Law and Innovation: Evidence from State Trade Secrets Laws

Abstract

Here, I study the effect of trade secrets laws on R&D and patenting. Stronger secrecy protection could increase or reduce R&D. By reducing spillovers, stronger protection might reduce or raise the return to R&D, depending on whether spillover and own R&D are complements or substitutes. By strengthening appropriability, stronger protection would raise the return to R&D. Empirically, I find a nuanced relation between changes in trade secrets law and R&D among U.S. manufacturers between 1976 and 2006. The relation increased with company size, as measured by sales revenue, and was present among high-tech companies, but not among low-tech companies. The increase in trade secrets protection in California between 1978-84 and 1990-98 was, for the average company in the respective industry, associated with 4.9% less R&D in industrial inorganic chemicals (SIC 2810), a low technology industry, and 14.8% more R&D in pharmaceuticals (SIC 2834), a high technology industry. Further, I find that stronger trade secrets law was associated with reduced patenting, suggesting that trade secrets and patents served as substitutes.