Law and Innovation: Evidence from the Uniform Trade Secrets Act

Most research and policy on protecting innovation focus on patents. Yet, almost all technology managers report secrecy to be more important than patents. Here, I show theoretically that stronger secrecy laws could increase or reduce R&D. By reducing spillovers, secrecy laws might reduce or raise the return to R&D, depending on whether spillover and own R&D are complements or substitutes. By strengthening appropriability, secrecy laws would raise the return to R&D. Empirically, I find that, among U.S. manufacturers between 1976 and 2006, the Uniform Trade Secrets Act (UTSA) was associated with an average 5.2% (±2.5%) reduction in R&D. This negative effect suggests that, on average, own and spillover R&D are complements. The impact of the UTSA was quite nuanced, being significant among low-tech companies, but not significant among high-tech companies. Further, I show theoretically that stronger secrecy laws could increase or reduce patenting depending on their relative impact on the exclusivity of the patentable innovation vis-a-vis complementary know-how. Empirically, the UTSA was associated with reduced patenting in industries where patents are relatively effective in protecting process innovations.