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

Strategic Management Journal (https://doi.org/10.1002/smj.3404)

USC Marshall School of Business Research Paper Sponsored by iORB, No. Forthcoming

65 Pages Posted: 2 May 2018 Last revised: 30 Mar 2022

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: March 17, 2022

Abstract

Knowledge protection strategies are crucial to innovating firms facing the risk of knowledge leakage. We examine the threat of worker departure as a key mechanism through which firms choose between patents and secrecy. We exploit a 1998 California court decision that ruled out-of-state noncompetes were not enforceable in California, thereby creating a loophole limiting non-California firms in their enforcement of noncompetes against their workers. When facing a higher threat of worker departure, firms strategically increased patent filings, exchanging legal protection for public disclosure of the invention. These effects were magnified for large-sized firms and for those in complex and fast-growing industries. Further mechanism tests on the possession of trade secrets, inventor migration, saliency of the decision, and independent inventors 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 (March 17, 2022). Strategic Management Journal (https://doi.org/10.1002/smj.3404), 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

HOME PAGE: http://www.leewyatt.com

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