Trade secrecy harms innovation.

We conducted an empirical analysis to understand how IDD affected the innovative productivity of inventors. We compared the patenting productivity of inventors in states that adopted IDD to the productivity of inventors in states that didn’t adopt IDD. In all, our sample spans the 1976-2003 time period, and analyzes the patenting outcomes of over 350,000 distinct inventors over that time span, for a total of over 2.5 million inventor-year observations.

We found that IDD had a negative effect on innovation, and specifically on innovation quality (which we measured by patent counts weighted by patent-forward citations). Inventors based in states where IDD was enforced innovated less compared to before IDD took hold and also compared to comparable inventors in non-IDD states. These results continue to hold after also including a wide range of controls for differences in inventor, invention, and firm characteristics.

The next question was what might be driving this pattern. We first checked whether this is simply the result of firms changing their IPP strategy – from less patenting to more trade secrecy — without necessarily affecting the innovation they produce. We found that this can only explain part of the result.

We then looked at whether this was due to our other two potential explanations: less idea recombination and weaker inventors’ incentives. Our findings are more consistent with the second story: that an employer-friendly trade secrecy regime is associated with diminished innovation outcomes because inventors’ incentives are dampened. It appears that because IDD lets employers sue inventors for joining a competitor, inventors are discouraged from seeking out other employment opportunities and thus perhaps less focused on strengthening their innovation portfolio.

We find that after an inventor is exposed to a stronger trade secrecy regime, that inventor systematically produces inventions which are more general-purpose (applicable to a wider spectrum of uses and industrial contexts) and thus less subject to the IDD (which primarily covers movement within the inventor’s field). We interpret this to mean that if an individual can’t move to direct competitors, they may reduce effort in their current area of focus (leading to the documented innovation slow-down) and find other areas in which they can signal their innovation quality.

Overall, our study suggests that, while firms lobby for a strengthened trade secrecy environment, this may ultimately backfire in the long run by leading to lower innovation. They may be able to retain their talent in the short run, but those employees may be less innovatively productive. More generally, the findings suggest that the non-patent intellectual property environment in which individuals and organizations operate can influence innovation outcomes.