Saturday, May 22, 2010

California Policies & Business

Silicon Valley is surely the American model for business entrepreneurship, but much of what it has done lately—which has led to many jobs fleeing the state—has been in response to an overly burdensome regulatory atmosphere in the state whose innovation and creativity gave the Valley its birth.

An article from City Journal examines this.

An excerpt.

“Eric Demers can’t remember how many pseudo–Silicon Valleys he has seen around the world while traveling for Advanced Micro Devices. The globe’s second-largest microchip designer and producer (after Intel), AMD was created 40 years ago in the authentic Silicon Valley in California. Demers, the firm’s chief technology officer, has no intention of moving. Across the world, he points out, private and public attempts to create new Silicon Valleys have achieved only “pale copies” of the original.

“That original has remained the undisputed cradle of high-tech and communications innovation. Historic leaders like Hewlett-Packard and Intel have stayed here; more recent giants Google, Facebook, and Twitter cluster around the pioneers. The Valley’s economy, concentrated in a 60-mile corridor running from San Francisco to San Jose, attracts one-third of all venture capital invested in new businesses in the United States—39 percent in 2009, though the $7 billion made it a slow year. A new start-up launches every working day. From among these high-tech ventures will emerge the next Google or Intel.

“Silicon Valley faces a serious threat, however: the fiscal and regulatory earthquakes rocking California, which verges on becoming a failed state. Measured by per-household state and local government spending, California ranks third-highest in the nation, behind Alaska and New York. The state government is trying desperately to squeeze money out of any profitable activity to meet the crippling costs. Further, California continues to impose onerous regulations on the private sector. High taxes and stifling regulations give companies a strong incentive to move elsewhere. In this increasingly business-hostile environment, will Silicon Valley’s unique entrepreneurial spirit survive?

“Forty years ago, when Silicon Valley began to expand and soon came to dominate the high-tech universe, most of its companies were manufacturing enterprises, producing microchips and computers right on the spot. No longer. Starting in the 1980s, Valley firms began moving away from production to concentrate on inventing new products and services. AMD, for example, outsourced most of its manufacturing years ago to factories in countries like China, India, and Taiwan—places with lower wages and high production quality. The approximately 3,000 employees at the company’s Sunnyvale offices are designers, marketers, accountants, and mechanical engineers; what tiny production lines remain are for building prototypes.

“Was so much outsourcing necessary? Jason Clemens, research director for the Pacific Research Institute in San Francisco, one of California’s few free-market think tanks, acknowledges that countries like Taiwan offer a powerful “pull” factor for shifting manufacturing to East Asia. But there has been a major “push” factor, too, Clemens argues: the Golden State’s excessive income and property taxes and its web of regulations, which, he believes, have driven up outsourcing. As Berkeley-based journalist Francis Pisani puts it: “Outsourcing is the only answer to taxes and regulations.”

“California has piled every imaginable burden on businesses. Minimum-wage laws are among the highest in the country, and health and safety regulations are among the strictest; cities like San Francisco and San Jose require businesses to offer employees health insurance; labor laws are extremely union-friendly; environmental policies drive up energy costs—and on and on. Small firms have the toughest time in this business-toxic climate. A recent study by Sanjay Varshney, dean of the College of Business Administration at California State University in Sacramento, estimates that the cost of state regulations in 2007 reached an average of $134,122 per small business—the equivalent of one job lost per company. And it’s not just the small guys: Google, which uses colossal amounts of electricity, is building its data centers in other states or abroad, where energy is much cheaper.”