Employee Mobility Constraints and Strategic Alliances

Abstract

Employee mobility facilitates alliance formation due to critical information transmission. At the same time, employee mobility and alliances can be substitute means by which firms source external capabilities. We emphasize the interaction between these two relationships and ask how employee mobility constraints in labor markets affect firms' alliances. More specifically, we propose dynamic changes in alliance formation following legislative changes that constrain employee mobility (i.e., the inevitable disclosure doctrine (IDD)). In the immediate aftermath of these changes that constrain employee mobility, the substitution effect dominates, and firms form more alliances to access cabilities. In the long run, this effect is dampened due to a lack of supply of new hires that would otherwise foster technology partnerships. We further investigate factors that change the demand and supply conditions. Knowledge-intensive firms have more alliances in the aftermath and fewer alliances in the long run. Stronger noncompete enforceability shifts the timeframe so that firms do not have higher alliances even in the aftermath of IDD adoption. Our hypotheses are supported by empirical results from a sample of venture-backed startups in the biopharmaceutical industry.