Deepak Somaya

Abstract

External knowledge sourcing is widely understood to be vital for firms’ innovation performance, but also a challenge for value capture by firms. We add to this literature by highlighting an under-studied downside of firms’ external knowledge sourcing activities; namely, the increased risks of losing valuable R&D talent. Therefore, in contrast with conventional wisdom, we propose that employee mobility barriers may paradoxically increase external knowledge sourcing from geographically proximate firms to whom R&D talent is likely to move. Leveraging a quasi-exogenous increase in mobility barriers resulting from a change in Michigan non-compete law, we find that—consistent with our theorized mechanism—mobility barriers increased firms’ external knowledge sourcing from local (within-state) sources, and this effect was stronger for firms that rely more internally developed (versus externally acquired) R&D talent, and in industries with weaker appropriability. Additional analyses provide corroborative evidence in the changes to specific firm-level knowledge sourcing activities within Michigan firms and in knowledge sourcing by firms following other state-level changes of non- compete law.