More on the California Rustbelt

The last post documented the exodus of startup businesses from California. In that post, I explored a previously unexamined source of data on startup company activity—Form Ds filed with the Securities and Exchange Commission—to discover evidence of a drop in California’s share of startup businesses over the 2002-2012 period. In this post, I look at which other states are gaining startups companies and which states are losing them.

The table below ranks the largest states in order of percentage gain or loss in each state’s share of startup companies over the 2002-2012 period. The results initially seem to fit the oft-repeated narrative of companies fleeing California for more “business-friendly” states such as Texas. The table shows that Texas had the largest percentage increase in its share of startup businesses while California had the largest percentage decrease in its share of startup businesses.

 

State	Percent Change in Share of Form D Companies 2002-2012
TEXAS	49.89
NEW YORK	47.37
CONNECTICUT	40.62
ILLINOIS	18.08
WASHINGTON	6.42
PENNSYLVANIA	3.63
MICHIGAN	1.86
ARIZONA	-2.17
FLORIDA	-5.57
COLORADO	-18.9
MARYLAND	-19.3
NEW JERSEY	-20.51
OHIO	-22.71
MINNESOTA	-26.71
MASSACHUSETTS	-26.87
GEORGIA	-28.29
NORTH CAROLINA	-29.89
VIRGINIA	-33.96
CALIFORNIA	-35.44

 

Not all of the states among the largest gainers and losers fit the standard narrative of businesses seeking “business friendly” climates, however.  For example, New York and Connecticut had some of the largest gains among all the states, and yet they appear among the least business friendly on many popular rankings based on surveys and expert analyses. Similarly, Virginia appears to have lost companies at almost the same rate as California, yet Virginia typically scores higher than average on rankings of business climate. Are the rankings of business friendly states seriously defective?

It may be that the rankings themselves are reasonable, but that they fail to tell the whole story of startup business creation. Some rankings are based on surveys of business owners, and the survey respondents are likely dominated by small, locally-rooted businesses that cannot realistically relocate anyway, so their views can’t explain startup growth and movement among the states. Other rankings are based on expert analysis of the legal and regulatory climate, but even those likely do not fully explain the location decisions business owners make. Businesses choose among plausible states, rather than all states. A high-tech startup might have trouble finding the talent it needs in the hypothetical state of East Dakota, for example, no matter how “business friendly” that state might be.

In a sense, this explanation may just state the obvious—that there is more to attracting and retaining businesses than the state’s tax and regulatory climate. But I think there is a deeper explanation for the results, however, one in which California’s unique role in the national (and indeed international) innovation economy is the pivotal piece in the puzzle. The next post proposes a theory that all of these results can be attributed to the developing "rustbelt" economy in California.