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Where do entrepreneurs locate their new ventures? The role of downstream localization economies, pre-entry experience and product/market strategy. Pamela Adams (Franklin University CH & CRIOS Bocconi University) Roberto Fontana (University of Pavia & CRIOS Bocconi University)

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Pamela adams franklin university ch crios bocconi university

Where do entrepreneurs locate their new ventures? The role of downstream localization economies, pre-entry experience and product/market strategy

Pamela Adams (Franklin University CH & CRIOS Bocconi University)

Roberto Fontana (University of Pavia & CRIOS Bocconi University)

Franco Malerba(CRIOS Bocconi University)

12th Annual User and Open Innovation Conference

Harvard Business School, July 28-30, 2014


Pamela adams franklin university ch crios bocconi university

Where do entrepreneurs locate their new ventures? Where does this research fit within the literature on “users” and “user entrepreneurship”?


Entrepreneurship in a value chain perspective

Entrepreneurship in a valuechainperspective

Upstream

Focal Industry

Downstream

University spinoffs

Employee spinouts

User Entrepreneurship

(Shane, 2004; Lowe and Ziedonis, 2006; Clarysse and Wright, 2011)

(Agarwalet al.,2004; Franco and Filson, 2006; Klepper, 2001, 2002; Chatterji, 2009; Dahl and Sorenson, 2011)

(Shah and Tripsas, 2007; Shah, Winston Smith, Reedy, 2012; Shah, Mody, 2014)


Entrepreneurship in a value chain perspective1

Entrepreneurship in a valuechainperspective

Upstream

Focal Industry

Downstream

User Entrepre-neurship

Focal spinouts

University spinoffs

User

Spinouts

What are user spinouts :

Independent start-ups in the focal industry founded by ex-employees of firms in downstream, intermediate industries that use technologies or component parts in their products or production processes.


Entrepreneurship in a value chain perspective2

Entrepreneurship in a valuechainperspective

Upstream

Focal Industry

Downstream

User Entrepre-neurship

Focal spinouts

University spinoffs

User

Spinouts

Employee spinouts ------------------------- User entrepreneurs

  • Experience and know-how

    from pre-entry employment in

    an organization Although their products are “used” by organizations and not by individuals,

    user spinouts:

    - have knowledge of user applications

    - can recognize unmet needs of users

    - are immersed in problem context

    - are part of wider community of users


Pamela adams franklin university ch crios bocconi university

User spinouts : The current research question

If user spinouts make different strategic choices at entry in terms of product/market strategy (research presented in Vienna, 2011; Boston, 2012)

Do user spinouts also make different location choices than focal spinouts ?


Pamela adams franklin university ch crios bocconi university

Whatdoes the theorysay?

Location choicesdetermined by:

Family, friends, social capital

Such capital assists in understanding the localcontext, identifyingopportunities, and mobilizingresources

Agglomeration economies

A higher density of firms in the same industry may provide entrants with advantages of specialized labor markets, strong supplier networks and knowledge spillovers

Dahl and Sorenson, 2009,2011; Sorenson and Audia, 2000; Figueiredo et al., 2002)

Marshall, 1920; Nachum and Keeble, 2003; Berchicci et al., 2011)


Pamela adams franklin university ch crios bocconi university

Whatdoes the theorysay?

Location choicesdetermined by:

Family, friends, social capital

Such capital assists in understanding the localcontext, identifyingopportunities, and mobilizingresources

Agglomeration economies

A higher density of firms in the same industry may provide entrants with advantages of specialized labor markets, strong supplier networks and knowledge spillovers

How do dynamics on the demand side (downstream) influence location choices?

Dahl and Sorenson, 2009,2011; Sorenson and Audia, 2000; Figueiredo et al., 2002)

Marshall, 1920; Nachum and Keeble, 2003; Berchicci et al., 2011)


Pamela adams franklin university ch crios bocconi university

Do user spinouts make different location choices than focal spinouts ?

User spinouts : The current research question

Why might their choices be different?

