December 05, 2014

The U.S. Chamber of Commerce won't read this because some of the words have more than one syllable

The map confirms that California has the highest median RQ (103.6) and no fewer than 28 out of the top 50 firms in terms of RQ score. (Note that the RQ scale for firms is like the IQ scale for individuals — the average is 100, and 67% of firms fall between 85 and 115). What’s nice about this is that California also has (by far) the highest number of publicly-traded firms doing R&D (235), so the total effect is large. The other state that stands out is Minnesota. Like California, it has an above-average RQ (101.5), and also a large number of firms doing R&D (38).

But what sets these two states apart from the other states? It’s clearly not geography — it’s hard to imagine two states being more different in climate (sun versus snow), location (coastal versus mid-western) or culture. Its not industry specific; the firms in both states span a wide set of industries and no single industry comprises more that 15% of firms in either state, so the explanation is unlikely to come from Porter’s four-diamond framework of regional advantage.

But there is one important institutional feature shared by California and Minnesota that is consistent with the Klepper story: both states have legislation restricting the enforcement of non-compete agreements.

Papers by Matt Marx and other researchers show that employees in states that restrict the enforcement of non-competes have more freedom to pursue new ventures in the same industry and location as their prior employer. In other words, California and Minnesota have created environments that are favorable to the spawning of entrepreneurial ventures around a successful large innovator. Meanwhile in other states, although companies that enforce non-compete rules may be able to keep some employees from leaving, the entrepreneurial ones will leave anyway, and when they do, they’ll have to leave the state as well.

So although many firms may believe the institutional frameworks of California and Minnesota are unfriendly to and expensive for business, these states’ friendliness to entrepreneurial employees make them better locations in the long term.


(The U.S. Chamber of Commerce's 2010 press release describing its ideological and economically illiterate critique of California is here.  The actual report is no longer available at the original links.)


Post a Comment

<< Home