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?
[...]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.
Hank Nothhaft is the CEO of Tessera, a firm in the field of semiconductor miniaturization. He shows me the vacant office parks and empty lots around his company’s San Jose factory. Silicon Valley, he observes, lost more than a quarter of its computer, microchip, and communications-equipment manufacturing jobs from 2001 to 2008, and Tessera proved no exception. The company has kept some of its assembly lines and industrial operations going here, but it now produces two-thirds of its nanotechnology chips in less expensive North Carolina and in various countries overseas, with China becoming the latest contender for a production facility. Just back from a trip there, Nothhaft says that he has been offered terms he “cannot decently refuse.” Using the Internet and videoconferencing, he can manage Tessera factories around the globe without leaving his San Jose office. “The business environment is becoming awful in California,” Nothhaft complains—just by moving his headquarters to Nevada, he’d save $5 million a year in taxes.
I quoted the interesting part of the article above, the rest is just more details about the past, present and future of Silicon Valley.