Report confirms what everyone already knows: business are leaving California

It’s no myth: businesses are fleeing California, apparently at a stronger pace than previously believed.

Between 2012 and 2019, the number of businesses that left the state nearly doubled, according to California’s Competitiveness: A Regional Approach, a study released this month by the Los Angeles Area Chamber of Commerce.

“California is anything but a business-friendly environment,” the report’s introduction states, repeating sentiment business owners, managers, and conservative politicians, among others, have maintained for years.

The 68-page study notes that, despite being the fifth-largest economy in the world and the largest economy of any U.S. state, California’s economic reputation has diminished in recent years, for several reasons, including the number of companies that have left the state because of high taxes, too much government regulation, and other business costs.

The report also notes that, despite decades of population growth, California’s economy has slowed in the last 10 years when compared with other states.

“Affordability and quality-of-life issues are perceived to be the main factors for the exodus,” the report states. “California seems to be in the midst of a perfect storm, as it contends with an exodus of firms and people, reduced federal influence, and its recovery from the pandemic.”

Since 1990, the earliest year with usable data, through 2012, more businesses left California each year than came here, according to the study.

Business migration was “relatively low and stable” between 1990 and 2000, but it tripled in the five years after that.

“Net migration fell from 2005 until 2012, at which point there is an acceleration in the outmigration of firms,” the study reads. “By 2020, net migration was eight times larger than in 2012.”

The report was done in collaboration with the Inland Empire Economic Partnership, but information from Riverside and San Bernardino counties was included with data from Greater Los Angeles, not analyzed separately.

“The most important part of the Inland Empire’s economy is logistics, and that is a regional issue.” Kleinhenz said. “We felt like it should be studied with the rest of the Southern California region.”

The study is not entirely negative, and it does try to put some of its data into perspective. It states that while nearly 4,000 businesses left California four years ago, that was less than 0.3 percent of all of the businesses operating in the state that year.

“It’s a nuanced analysis with a lot of detail, and it’s complicated in some places,” Kleinhenz said. “Yes, there are businesses leaving California, and that’s not a good thing, but the issue is a little more complicated than that.”

To back up that assertion, Kleinhenz cites data from 2018 and 2019 compiled by the U.S. Bureau of Labor Statistics

The number of private businesses in California increased by 35,254, – 2.3 percent – between 2018 and 2019, according to the bureau.

Also during that time, 251,568 jobs were added to California’s economy, an increase of 1.7 percent.

What else happened to California’s economy in 2019? It lost 1,915 businesses to other states That means that, despite losing nearly 2,000 businesses to rival states, California still added jobs, according to the bureau.

“Losing businesses is a concern, but it’s only part of the story,” Kleinhenz said. “In fact, if you measure the loss of 1,915 establishments to other states relative to the number of establishments in 2019 (1.5 million), it amounts to slightly more than one-tenth of one percent.”

Another aspect of businesses leaving California that should be reconsidered is the belief that too much government regulation, particularly regarding environmental laws, is solely to blame for California losing businesses.

For years that explanation has been treated as gospel by many business owners, and there’s no arguing that California imposes many regulations on its businesses. However, that’s not the only reason businesses are leaving.

The high cost of living and not enough affordable housing has had much to do with the trend.  Also, other states have improved their economies and have become more competitive with California, making it easier for them to poach businesses.

For example, for years Los Angeles had an advantage in several important economic “clusters,” including aerospace, and video production, according to the report.

However, as transportation and communication have improved, “other regions in the country have aggressively invested in infrastructure, education and other [areas} in an effort to create and grow their own local clusters,” the report states.

One way they’ve created and grown those clusters is to persuade businesses from other states to move there – said Jay Prag, professor of economics at the Drucker School of Management at Claremont Graduate University.

“For a long time, other states have been paying closer attention than California has to their businesses, both keeping the ones they have and attracting new ones,” Prag said. “Nevada, Arizona, and Texas are the obvious ones, but there are a few others.

“At some point, California started taking businesses for granted, and those states took advantage of it.”

A well-paying middle-class job, particularly in manufacturing, has become a rare commodity, Prag said.

“When I came to California in 1986, there were a  lot of good middle-class industrial jobs here, but most of those have left the state,” Prag said. “A lot of that was in aerospace – Northrup, Boeing General Dynamics – but they’re all gone.”

California’s diversity and size mean it has a  lot of businesses other states can target for migration, especially if those states have businesses similar to California’s.

“Businesses like to be near businesses that are similar to them,” Kleinhenz said. “They like to be around businesses that do the same things they do.”

Besides addressing the cost of living and its lack of affordable housing, California must develop regional strategies that will keep businesses from leaving the state, the report states.

“A one-size-fits-all approach won’t work,” Kleinhenz said.