The geography of opportunity: Spatial heterogeneity in founding rates and the performance of biotechnology firms

Toby E. Stuart and Olav Sorenson

One of the most commonly observed features of the organization of markets is that similar business enterprises cluster in physical space. In this paper, we develop an explanation for firm co-location in high-technology industries that draws upon a relational account of new venture creation. We argue that industries cluster because entrepreneurs find it difficult to leverage the social ties necessary to mobilize essential resources when they reside far from those resources. Therefore, opportunities for high tech entrepreneurship mirror the distribution of critical resources. The same factors that enable high tech entrepreneurship, however, do not necessary promote firm performance. In the empirical analyses, we investigate the effects of geographic proximity to established biotechnology firms, sources of biotechnology expertise (highly-skilled labor), and venture capitalists on the location-specific founding rates and performance of biotechnology firms. The paper finds that the local conditions that promote new venture creation differ from those that maximize the performance of recently established companies.

Research Policy, 32 (2003): 229-253

Navigating the technology landscape of innovation

Lee Fleming and Olav Sorenson

Some companies are better off making incremental improvements to their products. Others that must compete on their ability to innovate focus on breakthrough inventions. Either approach requires the exploration of a specific type of ‘technology landscape’ and the right strategy for searching across the terrain.

MIT Sloan Management Review, Winter 2003: 15-23

The Red Queen in organizational creation and development

William P. Barnett and Olav Sorenson

We synthesize organization learning theory and organizational ecology to predict systematic patterns in the founding and growth of organizations over time. Our central argument is that competition triggers organizational learning, which in turn intensifies competition that again triggers an adaptive response. We model this self-exciting dynamic–sometimes referred to as the ‘Red Queen’ in general evolutionary theory–to explain organizational founding and growth rates among the thousands of retail banks that have operated in Illinois at any time from 1900-1993. We find strong evidence that Red Queen evolution led some organizations to grow quickly and to place strong competitive pressure on rivals. Red Queen evolution also helped establish barriers to entry. However, this same evolutionary process appears to make organizations more susceptible to ‘competency traps’, ultimately slowing their growth rates and inviting new market entry. Organizations confronted by a widely varying distribution of competitors grow more slowly and are more likely to face new entrants. Overall, the results suggest that processes of organizational creation and growth emerge from ecologies of learning organizations. More generally, we discuss the use of ecological theory and models to study the empirical consequences of organizational learning.

Industrial and Corporate Change, 11 (2002): 289-325

Technology as a complex adaptive system: Evidence from patent data

Lee Fleming and Olav Sorenson

This paper develops a theory of invention by drawing on complex adaptive systems theory. We see invention as a process of recombinant search over technology landscapes. This framing suggests that inventors might face a ‘complexity catastrophe’ when they attempt to combine highly interdependent technologies. Our empirical analysis of patent citation rates supports this expectation. Our results also suggest, however, that the process of invention differs in important ways from biological evolution. We discuss the implications of these findings for research on technological evolution, industrial change, and technology strategy.

Research Policy, 30 (2001): 1019-1039

Tradeoffs in the organization of production: Multi-unit firms, geographic dispersion and organizational learning

Pino G. Audia, Olav Sorenson, and Jerald Hage

Firms face a choice in the organization of production. By concentrating production at one site, they can enjoy economies of scale. Or, by dispersing production across multiple facilities, firms can benefit from product-specific efficiencies and enhanced organizational learning. When choosing to organize in multiple units, firms must also decide where to locate these units. Concentrating production geographically can enhance economies of scale and facilitate organizational learning. On the other hand, dispersing facilities might allow the firm to lower transportation costs, reduce risks, and forbear competition. To examine these tradeoffs, we compare exit rates of single-unit organizations to multiunit organizations and their constituent plants in the U.S. footwear industry between 1940 and 1989. Our results suggest that, multiunit organizations benefit primarily from enhanced organizational learning, competitive forbearance and the diversification of risk. Nevertheless, these benefits appear to come at the expense of organizational adaptability.

Advances in Strategic Management, 18 (2001): 75-105

Preprint available

Finding the right mix: Franchising, organizational learning, and chain performance

Olav Sorenson and Jesper B. Sørensen

Franchising provides an increasingly important vehicle for entrepreneurial wealth creation and accounts for a large and growing share of business in the retail and service sectors. Chains—which operate in dispersed markets—most frequently use this form of governance. These firms must balance the centralization and standardization required for efficiency with the adaptation needed for success in varied local markets. By adopting an organizational learning perspective, we argue that the mix of company-owned and franchised units affects this balance, thereby influencing chain performance. In particular, the different incentives facing company managers and the entrepreneurs that manage franchises encourage distinct patterns of organizational learning. Franchised establishments provide better opportunities for the firm to learn through experimentation; however, companies find it easier to diffuse this information and enforce standards through their company-owned units. Analyses of franchised restaurant chains in the United States provide empirical evidence of this trade-off.

Strategic Management Journal, 22 (2001): 713-724

Syndication networks and the spatial distribution of venture capital investments

Olav Sorenson and Toby E. Stuart

Sociological investigations of economic exchange reveal how institutions and social structures shape transaction patterns among economic actors. This article explores how interfirm networks in the U.S. venture capital (VC) market affect spatial patterns of exchange. Evidence suggests that information about potential investment opportunities generally circulates within geographic and industry spaces. In turn, the circumscribed flow of information within these spaces contributes to the geographic- and industry-localization of VC investments. Empirical analyses demonstrate that the social networks in the VC community—built up through the industry’s extensive use of syndicated investing—diffuse information across boundaries and therefore expand the spatial radius of exchange. Venture capitalists that build axial positions in the industry’s coinvestment network invest more frequently in spatially distant companies. Thus, variation in actors’ positioning within the structure of the market appears to differentiate market participants’ ability to overcome boundaries that otherwise would curtail exchange.

American Journal of Sociology, 106 (2001): 1546-1588

The social structure of entrepreneurial activity: Geographic concentration of footwear production in the U.S., 1940-1989

Olav Sorenson and Pino G. Audia

Nearly all industries exhibit geographic concentration. Most theories of the location of industry explain the persistence of these production centers as the result of economic efficiency. This article argues instead that heterogeneity in entrepreneurial opportunities, rather than differential performance, maintains geographic concentration. Entrepreneurs need exposure to existing organizations in the industry to acquire tacit knowledge, obtain important social ties, and build self-confidence. Thus, the current geographic distribution of production places important constraints on entrepreneurial activity. Due to these constraints, new foundings tend to reify the existing geographic distribution of production. Empirical evidence from the shoe industry supports this thesis.

American Journal of Sociology, 106 (2000): 424-462

The effect of population level learning on market entry: The American automobile industry

Olav Sorenson

Is starting a new business more difficult in an emerging industry or in a mature industry? The density dependent model of organizational ecology maintains that the industry’s age is irrelevant; the number of firms currently occupying the market niche determines the industry’s competitive structure. Nevertheless, population-level learning predicts historical asymmetry in entry barriers. Over time, the average fitness of the surviving population members increases, making market entry more difficult. At the same time, surviving organizations become increasingly spread out across the resource space, providing niches that new firms can exploit. Thus, industry-level evolution systematically alters the environment that both existing organizations and new firms face. I offer a new specification for the founding rate model that synthesizes ecological and evolutionary perspectives. Tests of this model in the American automobile industry support its merit.

Social Science Research, 29 (2000): 307-326