In the last couple of posts I presented data that shows a decline in California’s share of startup companies and the states that have gained and lost the most startup companies. The natural next question is: where are the businesses going?
The answer, somewhat surprisingly, appears to be “nowhere.” Using the same data as in the prior post I looked for changes in state location among existing companies by comparing headquarters addresses for companies that filed multiple Form Ds. Over the period (2002-2012), the number of businesses that had moved their headquarters into California was about the same as those that had moved their headquarters out of California. Furthermore, these rates were roughly constant over the period. Thus, at least among startup companies that have filed multiple Form Ds, there is no massive relocation from California to other states.
If companies aren’t leaving California, why has California’s share of startup businesses declined so precipitously? The answer seems to lie not in interstate relocation of existing companies, but in decreased California creation of new ones. The drop in California’s share of startup businesses is not primarily because businesses are packing up and leaving for other states. Instead, it appears that new businesses simply aren’t coming to California in the first place.
This explanation for California’s decline in startup companies makes intuitive sense and is consistent with other studies that have failed to show massive relocation. It is very difficult for a state to lure existing companies away because a move typically involves relocating employees, offices, facilities, and the like. As a result, existing companies, even existing early-stage companies, are somewhat immobile. But true startup companies that have not yet put down permanent roots are often recruiting new employees nationwide. Thus, it’s relatively easy for a startup company to avoid a state that’s hostile to business, and that is what appears to be happening in California.
As a result, California may not have much to fear from established companies leaving the state. But that doesn’t mean California has nothing to fear. The trend of new business creation shifting to other states is more threatening in the long-term to California’s economy than established companies pulling up stakes and leaving. Historically, the reason there have been so many innovative companies in California is not that Californians have a monopoly on innovative ideas; it is that innovative people with ideas come to California from other places to start businesses. If fewer companies are being created in California, the long-term effects on the California economy will be significant.
The data suggest that the brightest days of California new business innovation may well be in the past if the destructive excesses of California’s bureaucracies cannot be reversed. Established businesses will likely stay. New businesses, however, will likely continue to look elsewhere in light of California’s increasingly dire fiscal, regulatory, and business climate. Of course it is always possible that a rebound in the national economy will produce a reversal in these trends. It is also possible, however, that the California of the next decade may not look like the California of today. Instead, the next generation of Californians may well inherit a 21st Century version of a rustbelt economy.