California is outpacing the nation in employment growth, and many of the jobs are coming from new businesses.
That’s one of the takeaways from the newly released California New Business Creation report, commissioned by the nonprofit organization Next 10 and prepared by Beacon Economics. The study dispels the notion that the Golden State’s unfriendly business climate has sidelined its economy.
A BIGGER ECONOMIC PICTURE
“This report analyzes the most relevant available data, and provides a more comprehensive look at California’s business climate than is typically presented,” said F. Noel Perry, businessman and founder of Next 10, which funds research into state issues. “Often, the characterization of California as not friendly to business is based on the state’s high tax rates alone. A broader examination of business and labor indicators places California above average.”
CALIFORNIA RANKS HIGH IN BUSINESS EXPANSION, GROWTH
The report finds California near the top of many key state-by-state rankings for both new-business expansion and small-business growth.
In 2013, California was the fourth-ranked state in net job creation, according to the Census Bureau’s Business Dynamics Statistics.
The report’s list of top states for net job creation in 2013 ranks Delaware first, with a job creation rate of 6.4 percent. North Dakota was second with a rate of 4.3 percent, followed by Montana (4.1 percent), California (4 percent) and Idaho (3.8 percent).
Texas, which used to outpace California, ranked sixth with a growth rate of 3.5 percent.
Several of the states that lead California in job creation, such as north Dakota, have done well primarily because of increases in jobs associated with the energy boom that has been underway for several years, the report said.
California and North Dakota were tied at fifth place for creation of new businesses in 2013 with an entry rate of 11.4 percent. It also had the 10th-highest entry rate of small businesses with one to four employees, with small firms representing more than 19 percent of the new enterprises.
NEW BUSINESSES POPPING UP
Christopher Thornberg, a founding partner with Beacon Economics who helped prepare the report, put things in perspective.
“Is California business unfriendly? Yeah it is,” he said. “But most states are business unfriendly. The real question is whether it matters that much. That’s where I start pushing back.”
Thornberg said the report is designed to broaden the conversation on economic growth.
“It’s tough to do business here, no doubt about it,” he said. “But there are plenty of reasons to make the effort. This is a dynamic economy with great entrepreneurs. What’s really important are the small, new firms that are popping up. That’s the big swing item because business creation is so important for the long run and the future of the state."
LOCAL GROWTH NOTED
Mike Schaffer, CEO of Echo-Factory, a Pasadena-based ad and marketing agency that helps businesses grow, knows all about that.
“There’s a lot going on in Pasadena right now, especially within the animation community,” he said. “Businesses are feeling pretty good right now. There are a lot of startups that have been trudging along for the past year that are now starting to grow.”
He chalks that up to a steadily improving economy. Schaffer said he’s also seen significant growth in the business-to-business sector with software companies that are focused on automation and manufacturing firms that have integrated 3D printing into their operations.
Perry said the report comes as good news.
“I was surprised that we were near the top in three to four of the major categories,” Perry said. “I was pleased to see that we have done so well, but that doesn’t mean California is the perfect place to be. We have a lot of challenges with the increased price of housing, for example, But this data shows that, compared to other states, we are above average.”
The report also finds that California is still attracting new residents. From 2007 to 2014, the state welcomed nearly 49,000 new residents with bachelor’s degrees or higher, for example.
It’s not all good news.
RATE OF NEW BUSINESS GROWTH SLOWS
The California New Business Creation report notes that California’s rate of new business growth, or the establishment entry rate, has been falling. In 1997, the state’s establishment entry rate was 17 percent, but that declined to roughly 12 percent in the early 1990s, where it remained relatively steady until the Great Recession before dropping even lower in recent years.
“Given the prevalence of this trend across the nation — including states with high and low taxes and perceived friendly and unfriendly business climates — the pattern cannot be explained by California’s specific business climate,” the report said. “We simply do not have nearly a complete enough understanding to explain the trend. Still, policymakers should be watching closely.”