Innovation, Competition, and Non-Competes

Why is California so prosperous?

Map of US economic activity by metro area. Source: Bureau of Economic Analysis, Howmuch.net

A map of economic activity in the US is telling. In our $20 trillion economy, New York City produces 15% of our production, but four cities in California produce almost 20%: San Francisco, San Jose, LA, and San Diego. The wealth amassed in places like Newport Beach is impressive. On a recent trip, I was struck by the forests of masts belonging to million-dollar yachts in the harbor.

On purely physical level, this is understandable: who wouldn’t want to live in a seasonable, temperate climate with access to the ocean, beaches, mountains, and rivers. Migration into California has been an ongoing theme in American popular culture. And California agriculture benefits tremendously from its pleasant weather.

Newport Beach Harbor. Photo: Doug Tengdin

But there’s also an element of economic policy that sets California apart, from the standpoint of innovation. The State doesn’t allow for noncompete clauses in employment contracts. In 1956 William Shockley, a manager at Bell Labs, started his own semiconductor lab to commercialize his research on transistors. His management style was paranoid and autocratic, and a group of eight employees soon left to found Fairchild Semiconductor. Two of those left Fairchild ten years later to found Intel. Imagine if Shockley could have sued the folks he called his “traitorous eight” to stop them from working on silicon wafer chips.

The tradition continues today. Facebook, Google, Apple, and Uber hire employees away from each other all the time. In fact, several tech companies recently settled an anti-employee-poaching court case for over $400 million. California’s hostility to noncompete clauses is a big reason why Silicon Valley is hub of the technology sector, and the tech sector’s growth in the information economy is a big reason why California’s economy is so large.

Competition – for employees, ideas, capital, and innovation – is always better than centralized control. Of course, the system is complex. After all, trade secrets and intellectual property also need safeguards. But California seems to have found a healthy mix of employee freedom and capital protection.

Christopher Hitchens once wrote that California is full of nonsense and delusion and egomania. That may be so. But often those things – along with the free movement of labor and ideas – are just what’s needed to build an economy.

Douglas R. Tengdin, CFA

Charter Trust Company

“The Best Trust Company in New England”

By |2018-08-02T07:51:23+00:00August 2nd, 2018|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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