Category Archives: economic development

Economic Development Strategies Need New Perspectives

nyc hudson yards development

Published in the Telegraph-Journal 11th December 2012

Government, business and academia are beginning to recognize the importance of the economic growth even if they are not in full agreement about what to do about it. Canada’s standard response to global economic transformation has essentially resulted in maintaining the status quo but this can no longer be enough. For future generations to continue to enjoy the high standard of living that has become emblematic of the Canadian identity, elements of an economic development strategy may be necessary

What is clear is that some of the policy measures initiated at the provincial or federal level must be integrated into a comprehensive, long-term country-wide strategy. At the same time, this national vision must be incorporated into approaches that respond to local conditions on the ground because not all economic growth is created equal. In Canada, a large number of firms are small and medium size (SME), without the critical mass to compete internationally. While business mythology has it that SMEs are responsible for the creation of the largest number of jobs in Canada, this statistic is not the whole story. The key success factor that underpins whether firms will grow and create jobs is not size but an ability to sustain high levels of growth.

Across industries in Canada, and irrespective of firm size, a small percentage of firms that achieve high growth are responsible for driving a disproportionately high level of economic expansion. A study by the Conference Board of Canada states that more than forty per cent of new jobs come from the fastest growing 5 per cent of all firms. In the U.S., from 1998 to 2008, high growth firms were responsible for significantly higher productivity levels than other firms across size and sector characteristics.

We start off productively enough. Canada has a high level of entrepreneurial activity, but over time several factors – such as risk aversion, low export activity, lack of practical university support and weak R&D spending, have conspired to suppress firm growth. Ensuring that these firms are able to achieve scale and sustain their growth to compete on global markets should be a key priority for government, business and academia. Among OECD nations, Canada produces more than its fair share of fast growing firms under five years old.  But as Canadian firms mature, fewer are able to sustain growth, while firms in countries such as the U.S., Sweden and Israel accelerate their growth.

In recent decades, Canadian productivity has substantially lagged the United States and other advanced economies. Productivity growth in Canadian manufacturing averaged less than one per cent between 2000 and 2008 against 3.3 per cent for the American manufacturing industry. Although 4.5 per cent of American services firms are able to sustain their high growth trajectory, fewer than three per cent of Canadian firms are able to do so. Comparisons with other countries in areas such as the number of trade agreements reveal similar disparities. That Canadians have signed far fewer trade agreements than many of its OECD counterparts illustrates our over-reliance on the American market which ironically was strengthened by the North America Free Trade Agreement.

Firms must aggressively exploit opportunities for growth and continually re-evaluate strategic priorities to address a highly charged competitive environment. Mid-size firms that are competing internationally usually are adept at taking advantage of government and university programs and assistance. But there has been very little research performed on how firms can achieve escape velocity to transition from successful start-ups to becoming viable and competitive global players. Instead, governments and academia remain transfixed by the dynamics of start-up sustainability and competition. For firms that seek to move to becoming more global in scope, there is substantially less capable advice, support and intelligence.

Because demographics increasingly constrain the ability of a reduced workforce to support an aging population, we need bold competitors on the world stage. While some Canadians have shown that they can compete globally, too few of our business leaders go down this path. We know that this needs to change but government and academia need to provide the necessary guidance to minimize risk and uncertainty.

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Filed under economic development, Innovation strategy

Private Sector Wouldn’t Move More Quickly Than invest NB

By Peter Lindfield, published in the Telegraph-Journal 25th September 2012

New Brunswick’s economy is growing slowly. The province hasn’t yet recovered from the downturn in the forestry industry, and other sectors haven’t grown enough to compensate.

In the face of large fiscal deficits and a still-growing government debt, it’s understandable that many New Brunswickers are eager to see the results of Invest New Brunswick’s (Invest NB) drive to getting business to locate and expand in this province.

Invest NB was officially launched one year ago. Some are asking why the organization has not started to generate visible results. A number of business people have commented that not only are these results overdue but the private sector would have had sales wins and would be driving revenues by now.

But do comparisons with the private sector provide an accurate assessment of Invest NB’s performance to date? Where would private sector firms be in the sales cycle by comparison, and why does it take so long to make these sales?

Early criticism of Invest NB’s performance may speak more to how little is known about complex sales. An expenditure of one year may represent only an initial investment.

In industries such as IT, telecommunications and financial services, companies can spend five years or more on finalizing a complex sale, and for good reason. A major procurement of software, for example, can commit a firm to a strategic and tactical direction out of proportion to its dollar value or infrastructure implications. Enterprise resource planning software, intended to increase the efficiencies of firms’ operations, frequently require the engineering of corporate policies, programs and processes to suit. These purchasing decisions are not made lightly.

Similarly, relocation and expansion decisions can make or break companies seeking to make investments to increase their competitiveness. There is no question that New Brunswick will be the location of choice for some firms, but the competition for these firms is fierce. And the sales teams that anchor Invest NB’s efforts to persuade these firms to make their investments in this province will be faced with many of the same challenges facing their private sector counterparts.

These challenges include initial evaluations of the opportunities on the horizon. New Brunswick possesses areas of expertise, such as forestry, logistics and information technology that increase the attractiveness of the province not only to potential new firms but also to companies already located here that wish to expand.

