It's about denial of labour leading to denial of broader competition, rather than a true intent to build a competing product. If you were actually to follow through with building the product you would need a lot more than just engineers to roll out a successful product, effectively an entire company is needed, which would spread the company focus out and the lead to investor questions about your focus and commitment. Then if it's an unproven idea there's significant risk in going to market etc etc.

Cheaper to just lock up the talent and burn the wages. Bit of a ding to your books, big ding to your competitor's capability.

In saying that, it's a terrible practice. Massive waste of time, opportunity, talent and money.