Growing through Spinoffs. Corporate Governance, Entry, and Innovation

44 Pages Posted: 27 May 2020

See all articles by Maurizio Iacopetta

Maurizio Iacopetta

OFCE (Centre de recherche en Economie de Sciences Po); SKEMA Business School - Sophia Antipolis Campus

Raoul Minetti

Michigan State University

Pierluigi Murro

Luiss Guido Carli University - Department of Business and Management

Date Written: April 29, 2020

Abstract

New firms are often based on ideas that the founders developed while working for incumbent firms. We study the macroeconomic effects of spinoffs through a growth model of product variety expansion, driven by firm entry, and product innovation. Spinoffs stem from conflicts of interest between incumbent firms' shareholders and employees. The analysis suggests that incumbents invest more in product innovation when knowledge protection is stronger. An inverted-U shape relationship emerges, however, between the intensity of spinoff activities and the strength of the rule of law. A calibration experiment indicates that, with a good rule of law, loosening knowledge protection by 5% reduces product innovation by one fifth in the short run and one seventh in the long run, but boosts the spinoff rate by one tenth and one sixth in the short and long run, respectively. Nevertheless, per capita income growth drops and welfare deteriorates. The trade-offs are broadly consistent with evidence from Italian firms.

Keywords: Corporate Governance, Endogenous Growth, Spinoffs

JEL Classification: E44, O40, G30

Suggested Citation

Iacopetta, Maurizio and Minetti, Raoul and Murro, Pierluigi, Growing through Spinoffs. Corporate Governance, Entry, and Innovation (April 29, 2020). Available at SSRN: https://ssrn.com/abstract=3588255 or http://dx.doi.org/10.2139/ssrn.3588255

Maurizio Iacopetta (Contact Author)

OFCE (Centre de recherche en Economie de Sciences Po)

31 rue Croix des Petits Champs
75049 Paris Cedex 01
France

SKEMA Business School - Sophia Antipolis Campus ( email )

60 rue Dostoïevski
Sophia Antipolis, 06902
France

Raoul Minetti

Michigan State University ( email )

Agriculture Hall
East Lansing, MI 48824-1122
United States

Pierluigi Murro

Luiss Guido Carli University - Department of Business and Management ( email )

Via Salvini, 3
Rome, 00198
Italy

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