Innovation and Knowledge Protection: How Firms Respond to a Loophole in Non-Compete Enforcement

37 Pages Posted: 2 May 2018

See all articles by Hyo Kang

Hyo Kang

UC Berkeley Haas School of Business

Wyatt Lee

Rotman School of Management

Date Written: April 30, 2018

Abstract

We examine how firms manage innovation processes and outcomes to protect themselves against knowledge leakage caused by employee mobility. In 1998, the California Court of Appeal ruled that non-compete agreements (“non-competes”) signed by an employer and an employee outside of California are not enforceable in California. This court decision created a loophole for non-California firms in their enforceability of non-competes as employees bound by non-competes could now move freely to California firms. We find that this California-driven loophole significantly affected knowledge management of firms outside California which had been enforcing non-competes. Internally, firms increased patenting without increasing R&D input. This implies that firms rely more on strategic patenting, rather than secrecy, when the risk of employee separation increases. Firms also changed their external relationships. On the one hand, firms decreased alliances, particularly with California firms, in fear of potential employee movement. On the other hand, firms relatively increased acquisitions of California firms compared to non-California firms in their M&A portfolio. The results suggest that alliance and acquisition provide opposite incentives and are less substitutable for knowledge protection purposes.

Keywords: Innovation Strategy, Knowledge Protection, Employee Mobility, Non-Competes

JEL Classification: O32, J61, K31, G34

Suggested Citation

Kang, Hyo and Lee, Wyatt, Innovation and Knowledge Protection: How Firms Respond to a Loophole in Non-Compete Enforcement (April 30, 2018). Available at SSRN: https://ssrn.com/abstract=3171829 or http://dx.doi.org/10.2139/ssrn.3171829

Hyo Kang (Contact Author)

UC Berkeley Haas School of Business ( email )

545 Student Services Building
Berkeley, CA 94720
United States

HOME PAGE: http://hyokang.com

Wyatt Lee

Rotman School of Management ( email )

105 St George St, Toronto, ON M5S 3E6
Toronto, Ontario M5S 3G8
Canada

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