How local policies enable business growth (despite federal regulation)
How weakened non-compete enforcement drives regional business growth by fostering entrepreneurship, reducing labour market barriers and enabling innovation
When the US state of Oregon weakened the enforceability of non-compete agreements in 2008, it marked one of the first significant state-level reforms targeting these controversial employment contracts. The change meant that companies could no longer restrict employees from working for competitors or starting competing businesses unless the employee was a senior executive with access to trade secrets or held substantial customer relationships. This reform affected businesses across Oregon's major technology hubs like Portland and Eugene, where skilled workers had previously faced significant barriers to changing employers or launching startups.
The policy change aligned with similar reforms in other states, including Montana, South Carolina, and New Hampshire, between 2009 and 2011. These natural experiments provided researchers with valuable data to examine how reducing labour market frictions through weakened non-compete enforcement influenced business growth and entrepreneurship at the regional level. The reforms also sparked renewed debate about balancing employer interests in protecting intellectual property with worker mobility and economic dynamism.
This real-world policy shift formed the foundation for new research examining how changes in labour market regulations influenced regional business growth across the United States. The study revealed that reducing restrictions on employee mobility through weakened non-compete enforcement led to significant increases in high-growth entrepreneurship – but with important caveats about how other institutional factors affected outcomes.
The research paper, Labor market reform as an external enabler of high-growth entrepreneurship: A multi-level institutional contingency perspective, took in data from 270 metropolitan areas over 13 years, with a view to understanding how reduced enforcement of non-compete agreements affected business growth rates. The study, which was co-authored by Dr Michael Araki, a lecturer in the School of Management and Governance at UNSW Business School, together with Associate Professor Daniel Bennett in the Department of Management and Entrepreneurship at the University of Louisville, and Professor Gary Wagner in the Department of Economics and Finance at the University of Louisiana at Lafayette, focused specifically on how these state-level policy changes interacted with both federal regulations and local pro-market institutional changes.
"While reducing the enforceability of NCAs can foster regional high-growth entrepreneurship, the effectiveness of such reforms is heavily influenced by concurrent federal and local institutional changes," the researchers noted in their findings published in the Journal of Business Venturing.
“Our motivation was to understand how changes in the labour market rules can influence high-growth entrepreneurship – not just starting new ventures, but helping them scale,” said Dr Araki. “We had reason to believe that these effects were not uniform across the board, so we set out to explore how broader policy dynamics, especially the interplay between federal, state, and local institutions, shape this outcome. In the process, we also identified mechanisms that may hinder entrepreneurial growth rather than support it.”
The impact of non-compete reforms
The research demonstrated that when states weakened non-compete agreement enforcement, affected regions experienced meaningful increases in high-growth entrepreneurship. Specifically, these policy changes led to between 8.7 to 10.1 new high-growth establishments per 100,000 incumbent establishments in the analysed period.
This growth occurred because reducing non-compete enforcement lowered barriers for employees to either start their own ventures or join growing companies. As the researchers explained: "NCAs may act like other types of labour market institutions that impede labour mobility."
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The impact was particularly significant for high-skilled workers and knowledge-intensive industries. The study found that "NCAs are particularly common among high-skilled employees, who may possess important industry knowledge and strategic human capital that is key for successful entrepreneurship." This finding highlights how non-compete agreements can create substantial friction in labour markets where expertise and specialised knowledge drive innovation and growth.
The researchers identified several key mechanisms through which reduced non-compete enforcement enabled business growth. "When NCAs are enforceable, prospective entrepreneurs may delay or be deterred from leaving secure employment to start new ventures by the loss of income and time while waiting for the non-compete duration to expire," the study noted. By removing these barriers, the reforms allowed entrepreneurs to conserve valuable time and resources that can be used to plan and finance their ventures.
The federal regulation factor
However, the positive effects of reduced non-compete enforcement were not uniform across all industries. The research found that sectors facing increased federal regulatory requirements experienced significantly diminished benefits from the labour market reforms.
"In industries experiencing high levels of federal regulatory expansion, this may not be the case. Especially for high-growth entrepreneurship, where timing is critical for capitalising on technological advances or market opportunities, the ability to quickly seize an opportunity might be dampened," the researchers observed.
