Examining The Relationship Between Guaranteed Job-Leave Policies and Entrepreneurship

When employees discover potentially significant inventions during their line of work, they can decide whether to leave their company and form a new startup around the idea, or to transfer the knowledge to the parent firm and attempt to gain financial compensation through a spinoff.  As seen in the 2016 summary report from Failure Aversion Change in Europe (FACE) Entrepreneurship, the two main fears for entrepreneurs are financial security and losing a stable, professional job. Recent research also suggests that granting employees extended leaves of absence with guaranteed options for returning increases the likelihood of entrepreneurship.  Coupled together, these results prompted SSTI to further review the relationship between corporate-leave policies and entrepreneurship.

In Experimenting with Entrepreneurship: The Effect of Job-Protected Leave, a recently released working paper from Dartmouth’s Tuck School of Business, authors Joshua Gottleib, Richard Townsend, and Ting Xu test whether likelihood of entry into entrepreneurship is influenced by granting employees extended leaves of absence with a guaranteed option for returning. The authors examine a 2000 reform to Canadian parental-leave laws that increased job-protected leave to one year – an increase of approximately five months. They posit that, in theory, Canadian employees may be able to use their additional time off to test the viability of a business idea, even while caring for a new child.

Beyond citing anecdotal evidence of increased entrepreneurship among Canadian women after the reform, the authors use an empirical model to examine whether mothers who gave birth just after the reform went into effect were more likely to be entrepreneurs. They found that the increase in job-protected leave led to an approximately 1.8 percentage point increase, which, when compared to a 5 percent base rate, represents an economically significant increase of 35 percent. Furthermore, these results were not driven by new businesses that quickly failed, but rather those that were in existence for at least five years. The effect was also stronger for women entrepreneurs with more human and financial capital.

In addition to the FACE Entrepreneurship study highlighting the loss of job stability as a major fear of entrepreneurs, these results prompted SSTI to review the relationship between corporate-leave policies and entrepreneurship. From the perspective of an individual, job-protected leave offers an opportunity to consider entrepreneurship while also providing the stability associated with their established profession. From the perspective of a firm, however, it is potentially more difficult to see the value in allowing employees to pursue other opportunities.  

In lieu of giving leave for employees to pursue entrepreneurial endeavors, many firms use tactics that allow workers to use company time to pursue potentially unrelated innovative ideas. For example, in 1948 3M began allowing employees to use 15 percent of their paid time to develop their own ideas or products, while similar programs have emerged at Quicken Loans, Michigan’s Consumers Energy, and perhaps most famously, Google. When 3M recently unseated Google as the top preferred workplace for millennials, its managers specifically cited their established 15 percent policy and the culture it created as a key reason. Through this process, employees receive varying degrees of rewards for the success of these side projects, and the companies can also find new products or ideas in the process; Post-it-Note’s and Gmail, for instance, are two of the many products developed during this type of leave.  As a result, this version of a leave program could be considered advantageous for both the employee and the employer.

Companies can accrue losses in a variety of ways when employees leave to pursue entrepreneurship or other opportunities, as noted in a recently released research paper from the University of Southern California’s Center for Law and Social Science. These may include losses associated with training investments, incurred losses while hiring and training new employees, and the risk of former employees transmitting proprietary information, according to the paper. Because of these losses, parent firms might be hesitant to pursue policies that can increase the likelihood of employee departure and entrepreneurship, such as job-protected leave. Research by Ionnis Ioannou of London Business School, however, suggests several reasons companies could benefit from these spinouts occurring.

In When do Spinouts Enhance Parent Firm Performance? Evidence from the U.S. Automobile Industry 1890-1986, Ioannou finds evidence that spinouts are positively associated with parent company performance when they increase the corporate coherence of the parent. Corporate coherence means the capacity for a company to generate and exploit complementarities of dispersed knowledge and localized learning processes. Ioannou suggests two potential explanations for these findings: either those well-performing companies are the ones most likely to spin-out entrepreneurial ventures that increase corporate coherence, or that the most incoherent parent companies are the ones who have the most employees exit and start new companies so that their coherence would improve the most in post-spinout performance.

From the viewpoint of a corporation, Ioannou suggests that spinouts can improve corporate coherence by helping companies refocus their resources on the core or by identifying potential conflicts within the organization.  In other words, spinouts can help a company to pay more attention on potential subindustries or products of importance or by helping the company realize internal issues that inhibit innovation. One example of this could be Google, who as a means of retaining employees they realized would otherwise leave to start their own company, announced the development of an internal incubator in April 2016 to expand on their current intrapreneurship programs.

For individuals hoping to pursue work that interests them, both job-protected leave and the 3M 15-percent model have their merits, and both likely increase that individual’s propensity to be an entrepreneur. This is especially true considering that a lack of job stability is a main fear of entrepreneurs. Although corporations may see more value in internal innovation programs, it does not mean that all impacts of employees leaving to start their own endeavors are negative. In addition to the value of aligning workers with the work they want to do, the company’s corporate coherence can also be improved in the process.