Stronger US state trade secret law linked to 4.2% lower inventor-network modularity in 783 firms

Eunkwang Seo and Christopher P. Dinkel of the Spears School of Business at Oklahoma State University studied how state-level changes in US trade secret law affect the organization of innovation inside firms. The study was published in Strategic Management Journal. The authors analyzed inventor collaboration in US patent data from 783 high-tech firms between 1976 and 2017 and measured the modularity of each firm's inventor network. Stronger trade secret protection was associated with lower modularity of innovation activities within firms doi.orgStrategic Management Journaldoi.orgOpen source ↗.

Method and results

States adopted the Uniform Trade Secrets Act in different years. This allowed the researchers to compare firms headquartered in states that had strengthened protection with same-industry firms in states that had not yet done so. According to the authors, adoption of the act reduced the modularity of inventor networks by 4.2 percent relative to the sample mean. The effect emerged roughly two years after enactment doi.orgStrategic Management Journaldoi.orgOpen source ↗.

Technological impact, a measure of how much inventions influence later technology, rose by 15.9 percent relative to the sample mean doi.orgStrategic Management Journaldoi.orgOpen source ↗.

The effect was more pronounced for firms with superior technologies and for firms located near competitors, both of which raise concerns about protecting knowledge. It was less pronounced in industries where alternative mechanisms, such as patents, complementary assets or lead time, already protect knowledge effectively doi.orgStrategic Management Journaldoi.orgOpen source ↗.

Role of new hires

The authors identify the increased betweenness centrality of new hires, both skilled and junior, as an underlying mechanism of the effect. After protection strengthened, newly hired inventors increasingly became bridges between previously separated innovation communities. The positions of long-tenured inventors did not change significantly doi.orgStrategic Management Journaldoi.orgOpen source ↗.

Seo and Dinkel note that new hires are typically less socialized and therefore less trusted than long-tenured colleagues. In their interpretation, stronger legal protection appears to ease this trust problem, so firms place both experienced and early-career hires in bridging roles.

The authors state that the evidence covers patented collaborations in US high-tech firms. They add that compartmentalization may remain a sensible defense where legal protection is weak.