The strange reason why big, innovative companies are hit by ‘brain drain’

Big companies that ramp up their research and development budget see one big damaging effect, new research has revealed.

Rather than encouraging workers to stay and be part of a company that’s trying to find solutions to problems in innovative ways, lots of their best employees walk out of the door to start new businesses, taking those new ideas with them.

Put bluntly, they don’t want to give their ideas to a big company to own and profit from. Why work for a big corporation when you can start your own enterprise filled with your own ideas?

A 100% within-firm increase in R&D leads to an 8.4% increase in the employee departure rate to entrepreneurship.

“A 100% within-firm increase in R&D leads to an 8.4% increase in the employee departure rate to entrepreneurship,” according to a paper released by professors Tania Babina, assistant professor of business at Columbia University Business School and Sabrina Howell, assistant professor of finance at New York University’s Leonard N. Stern School of Business.

“Losing employees to startups is a ‘dark side’ of R&D,” they write, adding, “The effect also seems to reflect ideas or skills that are poor complements to the firm’s assets.”

The research is based on corporate filings and, more notably, on exclusive access that the academics got to U.S. Census Bureau data from 1990 to 2008. The data showed who worked where, when they left, where they went, and how much they earned. Their creative analysis examined the share of a company’s employees “who depart and are among the top five earners of (another) firm founded within three years,” they write.

The effect also seems to reflect ideas or skills that are poor complements to the firm’s assets.

Their conclusion: This big-company brain-drain is spawning thousands of new ventures. And these new ventures are often high caliber, if risky. The brain-drain startups are “more likely to be incorporated,” than other small business, “have higher wages on average,” and are more likely to be backed by venture capital, they add. The new ventures are also more likely to be in high-tech fields, and either to fail, or to be taken over, than other small businesses.

“The effect appears to be driven by risky, new-to-the-world ideas, rather than ‘Main Street’-type businesses,” they conclude. In other words, employees aren’t quitting high R&D companies to open pizzerias and hardware stores.

Spin-offs are nothing new, and the history of business is littered with people who quit a big company to start their own venture. And you’d expect the entrepreneurs of tomorrow to work at exciting growth companies with lots of R&D rather than, say, your local power company.

It’s a problem if companies are losing the benefits of R&D because the ideas, and the people, are walking out the door.

But it’s a problem if this means big companies are losing the benefits of a lot of their R&D spending because the ideas, and the people, are walking out the door.

And that may be the case, the researchers find.

“Parent firms do not appear to internalize the benefits of R&D-induced startups by investing in or acquiring them,” they conclude. Instead, companies are losing these high-growth ventures either because management fears the risks, or doesn’t want to diversify into new fields, they argue.

Or maybe big companies are just too bureaucratic, inward-looking and riven with office politics to support new ideas or people who want to pursue them, experts say.

The findings may be related to a phenomenon that has long puzzled financial analysts: Small company stocks have proven far better investments over time than big company stocks. Since 2000, for example, data show that an investment in the MSCI U.S. Large Cap Index MSCI, +0.58%  has produced less than half the total profits of an equivalent investment in the MSCI U.S. Small Cap index.

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