Recent research from HEC Paris explores how non-compete agreements (NCAs) affect investment practices and business growth. This study shows that these legal rules influence companies’ investment decisions, including spending on physical assets, intangible assets, and new ventures.
The study suggests that while NCAs can protect firms’ investments in physical capital, they may also reduce business dynamism by limiting the entry of new firms.
A hot topic
Non-competes are a hot topic in the United States. At least ten states have banned them for low-wage workers. On April 23, the Federal Trade Commission (FTC) voted to broadly prohibit NCAs, making them unenforceable even for existing contracts, except for senior executives.
The FTC’s vote has intensified the debate. Supporters of the ban hope it will boost the American economy and lead to higher wages. Critics warn that it could slow down investment. This debate is crucial since a fifth of American workers have non-compete clauses in their contracts.
In this context, the study provides important insights into how NCAs impact corporate investment and entrepreneurship. It highlights that companies reliant on knowledge-intensive roles are especially affected by NCAs.
Affecting investment
For example, the study found that in states where NCAs are more enforceable, firms increase their physical investments—such as buildings, machinery, and vehicles—by up to 39%. This increase is driven by companies that rely heavily on knowledge-intensive occupations. The researchers used data from anonymized LinkedIn profiles to track employee movements.
Although firms increase physical investments when NCAs are easier to enforce, the study found no significant effect on investment in research and development (R&D) or patent applications. Importantly, NCAs discourage new firm entry in knowledge-intensive sectors. This shows a trade-off with NCAs: they encourage investment in existing firms but hinder the creation of new ones.
The authors believe their study offers practical insights for policymakers and business leaders dealing with the complexities of NCAs and their economic impact.
“It is important to understand the trade-offs generated by non-competes,” the authors conclude. “This study shows that yes, incumbent firms may benefit from NCs, but this also comes at a cost since we get fewer new firms in corresponding sectors.”
