Your company's ability to stay innovative doesn't just depend on how you manage your team--the business climate in your state matters, too. And according to a recent study, whether or not your state has passed one law in particular could be what's standing between you and a more creative team.

A pair of researchers out of the Nanyang Business School in Singapore and the Shanghai University of Finance and Economics recently sought to examine the effects of the Employment Non-Discrimination Act (ENDA), a law that makes it illegal to hire or fire employees based on sexual orientation or gender identity. First passed in 1977, the law is now on the books in 20 U.S. states, including the District of Columbia.

The thesis of the longitudinal study--which looked at patent applications, among other things, between 1976 to 2008--started from the premise that people who favor LGBT rights tend to be more educated, come from diverse backgrounds, and tend to be more willing to take risks than their less tolerant counterparts. These traits tend to be more often associated with greater levels of creativity, argue the researchers.

"Our theory is that because the pro-LGBT individuals are likely to be more creative than the anti-LGBT ones, corporate innovation is enhanced," the researchers write in Harvard Business Review.

Their findings, recently published in the academic journal Management Science, offer an important lesson for entrepreneurs: that it's important to understand how legislation in their state may both directly and indirectly affect their company's ability to build the best team. But there's another important lesson here: nailing down what makes a state--and its companies--innovative is still a pretty elusive research task.

According to the findings, in states where the ENDA had been passed, the publicly-owned businesses there produced 8 percent more patents. ENDA states saw an 11 percent uptick in the number of citations of patents (one measurement that is used to determine how innovative a patent is) obtained by businesses in their states, compared to states that hadn't passed an ENDA. On the whole, more individual inventors tended to move to these states within three years of the law taking effect.

In an attempt to determine that the passage of an ENDA in a state led to an increase in innovation--rather than simply mirroring a rise in corporate innovation that was due to other factors--the researchers said they controlled for a number of company characteristics. Among others, they cited size, profitability, and growth opportunities, as well as state characteristics including GDP, population, education, and political balance.

Finally, the researchers also compared innovation output between neighboring states where one state had passed an ENDA, and the other state hadn't. (The researchers' theory was that because economic conditions have a tendency to spill across state borders, the rate of increase or decrease in the number of patents obtained would be similar in both states.) Instead, they found that there was "a significant increase in firms' innovation after their states passed ENDAs, relative to their close-by neighboring firms."

Before you read too much into the findings, it's worth considering the limitations of such a study. For one thing, patents are only one way to try to measure innovation. Plenty of creative and successful companies are skeptical of the patent process due to its complexity, bureaucracy, and often weak protection for the inventor.

Perhaps more importantly, despite the researchers' efforts to control for a number of variables, it's still extremely difficult to draw a causal relationship between the passage of an ENDA and an increase in corporate innovation. A more diverse labor pool does indeed offer a business community more hiring possibilities. But without interviewing the individual inventors and asking why they moved to the states that had passed an ENDA, it's a leap to conclude that the law is what explicitly drove their decisions. It's certainly possible that innovative companies might have revamped their recruiting efforts to specifically attract an LGBT population after their state passed legislation, but the study did not address this. (Saleforce's Marc Benioff went on recent crusade against anti-LGBT legislation in several states.)

"The mindset of business leaders (which is difficult to control in the regression) could be the true driving force," the researchers acknowledged in their paper.

Regardless, the study is an interesting attempt to track the unintentional consequences anti-discrimination legislation may have on attracting creative thinkers to a state. It's also a reminder that fostering innovation at the state level is far from a simple or straightforward task.

Published on: Aug 22, 2016