California Business Needs to Go Small or Go Home


Here’s the bitter reality for business in much of California: there’s no cavalry riding to rescue you from the state’s regulatory and tax vise. The voters in California have spoken, and with a definitive, distinctive twist, turned against any suggestion of reform and confirmed the continued domination of the state by public employee unions, environmental activists and their crony capitalist allies.

You are on your own, Southern California businesses, and can count on very little help, and, likely, much mischief, from Sacramento and various lower orders of government. To find a way out of stubbornly high unemployment and anemic income growth, the Southland will need to find a novel way to restart its economic engine based almost entirely on its grass-roots business, its creative savvy and entrepreneurial culture.

This shift poses a great challenge, both for California’s interior counties and parts of the coastal region. Unlike Silicon Valley and its hip twin, San Francisco, no one is investing much in the Southland. Among the nation’s largest metropolitan areas, the Los Angeles region has become a corporate stepchild, trailing in new office construction not only to world-beaters like Houston, but also New York, the Bay Area and even slower-growing Philadelphia or Chicago. In fact, although the second largest metro area in the country, L.A.-Orange County does not even make the top 10 regions for new building.

Nor can we expect much in the way of residential housing growth, particularly single-family homes, as the state’s planners continue their jihad against anything smacking of suburban expansion. Traditional industries like aerospace, manufacturing and logistics face enormous regulatory barriers, ruinous taxation levels and huge energy price increases that will slow any potential growth, and could lead to yet more departures by existing large firms. Virtually all the region’s former major established aerospace companies have relocated their headquarters elsewhere, which hurts efforts to get them to expand or maintain facilities here.

Despite all this, the Southland is not without considerable assets. Perhaps most promising is the region’s status as the nation’s No. 1 producer of engineers – almost 3,000 annually. This raw material is now being somewhat squandered, with as many as 70 percent of graduates leaving the area to find work.

But there’s no reason for unmitigated despair; overall, Los Angeles-Orange has increased its ranks of new educated workers ages 25-34 since 2011 as much as ballyhooed New York, San Francisco and much more than Portland, Ore. For its part, the Inland Empire ranked fourth among 52 large metropolitan areas in terms of increased presence of bachelor’s degree-holders in this age group, adding almost 19,000 college-educated people since 2011.

There’s also a case to be made for Southern California as an emerging tech hub. As venture capitalist Mark Shuster points out, the region ranks third, just behind the Bay Area and New York, for its percentage of the nation’s tech startups, and is now the fastest-growing. The overall tech base, which includes aerospace, is still the largest in the country, with more than 360,000 employees. As tech moves from basic infrastructure to application, Shuster argues, the Southland’s time may come.

Despite producing MySpace, the region may have lost out in the social media wars, but shifts in tech trends could turn out to be far more advantageous. This relative optimism is remarkable given the losses in so many key engineering-driven industries over recent decades, from electronics and energy to aerospace.

Southern California’s technology community could well benefit from such things as growing demand for content among tech firms, as well as attempts to reboot space exploration. Indeed, investor Peter Thiel recently suggested that the region’s technology industry is the most “underestimated” in the nation.

“I’d definitely be short New York and long L.A.,” Thiel told the Los Angeles Times, citing both commercial space pioneer SpaceX and Oculus, the Irvine-based maker of virtual-reality headsets.

The case for a grass-roots rebound of tech in Southern California depends heavily on one key asset – the presence of the nation’s largest community of people in the arts. Roughly half of these workers are self-employed, according to the economic forecasting firm EMSI.

The Silicon Valley may be ideal as a place to nurture digitial technologies, but “nerds” as a whole are not cultural mavens or trend-seekers. They are better at transmitting messages than putting something worthwhile in them. In contrast, Southern California excels in filling messages with product.

The large existing base of television, movie and commercial producers has nurtured skills that are sought worldwide. Yet at the same time, with the studio system clearly in decline, as large productions go elsewhere, digital players such as Netflix, Amazon, Apple, as well as Los Angeles-based Hulu, have become more important. Indeed, when my Chapman students, many of them film majors, discuss their futures, it is increasingly these intermediaries, not the studios, that they identify as critical to a successful career.

