Employees’ Break-offs and Location Selection: The Birth of Industrial Clusters

Empirical observation suggests that several industrial clusters originate from employees who break off and locate their new firms close to former employers. The reasons for such a choice are complex and include a variety of costs' considerations. We present a two-player three-stage simultaneous game with interdependent decisions concerning break-offs, deterrent compensations, location, and profit-maximizing production outputs. The structure of the game explains under what conditions a break-off is desirable, what location's choice makes it optimal, and why the break-off process may lead to the birth of a cluster. We demonstrate how marginal production/congestion cost, degree of product differentiation, R&D investment in a region, and market size, all influence the likelihood of a firm's break-off and its subsequent location decision. Our results provide a rationale for why, in industries in which technology plays a significant role, an increase in R&D investment in the region may encourage the break-off firm to locate away from the incumbent. We also show that subsidies aimed at increasing manufacturing activities and diffusing commercializable innovations can be ineffective in promoting clustering and unnecessary in larger markets, and their exact size is crucial in determining their effectiveness.

[1]  A. Dixit.  The Role Of Investment In Entry-Deterrence , 1980 .

[2]  Max Keilbach,et al.  The Theory of Knowledge Spillover Entrepreneurship , 2007 .

[3]  David N. Ku,et al.  Intercluster Innovation Differentials: The Role of Research Universities , 2008, IEEE Transactions on Engineering Management.

[4]  Y. Papageorgiou,et al.  AGGLOMERATION AS LOCAL INSTABILITY OF SPATIALLY UNIFORM STEADY-STATES , 1983 .

[5]  H. Mendelson,et al.  User delay costs and internal pricing for a service facility , 1990 .

[6]  Lilach Nachum,et al.  Product differentiation, external economies and MNE location choices: M&As in Global Cities , 2005 .

[7]  Roberta Rabellotti,et al.  Upgrading in Clusters and Value Chains in Latin America: The Role of Policies , 2004 .

[8]  Joel A. C. Baum,et al.  Love Thy Neighbor? Differentiation and Agglomeration in the Manhattan Hotel Industry, 1898-1990 , 1997 .

[9]  E. A. Locke,et al.  The relationship of entrepreneurial traits, skill, and motivation to subsequent venture growth. , 2004, The Journal of applied psychology.

[10]  Erik E. Lehmann,et al.  The knowledge spillover theory of entrepreneurship , 2013 .

[11]  Rupert J. Ederer.  A Principle for Economics , 2008 .

[12]  H. Hotelling.  Stability in Competition , 1929 .

[13]  Fredrick Flyer,et al.  Agglomeration economies, firm heterogeneity, and foreign direct investment in the United States , 2000 .

[14]  Marco Bellandi,et al.  Local development and embedded large firms , 2001 .

[15]  Tae Kyung Sung,et al.  Characteristics of Technology Transfer in Business Ventures: The Case of Daejeon, Korea , 2003 .

[16]  C. Galbraith,et al.  Location Decisions by High Technology Firms: A Comparison of Firm Size, Industry Type and Institutional Form , 1989 .

[17]  Paul Krugman,et al.  Space: The Final Frontier , 1998 .

[18]  M. Porter.  Clusters and the new economics of competition. , 1998, Harvard business review.

[19]  B. Perles,et al.  Motivational Factors Influencing High-Technology Entrepreneurship , 1988 .

[20]  D. Shepherd,et al.  Entrepreneurs’ Decisions to Exploit Opportunities , 2004 .

[21]  Timothy B. Folta,et al.  Geographic cluster size and firm performance , 2006 .

[22]  Howard E. Aldrich,et al.  Fools Rush in? The Institutional Context of Industry Creation , 1994 .

[23]  Albert N. Link,et al.  A Theoretical and Empirical Analysis of the Decision to Locate on a University Research Park , 2008, IEEE Transactions on Engineering Management.

[24]  Aaas News,et al.  Book Reviews , 1893, Buffalo Medical and Surgical Journal.

[25]  Srilata Zaheer,et al.  Concentration and Dispersion in Global Industries: Remote Electronic Access and the Location of Economic Activities , 2001 .

