To compete, or not to compete .... continued

Posted by:
Secretary Gregory Bialecki, Executive Office of Housing and Economic Development

I have seen a number of responses to my blog entry on non-competes earlier this week, including one Tweet that summarized it as "Bialecki...argues for the status quo." I don't think that's what I said, but on re-reading my own post, I can see why someone would say that. In an attempt to lay out our thinking on the subject, I did give the appearance of being more comfortable with the status quo. So let me elaborate a little bit more on two points:

First, I think Rep. Will Brownsberger and his colleagues got it right by deciding to limit/regulate non-competes, as opposed to attempting to eliminate them in Massachusetts. I know that this decision will disappoint a number of folks who feel strongly about the issue, but it feels right to me for the reasons I set out earlier this week. Eliminating non-competes would be a dramatic change in our way of doing business and there is just not a broad consensus of opinion that eliminating non-competes is the right move.

Second, even though Rep. Brownsberger's decision was the right one, it does send the discussion down a challenging path, because the limitation/regulation approach means that a lot of lines need to be drawn in places where there is no clear answer. If we want to make a distinction between non-competes for senior management versus junior staff, for example, where do we draw that line? As I mentioned earlier this week, if those rules aren't clear, then the uncertainty created might even be worse than the status quo.

Does that mean the limitation/regulation approach is not worth trying? Absolutely not. We welcome the efforts of Rep. Brownsberger, his colleagues and other stakeholders in the MA innovation economy to explore the possibilities for non-compete rules that work better than the ones we have today, and we will certainly keep an open mind.

Comments

[Jeff Anderson]

Dear Secretary Bialecki,

As an entrepreneur and small business owner in Massachusetts for nearly 10 years (and a prior resident of California), I emphatically support a ban on non-competes in the Commonwealth. I am greatly concerned that the current bill from Rep. Brownsberger (although well-intentioned) will not solve the problem and will instead add to the frustration.

Please reconsider.

The right place to start is with an excellent book written by Levine and Boldrin called Against Intellectual Monopoly. Among other things, it discusses how the lack of noncompetes helped Silicon Valley grow. This argument was supported by Saxenian in Regional Advantage which helps explain why Silicon Valley developed into the high tech hub it is today (compared to the much weaker Route 128). Saxenian concludes that the single biggest difference was the ability of employees to move from firm to firm in Silicon Valley. Following on that, Mike Masnick argues “That factor, ahead of many others, caused Silicon Valley to take off, while the lack of mobility in Boston caused its tech companies to stagnate and make them unable to compete against more nimble Silicon Valley firms. Saxenian claims that the difference in mobility was simply due to ‘cultural’ differences between the east coast and the west coast. However, the impact was massive. The frequent job changes helped speed up the process of innovation, as ideas flowed more freely, allowing ideas to quickly change and grow and build upon other ideas leading to faster and better innovation. In contrast, employees in Boston stuck with their firms. The firms grew bigger, but slowly, and new ideas didn't flow nearly as easily. There was less direct competition from firm to firm, so firms were able to rest on their laurels rather than increasing their own pace of innovation.” Ronald Gilson followed up on Saxenian with research suggesting that it was the legal differences (specifically: California does not enforce noncompetes) that drove the change. The Federal Reserve and the National Bureau of Economic Research then stepped in; their research confirmed the views of Gilson with their report entitled Job Hopping in Silicon Valley. Their data showed that there is much greater mobility in Silicon Valley than elsewhere, reinforcing Gilson's suggestion that it was no noncompetes that made the difference. Furthermore, the Harvard Business School’s research looked at Michigan which had enforced noncompetes but effectively stopped in 1985. According to Mike Masnick, the “research showed that immediately following the change, mobility of inventors in Michigan decreased noticeably, slowing the spread of certain ideas. Their research found that ‘The networks of small companies so crucial to Silicon Valley's growth would be less likely to develop in regions that enforce noncompetes.’”

The Commonwealth would greatly benefit from this change, and I encourage Secretary Bialecki, Rep. Brownsberger and our other legislators to take a look at the facts - rather than empty arguments.