Growing through Spinoffs. Corporate Governance, Entry, and Innovation

Maurizio Iacopetta (maurizio.iacopetta@skema.edu), Raoul Minetti and Pierluigi Murro

No 2002, Working Papers CASMEF from Dipartimento di Economia e Finanza, LUISS Guido Carli

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 firm.

Keywords: Corporate governance; Endogenous growth; Spinoffs (search for similar items in EconPapers)
JEL-codes: E44 G30 O40 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2020-04
New Economics Papers: this item is included in nep-cse, nep-ent, nep-gen, nep-ino, nep-knm, nep-mac, nep-sbm and nep-tid
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Working Paper: Growing through Spinoffs. Corporate Governance, Entry, and Innovation (2020)
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