Employee spinoffs and other entrants: stylized facts from Brazil

Where do the capabilities of new firms in developing countries come from? One answer is from other firms: employees spin off to launch their own businesses. In this project, Marc Muendler and James Rauch of the University of California, San Diego computed, for the first time, the share of employee spinoffs in a representative sample of a developing country’s new firms using precise and replicable criteria. Working with a comprehensive linked employer-employee database for Brazil, Muendler and Rauch found that, depending on definition, employee spinoffs accounted for between one-sixth and one-third of the new firms in Brazil’s formal private sector during the period 1995-2001. Having identified employee spinoff firms, Muendler and Rauch used them to shed light on two kinds of intrafirm learning. The first kind is learning by employees about their employer’s technology, customers, and suppliers. The second kind is learning by employees about the capabilities and preferences of their colleagues. The first kind of intrafirm learning is reflected in the findings of Muendler and Rauch for basic indicators of performance of new employee spinoff firms compared to other entrants. Regardless of definition, size at entry is larger for employee spinoffs than for new firms without “parents” but smaller than for diversification ventures of existing firms. Similarly, exit rates for employee spinoffs are less than for new firms without parents and comparable to those for diversification ventures of existing firms. These results are consistent with the idea that a spinoff partially inherits its spawning parent’s productivity through the knowledge that the founding workers take with them. Muendler and Rauch also found evidence that employee spinoff firms learned about the customers of their parents. In particular, exporting spinoffs from exporting parents copied their parents’ export destinations and even supplanted their parents as suppliers for those destinations. Supplying their parents’ customers may be one of the reasons for Muendler and Rauch’s finding that spinoffs locate even closer to their parents than their parents’ own new plants, contributing to the formation of industrial clusters. Muendler and Rauch obtained results for the second type of learning as well, that of employees about their colleagues. They contrasted the survival at spinoff firms of employees who moved together from the parent with outside workers hired at the same time. The year-to-year survival rate of the founding-team workers was substantially higher, reflecting that they had been recruited by colleagues who knew they would be good fits with the new firm, but the survival rate of the outsiders gradually caught up as the ones who were bad fits were weeded out. After five years, workers hired from the parent firm were 52 percent more likely to remain with the spinoff firm than outside hires. The research of Muendler and Rauch shows that, in a developing country like Brazil, employee spinoff firms offer an important mechanism through which informal learning by employees within firms is mobilized to create new firms and jobs.