1 Introduction
Entrepreneurship has been a popular research field in the last few decades and has obtained considerable prominence in management and social sciences
[1]. Besides, entrepreneurship is considered as situations in which services, technical information, new goods, and organizing methods can be introduced through the establishment of new social relationships
[2]. New entrants are considered as agents of change in the market
[3]. Moreover, the collusion pricing might be prevented by the larger number of companies and the competition effect should be acquired by the firms in the homogeneous industry. With the intensity of competition from the social welfare theory point of view, the social welfare increases. Entrepreneurship plays a key role to push economies forward, especially for emerging economies and extremely poor countries
[4, 5]. Since an increasing number of entrepreneurship-related papers have been published in highly ranked management journals, researchers have attached more and more attention to entrepreneurship research. Many perspectives have been adopted by researchers to confirm the benefits of entrepreneurship. For example, Acs, et al.
[6] have shown that the National Systems of Entrepreneurship (NSE) has positive and significant connection with economic growth. Audretsch et al.
[7] argued that knowledge-based entrepreneurship that is discovering new technical knowledge and investing in it has a positive effect on regional economies. Thus, positive entrepreneurship policies are employed by some countries to facilitate the diffusion of entrepreneurial benefits.
However, entrepreneurship is a holistic process, that including not only the entrepreneurial implementation but also the source of front-end entrepreneurs. In fact, entrepreneurs can be divided into two categories: Those with work experience and those without work experience. Entrepreneurs with work experience include former company staff, employees of public institutions, and entrepreneurial failures, etc. College graduates, for example, are entrepreneurs without work experience. Different types of entrepreneurs have their own entrepreneurial characteristics. It is one-sided to ignore the source of the entrepreneur and only consider the economic effect of the entrepreneurial action. It would lead to the deviation in the implementation effect of entrepreneurial incentive policies. However, this is exactly what researchers tend to ignore when studying entrepreneurship policies.
In this paper, the case where potential entrepreneurs are people with work experience and come from existing firms is focused. Researchers are increasingly interested in employee entrepreneurship, which has proven to be a highly successful and prevalent form of entrepreneurial entry
[8-11]. It is estimated that at least nine out of ten entrepreneurs work for established employers before launching their ventures
[11]. Previous articles have referred to this method of starting up a business as a start-up, spinoff, spawn, spinouts, and so on
[12-15]. These terms are different from those in start-up industry and equity involvement of parent firms. Based on the spinouts in Adams's article, spinouts are used in this paper to describe independent intra-industry start-ups whose founders are ex-employees of incumbent firms
[16].
Correspondingly, as the parent firms of employees who start new independent ventures, incumbents are bound to be affected. By some accounts, spinouts are often adjudged as plunderers of their parent firms' innovations and resources. Ex-employees learn and exploit knowledge from their prior employment and then compete with their former employers and other firms in the industry
[17-19]. However, some researchers hold that the negative effect has been overstated and that spinouts may have positive effects on the parent
[20, 21]. Different results depend on the cooperative or competitive relationship between the departing employee and the parent firm
[22]. However, whether it is harmful or beneficial, the most direct loss faced by the parent firm is caused by recruitment and training replacement staff, disrupting the operation and decreasing the quality of customer service
[23]. The parent firm may try to prevent spinouts at first
[24]. Therefore, the sustainability of preferential policies to entrepreneurs would be affected.
Although a portion of papers involves spinouts, researches on spinouts management generally do not focus on the changes in social welfare. As a significant part of the social system, the existence of enterprises must be linked to social welfare. A corporate action is an essential factor affecting social welfare. Due to the complexity of business management and human being's finitude, the optimal allocation of social resources may not be guaranteed by corporate activities; it is not clear how social welfare will change. Therefore, there is a relationship between the mode governing spinouts of incumbent firms and social welfare. Besides, the uncertainty of the change makes this topic worth studying. In previous studies, there has been a rather distinct separation between the literature on spinouts management and social welfare. In this paper, we aim to study social welfare under the entry restrictions of incumbent firms for employees. Then, we answer the question: Can positive entrepreneurship policies always improve social welfare? Based on the model of employee entry established by Burke et al.
