Texas is making another gamble to become America’s tech hub. It will be an uphill battle, to put it mildly. But a seemingly small policy change could give the state a big boost in its quest to attract the tech industry: ban the enforcement of non-competitive deals.
In the 1970s, Austin established itself as a tech group, but it never reached the heights of Silicon Valley or Seattle. To do that, a city needs a critical mass of talented engineers, large employers, and venture capital. Now, the urban dysfunction of the San Francisco Bay area and the desire to cut taxes have prompted some tech companies and investors to relocate from the bay to Austin. Elon Musk’s companies, Tesla and SpaceX, are probably the most notable large companies making new investments in the area, and Musk himself has moved to Texas. Oracle and a handful of venture capitalists are also on the move.
This is good news for Austin, but so far it’s a trickle, not a flood. Tesla factories are nice, but if Austin is to become a Seattle or San Francisco-level startup and software hub, it will need a lot more than that. As my colleague Justin Fox has written, the entire state of Texas has lagged far behind in both areas.
Therefore, the Texas state government must do everything possible to ensure that the current trend accelerates. And one of the easiest things you could do would be to prohibit the application of non-competitive agreements.
Non-compete agreements restrict the ability of workers to move between companies in an industry (or start their own new company). All things being equal, companies would like to be able to prevent their workers from moving into the competition. Ideas will inevitably leak between companies when employees move out, even if proprietary technologies are formally protected by copyright law and nondisclosure agreements.
But by preventing these ideas from spreading, a company does a bit of damage to the entire industrial ecosystem around it. Ideas are synergistic: they can be rearranged in different combinations and produce new technologies, products and management techniques. Sometimes just having the same employee in a different work environment or role will allow them to do great things. Fairchild Semiconductor, for example, spawned a host of spin-offs that formed the backbone of the original Silicon Valley.
That might not have been possible if California had allowed the application of non-competitive agreements. Scholars have cited California’s refusal to abide by these clauses as one of the reasons Silicon Valley has become so dominant among US tech groups. In her book “Regional Advantage: Culture and Competition in Silicon Valley and Route 128”, researcher AnnaLee Saxenian cites it as one of the main reasons why California was able to overtake Massachusetts, which had a huge advantage in terms of the technology industry. .
Empirical studies support this. A 2017 paper by economists Evan Starr, Justin Frake, and Rajshree Agarwal, finds that in states that enforce non-competitive agreements, industries with more of these agreements “receive relatively fewer job offers, have reduced mobility, and experience wages. Lower”. Another 2017 paper by economist Jessica Jeffers finds that reduced labor mobility caused by non-competition reduces the number of startups, especially in knowledge industries.
And that encompasses a whole technological group. Places like Silicon Valley exist precisely because tech companies and venture capitalists want to tap into the vast amount of engineering and management talent that exists in the area. Non-competitors enclose that group; If all the people who are potentially the best hired people can’t legally work for you, you could also move your company to central Wyoming or the Philippines, where at least the rent is cheap.
That is why Texas needs to change its law to make non-competitors unenforceable, as in California. Big business will likely push against this move; from their own narrow point of view, noncompetitors seem like a good deal. But the small benefit they make comes at the expense of the entire tech ecosystem. Every Texas business that causes its workers to sign non-competitive agreements helps itself at the expense of the state itself. Therefore, the state must intervene. While Texas law discourages settlements, they can still be enforced when deemed “reasonable.” That’s not good enough.
Banning non-competitors would be inconsistent with Texas’ principles and reputation as a defender of the free market. Non-competition agreements are restrictions on the free movement of labor; gobble up the markets. Ultimately, the market is more important than the prerogatives of any particular company.
In fact, Texas is not the only state that needs to ban non-competitors; all other states should do the same. Many, including Massachusetts, are acting to limit the practice. President-elect Joe Biden even proposed a federal ban on non-competitors. If it could be passed by Congress, such a ban would put all states on a more level playing field when it comes to driving technology away from Silicon Valley.
Reasons Why Texas is poised to be the next Silicon Valley
Texas is no longer just an oil state, during the last year several companies and their directors have established their residence there.
“Silicon Valley won’t last forever and Texas knows it,” according to an article by Bloomberg’s Stephen Mihm in which he describes the rise and fall of innovation centers over time.
Although California continues to dominate most of the research and development centers, Mihm warns that Texas is getting closer.
According to the report, Texas has overtaken California in high-tech exports. In 2019, about 1,800 companies left California, and the majority went to Texas. That same year 42,500 people left California to also move to Texas.
The high housing costs, high tax rates and strict regulations have made it difficult to live, work and do business in California.
Now the southern state has the characteristics that made Silicon Valley surround itself with innovative companies . More and more technology companies and their CEOs are choosing to relocate their operations to Texas and other lower cost-of-living states with more favorable tax laws and fewer restrictions.
Austin, for example, has many qualities that make it a very attractive city. In addition to being a cultural hub, “that’s where people want to be,” said Laura Huffman, president and CEO of the Austin Chamber, in an interview with CNN Business.
Dropbox CEO Drew Houston purchased a home in Austin, which will become his permanent residence. Douglas Merritt, CEO of Splunk, has also done the same and Tesla billionaire Elon Musk is building a large factory near Austin and in late 2020 announced that he had moved from California to Texas to be close to the facilities of their companies.
The opinion piece mentions that Rice University of Houston is one of the access routes to these types of jobs and has served as a driver of development in the same way that Stanford has been for Silicon Valley throughout the years. years.