firm alone, Fairchild Semiconductor, that they have been dubbed Fairchildren. Opinions differ greatly about the contribution of spin-offs to innovation and economic growth. Some perceive spin-offs as parasites, feeding off the innovative efforts of their unwitting “parents.”