[25], the model in terms of strategies that the incumbent firms can adopt and the social welfare are expanded during the entire research process. The results show that the model can be a good analysis of the problems studied in this paper.
The rest of this paper is organized as follows. In Section 2, assumptions and the establishment process of the employee entry model are expounded. In Section 3, the changes in social welfare under the different deterring strategies adopted by incumbent firms are studied. Finally, the main conclusions are drawn in Section 4, and the limitations and further research are discussed.
2 The Model of Entry by Spinouts
In the following sections, spinouts are used to characterize the entrepreneurial behavior of departing employees in the same industry. Spinouts are more likely to become competitors for incumbents in the market where market competition is less than perfect. Especially when they have been employed for many years, the parent firm communicates his or her signals to each employee, causing their views to converge. Employees learn from successful employers about how to compete profitably in the same industry, exacerbating the homogeneity of the companies in both. As Klepper and Sleeper
[14] note that spinouts are mainly tied to the experiences of incumbent producers rather than the prospects for new producers. Based on the statements above, the standpoint that there is a competition between spinouts and incumbents is employed in this paper. It is appropriate to use the Cournot model in the economy to express the competitive relationship between them in the market
[25, 26]. Employee entry was modeled by Burke and To
[25] to research on how the reduction in barriers to entry affects market performance. According to his model, we further extend the model based on our research goal.
Overall, our research differs from Burke's
[25] analysis in the following ways. First of all, the motivation of this paper is to analyze social welfare instead of market performance. Market performance describes economic outcomes, while social welfare expresses consumer surplus and producer surplus. Second, in this paper, the model is expanded in the aspect of corporate individual choice, such as whether to raise employees' wages, the control of the employees with different levels of capability, and whether to improve internal investment. These strategies are relatively easy for companies to adopt in reality.
2.1 Assumptions
First of all, in order to guarantee the existence and uniqueness of the symmetric and stable Cournot Nash equilibrium, we make the following assumptions:
Assumption 1 Consider an oligopolistic firm comprised of employees who have sufficient resources and skills to enter the homogeneous market and compete with their parent. Suppose these employees are the only source of potential competitors.
Assumption 2 If employee entry occurs, parent firm and spinout are assumed to behave as homogeneous good Cournot competitors with inverse demand function , let with , where represents the output.
Assumption 3 There are sunk cost barriers to employee's entry of magnitude . includes any costs borne by an entrant to enter a market.
Assumption 4 Every employee and incumbent's manager has a defined level of ability. The larger the firm's production scale, the stronger the ability it needs. Thus, incumbent firm's () and employee's abilities can be summarized by a differentiable cost function and . It represents the strong ability when the value is small. For simplicity, marginal costs are assumed as constant with and where . Given the employees are of value to the employer, it is reasonable to set .
2.2 The Model Setup
Based on the foregoing assumptions, Cournot competition occurs when employees decide to enter the same market. Suppose that there are already employees in the company's employees establishing their own business. The incumbent and each entrant earns respective profits of:
where is the Cournot Nash equilibrium output for the incumbent and is the entrants' Cournot Nash equilibrium output, is the employee's salary paid by . The marginal cost of ability in Equation 1 is , because there are still employees working for the incumbent. However, Eq. 1 changes when . This means the extreme situation that all employees leave, enterprises must do it personally. Thus the marginal cost of ability is , can be expressed as:
On the basis of the above model, we then demonstrate how a firm may seek to take actions to prevent employees from leaving, thereby causing changes in social welfare.
