From loss to recovery: Spin-outs and parents’ innovation

Spin-outs (new ventures founded by ex-employees) have received attention partly due to the potential negative implications they present to the incumbents from which they originate (i.e. parents). Spin-outs can threaten parents not only because of the increased future competition but also because of the immediate disruptions to their knowledge bases. These negative implications rest on the notion that parents are mere bystanders. We depart from this bystander notion by considering parents’ adaptations to disruptions caused by spin-outs. Specifically, we investigate both the effects of spin-outs on parents’ innovation and the factors that motivate and enable parents to cope with the knowledge gaps arising from spin-outs. We demonstrate that although spin-outs dent parents’ innovation output in the knowledge areas affected by spin-outs, such decline is non-enduring. We also argue and demonstrate that the importance of knowledge areas affected by spin-outs as well as the availability of human capital—internal and newly hired—drive the recovery of parents’ innovation output. We contribute to the literature by refining the theoretical and empirical understanding of the factors shaping parents’ adaptation and creative reconstruction in the aftermath of spin-outs.