May 22, 2023

Meet Bob. He used to work at Google as a software engineer, but he came up with a great idea for a new venture, and he left to pursue his dream. Is he a traitor to Google?

The reflex characterization of employee mobility as negative got Ji Youn (Rose) Kim thinking, and the result is a research article she co-authored with H. Kevin Steensma, titled “Employee Mobility, Spin-outs, and Knowledge Spill-In: How Incumbent Firms Can Learn from New Ventures," published in Strategic Management Journal.

“Existing research suggests that employee mobility has a negative impact on prior firms because mobile employees take their existing social capital or knowledge/technology from their employment with them,” Kim said. “Consequently, the relationship between parent firms and spinouts—that is, between Google and Bob’s new company in my example—is frequently described as negative. However, I thought it doesn’t always have to be negative; there can be some positive effect in the long term.”

In fact, she said, some scholars have begun to suggest the theoretical possibility of a win-win relationship where both the established firm and the new venture learn from each other. That intriguing possibility led Kim to conduct her study.

To collect her data, Kim constructed a sample of 41 incumbent firms and 370 new ventures in the IT sector of the U.S. economy between 1990 and 2006, using the Thomson One VentureXpert database. Kim tracked mobility of patent inventors between the two sets of firms—incumbent firms and new ventures. 

To measure how incumbent firms learn from new ventures that hire away their previous patent inventors, Kim used patent citation data. Just as academic authors cite other scholars’ papers in their publications, patent inventors cite existing patents in their patent application. Kim concluded that incumbent firms learn from new ventures if incumbent firms cite any of the patents developed by new ventures after those former employees left the incumbent firm. 
The process of identifying a spin-out relationship between new ventures and incumbent firms proved quite laborious as Kim had to manually collect data on the prior employment history of several hundreds of founders through online search. 
Kim and her research partner found that there are two types of employee mobility between incumbent firms and new ventures. One type occurs when employees leave to become entrepreneurs of their own ventures, and the other when employees leave to become just employees of new startups. 

“We found that incumbent firms are more likely to learn and build on the technology of their spin-outs than from new ventures that simply employ non-founding inventors formerly employed by the respective IT firm,” she said. 
Going back to her Google example, Kim said perhaps Bob maintains his relationship with other software engineers at Google, and perhaps he uses his social networks to seek help with a problem or to advertise his new venture. Similarly, Bob’s old friends at Google can keep abreast of what’s happening in his new venture, especially in regard to technological development, and may even incorporate what they have learned from Bob’s new venture into their research and development efforts at Google. 

“In this way, incumbent firms may be able to learn from their spin-outs or new ventures who hired individuals who previously worked for them,” Kim said. “In such case, the relationship between incumbent firms and new ventures doesn’t have to be zero-sum and negative all the time.”

However, that learning benefit is soundly lost if incumbent firms have a history of misappropriating the intellectual property of other firms, Kim said. 
“This is consistent with our argument that founders, with their private knowledge about the propensity of parent firms to misappropriate others’ knowledge through their own employment experience, may sever social relationships with former co-workers or limit their conversation to strictly superficial aspects of their operations for fear that their knowledge will be appropriated without fair compensation,” she said.
The lesson here for incumbent firms is to consider the conditions under which people exit and the long-term costs of disrespecting the intellectual property rights of others, Kim said. 

And beyond that, firms who foster employees with the kind of drive and knowledge it takes to start up their own ventures should look beyond the loss to the potential knowledge they may glean from the resulting new ventures, she said.