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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.

Scenarios for the future

The following are presented as four possible scenarios for the future of California’s business climate.