By Junfu Zhang, research fellow, Public Policy
Institute of California
This opinion article appeared in the San Diego
Union-Tribune on September 24, 2003
In a recall election fueled by California's sagging economic fortunes,
bewailing the state's inhospitable business climate has become the mantra of
many candidates. They view many of California's regulations, fees and taxes – as
well as its soaring energy costs and assorted forms of compensation – as
responsible for driving businesses into the low-cost clutches of other
But despite all the politicking, there is very little solid information to
confirm whether or not California is really driving businesses away. The reality
is that no state agency tracks business movements, and policy-makers generally
rely on anecdotal evidence to support their arguments about business
There is also a more fundamental issue: Is business relocation the only or
best measure of the state's business climate? The claims about fleeing firms
virtually ignore how hospitable California is for the creation of new firms.
Policy-makers are in serious need of systematic information.
The reality of California's business climate is far more complex than the
rhetoric might suggest. While it's true that many firms have moved out of
California, others have moved in. Moreover, throughout the 1990s, many more
firms opened and closed within the state than moved into or out of it. In other
words, it was the "vitality" not the "mobility" of firms that drove fluctuations
in the labor market.
In a recent study of Silicon Valley's industry dynamics by the Public Policy
Institute of California, we examined both directions for relocation between
1990-2001 and found that Silicon Valley is indeed losing business establishments
(stand-alone firms or branches or subsidiaries of firms) to other states. During
those years, 844 establishments moved from Silicon Valley to locations outside
California, eliminating 22,534 jobs in the region.
However, firm relocation was not a one-way street. During the same period,
398 establishments moved into Silicon Valley from outside California, adding
10,441 jobs to the region, cutting the net job loss from relocation nearly in
Although out-moving establishments are most likely to go to California's
neighbors such as Oregon and Nevada, those moving into Silicon Valley are most
likely to come from New York and Massachusetts, states with strong high-tech
economies. Moreover, business establishments moving out are different from those
moving in, and are moving for different reasons. The evidence shows that Silicon
Valley is more attractive to young high-tech start-ups than it is to mature
In separate research, we examined the dynamics of California's biotechnology
industry and found very similar relocation patterns: More biotech establishments
left California than arrived between 1990-2001, and those moving out of
California tended to be older.
What do these studies tell us overall? Although more businesses moved out of
California than moved in, two developments mitigate the negative effect on the
First, our analysis of Silicon Valley shows that newly formed businesses
overwhelmingly outnumber businesses lost to relocation. Between 1990-2001, for
every business Silicon Valley lost to other states, nearly 150 new
establishments were created, which was more than enough to compensate.
Second, although more establishments move out of the state than move in, the long-term net effect on the economy may not be negative. In the biotech industry, despite the fact that more firms left California than arrived, the ones that moved in hired 4,049 employees by 2001, more than twice the number (1,181) that had been employed by those who moved out.
The concern over California losing businesses to other states is certainly legitimate, but it must be understood in a broader context of industry dynamics. We need to look at the complete picture of firm relocation and creation. Firms are leaving California, but others are coming, and many new ones are being created. In this context, policy-makers might address business relocation in three ways:
First, state and local governments could consider ways to encourage and facilitate new firm formation and growth.
Second, although there are legitimate concerns about these policy levers, state and local governments may want to look into ways of improving the business environment through tax breaks and by supporting some deregulation. Several proposals have already emerged in the Legislature seeking to restructure state tax incentives to keep companies in California.
Finally, state and local governments could help reinforce the comparative advantages that attract businesses to California in the first place. The state has a diverse economy, a high-quality labor force, a culture that encourages innovation and entrepreneurship, a lifestyle that is alluring to all sorts of talented workers and a geographic proximity to the fast-growing Asian economies. Efforts to promote these positives could enhance California's appeal for potential businesses.
Whatever the outcome of the recall, discussions of California's business climate could use a little more substance and far fewer sound bites. The state's economic realities simply defy common definitions. Those realities – as well as potential fixes – are complicated by our unique nature, but understanding and bolstering the state's real business climate remains central to our economic vitality.