Employee entrepreneurship in response to non-compete enforceability

Abstract

Employee entrepreneurship is an important source of new ventures and economic development. However, employee entrepreneurship is affected by formal institutions such as non-compete agreements. Non-compete agreements stipulate that an employee may not work for a competitor or create a new competing venture, for some period of time and limited scope. We argue from the institutional perspective that employee responses to non-competes can range from compliance, compromise, defiance, avoidance, to manipulation. We test hypotheses predicting four of these five potential responses using a cross-country measure of non-compete enforceability and sample of employee entrepreneurs. Our results indicate that a country’s non-compete enforceability is associated with increased intrapreneurship, reduced spinout entrepreneurship, and more spinouts involving new products or services, especially when employees enter the same industry as their parent firm. These results help to clarify the influence that non-competes can have on the paths that employee entrepreneurs take.