This suggests a very different picture of the Southland’s industry than the one normally associated with large companies, studios and deep concentrations of talent. In the future, more production will be done by individuals, sometimes working out of their homes, scattered across the region. According to Kauffman Foundation research, the L.A. area already has the second-most entrepreneurs per 100 people in the U.S., just slightly behind the Bay Area. By necessity, Southern California’s economy will become more entrepreneurial and grass-roots; even as we have been losing large companies, our percentage growth in self-employed is among the highest in the country.

Not surprisingly, this activity appears concentrated not in the traditional bailiwicks in the San Fernando Valley, or in the hyped Downtown-adjacent areas, but along the coastal strip from Santa Monica to Irvine that some promoters have christened “the tech coast.” This epitomizes the growing role of young individuals and startups – as opposed to veteran engineers – in shaping the Southland’s emerging tech economy.

This pattern, however, is not just restrictive to digital entertainment. Southern California’s network of tested aerospace engineers – which, at 5,000 people, is second only to Seattle’s – is one reason why companies like SpaceX have located here. In an economy that relies more and more on individual expertise, this is a critical advantage.

One powerful caveat: We are not likely to see much blue-collar spinoffs of tech here, due largely to high land, regulatory and energy costs. Space X, for example, may have its key brain power in Southern California, but has chosen to construct its spaceport in lower-cost, business-friendly Texas. Another aerospace firm, Firefly Systems, this year decamped entirely for Texas, moving its headquarters to the Austin area and rocket engine facilities to rural Burnett County.

This pattern suggests that many of our emerging firms may remain somewhat limited in scope and largely focused on high-end functions, which reduces the positive impact for the region’s struggling local middle class and working class.

But the new grass-roots economy does not apply only to tech. Los Angeles has seen a huge rise in the number of people working from home, a percentage that since 1980 has more than tripled even as transit’s ridership share has dropped. Small, home-based businesses are common not only in such fields as real estate, but also in business consulting and even trade.

These home-based businesses, and small ones tucked into strip malls or small industrial centers – for example, in food processing – represent the last, best hope for a revived Southland economy. Our corporate community seems destined to continue shrinking, but this does not necessarily mean that the overall economy has to follow suit. Unable to rely on local officials to make things better, our best chance lies with relying on the entrepreneurial spirit and creativity of our people – the very thing that made us such an economic beacon in decades past.

This piece first appeared at the Orange County Register.

Joel Kotkin is executive editor of and Roger Hobbs Distinguished Fellow in Urban Studies at Chapman University, and a member of the editorial board of the Orange County Register. His newest book, The New Class Conflict is now available at Amazon and Telos Press. He is author of The City: A Global History and The Next Hundred Million: America in 2050. His most recent study, The Rise of Postfamilialism, has been widely discussed and distributed internationally. He lives in Los Angeles, CA.

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A clear structure is always

A clear structure is always essential to understand the growth and the position of a business. I completely agree with the concept of this blog. It is a great post giving a clear and brief idea about business planning. Achieve the goal is the main aim of all organization. For this a well-developed and latest organizational structure is essential. With this book keeping plays a vital role for a clean and easy statements and accounts.

Business in California

It is really a bitter reality for business in California. We have found several kinds of ups and down in every business; due to lack of proper resources most of the business organizations are really suffering a lot. But here in California we have found some bitter truth that how business ventures are facing problems in different parts of California; I hope with the support of better economic condition they are able to establish a better business background in California.
Management Coaching

The Decline of Face to Face Communication - CA vs. Arizona

The Phoenix metro invests in its freeway system, along with wide, six lane 132' wide boulevards, so one can travel from the western suburbs to Mesa or Scottsdale in as little as 45 minutes. Whereas this same distance in Southern California could take up to four hours.

Perhaps, markets that invest in building more "belt freeways," such as Phoenix, will not face this decline in face to face communication?

Also, the Coachella Valley (Palm Springs, Palm Desert, La Quinta, etc.) invests in wide, six lane boulevards, well over 100 feet wide, and there is not much traffic, just like Phoenix.

The following statistic from Joel Kotkin looks promising for the Imland Empire (Riverside and San Bernardino Counties, including the Coachella Valley).

"For its part, the Inland Empire ranked fourth among 52 large metropolitan areas in terms of increased presence of bachelor’s degree-holders in this age group, adding almost 19,000 college-educated people since 2011."

