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) 12 th Annual User and Open Innovation Conference Harvard Business School, July 28-30, 2014

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 UpstreamFocal IndustryDownstream Universit y spinoffs User Entrepreneurshi p Employee spinouts (Shah and Tripsas, 2007; Shah, Winston Smith, Reedy, 2012; Shah, Mody, 2014) (Agarwal et al.,2004; Franco and Filson, 2006; Klepper, 2001, 2002; Chatterji, 2009; Dahl and Sorenson, 2011) (Shane, 2004; Lowe and Ziedonis, 2006; Clarysse and Wright, 2011)

Entrepreneurship in a value chain perspective UpstreamFocal IndustryDownstream University spinoffs User Entrepre- neurship Focal spinouts 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 perspective UpstreamFocal IndustryDownstream University spinoffs User Entrepre- neurship Focal spinouts 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

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 ?

What does the theory say? Location choices determined by: Family, friends, social capital Such capital assists in understanding the local context, identifying opportunities, and mobilizing resources Dahl and Sorenson, 2009,2011; Sorenson and Audia, 2000; Figueiredo et al., 2002) 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 Marshall, 1920; Nachum and Keeble, 2003; Berchicci et al., 2011)

What does the theory say? Location choices determined by: Family, friends, social capital Such capital assists in understanding the local context, identifying opportunities, and mobilizing resources Dahl and Sorenson, 2009,2011; Sorenson and Audia, 2000; Figueiredo et al., 2002) 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 Marshall, 1920; Nachum and Keeble, 2003; Berchicci et al., 2011) How do dynamics on the demand side (downstream) influence location choices?

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 spinout vs. 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 ) Do user spinouts make different location choices than focal spinouts ?

Three steps in our analysis Step One : the location decisions of all spinouts (existing literature) Step Two: the location decisions of focal spinouts vs. user spinouts Step Three: the location decisions of focal spinouts vs. user spinouts in different product categories

The data: Pre-entry experience  Sample: 413 independent semiconductor spinouts  All new spinouts founded between 1997 and 2007  Survival traced up to 2010  Final outcome:  Focal spinouts (268), User spinouts (145) (a relevant category)

Generic products Products that are sold indistinctly into multiple markets with no need of customization or adaptation Market-specific products 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. The data: Product/market categories at entry

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: user industry density

Results (1)

Results (2)

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) 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. 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 Findings

For firms that stay in their region of origin : When there is a strong match between 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 match between 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. Findings

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

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? 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 Findings

In conclusion, the ’where’ decision depends not only on location characteristics, but also on WHO YOU ARE (initial capabilities) AND WHAT YOU DO (product strategy) Family, friends, social capital Such capital assists in understanding the local context, identifying opportunities, and mobilizing resources 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 -Pre-entry experience (user vs. focal spinouts) -Product/market strategy (generic vs. market specific)

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 Conclusions