The Penrosean spinout: A new spin on the theory of the entrepreneurial firm

We integrate Penrose's (1959) theory of firm growth with the spinout literature to identify a previously overlooked type of new venture: the Penrosean spinout. Penrose identified the accumulation of managerial capacity as a natural byproduct of routine firm operations and a catalyst of firm growth. However, managerial capacity may also accumulate in non-managerial employees, particularly in low-tech sectors such as the trades, where workers readily observe and absorb the full range of activities required to run an enterprise. When it does accumulate, excess managerial capacity may catalyze not firm growth but new firm formation — a spinout. In a pure Penrosean spinout, employer and employee need not disagree about the product, the market, or the production process; they disagree about whether to expand the business, and on what terms. Our framework makes three contributions. First, it identifies an endogenous mechanism of entrepreneurial entry: the seeds of new firm formation are sown continuously in the normal course of business, not only in response to technological disruption or novel market insight. Second, it explains persistent industry fragmentation in low-tech sectors as a structural consequence of the routine leakage of managerial capacity through spinouts. Third, it offers a novel account of why noncompete agreements and occupational licensing are prevalent among low-wage workers who possess little proprietary technical knowledge. By extending spinout theory beyond high-tech contexts, we contribute to a more comprehensive understanding of the emergence of entrepreneurial firms.