However, the Inland Empire might be entering a second housing bubble. Without affordable housing, college grads from California Universities on the coast will keep going east on either I-10 or I-40, finding cheaper housing in Phoenix, Albuquerque, and Austin ... bypassing the Inland Empire.

Also, it is unfortunate to read here that 70% of engineering graduates leave Southern California after graduation.

Yes, new thinking trumps old thinking

The last 3 paragraphs are the best.

Even in the 1970's, I could see that the concept of a downtown was an idea that LA could do without. We were decentralized and that was good. Sad to say, people were wedded to a city center since the good old days of Sodom and Gemorrah, and old ways die slowing. So we continued to have corruption and more centralization, TOD's, mixed use projects, traffic congestion, and urban flight away from the densified central areas. [Yes, Lott was moving to the suburbs away from the crime of the crowded city!]

Why would I want to drive to DTLA to write an article when I can stay in the Hollywood Hills? I technically have an office in Beverly Hills, but there is no need for me to go there. Why drive 30 minutes (it used to take 15 min) to meet with someone when I can meet them in a coffee shop? Soon, it will only be a Virtual Presence meeting.

With the Advent of Supersized Electronics, as opposed to tiny and mobile devises, the need to leave the house will decrease, and just as importantly, the need for to leave at any particular time of day will end. This chnage in life style will reduce the density of cars on the streets and freeway so traffic will move much faster.

Of course, when a family has three wall size super monitors with allow one to be virtually anywhere in the world, we will need larger homes as we will need more super-monitors. It saw it first in the 1950's when kids got their own phone lines, and then when the kids got their own TVs, now each kid has his own iPhone, his/her own computer, and a bunch of others things which I am too old to classify.

Not only will R-1's be in demand, larger R-1's will be in demand. After all, with more Virtual Presence, all portions of Los Angeles and The OC move closer together. Distance is measured in Time, not in miles. Less concentration of population and less vehicle density allow the freeways to move faster and the closer everything becomes.

My money is on the tech gurus. The owl of Minerva flies at dusk

I agree. Colin Clark was a distinguished urban economist in his day, and one of his favourite sayings was "the owl of Minerva flies at dusk".

Minerva was the Greeks deity of wisdom. The point of the saying is that we often only get wise to something as the sun is setting on it anyway.

I can see all this boosterism of "face to face interactions in dense urban environments leading to cross fertilisation of ideas and growing productivity" looking like this before very long. The sun is setting on this whole paradigm right now. I am with Frank Duffy on this - his “The Life and Death of the Urban Office” is exemplary of his general idea.

Substituting for face-to-face interaction is like a Holy Grail the entire IT sector is devoted to, and my money is on the IT gurus winning this conflict eventually over the CBD property rent-seekers (which is about what the dense-cluster advocacy boils down to).

I also question whether all the ideas cross-fertilised in Manhattan from the 1980’s onwards were good ones and whether we might have been better off without them – reading Michael Lewis’s stuff beginning with “Liar’s Poker” leads me to this conclusion. Why celebrate “creativity” that is close to conspiracy to defraud the public?

The same goes for bureaucracy and law and consultancy and accounting these days, I reckon.

And I love "Eunuchs of the Universe" by Tom Wolfe: according to Wolfe, Wall Street as a business model is well on the way to being superseded already, with almost no-one noticing.

"James Simons hid his operation (Renaissance Technologies) so well, it was more than a decade before Wall Street woke up to what Simons had there. For a start, he set up shop with a team of other quants, virtually all strangers to Wall Street, in a town on the north shore of Long Island out in Suffolk County, named East Setauket. East Setauket was the sort of town so small in scale, so given over to little buildings in a colonial—New England style—the first settlers had sailed across Long Island Sound from New England three centuries ago—people went away saying, “Oh, how picturesque.” East Setauket had two advantages: it was very near Simons’s office at Stony Brook—and nobody, nobody, in the Wall Street financial world ever heard of it. Good. Simons didn’t want anybody from Wall Street to come near the place.

With one exception, he hired no one tainted by Wall Street experience or even Wall Street ambitions… such as business-school graduates, M.B.A.s. Their young minds had already been twisted too far. They had been expertly educated to become dim-witted macho blowhard frat-boy losers..."