The Effectiveness of Secrecy As An Appropriation Mechanism Evidence From The Uniform Trade Secrets Act

Abstract

Although the study of appropriability has received substantial attention in strategy literature, little is known about how trade secrecy as appropriation mechanism affects firm R&D productivity, let alone under what conditions the effect of trade secrecy on firm R&D productivity is more or less pronounced. Thus, this study examines how and when trade secrecy improves firm R&D productivity. Using a natural experiment provided by the staggered implementation of trade secret law – Uniform Trade Secrets Act - and using a difference-in-differences approach, we find that the stronger trade secret protection positively affects firm R&D productivity. We also find that the positive effect of stronger trade secret protection on firm R&D productivity is less pronounced for firms possessing a larger number of patents while the effect is more pronounced for firms investing into more downstream complementary assets. We further find that the positive effect of strong trade secret protection on firm R&D productivity is more pronounced in complex technology industries relative to discrete technology industries and the positive effect is also more pronounced in highly concentrated industries.