There's that, but also plain inertia. It's hard to move an industry elsewhere once all the supporting B2B companies get established around the core.

Software is there today because it was "Silicon Valley" and focused itself around tech. It was Silicon Valley because that's where the semiconductor boom happened. The semiconductor boom happened because that's where Fairchild started. Because that's where founders who quit Shockley were. And Shockley was there because Shockley himself was a professor at Stanford when it started. Why? Probably because he grew up around there. Why? Because that was where his parents settled after doing mining work across the US and internationally.

tl;dr: Today's tech industry is based in California because a couple in the early 1900s though Palo Alto was nice. It's got fuck all to do with California's policies. And even if it did, it was the policies of 70+ years ago, not today.

Edit:

The fact that it's only 4th, while having so many people

Not the 4th largest state economy. The 4th largest economy. #1 is the entire US, #2 is China, and #3 is Germany. #5 is Japan. Germany is the least populous of those with around 85m.