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# Knowledge protection and modularity of innovation activities in firms: Evidence from US trade secrecy law

## Details

**Authors** Eunkwang Seo, Christopher P. Dinkel

**Year** 2026

**Publisher** Strategic Management Journal

**Kind of work** article

**Discipline** Business & Management

**Secondary disciplines** Law & Jurisprudence

[Read it at the publisher](https://doi.org/10.1002/smj.70125) 
10.1002/smj.70125

## In authors' words

### Abstract

Research Summary: Strategy scholars have theoretically explored the relationship between legal knowledge protection and modularity of innovation activities in firms, but this relationship has yet to be empirically tested in the literature. Leveraging state-level changes in US trade secrecy law and using a network modularity measure, this paper examines how trade secret protection affects the modularity of firms' innovation activities. Analyzing intrafirm inventor collaboration patterns in US patent data from 783 high-tech firms between 1976 and 2017, we find that increased trade secret protection is negatively associated with the modularity of innovation activities within firms. This effect is more pronounced for firms with superior technologies and those geographically collocated with competitors—factors that enhance firms' knowledge appropriability concerns—and less pronounced for firms in industries where alternative appropriability mechanisms are highly effective. Moreover, our findings suggest that the increased betweenness centrality of new hires (skilled and junior) serves as an important underlying mechanism for the treatment effect. These results contribute to the literature by illuminating how firms strategize their internal innovation activities for knowledge protection and by underscoring its underlying mechanism. Managerial Summary: Firms often modularize innovation activities to safeguard proprietary knowledge, but this approach can undermine innovation performance by restricting knowledge integration within organizations. This study demonstrates that stronger legal mechanisms alleviating firms' knowledge protection concerns, such as increased trade secret protection, encourage firms to adopt a less modularized, more integrated innovation system. Furthermore, we find that under such protections, firms are more likely to position new hires, including both skilled and junior employees, in central roles to connect innovation communities within the organization. These findings offer valuable insights for managers, illustrating how knowledge protection concerns can shape the structure of firms' innovation activities.

### What they set out to do (purpose)

To empirically test the theorized relationship between legal knowledge protection and the modularity of firms' internal innovation activities.

### Who or what was studied (sample)

Intrafirm inventor collaboration patterns from US patent data covering 783 high-tech firms, 1976-2017.

### How they did it (methods)

Quasi-experimental analysis exploiting state-level changes in US trade secrecy law, using a network modularity measure computed over intrafirm inventor collaboration networks.

### What they found (results)

Increased trade secret protection was negatively associated with the modularity of firms' innovation activities, an effect that was stronger for firms with superior technologies or those colocated with competitors and weaker where other appropriability mechanisms were effective, with increased betweenness centrality of new hires identified as an underlying mechanism.

## Commentary

### In short

The finding shows that a change in the legal relationship governing knowledge protection reshapes how a firm's innovation activity is decomposed into more or less separable modules, with the reorganization running through a relational mechanism—the network position of new hires.

**Patterns it shows** S, R

**Added** 2026-09-13

**How to cite this** Eunkwang Seo, Christopher P. Dinkel (2026). Knowledge protection and modularity of innovation activities in firms: Evidence from US trade secrecy law. Strategic Management Journal.