"That put california 5.5 points behind Massachusetts, which took the No. 1 spot for the second year in a row, but more than 26 points above the national average. What's more, the report found signs of complacency and decline in California in much of the data.

In academic R&D dollars per capita, the state now ranks No. 18 nationally, down from 15 last year. In university-based engineering R&D, the state has slipped to No. 21 from No. 12 five years ago, a decline the report labeled "troubling."

Ranked by business starts per 100,000 workers, California fell to No. 12 nationally from No. 6 last year. Ten years ago, it would have been a no-brainer for these foreigners to stay here," DeVol said. "But there's lots of evidence that U.S.-trained engineers from India and China have been going home."

"If you lose manufacturing, ultimately you're going to find more R&D migrating to where the manufacturing production operations are," DeVol said."