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Firms view industry switchers as risky business

Bullseye dart on new career

Changing careers in the corporate world is hard work.

The road block is uncertainty about whether an applicant can become a productive employee without previous experience in the firm’s industry, according to new research by Camelia M. Kuhnen of the University of North Carolina Kenan-Flagler Business School and economics profess Paul Oyer of the Stanford Graduate School of Business.

They find that companies are almost twice as likely to hire someone who already has worked in their industry versus someone who has not.

Kuhnen and Oyer studied the process firms use to hire MBA students by analyzing a unique dataset of MBA recruiting activity at a top U.S. business school. They share their results in “Exploration for Human Capital: Evidence from the MBA Labor Market,” a working paper for the National Bureau of Economic Research (NBER), where they are faculty research fellows. They combine insights from research about firms’ investment decisions as well as personnel economics to empirically analyze the process firms use to select employees.

“Uncertainty hinders hiring,” said Kuhnen. “Hiring people is an investment – one made with uncertainty about their future productivity. To minimize that uncertainty, firms prefer to hire job candidates who already have worked in their industry.”

The odds for applicants with industry experience to be selected are 1.71 times higher than for those without industry experience.

Uncertainty about industry fit has a more detrimental effect on hiring when firms:
• Face higher cost for firing and replacing employees
• Experience less competition from other firms in their industry for hiring talent
• Hire for a full-time position compared to an internship
• Are small and not well known

One way that firms can lower uncertainty about industry fit is to hire using probationary work arrangements as a way to learn more about the potential employee before making long-term hiring decisions. Consequently, employers value summer internships as a way to assess and learn about MBA candidates – their investment is low as would be the termination costs.

The researchers show that the rates for interns who don’t get a permanent job offer at the end of the summer are 19 percent higher for those without industry experience compared to their experienced counterparts – evidence that the firms use “probationary employment” to learn about the candidates’ industry fit.

Competition diminishes the effect of uncertainty, said Kuhnen. “Uncertainty matters less when more firms are hiring from the same pool in the same period of time – recruiters know that waiting for more information could mean losing the hire to another firm.”

“We are shedding light onto the matching process between firms and workers, where there has been limited empirical analysis conducted,” said Oyer. “Our findings show that considerations similar to those used by firms in making physical investments are also significant determinants of corporate hiring decisions.”