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 NewGeography.com 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.

Self employment photo by BigStockPhoto.com.