Intellectual property allocation and firm investments in innovation

Successful innovations are achieved by combining employee ingenuity with firm resources. However, firms will suppress investment if employees can easily leave the firm and take these innovations with them. I provide new evidence on how changes to employee outside options impact innovation incentives using state court decisions to adopt the Inevitable Disclosure Doctrine (IDD), which strengthens firm trade secret protections by limiting employee mobility. I find that IDD adoption leads to an increase in innovation output and investment in high technology industries, where employee outside options are higher, but not in low technology industries. Furthermore, I find that these firms are able to hire talented employees. These results show that decreasing the ability of employees to leave the firm in high technology industries can be mutually beneficial.