In this paper we examine to what extent market conditions facilitating start-up

formation affect technical change and firms' profits. We consider a model in which

R&D efforts of an incumbent firm generate partly tacit technological know-how

embodied in a key R&D employee, who might use it to form a start-up. The

availability of complementary assets influences whether new firms are created and

determine expected profits for start-up-founders. A large availability of complementary

assets has the direct effect that the generation of start-ups is fostered.

However, as a strategic effect, the incentives of incumbent firms to invest in R&D

might be reduced because of the increased danger of knowledge loss occurring

through start-up formation. We fully characterize the effects of an increase in the

availability of complementary assets, showing under which conditions the effects

on innovative activities and industry profits are negative.