Legalization decreases innovation.

This study provides new evidence that state-level public health policies of marijuana legalization adversely affect regional innovation activity, using a quasi-experimental research design. MMLs have a net negative effect on the overall output of regional innovation activity, which is driven by deteriorating innovation quality. Guided by the process-based view of innovation, we further reveal that MMLs’ positive influence on the innovation process is magnified through innovators’ collaboration and is likely to be driven by the idea generation for “weak” patents. The negative impact, however, is strengthened through individual efforts and is plausibly driven by the implementation of “hit” patents.

The paper makes the following contributions. First, our paper introduces public health policies into the innovation management literature as an external factor that constitutes organizations’ external environment. Scholars have recognized that it is important to extend our understanding of the potentially complex and nuanced implications of wellness and health on managerial challenges (Vakili & McGahan,2016). Nonetheless, recent research mainly focuses on organizations’ internal policies, such as wellness programs or safety rules (Gubler et al., 2018; Pagell et al., 2020), and paysless attention to organizations’ external conditions, such as regional public health policies. Our results imply that external public health policies, such as marijuana legalization, have substantial effects on knowledge workers’ individual and collaborative effectiveness in the innovation process. The findings suggest that managers should consider the potential influence of external public health policies in designing and deploying internal policies. Further, our findings provide a rationale for organizations’ engagement in corporate social responsibility practices and for their lobbying to influence public policymaking and secure a favorable public health environment. Thus, our findings add to research that studies organizations’ corporate social responsibility (Godfrey et al.,2009; Gubler et al., 2018; Pagell et al., 2020) and non-market strategy (Barber & Diestre, 2019). Relatedly, organizations’ strategic location choices also hinge upon favorable local public health policies (Alcácer & Chung, 2014). In sum, this paper adds to the research stream that considers innovation management as a multidisciplinary realm (Gaimon et al.,2017).

Second, this study contributes to our understanding of how marijuana legalization affects regional economy. Research shows that the increased use of controlled substances (e.g., marijuana and opioids) negatively affects local economies by causing higher public financing costs (Cheng et al., 2022)and lower business valuations (Ouimet et al., 2021). Our findings contribute to this research by adding new evidence that marijuana legalization leads to the destruction of economic value. Our findings are especially timely considering the many proponents in the United States and worldwide of legalizing recreational marijuana use. 28 Regulators should consider MMLs’ adverse effect on innovation activity when estimating the net social welfare of similar policies. For instance, we find that MMLs dampen for-profit assignees’ innovation activity, which has been shown to be closely associated with a region’s economic development (Agrawal et al.,2014). Specifically, a reduction in the innovation effectiveness of for-profit assignees implies that these firms may find it challenging to gain or maintain a competitive advantage. Firms’ reduced innovation activity may also negatively affect knowledge exchange or spill over across firms in the region, further limiting firms’ innovation effectiveness and thus competitiveness (Jaffe et al., 1993). As a result, the regional economy may face issues such as increased unemployment rates and greater public social welfare expenditures. Public health policies may thus have negative spillover effects on the regional economy. Future research can further explore MMLs’ potential negative spillover effects on the broader regional economy through deteriorating innovation activity.

Moreover, our study complements recent research focusing on the potential implication of MMLs on regional innovation. Vakili and Zhang (2018) adopt the perspective of social liberalization and document a positive link between MMLs and patent counts at the state level. They attribute such a link to an increase in social interactions among inventors within a more liberal environment. In contrast, we analyze marijuana legalization from a public health perspective and develop our hypotheses within the framework of the process-based view of innovation. This framework allows us to comprehensively consider the complex effects of MMLs on innovators’ individual and collaborative efforts during idea generation and implementation of the innovation process. Thus, we are able to better develop competing arguments for MMLs’ potential positive and negative effects. The framework also guides our empirical exploration into finding a predominantly negative impact of MMLs on overall innovation output and nuanced, heterogeneous impacts when decomposing innovation by quantity and quality (in which case the effect can be insignificant or positive depending on the patent type).By doing so, we complement Vakili and Zhang (2018) in three ways. First, while our results confirm the finding that MMLs have positive effects on the quantity of certain patents(e.g., patents that involve more collaboration), we further show that MMLs have a net negative impact on total citations, which is driven by deteriorating patent quality. Also importantly, this adverse impact is mitigated through collaboration. Second, our results not only confirm Vakili and Zhang’s (2018) finding of the benefits of MMLs in increasing the number of “hit” patents but also show the cost of MMLs in terms of increasing the number of “weak” patents and reducing patent quality (for both “hit” and “weak” patents). Third, our results in the Online Appendix also imply that the impact of MMLs on a region’s overall innovation output varies by the technological focus of the region.