As Kauffman Junior Faculty Fellows’ grant periods come to an end and they share some of their research, Growthology will share overviews of some of the lessons learned from their work in entrepreneurship.
Matt Marx, associate professor at MIT’s Sloan School of Management, 2013 Kauffman Junior Faculty Fellow, and 2008 Kauffman Dissertation Fellow, recently concluded his Kauffman Junior Faculty Fellowship (KJFF). KJFF grants last two to three years, and when the grants end, we at the Kauffman Foundation excitedly pour over the research produced by each fellow. Marx’s research focuses on whether or not new innovations and technologies force incumbent firms out of the market and how startups planning to disrupt the market should strategize their business plans. His research has been featured in mainstream media such as The Economist, TechCrunch, and Forbes.
In an article for The Economist, Marx contends that disruption in incumbent firms as a result of new technology isn’t always the end of the line for a firm’s survival. When incumbent firms can negotiate their way through “cooperative commercialization,” they can innovate and change up their organizations through buy-outs of the new technology or partnerships with the new technology’s startup venture. Similarly, in TechCrunch, Marx discusses how incumbent firms should use a “wait and see” approach regarding whether new technologies will be successful, and how such an approach can be beneficial to the incumbent firms before delving into a cooperative commercialization strategy.
In Forbes, Marx argues the benefits of a “switchback strategy” for startups. A switchback strategy plans for many changes throughout the startup process, moving in many directions (“zig-zagging,” as the article states) to climb to the top. This differs from a pivot strategy, which is a change in direction when a strategy fails. The switchback, rather, plans from the start to change directions throughout the startup process.
As a part of Matt Marx’s KJFF grant, he published the following papers:
Abstract: When start-up innovation involves a potentially disruptive technology—initially lagging in the predominant performance metric, but with a potentially favorable trajectory of improvement—incumbents may be wary of engaging in cooperative commercialization with the start-up. While the prevailing theory of disruptive innovation suggests that this will lead to (exclusively) competitive commercialization and the eventual replacement of incumbents, we consider a dynamic strategy involving product market entry before switching to a cooperative commercialization strategy. Empirical evidence from the automated speech recognition industry from 1952 to 2010 confirms our main hypothesis.
Abstract: We estimate the firm-level returns to retaining employees using difference-in-differences analysis and a natural experiment where the enforcement of employee noncompete agreements was inadvertently reversed in Michigan. We find that noncompete enforcement boosted the short-term value of publicly traded companies by approximately 9%. The effect is increasing in local competition and growth opportunities, and offset by patenting.
Abstract: We present a synthetic framework in which a technology entrepreneur employs a dynamic commercialization strategy to overcome obstacles to the adoption of their ideal strategy. Whereas prior work portrays the choice of whether to license a new technology or to self-commercialize as a single, static decision, we suggest that when entrepreneurs encounter obstacles to their ideal strategy they can nevertheless achieve it by temporarily adopting a non-ideal strategy. We refer to the sequential implementation of commercialization strategies, in which the first strategy enables the second, as a switchback—reminiscent of zigzag paths that enable passage up steep mountains. We analyze conditions under which switchbacks can be effective in enabling the entrepreneur’s ideal commercialization strategy given the attending costs, risks, and likely incumbent response.
Abstract: A growing body of research has documented the local impact of employee non-compete agreements, but their effect on interstate migration patterns remains unexplored. Exploiting an inadvertent policy reversal in Michigan as a natural experiment, we show that non-compete agreements are responsible for a “brain drain” of knowledge workers out of states that enforce such contracts to states where they are not enforceable. Importantly, this effect is felt most strongly on the margin of workers who are more collaborative and whose work is more impactful.
Abstract: A frequent finding in the entrepreneurship literature is that new ventures are more likely to be spawned by smaller firms. One common explanation suggests that small firms serve as “training grounds” for entrepreneurs, but direct evidence is lacking. We instead propose that the higher likelihood of entrepreneurs emanating from small firms may be attributable to their relative lack of attractive internal opportunities. If the transition to entrepreneurship is unaffected by availability of internal opportunities, then the small-firm effect should persist even when such are entirely absent. Using a new, hand-collected dataset of career histories in the speech recognition industry, we test this claim in a setting where firm dissolution extinguishes internal opportunities. For non-defunct firms we replicate the “small-firm effect.” However, we find that entrepreneurship rates among those present at firm dissolution are in fact higher for larger firms, inconsistent with the training-ground mechanism.
This year, we want to tell more stories of how the research we fund provides important lessons about entrepreneurship. Stick with Growthology to keep up, and check out Matt Marx’s research for more information about his work.
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