How innovating firms manage knowledge leakage: A natural experiment on the threat of worker departure

25 Pages Posted: 2 May 2018 Last revised: 8 Jun 2021

See all articles by Hyo Kang

Hyo Kang

Marshall School of Business, University of Southern California

Wyatt Lee

Rotman School of Management, University of Toronto

Date Written: April 10, 2021

Abstract

Innovating firms face a risk of knowledge leakage as their workers can join competitors. We study the threat of worker departure as the key mechanism through which firms decide on knowledge protection strategies. Our empirical analysis exploits a milestone court decision in 1998 whereby the California Court of Appeal ruled that out-of-state noncompetes are not enforceable in California. Consequently, non-California firms faced a loophole in the enforcement of noncompetes for their workers. When facing a higher threat of worker departure, firms strategically increase patent filings as a means of knowledge protection. The effects are magnified for large-sized firms and those in complex product industries. Further tests on the possession of trade secrets, physical proximity, migration rate, and industry dissimilarity to California support our theoretical account.

Keywords: innovation strategy, knowledge management, patents, worker mobility, out-of-state non-competes

JEL Classification: O32, J61, K31, G34

Suggested Citation

Kang, Hyo and Lee, Wyatt, How innovating firms manage knowledge leakage: A natural experiment on the threat of worker departure (April 10, 2021). USC Marshall School of Business Research Paper Sponsored by iORB, No. Forthcoming, Available at SSRN: https://ssrn.com/abstract=3171829 or http://dx.doi.org/10.2139/ssrn.3171829

Hyo Kang (Contact Author)

Marshall School of Business, University of Southern California ( email )

701 Exposition Blvd
Los Angeles, CA California 90089
United States

HOME PAGE: http://hyokang.com

Wyatt Lee

Rotman School of Management, University of Toronto ( email )

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

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