3 Deterring Strategies and Social Welfare
3.1 Increase Employee Wages
Employee job satisfaction is the most frequently used predictor of turnover
[27]. Employees are less likely to leave their companies when they expressing high levels of job satisfaction. Generally, salary is a significant factor in improving the job satisfaction of employees
[28] because of its utility of attaining material goals. Prior research has shown that employee compensation plays a prominent role in shaping an employee's turnover decision. Moreover, salary growth is negatively related to turnover intention through the mediation of job satisfaction
[27, 29]. Therefore, the desire of employees to quit jobs may be reduced by increasing employee compensation. This is consistent with what happens in life and is also a key element of the game between the company and the employee.
Now analyze the situation that the employee has a tendency to become an entrepreneur. In order to prevent the entrant, the incumbent must pay the employee . In a Nash equilibrium, if the salary , the employee will choose to enter the market, and the entrant could earn rather than . What should be noted at this time is that the incumbent must also pay the same salary for the remaining employees in order to ensure the harmony and stability of the firm. Therefore, if the incumbent chooses to raise wages to prevent the entrant from leaving, can be rewritten as:
Differentiating the expression for the profit function (1) with respect to , we have . This means that as the wage increase, the profits of the enterprises gradually decrease. As becomes large, the cost of retaining staffs becomes arbitrarily large and therefore the incumbent will be compelled to allow some entry. There should be the optimal to maximize the incumbent's profit. Therefore, the effectiveness of retaining the employee in the form of raising wages will be limited by the number of homogeneous employees within the company. Even so, the incumbent has the incentive to prevent employees from leaving as long as . Therefore, even if positive entrepreneurship policies stirred up the entrepreneurial conviction of the incumbent employees, whether the conviction can be fulfilled or not would be interfered by the company.
Then let us analyze the changes in social welfare. According to economic theory, social welfare () is equal to producer surplus () plus consumer surplus (). The producer surplus can be expressed by the area of graph below the price line and above the marginal cost curve. Similarly, the total consumer surplus can be expressed by the area of the graph below the demand curve and above the price line. As shown in Equation (4), increasing wages is equivalent to increasing the fixed cost of the firm, and the marginal cost of the incumbent is unaffected. So, when the linear inverse demand function is still , the actual employee entry does not occur and social welfare does not change except for the change of the employee's salary.
Proposition 1 For a given number of employees, they could be prevented from entering by raising wages if they are the only entry threat, and there would be no change in social welfare. Therefore, the sustainability of a positive entrepreneurship policy would be impaired by incumbent firms, resulting in causing pay raises but not improving social welfare.
3.2 Consciously Control the Ability of Employees
In addition to controlling employees' wages, the ability of employees can also be controlled by the incumbent when hiring staff. There are two opposing forces influencing the requirements of employers for the ability of employees when they represent the threat of entry. First, employers know that hiring a capable workforce can make them successful in contemporary competitions. Meanwhile, employing competent employees means lower marginal costs
. From the above perspective, firms are willing to hire staff with higher levels of competence. Next, enterprises may be wary of employee entry because of distrust between employees and employers, especially using social networks that are prevalent in the recruiting process; moreover, the level of credibility of social networks is distinct in different firms
[30]. The incumbent may hire employees with medium levels of competence to guard against employees' follow-on entrepreneurial. However, the employees with a certain level of competence can be employed is also related to the nature of the company. If their knowledge characteristics are more likely to be embodied in physical capital rather than human capital, making it difficult for employees to obtain
[14], this would lead the incumbent to be bolder when choosing employees with strong abilities. Therefore, the level of employees' competency employed by different firms is ambiguous. Given this, how the choice decision of different employees' ability affects social welfare would be analyzed when the incumbent is threatened by employee entry; the incumbent still chooses to raise wages to prevent employees from leaving.
