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Employee spinouts, social networks, and family firms

Author

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  • James E. Rauch

Abstract

Recently collected data show that, within any manufacturing industry, vertically integrated firms tend to have larger, higher productivity plants, account for the bulk of sales, and also sell externally most of the inputs they produce. In a weak contracting environment characteristic of developing countries, vertically integrated firms are vulnerable to employee “spinouts”: managers of input divisions can start their own firms, making customized inputs formerly provided internally subject to hold-up and capturing the profits formerly made from external sales of generic inputs. This vulnerability is shown to lead to inefficiently low entry. Vertically integrated firms can fight back by hiring managers for their input divisions who are members of networks that informally sanction hold-ups or children who keep profits “in the family” even if they spin out. This is shown to predict the association of co-ethnic networks with high rates of entrepreneurship and the prominence of family-owned business groups in developing country manufacturing.
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Suggested Citation

  • James E. Rauch, 2014. "Employee spinouts, social networks, and family firms," Asia-Pacific Journal of Accounting & Economics, Taylor & Francis Journals, vol. 21(1), pages 105-105, March.
    • Handle: RePEc:taf:raaexx:v:21:y:2014:i:1:p:105-105
    DOI: 10.1080/16081625.2014.882810
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    Cited by:

    1. Castañeda Dower, Paul & Gerber, Theodore P. & Weber, Shlomo, 2022. "Firms, kinship networks, and economic growth in the Kyrgyz Republic," Journal of Comparative Economics, Elsevier, vol. 50(4), pages 997-1018.
    2. Chih-Yang Tseng, 2020. "Family firms and long-term orientation of SG&A expenditures," Review of Quantitative Finance and Accounting, Springer, vol. 55(4), pages 1181-1206, November.
    3. Sepideh Yeganegi & Parshotam Dass & André O. Laplume, 2024. "Reviewing the employee spinout literature: A cross‐disciplinary approach," Journal of Economic Surveys, Wiley Blackwell, vol. 38(1), pages 137-167, February.

    More about this item

    JEL classification:

    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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