Silicon Valley Is the World's Innovation Capital Because of a Technicality

Forcing employees to sign non-compete agreements drives entrepreneurs into states where they have more rights, such as California
Photograph: Getty Images

The secret to Silicon Valley’s triumph as the global capital of innovation may lie in a quirk of California’s employment policy, a new study suggests.

Unlike most states, California prohibits the legal enforcement of non-compete clauses, which force people who leave jobs to wait for a predetermined period before taking positions at rival companies. That puts it in the ideal position to rob other regions of their most prized inventors, according to the paper, published this month in the journal Research Policy.

The study shows that non-compete agreements encourage inventors to leave their homes for states that do not enforce the bans, and that the most talented inventors are also the most likely to be negatively affected by such contracts. It's a homegrown brain drain, the researchers say, stripping some regions of local talent while enriching others.     

“Policymakers who sanction the use of non-competes could be inadvertently creating regional disadvantage as far as retention of knowledge workers is concerned,” wrote the authors, professors at the Massachusetts Institute of Technology’s Sloan School of Business, INSEAD, and the University of California-Berkeley.

The study, which looked at the behavior of people who had registered at least two patents from 1975 to 2005, focused on Michigan, which in 1985 reversed its longstanding prohibition of non-compete agreements. The authors found that after Michigan changed the rules, the rate of emigration among inventors was twice as a high as it was in states where non-competes remained illegal. The inventors were, unsurprisingly, particularly likely to relocate to states that did not enforce non-competes. The researchers controlled for other factors that could have encouraged entrepreneurs to pack up, such as the decline in Michigan’s auto and agriculture industries, and found the same pattern.

Even worse for Michigan, its most talented inventors were also the most likely to flee. After 1985, Michigan inventors whose patents had been cited more often than the median—a common indicator of an invention’s impact—had a much higher risk of moving to a state in which non-competes were illegal than were inventors in a control group.

"Firms are going to be willing to relocate someone who is really good, as opposed to someone who is average," says Lee Fleming, a professor at Berkeley who co-authored the study. For the inventors, it makes sense to take a risk on a place such as California, where they have more freedom. "If the job they relocate for doesn’t work out, then they can walk across the street because there are no non-competes," says Fleming. 

Companies still write non-competes into contracts, even when they are unenforceable by law. Silicon Valley giants Google and Apple have been sued by the Justice Department for quietly agreeing not to offer new desks to each other’s employees. 

The good news for states such as Michigan is that this particular talent vacuum is easily reversible. “Enticing talent from outside the state can be expensive and the prospect of (re)training local workers can be uncertain,” the authors note. A slew of states, including New York, Texas, and Florida, have changed their policies on non-competes in the past two decades, they write, and Massachusetts seems poised to ban them. For their part, companies may see non-compete clauses as the only way to safeguard in-house innovations and secrets. In reality, the study suggests, forcing employees’ loyalty could drive the best of them away. 

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