A simple model has been made to parsimoniously explain the entry issues and also guide the empirical analysis of social welfare. Suppose , a firm hires only one employee. When the incumbent prefers to prevent entry, as we have already shown in the previous section, can be rewritten as:
According to Equation 2, can be expressed as:
Hence we can rewrite the incumbent's profits as follows
where is the post-entry Cournot Nash equilibrium output of employee and is the incumbent's post-entry Cournot Nash equilibrium output, which can be calculated though combining (6) and the incumbent's post-entry profit
According to the linear inverse demand function , , . Additionally, the monopoly output of the incumbent can be expressed as by Equation 5, where must meet the condition to ensure . Thus, Equation 7 can be rewritten as:
At this point, the incumbent still has monopoly power, and the potential entrant obtains desired income. Profit maximizing must satisfy
Thus, when , the incumbent can maximize its profit. Since marginal cost is inversely related to the employee's ability, this result can be interpreted as follows: In order to prevent employees from entering, capable employees will be hired only to a limited extent, and when employees' ability exceeds a certain level, the incumbent tends to employ employees with weaker abilities.
Then the social welfare function is defined as the sum of producer and consumer surpluses and is given by the following expression
Differentiating the expression for the social welfare function (11) with respect to and evaluating it at different yields that is minimized when . Recognizing that (this expression was described above), is monotonically decreasing with increasing . Thus, the higher the ability fo employees the higher the gain in social welfare.
In trying to explain the relationship between social welfare and hiring decisions we can go into two situations as (Situation 1) or (Situation 2). We present the relationship between social welfare and the firm's profits under the two situations. If , the incumbent tends to employ employees with weaker abilities, which has a negative impact on social welfare. If , social welfare and corporate profits change in the opposite direction when , social welfare and corporate profits change in the same direction when . So we can draw conclusions:
Proposition 2 In order to prevent employees from entering, the incumbent would consciously control the ability of employees at the time of recruitment to maximize their own profits, and social welfare would thereby be changed. What is noteworthy is that sometimes the choice of incumbent firms would be contrary to the goal of increasing social welfare. Therefore, the precautionary mentality of incumbents may be caused by a positive entrepreneurial policy, making them employ employees with weaker abilities and leading to a reduction rather than an increase in social welfare.
3.3 Increase Endogenous Barriers to Entry
The term barriers to entry has been around for decades. Based on earlier theoretical developments, it was mainly the work of Bain
[31] that gave the theory of barriers to entry the importance. In the industrial organization literature, a barrier to entry is generally defined as an additional cost of producing when a firm seeks to enter an industry. It can be divided into two categories according to the cause of the entry barriers
[32]. The first category is structural barriers to entry that firms cannot control such as social systems and economies of scale. The second category is entry deterring strategies that firms can control such as advertising expenditure and adding new equipment. Therefore, from the perspective of the firm, barriers to entry can be endogenously determined. In the previous section, the incumbent did not invest in barriers to entry. Now we allow firms to have some discretion over
. Endogenous barriers to entry are available for the incumbent because of their predominance position in the market.
Now split into exogenous barriers to entry () and endogenous barriers to entry (). Suppose that is defined as where is the investment of incumbents to increase barriers to entry. Further, suppose that , and so that returns to investing in entry barriers decline. Therefore, becomes
Differentiating Equation (12) with respect to yields
When , the profits of the incumbent will increase as increases. Similar to raising wages, increasing barriers to entry is equivalent to changing the fixed cost of the firms. When the linear inverse demand function is still , social welfare does not change. In fact, this is a re-statement of Proposition 1 in that the sustainability of a positive entrepreneurial policy will be impaired by incumbent firms. Unlike increasing wages, however, investing in barriers to entry will increase incumbents' profits by reducing fixed costs. As a result, as long as , the incumbent prefer investing in endogenous barriers to entry to increasing wages if they have the ability.
Proposition 3 Endogenous barriers to entry may be prompted by a desire to reduce labor costs and increase profits. Employees' entrepreneurial passion may be strangled by high endogenous barriers to entry. Therefore, positive entrepreneurial policies may have no effect on industry output and social welfare.