  • Locations differ in terms of agglomeration economies (density of focal vs. downstream industries)

  • Knowledge context of pre-entry experience differs: focal spinoutvs. user spinout (Agarwal, et al., 2004; Agarwal and Shah, 2013; von Hippel, 1988; Adams, Fontana, Malerba, 2013)

  • Knowledge required for entry into different product categories (Helfat and Lieberman, 2002)


Pamela adams franklin university ch crios bocconi university

Three steps in ouranalysis

StepOne : the location decisions of allspinouts (existingliterature)

StepTwo: the location decisions of focalspinouts vs. userspinouts

StepThree: the location decisions of focalspinouts vs. userspinoutsin differentproductcategories


The data pre entry experience

The data: Pre-entry experience

  • Sample: 413 independentsemiconductorspinouts

    • Allnewspinoutsfoundedbetween 1997 and 2007

    • Survivaltraced up to 2010

  • Final outcome:

    • Focal spinouts (268), User spinouts (145)

      (a relevant category)


The data product market categories at entry

The data: Product/market categoriesat entry

Genericproducts

Market-specificproducts

Products that respond to the distinct needs of specific customer categories that stem from requirements in an application area or from a desire to differentiate a final product through the use of components.

Products that are sold indistinctly into multiple markets with no need of customization or adaptation


The data location economies

The data: Location economies

Reconstructing the location of firms

  • 113 Combined Statistical Areas (CSAs)

  • Density of semiconductor firms or user firms in area

  • Methodology

    Conditional Logit Model to estimate at each point in time t the probability for a new firm originating in CSA i to choose CSA j

    Separate results for those that stay in their home region and those that locate in a different region than parent.


Localization descriptives semiconductor industry density

Localization descriptives: semiconductor industry density


Localization descriptives user industry density

Localization descriptives: user industry density


Results 1

Results (1)


Results 2

Results (2)


Pamela adams franklin university ch crios bocconi university

Findings

Step One. Firms that stayed in their home region

If we do not look at type of entrant or product strategy,

entrepreneurs are more likely to stay in their home

region the higher the density of firms in the focal industry.

This confirms Berchicci, King, Tucci(2011)


Pamela adams franklin university ch crios bocconi university

Findings

Steps 2 and 3.

But if we include pre-entry experience (focal vs. user spinouts) and product strategy (generic vs. market specific) we find that the

MATCH between the initial capabilities (pre-entry experience) of entrants and the product strategy of the new firm affects the importance of localization economies and the location choices of spinouts.


Pamela adams franklin university ch crios bocconi university

Findings

Our study proposes that match between initial capabilities and knowledge required by product/market strategy:

Stronger match when

Focal spinout ------------ Generic products

User spinout -------------- Market specific products

Weaker match when

Focal spinout -------------- Market specific products

User spinout -------------- Generic products


Pamela adams franklin university ch crios bocconi university

Findings

For firms that stay in their region of origin:

When there is a strong matchbetween the initial capabilities of entrants and the type of demand of the focal market (spinoffs with generic products and user spinouts with market specific products), localization economies provide an additional incentive for firms to stay in their home regions.

When there is a weak matchbetween the initial capabilities of entrants and the product market strategy (focal spinouts in market specific products and user spinouts in generic products), localization economies are not significant. In this case entrants seem to be influenced by the presence of social capital in the home region.


Pamela adams franklin university ch crios bocconi university

Findings: 30% of new firms locate away from home area: careful about assumptions that spinouts tend to stay near parent!


Pamela adams franklin university ch crios bocconi university

Findings

For firms that do not stay in their region of origin

(they loose their social capital):

- location decisions of user spinouts are influenced by localization economies related to the focal industry

- location decisions of the focal spinouts are influenced by localization economies related to downstream, user industries

Why is that?


Pamela adams franklin university ch crios bocconi university

Findings

The match between capabilities and product requirements affects the importance of location characteristics

WHO YOU ARE/WHAT YOU DOWHERE YOU LOCATE

USER SPINOUT +FOCAL INDUSTRY

GENERIC PRODUCTS (complementary knowledge)

FOCAL SPINOUT +USER INDUSTRY

MARKET SPECIFIC(complementary knowledge)

PRODUCTS


Pamela adams franklin university ch crios bocconi university

In conclusion, the ’where’ decisiondependsnotonly on location characteristics, butalso on

WHO YOU ARE (initialcapabilities) AND WHAT YOU DO (productstrategy)

Agglomeration economies

A higher density of firms in the same industry may provide entrants with advantages of specialized labor markets, strong supplier networks and knowledge spillovers

Family, friends, social capital

Such capital assists in understanding the localcontext, identifyingopportunities, and mobilizingresources

  • Pre-entry experience

  • (user vs. focal spinouts)

  • Product/market strategy

  • (generic vs. market specific)


Pamela adams franklin university ch crios bocconi university

Conclusions

Research on entrepreneurship and location choices must go beyond aggregate level statistics to examine the effects of downstream entry and user industry knowledge.

Downstream, user knowledge plays a role in location decisions:

  • As a source of the core experience of the entrepreneur

  • As a requirement for the type of product to be offered

  • As a resource to be accessed in a specific location


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