Knowledge spillover theory of entrepreneurship

What is the knowledge spillover theory of entrepreneurship?

The knowledge spillover theory suggests that productive innovation comes from both incumbents (established firms) and new entrants (entrepreneurs and their organizations) (Acs et al., 2009; Audretsch and Lehmann, 2005).

Knowledge is inherently leaky, and moves through networks and via stakeholder mobility. This is probably a good assumption given that many organizations find it very difficult to keep secrets. Whistleblowers, for example, demonstrate the limits secrecy when they leak information that is damning to their employers.

Knowledge spillovers are an important driver of economic growth and development because they enable entrepreneurs to identify and exploit new opportunities. In the context of entrepreneurship, spillovers refer to the diffusion of knowledge and ideas from one organization or individual to another. This can happen in a variety of ways, including through informal networks, collaborations, and formal knowledge-sharing mechanisms.

Entrepreneurship is fundamentally about creating new combinations of resources to create value. In order to do this, entrepreneurs need access to knowledge and information about new technologies, markets, and business models. Knowledge spillovers provide a key source of this raw material for entrepreneurial activity, allowing entrepreneurs to identify and exploit new opportunities that they might not have been able to see otherwise.

People moving across firms is a significant source of knowledge spillovers. Employees take their expertise and experience from their former employer with them when they move on to work for another company. This can involve understanding of emerging markets, business models, and technology as well as knowledge of organizational procedures and tactics.

When incumbents are efficient at exploiting the knowledge they create, then there are fewer opportunities for new entrants (Agarwal et al., 2010). However, inefficient use of knowledge by incumbents causes it to leak out of those organizations making it possible for new entrants to utilize it. For instance, incumbents often invest in innovations that they do not subsequently utilize because they may deem the innovations to be counter to their firms’ interests.

Innovations can cannibalize sales or reduce the value of a firms’ assets and resources, or threaten margins. As a result, employees who want to pursue innovations that are not supported by the parent firm may decide to leave to join other firms or to start new ventures.

While knowledge spillovers can be a powerful source of entrepreneurial opportunity, many organizations take steps to suppress the flow of knowledge and information to outside parties. This can be seen in a range of actions and policies that are designed to protect the organization's intellectual property, preserve competitive advantages, and retain key employees.

One way that organizations can suppress knowledge spillovers is through compensation schemes. For example, organizations may use non-disclosure agreements or confidentiality clauses to prevent employees from sharing information with competitors or other outside parties. Similarly, organizations may offer bonuses or other incentives to employees who develop new technologies or innovations, but only on the condition that they remain with the organization and do not take their knowledge elsewhere.

Non-compete contracts are another common tool used by organizations to suppress knowledge spillovers. These contracts prohibit employees from working for competitors or starting their own competing businesses for a certain period of time after leaving the organization. While these contracts can help to protect the organization's intellectual property and competitive position, they can also limit the flow of knowledge and innovation in the broader economy.

Intellectual property rights, such as patents and copyrights, can also be used to suppress knowledge spillovers. While these rights are intended to promote innovation and creativity, they can also create barriers to entry for new entrepreneurs who are seeking to build on existing knowledge and technology. For example, a patent holder may be able to prevent others from using or building upon their invention, even if doing so would be beneficial for the overall economy.

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