Job Mobility and the Exchange of Ideas

Serial entrepreneurs and venture capitalists obviously didn't appear out of nowhere. One reason they are more numerous in California is that the legal environment lends itself to the creation of innovative companies. Stanford professor Ronald J. Gilson, an expert on Japan and venture capital, discusses this in an article. In 1996, he analyzed the contrasting destinies of Silicon Valley and Route 128, the technology corridor near Boston. There, in the early 1980s, prestigious universities like MIT spawned most of the great names in technology, including Wang and DIGITAL. But the climate soon changed.

One of the main reasons Silicon Valley flourished while its eastern counterpart stagnated was that California law prohibits restrictive noncompete clauses in employment contracts. California companies can require that employees sign a nondisclosure agreement, stating they will not exploit the company's confidential information, but such an agreement doesn't prevent anyone from going to work for a competitor. So engineers who come up with a bright idea that doesn't interest the company they're currently working for can take it elsewhere or start their own venture.

In most other jurisdictions, a new employee can be required to sign a contract agreeing not to use any knowledge gained on the job in case he or she ever goes to work for a competitor. In the case of a direct competitor, reusing that gained knowledge is often seen as inevitable, so an engineer who receives a job offer from a competing firm can be legally prevented from accepting it.

In California, the absence of noncompete clauses thus contributes to the mobility of people, ideas, and expertise. It supports the cross-fertilization of innovations and helps new ideas move from the laboratory into real-world development. It also contributes, perhaps importantly, to the quality of human resources available in the Valley. Finally, an ever-growing number of employees aren't required to change fields when they change companies. Communities of professional acquaintances can develop to exchange ideas, advice, and information about projects. All this leads to increased specialization, because people who change jobs can continue to work in the same niche and increase their expertise.

When we think about the influence of human capital on the development of technology centers, universities are usually seen as key. Their role is fundamental, of course, but the labor market's operation is also a factor. If the market supports mobility and specialization, as it does in California, the quality of available expertise improves. In 2000, at the peak of the Internet bubble, three times more teaching jobs were open in data processing at Stanford than there were candidates to fill them. All the people who could have filled the extra jobs were working in the industry. Some experts at the time warned that if the trend continued, one of California's strong suits would be threatened—but that didn't occur. By encouraging practical, hands-on learning, job mobility compensated for education.

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