It didn’t come as a huge surprise when Oracle Corp announced it was moving its headquarters from California to Texas last week. The world’s second largest software company, founded in Silicon Valley in the late 1970s, had already transitioned parts of its 135,000-member workforce to Austin over the last two years as executives sought to cut costs.
But, following other high-profile departures, including Hewlett Packard Enterprise’s move from San Jose, California, to Houston, and the Tesla CEO Elon Musk’s very public exit, and amid a steady stream of news reports on San Francisco residents leaving the Bay Area, Texas officials started seeing an opportunity to gloat.
“While some states are driving away businesses with high taxes and heavy-handed regulations, we continue to see a tidal wave of companies like Oracle moving to Texas thanks to our friendly business climate, low taxes and the best workforce in the nation,” said the Texas governor, Greg Abbott.
Although it’s true that with the rise in remote work easing geographical workplace restrictions companies created in California could be looking for less-costly labor and lower taxes, industry experts say the San Francisco Bay Area remains the innovative center of the US tech industry and that title isn’t slipping away any time soon. Austin, which has long held its position as one of the top-10 tech destinations in the US, isn’t necessarily a competitor for California, they argue, but a colony.
“There is little sense that there is any massive relocation of startup ecosystems out of San Francisco,” said Richard Florida, a professor of economic analysis and policy at the University of Toronto and the co-founder of CityLab. “I think most people are just waving their hands”.
Yet there are challenges on the horizon, experts and policymakers admit. While Silicon Valley’s spill-over into other states won’t immediately shift the tides, the region’s ability to retain business moguls and churn out new startups will be crucial to its future. The biggest competitors in that area aren’t coming from inside the US.
‘Still the most innovative economy in the world’
Tech companies have established outposts in the Lone Star State to cut costs, helping cities like Austin steadily grow its tech sector over the last two decades. Austin’s tech hub is even dubbed the “Silicon Hills” a nod to where most tech companies got their start.
But even some of the most easily recognizable names sprouting offices in those “hills” still officially call the Bay Area home: Facebook, Apple, Google and even Musk’s Tesla aren’t likely to shift the bulk of their businesses out of California any time soon.
“There is a satellite system that’s developing,” Florida said, “but the hub of technology and innovation in the United States is the San Francisco Bay Area.”
The Bay Area still boasts more startups than any other state, eclipsing even its closest rivals in venture capital and investment. The nine-county region boasts a $535bn GDP and ranks 19th among the world’s economies. This year, it regained its title as the top large metro in the “best-performing cities’ ranking of the Milken Institute, an economic thinktank, praised for its “abundant venture capital, and innovation and entrepreneurial culture support regional high value-added industries, including the expanding tech and biotech industries”.
It’s also continued to foster a good environment for new fast-growing companies – nearly a quarter of the companies on this year’s fastest-growing companies list compiled by Fortune were launched in California. Startup data from 2018 shows that more than $81.8bn was invested over a two-year period in San Francisco. Austin saw roughly $3.6bn for the same time period.
“This is still the most innovative economy in the world,” said Dee Dee Myers, the director of the California governor Gavin Newsom’s Office of Business and Economic Development. “I am not saying we don’t have challenges we don’t need to try to solve – but people have been saying that California is over for a long time and it keeps not being true.”
Acknowledging that CEOs have left in search of lower taxes, more space, or cheaper labor, she argued that the Golden State was where some of those businesses grew to begin with. “They have benefited greatly from being here,” she said.
That doesn’t mean there’s not cause for concern. Although California still attracts close to half of all venture dollars, its share is declining. Texas may not be a threat to its tech sector, but competition is creeping in from outside the country.
“The United States has really been dramatically losing share of high technology businesses,” Florida said. “San Francisco is still one of the biggest centers but Shanghai and Beijing are very close behind.”
This year’s annual Bloomberg Innovation Index – an analysis that looks at a variety of metrics, including the number of hi-tech companies, manufacturing potential and research and development spending – listed the US as ninth in the world, after giving it the top spot in 2013.
San Francisco and San Jose were ranked No 1 and 2 in investment per capita, according to a 2018 analysis by the Center for American Entrepreneurship, a research and advocacy organization. But the same report awards Beijing the top spot for driving global growth.
“America’s once-singular dominance is now being challenged by the rapid ascent of potent startup cities in Europe, China, India and elsewhere,” the report said, adding that the US is losing its ability to attain high-skilled individuals who are instead increasingly staying in their home countries. The US is also failing to keep pace on funding research and development, and falling behind in education – two areas essential to a robust homegrown startup sector.
If the innovation economy in the US – and particularly in San Francisco – would start to slow, that could pose serious challenges for the state of California, sharpening the sting when big businesses like Oracle relocate their operation to cheaper locales.
California’s budget and ability to fund key state initiatives disproportionately relies on its ability to retain its richest residents. In the last budget cycle, close to 70% of California’s coffers came from personal income revenue, and the state has the highest marginal income tax rate in the nation. Texas, meanwhile, is one of seven states with no personal income tax.
“I am pretty worried about the exodus from California,” said Mark Duggan, the director of the Stanford Institute for Economic Policy Research (Siepr). “We are much more dependent than other states on those in the top 1% or even 0.1% of the income distribution.”
It’s not just businesses that have been on the move – residents have been pouring out of California this year. As California faces a difficult financial recovery from the Covid crisis, deepening its already devastating racial and financial disparities, officials will have to balance an equitable economic recovery along with fostering a competitive business environment.
Calling the issue a “perfect storm of factors” Duggan said new remote working possibilities, the rising cost of living in the state and a sharp spike in the state’s already high income tax that was created by Donald Trump’s 2017 tax plan could drive more business leaders away. These issues could make it harder for California to continue in its role as a tech center.
“It is all the more important for someone to articulate a vision,” he added. “I don’t see a strategic vision being outlined for the state – and I think that’s going to cost us.”
Myers, Newsom’s economic adviser, agreed that the state is facing big challenges, especially when it comes to balancing an equitable economic recovery along with fostering a competitive business environment. “You have to do both things at the same time,” she said. “We have always had a really progressive tax structure and there are built in challenges with that.” But, she is confident in California’s financial future. “These are hard issues to address,” she said. “But we will have to address them.”