Poaching and Entrepreneurship (Blog Post)

McNair Project

Poaching and Entrepreneurship (Blog Post)
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Abstract

A blog post focusing on some trends in business poaching.

Blog Text

"StIllannoyed? No wonder." read billboards funded by the Indiana government along the major thoroughfares of the greater Chicago area. Victor Smith, Indiana's Secretary of Commerce, in a practice known as business-poaching attempts to draw Illinois based businesses and startups to Indiana instead, a low-tax state that "works." Indiana is not alone in this practice, USA Today reports that former Texas Governor Rick Perry also actively pushed his state towards poaching. This practice brings about a larger conundrum though, in the highly competitive and often close-packed entrepreneur ecosystem, how are issues such as talent poaching, information sharing, and trade security maintained?

Take for example a co-working space shared by a variety of tech start-ups, at which point do the benefits of sharing know-how, resources, and mentorship in a hub or incubator environment become more of a liability than an asset? Research from Queen's University Belfast suggests that there is a natural transition between nascent firms and more developed firms from requiring the support of proximity to being hampered by it. Incubators were found top be effective support mechanisms for fledgling enterprises in that they provide basic facilities, office space, administrative staff and expert managers during the volatile start-up and growth process.

The research further found however that as the firms grew and sought to enhance credibility and protect market share, disadvantages emerged regarding incubator placement. Firm proximity created tensions concerning privacy, the protection of intellectual property and competitive strategies. It was also evident that as the firms became more mature, the need to develop independent, secure internal systems could be impeded by the ready availability of support and advice from the incubator management team. Similar results were seemingly replicated through an article in European Economic Review concerning information sharing among banking entities.

It was suggested that information sharing reduces relationship benefits, and, therefore relaxes competition for initial market shares. Information sharing introduces a welfare trade off by promoting equilibrium profits at the expense of talented entrepreneurs whenever market power persists in credit market, whereas it is a matter of indifference without market power. Thus information sharing may induce exclusion of creditworthy borrowers from credit markets. So how can information sharing and business poaching be combated?

Cliff Oxford, founder of the Oxford Center for Entrepreneurs, writing for the New York Times suggests a solution. In order to avoid the "huge and demoralizing loss for the culture and profits of a company" that is talent and information poaching, Oxford claims a new hire “break-up fee” worked for him and his company. He claims the plan worked as follows: employees started at about 50% less than market rate, but by month 12 they were 20% ahead of the market. By the end of the second year, they were 40% ahead of the market, and by year five they could be as much as 100% ahead of the market, and "worth every penny." Keeping in mind the potentially disastrous effects of business poaching and information dissemination, plans such as Oxfords may be a solution to reap the many benefits of co-working in entrepreneurship while avoiding the detriments.

Resources

Inline. See above.