California 100 released today its Future of California’s Business Climate report on Policies and Future Scenarios. The report examines how California’s economic prosperity relies on the existing mix of businesses already in the state, and governmental policies that affect business climate today, and in the future. The report demonstrates that, despite mainstream narratives about mass business exodus, there is no significant behavioral evidence that small businesses and startups, the source of new ideas and of business game changers, shun California. To the contrary, they seem to be thriving in California because of the state’s reputation for innovation, its highly talented workforce, its leadership in science and technology, and its access to venture capital. As a result, California has a very strong economic base that creates substantial exportable goods and wealth for California. The state does, however, face challenges affecting business with its highly regulated business environment and its high cost of living, especially the cost of housing.
California 100’s report on business climate is the final of 15 policy and scenario reports, adding to those previously released on the future of agriculture, advanced technology, arts, criminal justice reform, economic mobility, education, energy, health, housing, immigrant integration, transportation, federalism, fiscal reform and civil society.
“California remains a global hub of innovation and that innovation includes a vibrant business sector, but we cannot take our national and global leadership for granted,” said Karthick Ramakrishnan. “For big and small businesses alike to continue thriving, California must consider how regulations and costs of living affect business climate today and well into the future.”
California 100’s research work is led by Henry Brady, Director of Research for California 100 and former Dean at the UC Berkeley Goldman School of Public Policy. Faculty at Loyola Marymount University’s College of Business Administration assisted in the research and production of this report.
The Future of California’s Business Climate
The state of California is home to nearly 40 million people with nearly $3.4 trillion in gross state product as of 2021. California is the largest economy in the United States and the largest sub-national economy in the world. If California were a sovereign nation, it would rank as the world’s fifth largest economy, after Germany and ahead of the UK. California’s economy is varied, with many sizable sectors. The most dominant sectors include manufacturing, information, professional services, finance, and real-estate. Much of California’s economic activity is concentrated in Los Angeles, which has a relative focus on media, and the San Francisco Bay Area, which predominantly concentrates on technology.
California’s economic prosperity relies on the pre-existing mix of businesses already in the state and governmental policies that affect the business climate. “Business climate” is a loosely defined concept, and numerous business climate ratings and rankings published by the media, think tanks, trade associations, and policy institutions provide different interpretations of it. One interpretation is that it refers to the strength and vitality of business in a state. Another is that it is more narrowly focused on those policy choices by a state that help or impede business success. We take an expansive view because any complete understanding of a state’s business climate requires both a definition of what we mean by business success and prosperity and an elucidation of the factors that lead to that success.
More generally, this report considers a state’s “business climate” to be shaped by the facilitators and barriers to the growth and prosperity of businesses located there or considering a move there. Because different ranking systems place different priorities on a selective subset of promoters that enhance business productivity (e.g., talent availability) or barriers that impose costs of running businesses (e.g., tax policy), California’s business climate ranking varies. However, California’s “anti-business” reputation is quite consistently reflected in the Golden State’s disappointing placement in some rankings, including 50th in 2021 Chief Executive’s list of the “Best and Worst States for Business” Survey, 33rd in CNBC 2021 ranking, and 43rd in Forbes’ “Best States for Business” 2019 list.
In sharp contrast to these rankings and perceptions, California actually has enjoyed impressive economic prosperity rooted in a strong economic base. For example, it is sixth among all 50 states in GDP growth and ninth in both employment and per capita income growth in 2017-2019. Indeed, some business climate rankings rate California very highly based upon its performance. This disparity between the ranking systems and California’s economic results presents a paradox, which this report explores.
“This model has brought California economic prosperity,” said Richard Tang, assistant professor of marketing at the LMU College of Business Administration. “But in order to sustain its economic success, California must maintain its leadership in technological innovation and its ability to attract people while alleviating economic inequality.”
From Research to Action: The California 100 Roadmap
These California 100 reports on policies and future scenarios are part of a multi-stage process that is designed to inspire and engage Californians—from a variety of sectors and all walks of life—to build a stronger future. In the summer of 2022, California 100 expert and intergenerational Commission conducted a series of listening sessions throughout the state, to solicit feedback on the ideas generated by the research and to generate additional big and bold ideas for consideration by public and private agencies, as well as by everyday Californians. Insights will also be generated from the policy innovation projects throughout the state that cover a variety of topics, and our deep engagement on questions of science and technology as they relate to a variety of issues, including transportation and urban planning.
Earlier this month, California 100 released the findings from its California Considers: Policy Deliberations for our Long-Term Success Deliberative Poll. The poll engaged a representative sample of 719 Californians virtually over several days to deliberate 56 diverse policy proposals for the future of California. Key findings show strong support (greater than 60% both pre and post deliberation) for the state to provide universal mental healthcare, institute a strengthened high school civics course, develop a “one-stop-shop” for easier access to government programs, reform for the state’s CEQA law, and increase its support for K-12 education, among others.
California 100 has also been intentional about including young voices in its work. In February, the first-ever Youth Futures Summit was held in Sacramento which included the release of the Youth Futures Manifesto.
In the coming months, the California 100 Commission will draft a vision and strategy document for the future of California, based on briefing materials that build on insights from the various streams of work. California 100 will then launch a culminating event in early summer 2023 that serves as the formal launch of the vision and strategy document and, importantly, also brings together leaders and partners from our various streams of work and prior engagement.