Law and the boundaries of technology-intensive firms

The boundaries of technology-intensive firms are determined not only by economic considerations, but also by legal constraints. The law plays a dual role: First, by granting property right protection to certain types of information and withholding such protection from others, the law determines which innovations will be organized under a property-rights-based model and which will be organized by means of access control and restrictions on employee mobility. When information is protected by property rights, the optimal organization of innovation answers the question, "Who should own the innovation?" When information is not protected by property rights, this basic question becomes meaningless, and other sources of control-like access to the innovation and contractual restrictions on employee mobility-come to the fore. This brings us to the second role that law plays in drawing the boundaries of technologyintensive firms. In the absence of property rights in the innovation, covenants not to compete (CNCs) become critical in determining incentives and overall efficiency. The law imposes substantial restrictions on the scope and substance of CNCs. In some cases it is legal doctrine, rather than economic considerations, that determines the organization of innovation.