Spinoffs, Mergers and Industry Growth

Abstract: What is a mechanism through which innovation opportunities are pursued efficiently and innovation process becomes self-enhancing process? What are roles of spinoffs and mergers in such a mechanism? In this paper, I empirically investigate how organizational separation and consolidation affect a rate of innovation in an industry and a course of industry growth. Innovation can be seen as cumulative process in that one innovation becomes a foundation for next innovations (Aghion et al., 2008). If one innovation fails to be materialized for some reason, then subsequent innovations may not come to existence. Since creative destruction plays an important role in the evolution of an industry (Klette and Kortum, 2004), a course of industry growth can be crucially influenced by the pursuit and realization of a particular innovation opportunity. Innovation can be also regarded as experiment because a very few business ventures succeed and many business ventures fail (Kerr et al., 2014). From this viewpoint of innovation, we may argue that the larger the number innovation opportunities pursued at the same time, the higher the speed and the longer the periods of industry growth. The standard model (e.g., Klette and Kortum, 2004) assumes that every innovation opportunity is pursued and realized without frictions, but several pieces of anecdotal evidence suggest that spinoffs/spinouts pursued innovation opportunities their parent firms had decided to pass on (Klepper, 2015). This paper tries to shed light on a relationship between frictions in the pursuit of innovation opportunities and industry growth by using data from Basic Survey of Japanese Business Structures and Activities.