Recruiting highly-skilled inventors boosts firms’ patenting output and helps them garner insight into new technological domains, but generating innovation revenue may require a different type of skill, one that emphasizes the ability to bring new ideas to market.
In BSE Working Paper 1309, “Hiring Entrepreneurs for Innovation,” Louise Lindbjerg and Theodor Vladasel argue that former founders are uniquely endowed with such execution skills – creating and exploiting market gaps by configuring resources around new ideas – and study how hiring individuals with entrepreneurial experience benefits firm innovation. They show that entrepreneur hires, especially in middle managerial roles, are linked to higher sales from new products and services in Danish firms.
Human capital contributes to innovation and competitive advantage by allowing firms to generate knowledge and build capabilities. Yet, for new knowledge to drive profits and performance, established organizations must develop novel business opportunities. This requires a human capital profile centered on bringing new ideas and offerings to market: execution skills can help unlock the economic potential of innovation.
The authors propose that former founders are carriers of execution skills due to their prior experience with the many complex steps of venture creation. Founding a firm is an intense learning experience: in an uncertain environment, entrepreneurs link technical knowledge to market needs, craft the appropriate strategy, and gather the people and finances required to pursue their goals.
In managing their startups, entrepreneurs thus gain skills in assembling and mobilizing resources for executing their business idea. As the authors theorize next, this generalist human capital aids venture development in both new and established firms, especially when it comes to innovation outcomes.
How do entrepreneurs affect innovation?
Drawing on the nature of execution skills, the authors formulate three main predictions regarding the link between hiring entrepreneurs and innovation:
- Entrepreneur hires are positively associated with innovation in established firms. Recognizing the commercial potential of existing firm knowledge in uncertain, non-routine settings, former founders enjoy advantages over non-founders in assembling the requisite internal and external resources for introducing new offerings, an advantage compounded by entrepreneurs’ generalist human capital profile.
- Entrepreneurs’ positive effect on innovation is stronger when they are hired in middle management positions. Firms’ ability to innovate depends not only on human capital, but also on organizational design; the question then becomes: what level of authority should firms entrust upon newly hired entrepreneurs? Middle managers are particularly well placed to assemble and mobilize resources due to their central position in strategic decision making and information flow across organizational layers. Their enhanced decision rights favor execution skills deployment and may generate support for entrepreneurial action throughout the organization, making such roles particularly appropriate for entrepreneur hires.
- Entrepreneur hires’ positive effect on innovation is stronger for incremental than for radical innovation. While radical innovation heavily depends on specialized technical human capital and investments to generate new knowledge, incremental innovation often draws on broad, market-oriented search processes to uncover new, often time-sensitive uses for existing knowledge. Former founders’ profile favors the pursuit of otherwise difficult-to-spot improvements and execution skills may increase speed to market, so they are more tightly linked to incremental rather than radical innovation.
Bringing the theory to the data
The authors test their predictions in the Danish context, which provides both a thriving entrepreneurial environment and a dynamic labor market. They combine matched employer-employee administrative and Community Innovation Survey data for years 2007-2016, allowing them to analyze firm-level innovation outcomes while capturing employees’ careers in detail.
Focusing on how new entrepreneur hires affect firms’ share of sales from innovation, they find that an additional entrepreneur hire contributes 25 times more to hiring firms’ sales from innovation relative to an additional non-entrepreneur hire. Strengthening confidence in an execution skills interpretation, the authors rule out explanations based on technical and (general, routine) managerial skills, as well as hires coming through acquired companies. As predicted, the positive association between entrepreneur hires and innovation is driven by hires in middle management positions, who contribute 12 times more to firm innovation than those in non-managerial roles.
Finally, the authors separately examine innovation new to the firm (most incremental), the market, and the world (most radical), finding economically and statistically larger effects for incremental offerings. An additional former founder hire contributes 55 times more to hiring firms’ sales from incremental innovation than an additional non-founder hire, with the effect becoming weaker for innovation new to the market and eventually insignificant for innovation new to the world.
Lessons and implications
The theoretical framework and evidence in this paper make several key contributions to strategic management. The authors bridge entrepreneurship and hiring-for-innovation research, emphasizing a novel human capital input for innovation based on founders’ execution skills, best deployed when matched with the appropriate decision rights. This crucially provides established organizations with an additional tool for appropriating a larger share of the value their knowledge generates.
Moreover, the results highlight that entrepreneurial human capital can transcend the start-up context due to the portability of execution skills, helping justify the premium entrepreneurs often receive when they return to regular jobs in knowledge-intensive sectors and highlighting that returns to entrepreneurship accrue not only to individuals, but also to firms.