United States: Do Non-Competes Really Stifle Tech Innovation?

As has been well-chronicled in this blog, Massachusetts and many other states ( and even the federal government) have been grappling with proposed legislation that would ban or severely limit non-competes in employment contracts.  Proponents of bans on non-competes claim that they stifle innovation in the technology sector by preventing skilled employees from using their unique talents to start new businesses or helping young, developing companies introduce new products or technology to the market.  However, a debate continues to rage regarding whether there is any evidence that non-competes negatively impact technology innovation.

As we've discussed on this blog, Hawaii recently passed legislation that specifically prohibits non-competes "in any employment contract relating to an employee of a technology business."  The Hawaii legislature stated that non-competes impose a "special hardship on employees of technology businesses" and "unduly restrict future employment opportunities for technology workers and have a chilling effect on the creation of new technology businesses within the State by innovative employees."  In fact, the legislation specifically references "academic studies [that] have concluded that embracing employee mobility is a superior strategy for nurturing an innovation based economy."

But do "academic studies" actually support such a position?  The results are mixed.  Some studies have found that high employee mobility and short job tenure is positive for productivity in firms that spend on R&D, based on a variety of factors (including the spread of knowledge by mobile employees, greater incentives to create knowledge, and more dynamic labor markets).  On the other hand, another study found that companies in non-compete jurisdictions that enforced non-competes enjoyed reduced research and development costs through knowledge retention and investment in human capital.  Similarly, another study found that banning non-competes in the biotechnology industry would actually harm research productivity.  In short, there is no consensus on the impact non-competes have on innovation and productivity.

Non-compete opponents also point to the decline in innovation within Massachusetts' Route 128 area during the 1970s, while at the same time Silicon Valley was having relative success.  While one study concluded that California's ban on non-competes was a factor in the success of Silicon Valley over Route 128, other commenters haven't been quite as sure.  For example, Matthew Max, an MIT professor focused on tech innovation and entrepreneurship, thinks that it's premature to conclude that the elimination of non-competes results in more innovation.  Similarly, in her book, "Regional Advantage," AnnaLee Saxenian argues that Silicon Valley's advantage was primarily caused by cultural and structural differences between the East Coast and West Coast, resulting in Silicon Valley developing a decentralized but cooperative industrial system, while Route 128 came to be dominated by independent, self-sufficient corporations.

Recent growth in the technology sectors of various cities and states also challenges the assertion that the presence of non-competes stifles innovation.  Some of the fastest growing tech sectors are in states that enforce non-competes, including Utah's Wasatch Front; Austin, Texas; and the research triangle in North Carolina.  Commenters suggest that these locations have certain characteristics that make them more attractive than Silicon Valley to tech companies such as better infrastructure, more business-friendly state and local governments, and lower costs of doing business.

Although the Hawaii legislature was satisfied that non-competes limit mobility and stifle innovation, others have not been convinced, particularly those that do not share Hawaii's unique geography, which makes it particularly difficult for employees on one particular island to find non-offending jobs without leaving the island completely.  As states continue to debate the impact of non-competes on tech innovation and the economy as a whole, perhaps more empirical studies will provide guidance one way or the other.  Until then, it seems that the debate will continue in statehouses throughout the country.

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