Non-competes and Spinout Creation: A Cross-country Test of the Relationship with Individual Income

Abstract

The prevailing wisdom in the organizational literature is that spinouts by higher earning employees are more damaging to parent firms than spinouts by lower earning employees. Unfortunately, covenants not to compete (hereafter: non-competes) do not always discriminate between spinouts that could harm the parent firm and those that could help it. The greater human and financial capital of higher-earning employees permits them to overcome barriers created by non-competes. By contrast, lower earning employees may be effectively prevented from creating spinouts in the face of non- competes. In short, our study suggests that non-competes are not serving parent firms’ intended purpose of discouraging the spinouts by higher earning employees. Instead, they have an untended consequence of mainly blocking the wrong types of spawn–that is, spinouts by lower earning employees, which may not harm the parent firms. In fact, these spinouts may actually help the parent firm, and could have a net positive economic and social effect on the economy and society, thereby helping improve lives and well-being of the common people through reducing unemployment and poverty. This is the first international study of the effect of non-compete agreements as all previous studies have been single-country (i.e., U.S.-based).