Spinoffs: Grow Your Business but Minimize the Risks

BETTER TO EXPAND THE MOTHER COMPANY, OR CREATE RELATED FIRMS TO HANDLE GROWTH? A PAPER BY SIMONE SANTAMARIA POINTS TO THE LATTER SOLUTION

An entrepreneur can grow his business by increasing the size of his company (company growth) or by creating other companies (business group growth). The question is, what is the best way to do it? Simone Santamaria, PhD candidate at the Department of Management and Technology, provides an answer in his working paper Company Growth or Business Growth? Business Group Formation as a Strategic Growth Option.

He argues that the creation of new companies represents a wise strategy. “In a business group growth model an entrepreneur can more easily attract external resources to his non-core business activities, thus reducing the risk of losing control of his firm”. This is the case of an entrepreneur who contributes to the spinoff of an employee. Simone Santamaria has tested this hypothesis using a dataset of more than 4,000 Italian entrepreneurs featuring data on the creation of new businesses and their growth. The entrepreneurs who opt for business group growth experience a faster growth. They can more easily attract external resources and create partnerships.

This effect is more pronounced in the Italian regions with a high rate of litigation, that is regions where there is a high number of civil proceedings in relation to the population. This growth pattern is most frequently used when there is a narrow choice between different ways of financing the business. “The paper provides a formal model that clarifies the circumstances under which one growth pattern is more advantageous than others. Italy’s market structure is characterized by a lack of large firms. This study argues that a possible reason is the use by entrepreneurs of these strategies for minimizing risk”.

Read more about this topic:
Carlo Salvato. The Generation of Betapreneurs
Spinouts Increase Relations Between Their Creators and the Rest of the Firm
The Scientific Method and Business: Entrepreneurs Who Emulate Galileo Do Better
Spinouts that Originate from Downstrean Users Have Better Prospects
 

by Claudio Todesco