Non-Competes Could Explain Rise and Fall of Boston’s Route 128 Vs. Silicon Valley, Study Says—But Not Everyone Buys the Lessons

8/19/08Follow @gthuang

When it comes to non-compete clauses in employment contracts, it seems timing is everything. In the early stages of a tech industry, keeping employees from jumping ship and working for competitors might actually drive growth. But once the industry has matured, the same non-competes can hamper growth by restricting labor mobility. This might help explain a longstanding puzzle in innovation clusters—the rise of Route 128 in Massachusetts in the 1950s and 60s, and its subsequent slowdown relative to Silicon Valley in the 1970s and 80s.

That’s according to a new paper from April Franco and Matthew Mitchell of the University of Toronto’s Rotman School of Management. In their report, entitled “Covenants not to Compete, Labor Mobility, and Industry Dynamics,” the researchers use a mathematical model to compare tech-industry growth in the Northeast, which had (and still has) laws to help enforce non-compete clauses, with that of the Bay Area in California, which does not.

Franco and Mitchell argue that Silicon Valley gained the upper hand because its workers could spin out more businesses based on skills and knowledge developed at other companies. That much fits with conventional wisdom. What’s surprising is that their analysis also suggests non-competes encouraged young companies in the Northeast to come up with more ideas and inventions in the early days. And non-competes also kept workers in their original companies long enough for their ideas to become established, the research suggests. “There are times when you want to allow non-compete clauses and times that you want to allow labor mobility,” Mitchell said in a statement. “Now we have a structure to evaluate the two forces involved.”

Here at Xconomy, we’ve covered the non-compete debate a fair amount over the past year. Earlier this month, for instance, Bob reported on the local reaction to a California Supreme Court ruling affirming that companies can’t stop former employees from working for competitors.

So we wanted to hear what people are saying about the latest finding—it’s certainly controversial. “I don’t buy it,” said Bijan Sabet, general partner at Spark Capital in Boston, MA, and a leading proponent of getting rid of non-competes, when we reached him by e-mail. “Look, we have a very successful market & environment that doesn’t restrict innovation as long as NDAs [non-disclosure agreements] and NSAs [non-solicitation agreements] are maintained. It’s called California. And it works very well. California entrepreneurs have more rights than those in MA, WA and other states. Is that fair? Is that healthy?”

Sabet argues that regardless of timing or an industry’s stage of growth, non-competes limit the open market. “How is locking up employees better for the market as a whole and how is it better for the ecosystem,” he writes. “Startups challenge big companies which creates competition. Competition creates new ideas, new markets, new technologies and innovation. Without competition we don’t have an open market.”

And whether or not non-compete clauses helped Route 128 companies keep their most innovative employees in the decades after World War II, there’s no such argument for them in Massachusetts or Washington today—or so the Toronto researchers’ analysis would suggest, though Franco and Mitchell don’t say so explicitly.

Gregory T. Huang is Xconomy's Deputy Editor, National IT Editor, and the Editor of Xconomy Boston. You can e-mail him at gthuang@xconomy.com or call him at 617-252-7323. Follow @gthuang

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