What are spin-off firms?

Research-based spin-offs are generally understood to be small, new technology-based firms whose intellectual capital originated in universities or other public research institutes. The dimensions that differentiate spin-off firms from others are the type of resources they draw upon, their prevailing business model and their links to research organisations. Such spin-offs are created in order to commercially deploy new knowledge generated by public research organisations. 

Data on the number of such firms are not collected systematically across countries so that international comparisons are particularly difficult. Indicators on the performance of small firms and their survival is not ideal since spin-offs represent only a small share of the total number of firms. It is also worth noting that high death rates of spin-offs are not necessarily economically undesirable as many of new risky ideas might not be suitable for markets and, therefore, will not survive market competition. It is relevant to uncover whether such healthy cleansing arises or whether successful products fail due to market failures that policy could have addressed.

Collecting specific micro firm-level data and conducting case studies are, therefore, often the best ways to assess spin-offs and their performance.

How do spin-off firms from public sector research relate to innovation performance?

Spin-offs are a potentially powerful means for commercially deploying new technologies and scientific knowledge, introducing not only incremental but potentially also radical innovations. Specifically their linkages with public research, together with their commercial orientation, means these firms can be powerful innovators. They are often more flexible, high-tech and dynamic than other firms and can, therefore, be instrumental in the development of new markets and in the generation of high-technology clusters. If successful high-tech spin-offs can, therefore, not only generate innovation but also be an important engine for economic growth and employment. Spin-offs are expected to generate substantial positive knowledge spillovers, i.e. returns beyond those accruing to spin-offs themselves. There is, therefore, widespread consensus that the numbers of spin-offs are sub-optimal due to several market failures, such as the insufficient development of financial markets to cope with the risky business projects commonly proposed.

What actors are the important for spin-off firms to contribute to innovation performance?

The creation of spin-off firms depends on many actors of the innovation system, including notably the following:

• The creation of spin-off firms depends on the initiative of motivated researchers with the capacities to engage in such an activity. Launching a spin-off requires, for instance, entrepreneurial skills. If researchers are well-connected to a business community, such linkages can help complement scientific expertise with a needed business perspective.

• The incentives and services provided by research organisations to help researchers engage in such activities and any imposed constraints will, moreover, condition the extent to which spin-offs are created. For instance, employment regulations and conditions that forbid researchers to engage in other economically remunerated positions and/or incentive structures which do not reward commercial success will influence researcher’s willingness to create spin-offs.

Which factors are important for spin-off firms?

Many shaping factors will influence spin-offs and their creation including the following:

• Geography often turns out to be important. Specifically, close proximity to “sophisticated” business sectors with potential demand for high-tech products can facilitate the creation of spin-offs. The existence of a regional cluster of spin-offs and other high-tech SMEs can also foster the creation of spin-offs since such clusters already provide a suitable infrastructure that reduces entry and operating costs.

• One of the big challenges for would-be spin-offs is that most business projects are risky and involve potentially very costly initial sunk costs, for instance, for the development of high-tech prototypes. Access to finance tends to be challenging and depends on suitable financial market developments, particularly the availability of seed capital.

• It is arguably the case that certain domains of scientific research lend themselves more easily to the creation of spin-offs than others. The research specialisation of an economy’s public research institutions may therefore have an impact on spin-off opportunities. For instance, biomedical and information technology offer increasing market possibilities for original ideas. Less suitable fields are those that are more closely linked to advancing basic research or would require much more substantial large-scale investments beyond the capacities of a small spin-off for their development. 

• The way IPR regimes are organised can foster and/or hamper spin-offs. Complex ownership structures might complicate opportunities for individual researchers to create spin-offs based on some of the knowledge they have generated.

• Opportunities for spin-offs will also depend on industrial ecology. For instance, a large number of high-tech businesses can stimulate the creation of high-tech spin-off as these constitute a large potential demand for spin-off products. Moreover, underlying business conditions that ultimately determine industrial ecology will have obvious impacts on the creation of spin-off firms. 

• The expected status and role of universities and PRIs within an economy also influences the creation of spin-offs.

What policies are important for spin-off firms?

Several types of policies can stimulate the creation of such spin-offs. Providing research universities and PRIs with incentives for spin-offs is a central area for policies. This is related to the funding such organisations receive but will also depend on their capacities to provide services needed for the creation of spin-offs. This includes, for instance, dealing with IPR questions as well as providing services on legal and technical issues involved around the creation of spin-offs. The fact that researchers might not face any incentives and lack “business” capacities is, moreover, a central obstacle for the creation of spin-offs. Therefore, entrepreneurship training schemes aimed at providing researchers with an interest in such ventures are likely to be useful. Moreover, policies aimed at affecting several framework conditions can stimulate the creation of spin-ofs, including the provision of financing opportunities for spin-off activities and supporting the creation of high-tech clusters.

References

Mustar et al. (2006), Conceptualising the heterogeneity of research-based spin-offs: A multi-dimensional taxonomy, Research Policy 35 (2006):, pp. 289-308.