The study identified specific mechanisms through which increased federal regulation counteracted the benefits of non-compete reforms. "Because extra efforts are necessary for navigating these regulatory changes, dynamism can be lost and the decision-making process can be elongated, ultimately slowing down the translation of entrepreneurial opportunities into de facto high-growth entrepreneurship," the researchers explained. This regulatory burden was particularly evident in sectors like healthcare, financial services, and utilities, where compliance requirements grew substantially during the study period.
The data revealed that "while the mean number of requirements per industry during our sample period is 64,218 restrictions, this ranges from an average low of 6150 in wholesale trade to a high of more than 207,000 in manufacturing." These regulatory disparities helped explain why some industries benefited more from non-compete reforms than others. As the researchers noted, "the transaction costs savings enabled by weakened NCA enforceability can be dwarfed by the increased transaction costs associated with regulatory compliance."
The local policy solution
Perhaps the most significant finding for regional policymakers was that local pro-market institutional changes could effectively counteract the growth-dampening effects of increased federal regulation. The research showed that regions implementing business-friendly local policies helped preserve the positive impact of reduced non-compete enforcement, even in heavily regulated industries.
"Local policymakers enacting tax and spending reforms that allow individuals and businesses to retain a greater portion of their income and resources can serve as a conservation mechanism, buffering the resource escalation imposed by federal regulatory expansion," the study noted.
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The researchers identified specific ways local institutions could offset the federal regulatory burden. "Local pro-market institutional changes may also simplify the process of local institutional compliance, acting as a compression mechanism that buffers the elongation associated with a growing federal regulatory burden, enabling entrepreneurs to allocate more of their time and effort to launching and growing their business instead of focusing on compliance issues," they explained.
This finding builds on market-preserving federalism theory, which suggests that lower-level institutions can counteract the effects of upper-level regulatory changes. As the study demonstrated, "local pro-market institutional changes can create a more favourable environment for high-growth entrepreneurship through an enclosing mechanism that allows high-growth-potential ventures to focus more on capturing the value they create." The data showed that when a region increased its pro-market institutions by one standard deviation, the high-growth establishment rate increased by 2.8 rather than declined due to a higher regulatory burden.
Practical implications for business leaders
For business leaders and entrepreneurs, these findings highlight several important considerations when making location decisions. Regions with weak non-compete enforcement may offer advantages for both launching and scaling ventures, particularly in accessing skilled talent. However, industry-specific regulatory burdens should factor into location strategy.
"Entrepreneurs that have already launched their ventures and have their eyes set on growth may be hindered in this aspiration by the high costs of attracting high human capital employees imposed by NCAs," the researchers explained. They suggested that such entrepreneurs "may also want to consider relocating to states with weak enforcement of such contracts where their access to human capital resources will be expanded."
The research also emphasised the importance of evaluating local business policies when choosing operating locations. Areas with pro-market local institutions demonstrated better conditions for growth, even when federal regulatory burdens increased. This suggests business leaders should consider the complete institutional environment – federal, state and local – when making strategic location decisions.
Key takeaways for business
The study provides valuable insights for both business leaders and policymakers about enabling regional business growth. For entrepreneurs and executives, understanding how different levels of regulation and policy interact can inform better strategic decisions about where to locate and expand operations.
For local policymakers, the research demonstrates that they retain a significant ability to foster business growth through local institutional changes, even in the face of increasing federal regulation. As the researchers concluded: "Local pro-market institutional changes can create a more favourable environment for high-growth entrepreneurship through an enclosing mechanism that allows high-growth-potential ventures to focus more on capturing the value they create."
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For business leaders, whose success depends on how well they allocate scarce resources such as capital, labour and time, Dr Araki said navigating changes in policy and institutional environments is key. “This research helps to understand how the broad institutional environment shapes the balance between opportunity and challenge,” he said.
“Some policies, like weakened non-compete enforcement, may enable entrepreneurial potential by freeing up human capital. Conversely, federal regulatory expansion imposes frictions through what we call ‘elongation’, which slows business processes, and ‘resource escalation’, which diverts resources from core activities. Finally, supportive local policies can help preserve growth opportunities even as regulatory complexity increases at the federal level. This knowledge can help business leaders to strategically respond to policy dynamics, conserve important resources, and better position their businesses to seize emerging opportunities.”