While conventional wisdom points to clustering of similar industries in one area, preferably near major research universities, as the key to innovative success in industry, research has uncovered another, little-known factor that seems to play a crucial role in shaping success.
That factor is simply freedom; the freedom for innovative people to take their talents and ideas to new firms poised to develop their concepts into viable, actionable products.
Non-compete agreements, however, can restrict people’s ability to be innovative and continue to grow.
Anne Marie Knott, a professor of strategy at Washington University’s Olin Business School and director the Berkeley Research Group in Los Angeles, recently released information about her research into innovative success. Her findings led her down a path to uncover this missing ingredient.
Taking on Conventional Wisdom
Acknowledging the two key points of conventional wisdom – clustering and proximity to research universities – Knott took a look at these two factors in regard to American industries. In regard to clustering, she acknowledges such traditional clusters as Switzerland with its watchmakers and Germany with its auto manufacturers have flourished. Attempts to replicate industrial clustering in other locales, however, has often failed, she notes.
In trying to determine the whys, Knott looked at studies conducted by the late Steven Klepper and found a missing ingredient in spawning. This occurs when some companies serve as industrial training ground for employees who go on to new firms that cater to niche markets, driving innovation along with them.
Knott also delved into the need for a strong research university to exist within proximity to a business cluster for success to be realized. Pointing to a 1992 GAO study, she notes that invention income added up to less than 1% of the research support provided to universities by the National Institutes of Health and the National Science Foundation.
Furthermore, major research universities, such as Washington University’s medical school, have no major industrial firms operating in their shadows.
Uncovering the Missing Ingredient
Knott compared the effectiveness of R&D investment of every public firm across America on a state-by-state basis to arrive at a measure she calls the RQ, or research quotient. In mapping out the findings, she discovered two states stood above the rest when it comes to innovation, California and Minnesota.
What makes these two states, about as different as night and day in most regards, rise to the top? Knott looked into that question and uncovered that both restrict the enforcement of non-compete agreements. That means employees in these states have greater freedom to explore other opportunities within their industry in the same basic geographical area.
“California and Minnesota have created environments that are favorable to the spawning of entrepreneurial ventures around a successful large innovator,” she concluded. Essentially, these states are more friendly to workers who are entrepreneurial.
In the other 48 states, however, an atmosphere exists where non-compete agreements are enforced. While some companies might be able to retain their employees, those with a strong entrepreneurial drive will leave anyway, often for locales that are far away.
Legislative restrictions on non-competes aren’t even required to create the right atmosphere. Minnesota, for example, historically restricts enforcement through case law rather than legislation.
What this all adds up to, Knott points out, is that California and Minnesota are simply friendlier to entrepreneurial employees, making them a better long-term bet for industrial location and innovation.
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