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Silicon Valley top in innovation because of ban on non-compete clauses: Study

SAN JOSE — 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.

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

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.

“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 behaviour of people who had registered at least two patents from 1975 to 2005, focused on Michigan, which in 1985 reversed its long-standing 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-compete clauses are illegal. The inventors were, unsurprisingly, particularly likely to relocate to states that did not enforce non-compete clauses.

The researchers took into account other factors that could have encouraged entrepreneurs to pack up, such as the decline in Michigan’s automotive and agriculture industries, and found the same pattern.

“Firms are going to be willing to relocate someone who is really good, as opposed to someone who is average,” said Mr Lee Fleming, a professor at UC 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, they can walk across the street because there are no non-competes,” he said. BLOOMBERG

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