Recent Research I: Companies Can Prevent IP Leaks, But Should They?

Research-based companies draw much of their advantage in the market from their investment in technology development and the knowledge capital they have accumulated over time. Since this knowledge represents potential revenue, many companies jealously guard their intellectual property (IP) with non-compete clauses and other legal contracts with their employees. No company, however, can completely stop the outward flow of information. One of the most important means by which information can escape is through the movement of employees from one job to another. Reputations for Toughness in Patent Enforcement: Implications for Knowledge Spillovers via Inventor Mobility, a recent paper by Rajshree Agarwal, Martin Ganco and Rosemarie Ziedonis, states that a company’s reputation for intellectual property enforcement can significantly reduce the value lost through employee movement.

 

In their examination of IP enforcement and "job hopping" in the semiconductor industry, Agarwal et al. find that a firm's reputation for litigiousness plays a major role in the decision-making process of ex-employees. A strong reputation can effectively prevent former employees from appropriating the firm's knowledge capital and transferring it to another company or using it to create their own firm. This is particularly true when the new employer is smaller and unable to fund a legal dispute.

 

There can, however, be consequences to maintaining a tight grip on intellectual capital. The exchange of tacit and formal knowledge is at the heart of successful clusters and innovation networks. Agarwal et al. cite a 1994 study that found 71 percent of entrepreneurial founders commercialized ideas they had encountered or discovered while working at other companies. Restricting the flow of ideas out of high-tech companies could have a profound impact on regional entrepreneurship.

 

Another study, The Knowledge Spillover Theory of Entrepreneurship by Zoltan Acs, David Audretsch, Pontus Braunerhjelm and Bo Carlsson, lays out a knowledge spillover theory of entrepreneurship, a theory which centers on the idea that "knowledge created endogenously via R&D results in knowledge spillovers."

 

There appears to be a link in between regional investment in R&D and entrepreneurship, which Acs et al. cite as evidence that at least of portion of research investments spill over to new entrants. While this spillover may appear to be lost value to a firm, it is an essential ingredient in building strong regional industries and in introducing new sources of product and service innovation. As researchers and other employees leave existing businesses to start new companies, they are capable of bringing new technologies to market that might not otherwise have been commercialized within the context of the original company.

 

The authors conclude that when incumbent firms appropriate all of the results of their research, there is no knowledge spillover and consequently a reduction in associated entrepreneurial activity. This could negatively impact regional development, including the creation of firms that provide services and supplies to existing companies. New firms are also a source of product and service innovations for existing companies through licensing and mergers and acquisitions. Building a reputation for strong IP enforcement may seem tempting for companies that draw much of their competitive advantage through internal research, but this urge must be balanced with a more complete view of how innovation occurs.

 

Read Reputations for Toughness in Patent Enforcement: Implications for Knowledge Spillovers via Inventor Mobility at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1083263

 

The Knowledge Spillover Theory of Entrepreneurship was published in the November 2007 issue of the Journal of Management Studies. Purchases may be made through: http://www.blackwell-synergy.com/loi/JOMS?open=2007#year2007