Abstract
Built on a transaction cost economics (TCE) perspective, this study investigates whether startups’ early growth prompts them to relocate to a new place, and, if so, how long-distance versus short-distance choices affect their post-relocation performance in the market. The empirical findings using 4928 US startups from the Kauffman Firm Survey dataset are three-fold. First, startups are more likely to move as they grow in the developmental process of entrepreneurship. Second, startups realize higher levels of performance in terms of firm survival and sales growth only through transaction cost-minimizing intra-state relocation, not through inter-state relocation. Third, the superior performance of intra-state relocation of startups seems to be mitigated when they conduct location-independent businesses using Internet-based on-line transactions. The study concludes with managerial and public policy implications from these empirical findings.
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Notes
For detailed descriptions on the data collection process of the KFS dataset, please visit the following links.
https://www.kauffman.org/entrepreneurship/research/kauffman-firm-survey/
Partial relocation is defined as adding a new locational unit without closing the business at the current location, resulting in multiple locations. As such, it may not be clear if such a new addition is a result of relocation decisions or simply startups’ expansion strategies.
Startups normally make a decision of whether they are going to move first, followed by a subsequent decision of where they are going to move next. The relocation variables were collected through the following two steps: (1) startups’ response to a survey question on the change of their locations and (2) author’s examinations of the startups’ changed states over the 6-year study period. Some startups responded to the first step in the survey but did not reveal any information on their state(s) in the second step, resulting in some data observations with missing values.
Such choices of IVs are justifiable in the context of this study, because the predicted value of the US startups’ R&D/innovation capability is shown to possess high correlation with the endogenous intensity of R&D personnel (i.e., ρ = 0.7878 at p < 0.0001), but low correlation with the error terms (i.e., ρ = 0.0037 at p = 0.8347) in the model. Likewise, the predicted value of the US startups’ marketing capability is also shown to possess high correlation with the endogenous intensity of sales/marketing personnel (i.e., ρ = 0.7865 at p < 0.0001), but low correlation with the error terms (i.e., ρ = 0.0019 at p = 0.9156) in the model.
The measurement of relocation used in this study is based on a conservative notion of ‘complete relocation’ (Brouwer et al. 2004) to prevent any confounding effects from ‘partial relocation’ of startups.
When an interaction term is assumed between x1 (i.e., a startup i’s intra-state relocation choice) and x2 (i.e., the firm’s utilization of on-line Internet sales) in a regression equation, the probability of firm survival and the marginal effect of the intra-state relocation choice (i.e., x1) on the firm survival is derived as follows.
$$ \Pr \left[Y=1\ |\ X\right]=\Phi \left[{\beta}_0+{\beta}_1{x}_1+{\beta}_2{x}_2+{\beta}_3\left({x}_1{x}_2\right)\right] $$$$ \partial \Pr \left[Y=1\ |\ X\right]/\partial {x}_1=\phi \left[\cdotp \right]\left({\beta}_1+{\beta}_3{x}_2\right)=\phi \left[\cdotp \right]{\beta}_1+\phi \left[\cdotp \right]{\beta}_3{x}_2 $$Therefore, the marginal effect of a startup’s intra-state relocation on its post-relocation survival becomes ϕ[∙]β1 when the firm does not utilize on-line Internet sales for its entrepreneurial business (i.e., x2 = 0), whereas the marginal effect becomes ϕ[·]β1 + ϕ[·]β3 when the startup utilizes on-line Internet sales (i.e., x2 = 1). Since the SAS PROC QLIM procedure using the MARGINAL option produces ϕ[∙]β1 = 0.209 and ϕ[∙]β3 = − 0.251, these empirical results indicate that a startup’s probability of survival increases by 20.9% from the choice of intra-state relocation, but the location-independent nature of the startup’s Internet-based on-line business reduces the probability of survival to − 4.2% (i.e., 0.209–0.251 = − 0.042), supporting hypothesis 3.
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Lee, I.H.(. Startups, relocation, and firm performance: a transaction cost economics perspective. Small Bus Econ 58, 205–224 (2022). https://doi.org/10.1007/s11187-020-00406-z
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DOI: https://doi.org/10.1007/s11187-020-00406-z
Keywords
- Entrepreneurship
- Early growth
- Relocation strategies
- Intra-state relocation
- Inter-state relocation
- Firm performance
- US startups