How do trade secret laws affect the spread of innovation? A study conducted by researchers in the Department of Finance at National Taiwan University addresses this question by examining the Uniform Trade Secrets Act (UTSA) in the United States. The study focuses on whether stronger legal protection for trade secrets reduces technology spillovers from peer firms, which generate technological knowledge, to focal firms, which may benefit from that knowledge.
The analysis distinguishes technologies developed by peer firms according to whether those firms are located in states that had adopted the UTSA. The example of Questor Pharmaceuticals in Figure 1 illustrates how the study traces these knowledge flows. The results show that technology spillovers from peer firms in UTSA-adopting states are 27% to 51% lower than spillovers from peer firms in states without UTSA adoption. Moreover, focal firms linked to peers in UTSA states tend to have fewer migrant inventors, suggesting that inventor mobility is one important channel through which trade secret laws may affect knowledge diffusion.
The findings suggest an important policy trade-off. Stronger trade secret protection may help firms secure the returns from their R&D investments and encourage innovation. However, when such protection broadly limits the circulation of knowledge, it may also weaken technology diffusion, an important driver of economic growth. Policymakers should therefore consider not only the benefits of trade secret laws, including legal legitimacy, global competitiveness, and antitrust-related considerations, but also their potential cost in slowing the spread of innovation.
Technology spillovers to Questor Pharmaceuticals
Presentation at the Taiwan Symposium on Innovation Economics and Entrepreneurship
