To guard proprietary know-how, many firms separate their inventors into independent groups so that no single employee sees too much of the organization's knowledge. New research published in Strategic Management Journal finds that when U.S. states strengthened trade secret law, high-tech firms relied less on this kind of compartmentalization and connected their inventors more broadly — and the inventions that followed had greater technological impact.
Firms face a persistent tension when organizing innovation. Breakthroughs depend on bringing together people with different expertise, yet the more employees can see across projects, the easier it becomes for proprietary knowledge to walk out the door. Compartmentalization protects that knowledge, but it also makes it harder to recombine. Eunkwang Seo and Christopher P. Dinkel of Oklahoma State University's Spears School of Business set out to understand what happens to this tradeoff when the law offers firms stronger protection for their proprietary knowledge.
The question has taken on new urgency amid high-profile trade secret disputes over artificial intelligence talent. "Such disputes focus on what departing employees take with them; our research examines how legal protection shapes the way firms organize the people who remain," the authors write.
To answer it, the researchers drew on state adoption of the Uniform Trade Secrets Act and patent data from 783 high-tech firms between 1976 and 2017, measuring how modular — or compartmentalized — each firm's inventor collaboration network was. Because states adopted the act in different years, the team could compare firms headquartered in states that strengthened protection with same-industry firms in states that had not yet done so.
They found that adoption of the act reduced the modularity of firms' inventor networks by 4.2 percent relative to the sample mean — a substantial reorganization, given how little modularity typically changes within a firm over time. The effect emerged roughly two years after enactment, as firms adjusted their structures. Innovation quality improved as well: technological impact, a measure of how much inventions influence later technology, rose by 15.9 percent relative to the sample mean. The shift was most pronounced among firms with superior technologies or many nearby competitors — those with the most to lose from knowledge spillovers — and weaker where patents, complementary assets, or lead time already protected knowledge effectively.
New hires played a central role. After protection strengthened, newly hired inventors increasingly became bridges between previously separated innovation communities, while the positions of long-tenured inventors did not change significantly. "New hires bring valuable skills but, being less socialized, are typically less trusted than long-tenured colleagues," Seo and Dinkel explain. "Stronger legal protection appears to ease that trust problem, making firms more willing to place both experienced and early career hires in bridging roles."
For managers, the authors suggest several practical steps:
• Audit why teams are separated, distinguishing walls that serve an operational purpose from those built mainly to guard against leakage.
• Treat legal and organizational protection as substitutes, recognizing that the trade secret law of a firm's headquarters state should inform team design.
• Use onboarding to connect new inventors to multiple teams rather than a single group.
• Pair openness with clear protections, such as confidentiality agreements, trade secret policies, and documented access practices.
The findings also carry implications for policymakers weighing trade secret law, employee mobility, and noncompete agreements. While that debate focuses largely on hiring, the study suggests the law also shapes how openly firms organize innovation and integrate the people they hire. The authors note that the evidence covers patented collaborations in U.S. high-tech firms, and that compartmentalization may still be a sensible defense where legal protection remains weak.
"Protecting knowledge, in other words, does more than keep it from leaving the firm," Seo and Dinkel write. "It can also free firms to integrate the knowledge they already have."
To read the full context of the study and its methods, access the full paper available in the Strategic Management Journal .
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