[26]  David A. Garvin,et al.  Spin-offs and the New Firm Formation Process , 1983 .

[27]  Gerard Rushton,et al.  Models of Intra Urban Consumer Behavior and Their Implications for Central Place Theory , 1970 .

[28]  Tong Xin,et al.  An Innovative Region in China: Interaction Between Multinational Corporations and Local Firms in a High-Tech Cluster in Beijing , 2003 .

[29]  David J. Storey,et al.  Cross-national Comparisons of the Variation in New Firm Formation Rates , 1994 .

[30]  J. H. Dyer,et al.  Creating and managing a high‐performance knowledge‐sharing network: the Toyota case , 2000 .

[31]  Subodh Bhat,et al.  Opportunity Recognition: An Exploratory Investigation of a Component of the Entrepreneurial Process in the Context of the Health Care Industry , 2000 .

[32]  A. Walters.  The Theory and Measurement of Private and Social Cost of Highway Congestion , 1961 .

[33]  Michael J. Enright,et al.  Regional Clusters and Multinational Enterprises , 2000 .

[34]  L. Piscitello,et al.  Information Costs and Location of FDIs within the Host Country: Empirical Evidence from Italy , 1995 .

[35]  M. Feldman,et al.  R&D spillovers and the ge-ography of innovation and production , 1996 .

[36]  J. Enns,et al.  What competition? , 2002, Trends in Cognitive Sciences.

[37]  M. Feldman.  The Entrepreneurial Event Revisited: Firm Formation in a Regional Context , 2001 .

[38]  Edward E. Leamer,et al.  The Economic Geography of the Internet Age , 2001 .

[39]  T. Tambunan,et al.  Promoting Small and Medium Enterprises with a Clustering Approach: A Policy Experience from Indonesia , 2005 .

[40]  A. Blasco,et al.  The Location of New Firms and the Life Cycle of Industries , 2004 .

[41]  G. Fotopoulos,et al.  Location and Survival of New Entry , 2000 .

[42]  I. Zander.  The microfoundations of cluster stickiness--walking in the shoes of the entrepreneur , 2004 .

[43]  J. Breaugh.  Further Investigation of the Work Autonomy Scales: Two Studies , 1999 .

[44]  Don E. Waldman,et al.  Product Differentiation , 2006 .

[45]  Boyan Jovanovic,et al.  Firm formation with heterogeneous management and labor skills , 1994 .

[46]  M. Minniti.  Entrepreneurship and network externalities , 2005 .

[47]  Franz W. Kellermanns,et al.  The relationship between prior and subsequent new venture creation in the United States: A county level analysis , 2011 .

[48]  Johan Wiklund,et al.  Levels of Analysis in Entrepreneurship Research: Current Research Practice and Suggestions for the Future * , 2001 .

[49]  Christian Zeller,et al.  Clustering Biotech: A Recipe for Success? Spatial Patterns of Growth of Biotechnology in Munich, Rhineland and Hamburg , 2001 .

[50]  M. Amiti,et al.  Trade Costs and Location of Foreign Firms in China , 2005, SSRN Electronic Journal.

[51]  H. Steensma,et al.  International Market Entry by U.S. Internet Firms: An Empirical Analysis of Country Risk, National Culture, and Market Size , 2006 .

[52]  A. Spence.  Entry, Capacity, Investment and Oligopolistic Pricing , 1977 .

[53]  M. Feldman,et al.  Knowledge spillovers and the geography of innovation , 2004 .

[54]  Asbjørn Karlsen.  The dynamics of regional specialization and cluster formation: dividing trajectories of maritime industries in two Norwegian regions , 2005 .

[55]  Paul R. Milgrom,et al.  LIMIT PRICING AND ENTRY UNDER INCOMPLETE INFORMATION: AN EQUILIBRIUM ANALYSIS' , 1982 .

[56]  Pekka Ilmakunnas,et al.  Entrepreneurial Aspirations: Another Form of Job Search? , 2007 .

[57]  Jacques-François Thisse,et al.  Economics of Agglomeration: Cities, Industrial Location, and Regional Growth , 2002 .