Will a Noncompete Ban Impact Innovation Beyond Tech Hubs?

Earlier this year, the U.S. Federal Trade Commission proposed a ban on noncompete clauses in employment contracts with employees and independent contractors. The rule would require employers to rescind existing noncompete agreements, in addition to barring new ones. Whereas rules around noncompetes are currently set by each state individually, the proposed federal ban would apply nationwide. California — home to Silicon Valley — is one of a few states that already bans noncompetes.

Some studies show that noncompete agreements can reduce entrepreneurship, so one might conclude that banning noncompetes might drive innovation and entrepreneurship — but how and where? Will Silicon Valley and other tech hubs retain their status as centers of innovation? Will the effects of the proposed ban be geographically broad-based or more limited in scope? To find out, we turned to our expert panelists for their responses to this statement: The U.S. Federal Trade Commission’s proposed ban on noncompete agreements will impact innovation and entrepreneurship outside of existing technology hubs.

Agree

More than half of our panelists (55%) agree at some level that noncompetes will have an impact outside of existing tech hubs, with some noting that the prominence of such hubs has already lessened. Anita McGahan of the University of Toronto points out that “the geography of innovation and entrepreneurship has changed, particularly after the pandemic. While tech hubs are clearly important, they are not as important as they once were as centers of innovation.”

Others contend that California’s existing ban on noncompetes has helped make Silicon Valley the hub that it is. Stanford University’s Erik Brynjolfsson writes, “Work by AnnaLee Saxenian and others found that California’s long-standing ban on noncompetes helped fuel Silicon Valley’s innovation and entrepreneurship. It is likely that the FTC’s new rule will have similar results in the rest of the U.S.”

Many panelists think that the ban’s effect will extend across geographic areas and both emerging and established businesses. Timothy Simcoe of Boston University writes, “While benefits may be concentrated in existing technology and innovation hubs, the benefits can still be broad-based (and are likely to be larger outside of California, where noncompetes have long been tough to enforce).” Similarly, the University of Toronto’s Joshua Gans says, “The ban will be a potentially very significant positive for innovation, both within and outside of existing technology hubs.” And Maryann Feldman of Arizona State University notes that noncompete bans nationwide will increase the mobility of labor, and, in turn, “labor mobility will increase the flow of innovative ideas to both new and existing businesses.”

Strongly agree

“The talents of insightful scientists and inventors are increasingly being tapped by entrepreneurs who may be located far away from them.”

Anita McGahan

University of Toronto

Agree

“The ban’s effect will be most strongly felt in existing technology hubs, where more people are moving across firms.”

Petra Moser

New York University

Neither Agree nor Disagree

A quarter of our panelists (25%) have a stance in the middle. Some think it’s too soon to know how noncompete bans will play out, due to numerous driving factors. “The evidence shows important gaps in our understanding of how labor markets work. To paraphrase Fritz Machlup’s statement about patents, it would be irresponsible to either extend or ban noncompetes based on our present state of knowledge,” writes Ashish Arora of Duke University. Annamaria Conti of IE University notes, “The extent of the gains will depend on factors such as the availability of qualified human capital, availability of financing opportunities, market size, and ease of doing business.”

The ban’s effects may be most concentrated in existing tech hubs, some panelists contend. “We may simply see more activity in existing tech hubs where noncompetes were enforceable up to now,” says Yael Hochberg of Rice University. Richard Florida of the University of Toronto notes, “The biggest impact is likely to be an increase in innovation or innovative competition in existing tech hubs, as innovators can more easily leave companies where they work and start their own.”

Neither agree nor disagree

“To paraphrase Fritz Machlup’s statement about patents, it would be irresponsible to either extend or ban noncompetes based on our present state of knowledge.”

Ashish Arora

Duke University

Disagree

Only 20% of the panelists disagree with our statement, pointing to the variety of industries and locations already affected by noncompetes. The University of New South Wales’s Richard Holden writes, “There are plenty of industries outside of technology hubs where a two-year noncompete is important to innovation.”

Others note the limited impact of noncompetes overall. “Many firms other than startups or very small firms have alternative ways to protect their innovations, such as through downstream assets. Thus, noncompetes give them small additional protection,” says Alfonso Gambardella of Bocconi University. John Van Reenen of the London School of Economics and Political Science notes that noncompetes are only one tool for driving innovation and entrepreneurship: “Noncompetes are quite prevalent in low-tech sectors. … There are many other (much better) ways to promote innovation.”

Disagree

“There are many other (much better) ways to promote innovation.”

John Van Reenen

London School of Economics and Political Science