Are public health policies associated with corporate innovation? Evidence from U.S. nonsmoking laws 

By | December 12, 2023

Fostering a culture of innovation is paramount for the sustained growth of the global economy. Achieving innovative outcomes, however, is not easy. Prior research has extensively examined the effect of various regulations, firm characteristics, and incentive structures that are designed to increase innovation, many of which have limited effect. We add to this research by conducting a novel examination of whether regulations intended primarily to improve local health may also increase innovation. 

We examine comprehensive data on five decades of workplace nonsmoking laws passed at the city, county, and state levels from 1970 to 2019. Critical for our tests, these laws were passed in a staggered manner over time at the state and local levels, which reduces the likelihood that results in our subsequent tests are due to confounding factors because such factors would also have to occur in a similarly staggered manner. We match this data to firms based on the strictest nonsmoking laws that apply to their headquarters location each year. We measure innovation using the number of granted patents and subsequent citations, and we control for numerous firm, executive, and local macroeconomic characteristics that may also be associated with innovation to ensure our results are not due to these factors. Our primary tests use a rigorous generalized difference-in-differences design. That is, our tests compare innovation at a firm that is exposed to nonsmoking laws at its headquarters to innovation at the same firm before it was exposed to nonsmoking laws, and to other firms in the same state and year. 

We find consistent evidence that the number of patents and citations is significantly higher after workplace nonsmoking laws are effective in the geographic location in which a firm’s headquarters is located. Moreover, the economic significance of our findings is noteworthy, with approximately 3% more patents and 7% more citations during average years when nonsmoking laws are in effect. While prior medical research has shown dramatic short-term health benefits from nonsmoking laws, we would expect even stronger innovation-related results for firms that have been exposed to nonsmoking laws for several years because innovation takes time to complete. Consistent with this, we find that the nonsmoking laws are associated with approximately 8% more patents and 17% more citations for firms five or more years after the laws are adopted. 

We conduct a variety of corroborating tests and use alternative methodologies to fortify our results, such as using traditional difference-in-difference tests with matched samples, comparing firms in contiguous counties across state lines with different nonsmoking laws, and using pre-existing county health rates and instrumental variable analyses. We also use inventor-year data and show that individuals become more innovative after their location adopts a workplace nonsmoking ban. Collectively, these tests strengthen inferences regarding the positive association between nonsmoking laws and innovation and minimize the likelihood that our results are due to an alternative explanation. 

We then conduct exploratory analyses to provide insight into the underlying mechanisms for the relationship between nonsmoking laws and corporate innovation. We find strong evidence of at least three non-mutually exclusive mechanisms: 1) improved health, 2) improvements to individual employees’ innovation-related characteristics, and 3) refreshed labor markets. First, we find direct evidence that nonsmoking laws are associated with improved local health. County-level mortality rates drop significantly after the nonsmoking laws are enacted. Further, the laws’ association with innovation is most substantial when more potential exists for dramatic health improvements: in earlier periods when smoking rates were higher, and in counties with higher smoking rates. Second, we find evidence of changes to individual employees’ innovation-related characteristics, likely driven by enhanced employee health. Specifically, the laws are associated with proxies for improved employee creativity (e.g., more innovative and novel patents), productivity (e.g., more patents per employee), and reduced absenteeism (e.g., more patents that are the result of teamwork). Third, we find evidence that local employee and inventor labor markets grow as individuals appear to move into locales with newly passed smoking bans. Thus, companies can increase innovation not only through the enhanced innovative capacity of their existing workforces but also by capitalizing on improved labor markets. We find limited evidence that our results are due to firms increasing their investment in innovation (e.g., Capex and R&D) due to their expected cost savings from employer self-funded health insurance. 

Collectively, our study not only fuels the ongoing discourse on factors influencing innovation but also paints a picture of health-centric policies as unexpected catalysts for corporate creativity. Given the importance of innovation and the difficult and costly avenues that have been pursued to increase it, our findings should incent executives and policymakers alike to consider the broader implications of policies aimed at improving health. For example, employers continue to launch various programs to increase employee health and wellness (e.g., obesity reduction). Many of these programs appear primarily motivated by lowering healthcare costs, but our findings may encourage employers to expand these programs to benefit from the unexpected spillover association with innovation.  

For policymakers, not only do we find no evidence that nonsmoking laws have adverse economic effects—a common concern—but the positive effect on innovation is associated with increases in other local economic factors, such as the number of businesses and wages. Thus, while smoking rates have declined in the U.S. in recent years, further reductions might yield additional innovation-related improvements. Further, because many other countries have higher smoking rates, new nonsmoking laws have the potential to significantly increase global innovation. However, nonsmoking laws are only positively associated with innovation when local governments pass them, indicating that country- or state-level laws are unlikely to be as effective. Further, we show these nonsmoking laws appear to magnify the effects of other innovation-related policies, such as R&D tax credits, and complement other health-related policies, such as cigarette taxes. 

Brant Christensen is an Associate Professor of Accounting in the Marriott School of Business at Brigham Young University 

Adam Olson is an Associate Professor of Accounting in the Carl H. Lindner College of Business at the University of Cincinnati  

Christopher Yust is an Associate Professor of Accounting in the Mays Business School at Texas A&M University 

This post is adapted from their paper, “Are public health policies associated with corporate innovation? Evidence from U.S. nonsmoking laws,” forthcoming in Research Policy and available on SSRN. 

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