Entrepreneurship, the initial labor force, and the location of new firms

We propose that new firm founders locate their firms close to their home region in order to hire workers they know about through their prior employment, since it is easier to find high productivity employees among talent pools for which you have significant personal experience. We test our proposition using a matched employer–employee dataset for Portugal. Consistent with our predictions, new firms in the same industry as their founder’s prior employer (i.e., spinoffs) are more likely to locate in their founder’s home region, to hire workers from the founder’s prior employer and other firms in the same region and industry, to employ them longer, and to perform better than other new firms. Results suggest that the agglomeration of high performing spinoffs next to their parent firms should facilitate the emergence of successful industrial clusters.