Business Climate: Location, Location, Re-Location

PPIC has another report out this month, Business Location Decisions and Employment Dynamics in California, which sounds interesting:

Much recent debate about the state’s economy has focused on the narrow issue of whether California businesses are moving to other states—taking jobs with them. In this report, PPIC researchers Jed Kolko and David Neumark examine the broader patterns of employment dynamics—the ways in which jobs and businesses move into, around, and out of the state— to provide a more accurate and comprehensive understanding of the California economy.

I haven’t read through the entire thing yet, but looking through the short summary I see this:

The authors also examine trends among business establishments with headquarters inside California and those with headquarters outside the state. They find some decline in the share of employment in the state among firms with headquarters in California. These declines are offset by an increase in the share of employment in the state among firms headquartered outside the state. These findings suggest that such changes are more attributable to an increasing geographic dispersion of multiestablishment firms than to an inhospitable business climate in California.

This conclusion doesn’t necessarily follow from the findings, although, as I say, I have yet to read the entire report. Losing the headquarters of a business is generally and justifiably perceived to be worse for the state economy than losing (or even gaining) a branch office, and if the facts above are true it is not hard to see how one might think this actually is a sign that businesses are leaving because of “an inhospitable business climate in California.”

Further, the authors admit that “[t]he evidence shows that interstate relocation does cost California more jobs in higher-paying than in lower-paying industries,” which is yet another troubling sign. Yet “[o]verall, the authors find little cause for concern about California’s business climate, based on state employment trends and business location decisions.”

There is little doubt, as the report says, that the vast majority of movement by California businesses are within the state (I’d bet the same thing is true of businesses in most states). And there is little doubt, based on this and other reports, that some people likely exaggerate tales of businesses leaving California in droves for ideological purposes. And it is also seems true that the actual effect of out-of-state business relocation to the overall California economy is small. But is there really “little cause for concern”? The fundamental reason people talk about business relocation out-of-state is because it is a sign of a larger problem, not because such movement is at present substantially harming the state’s economy.

For instance, a quick glance at the report summary reveals that the two biggest migrations of businesses within California have been those moving out of the greater Los Angeles area to the Inland Empire (#1) and those moving out of the Bay area and into the greater Sacramento area (#2). It is not hard to see how one could make a case that such movement might be related to which area has a better “business climate.” Our own Kosmont-Rose Cost of Doing Business Survey, for instance, has consistently found cities in greater Los Angeles and the Bay area to have much higher costs than outlying areas. The fact that businesses are migrating in droves within the state to lower cost regions does not necessarily tell us anything about how we ought to think about the state business climate as a whole, although it could.

Moving out-of-state is out-of-the-question for the vast majority of businesses (which are small), as information costs alone are exceedingly high, never-mind the costs of uprooting family and the ignorance of where one should relocate, say, a restaurant in another state. For the vast majority of businesses, then, it would take nothing short of a major catastrophe or the great depression for them to move. If, however, large businesses are moving headquarters out of state, and higher paying jobs are leaving as well, this may be a sign that the “business climate” needs adjusting. The fact that large amounts of smaller businesses are moving within the state to low cost areas might in fact be a similar sign. If the climate in the state as a whole is worsening, wouldn’t that increase the pressure on businesses to pay attention to even slight variations in regions? Wouldn’t this push more businesses to seek the best possible location the least distance away?

All these questions may be answered, of course, in the full report.

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