4 Conclusions
In this paper, social welfare under the entry restrictions of the incumbent for employees has been studied. The whole research is based on a certain case where potential entrants are employees of existing firms. Then, the employer has the impetus to adopt an entry deterring strategy because the restriction of entry allows companies to retain employees and reduce potential competitors in the market. Therefore, even if positive entrepreneurship policies have provoked the entrepreneurial conviction of the incumbent employees, whether the conviction can be fulfilled or not would be interfered by the incumbent. The efficiency of positive entrepreneurship policies would be affected. In this paper, the Cournot competition model is established based on this theoretical logic. In the Cournot competition model where employees constitute the only threat of entry, we demonstrate that social welfare would not always be improved even in a good entrepreneurial environment. Therefore, social welfare would not be improved by positive entrepreneurship policies. More importantly, social welfare may be reduced because the incumbent adopts entry deterring strategies. The results in this paper are shown as follows.
First, there is no change in social welfare when incumbents resort to buy-off potential entry through higher wages. Therefore, the level of competition in an imperfectly competitive market would not be improved by a positive entrepreneurship policy, which may cause pay raises. However, the effectiveness of this strategy is affected by the characteristic of employees. Boosting the salary would be invalid when a job just pays the bills until long-held entrepreneurial ambitions can be realized. Thus, the above conclusion is valid when employees are profit-driven.
Second, social welfare can be increased by hiring competent employees; however, the incumbents do not aim to maximize social welfare. the cost of the game between the employer and the employees would be increased by hiring a capable employee when an employee is a potential entrepreneur; then, corporate behavior will deviate from increasing social welfare. Therefore, a positive entrepreneurial policy may lead to a reduction rather than an increase in social welfare.
Third, positive entrepreneurial policies may have no effect on industry output and social welfare when incumbent invests in barriers to entry. In fact, this is a re-statement of the proposition that the sustainability of a positive entrepreneurial policy would be impaired by incumbent firms.
Altogether, this paper builds on the insights of research on spinouts
[10-33] to uncover conditions under which the parent firms' behavior expose the social welfare to unfavorable results. Besides, the understanding of the relationship between positive entrepreneurship policies and social welfare is extended by these results, revealing a situation in which the sustainability of entrepreneurial policies is affected.
4.1 Implications
The theoretical contributions of this study are as follows. First, a new perspective on understanding the relationship between market entry and social welfare is provided in this study. Free entry is assumed to be desirable from the traditional wisdom in the industrial organization
[26]. However, many researchers have shown that the impact of unencumbered entry on total welfare is ambiguous, due to consumers gain and competitors loss
[32-35]. This study shows that the uncertainty may come from the entry restrictions of incumbent firms for employee entrepreneurship. Second, in the entrepreneurship policy, the importance of adjusting policies to the circumstance in which they are performed has been emphasized
[36, 37]. Our results underline the emphasis on the circumstance and present a specific situation where the sustainability of policy implementation may be affected by the circumstance. It shows that as an important environmental factor affecting the implementation of entrepreneurship policies, the incumbent firms should be highly-regarded.
Besides, practical values for policymakers are also provided in the results of this study. It is significant for policymakers to maintain clarity about the difference in the source of entrepreneurs. Different types of entrepreneurs have different sensitivities to entrepreneurship policies. From this perspective, it is unwise to use a one-size-fits-all approach to foster entrepreneurship. Nations can develop entrepreneurship policies that are conducive to the sustainable development of entrepreneurship based on the type of entrepreneurship they wish to encourage and the current economic context.
Both of these implications were desirable because our study is from the perspective of the incumbent, different from many past studies that were at the entrepreneur level
[2, 38].
4.2 Limitations and Future Research
There are a number of limitations to this paper that also provide directions for future research. The first issue concerned is the homogeneity of the spinout and the parent company. In fact, another situation is that spinouts differ from their parents. Spinouts appear to closely resemble their parent, however, someone may differentiate themselves from their parents to succeed
[14]. The welfare evaluation in the case that there is heterogeneity between the parent and the spinouts could be verified by future research. Next, our derivation is presented based on specific assumptions. Future research, adopting perhaps a dynamic modeling approach, may seek to relax the assumptions. Another possible extension is to consider other types of deterring strategies adopted by incumbents, such as encouraging employee to share ownership
[39] and supporting intrapreneurship
[40].
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