The provincial government has also committed to supporting six strategic industries. New Brunswick is home to excellent universities and research centres. These features of the provincial economy help leverage opportunities for the Invest NB teams to get potential investors to look at New Brunswick closely and provide parameters for their search for prospective clients.

Even so, working with prospective clients is time-consuming and attention to detail is critical. Leading private sector sales organizations know that even in advance they need to understand the prospect’s industry’s key drivers, the prospect’s competitive position in the industry and the functional levers affecting the prospect’s performance.

To understand the potential for risk in an account, private sector background work includes the comprehensive analysis of a prospect’s performance. This undertaking is time-consuming and necessary. It extends to such information as company history, organizational structure, equity, holdings, earnings per share, subsidiaries and annual reports and includes Management Discussion and Analysis (MD&A) documents, a wide range of Internet information and analysis by market specialists and ratings agencies.

There is simply no substitute for this analysis, and Invest NB requires as much time and effort to develop this critical knowledge base as the private sector.

In fact, the complexity associated with Invest NB’s task of selling the province parallels that of large deals in many industries. With this complexity comes the longer time frames necessary to close the deal. Rather than castigating Invest NB’s management for not announcing wins that may yet be in the pipeline, we should remember that the private sector would be not performing any better at this point.

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Filed under economic development, New Brunswick

Advantage of the Small But Nimble Player in Question

By Peter Lindfield, published in the Telegraph-Journal 1st June 2012

Any discussion about jobs and prosperity inevitably raises the subject of the government’s role in economic development. The ensuing arguments usually revolve around two main groups of thought. The first group is of the view that markets know best and building profitable companies is achieved in the absence of government interference. Regulations, subsidies and excessive rules tend to introduce market distortions and are to be avoided. Their take on Darwin is that he espouses the view of “survival of the fittest”, so it is inevitable that many companies will perish in the heat of competition. This particular version of laissez faire capitalism has become closely associated in the U.S. with the Republican Party ideologies of the Tea Party but has received a warm reception in some quarters in Canada as well. Creating jobs and generating competitiveness are the product but not the goals of profitable companies. In this world, government has no business picking winners and losers.

The second group holds the view that fragile companies need protection. This group also thinks that job creation and competitiveness intrinsically are government objectives. Their rationale is that capital, entrepreneurship and market know-how are often in short supply and may never develop if they are not carefully nurtured by government. In the right context and under controlled conditions, subjecting local industries to external competition is important. However, this requires that the industries have been sufficiently developed so that they do not succumb to the initial blast of foreign competition. This is particularly important since any local firms are likely to be small with few financial resources compared with the multinationals against which they have to compete.

Ironically, both of these perspectives are founded on theoretical models in which governments design finely-tuned optimal interventions and practical considerations. The theoretical language is remarkably similar although the results differ substantially. Both assume government is susceptible to being held hostage by special interests.

For society that has made investments, there is little value in exposing local firms to greater competition if they are most likely to be eliminated and if alternative sources of employment are not available. It is naive to demand market changes designed to produce a so-called level local playing field when competitors are tilting theirs in their own favor.

But at what point does government protection no longer make sense? Do start-ups, small firms and companies in transition merit the subsidies, incentives, inducements and grants that governments lay on every year? Are taxpayers realizing a good return on their investment when they support private corporations? Are we protecting infant industries when they are in their maturity and should either be standing on their own or falling to creative destruction?

Part of the challenge associated with these questions revolves around the mythology of the smaller but more nimble corporation. Laissez faire capitalists contend that small firms can thrive with the right characteristics of management, innovation, strategy and leadership. The objective is to effectively wield that innovation to grow in scope and scale.

Others hold that government must support start-ups. Recent academic research has thrown a spotlight on the critical importance of size and deep pockets in corporate portfolio development. Large multinationals can in fact move very quickly with new models of organization design. Whether economies of scale really matter depends on the industry type, degree of competition among firms, the length and complexity of the supply chain and the maturity of the market. The competitive advantage of the small but nimble player may no longer exist. The key question today is how long companies should huddle under the umbrella of government protection and what return taxpayers are receiving for this protection.

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Filed under economic development, Innovation strategy, Technology engine

Emphasis also needed on The Revenue Side of the Equation

Published in the Telegraph-Journal 6th April 2012

The New Brunswick government has set a course for fiscal stability and stable equilibrium, at least on the expenditure side of the ledger. The emphasis on cost cutting – primarily reductions in the numbers of civil service employees, the sunsetting of a small number of government programs and the pruning of entitlements in a few areas – has taken a substantial enough bite out of the fiscal deficit that, until recently, had been ballooning out of control. The budget introduced these cost-cutting measures in a relatively gradual way and, although civil service unions will continue to voice their discontent at these measures, no serious dislocations have been introduced into the economy. But government will soon have reached the limits of its ability to reduce its size before jeopardizing its ability to deliver services.

There are two overarching challenges that will need to be met in order for this province to relax its grip on the fiscal tiller. First, while it may be too aggressive to say that the issues of health care, education, pension plans and the fiscal debt are the economic equivalent of the Four Horsemen of the Apocalypse, each issue has the potential to generate divisive battles along its fault lines. Each issue is replete with embedded public expectations that will not easily be dislodged. And a test for the government’s resolve to achieve and maintain balanced budgets will be meeting those expectations. Reductions in the provision of government services while increasing the cost of the remaining services will not be popular, even among some of those who currently trumpet the need for government to exercise even greater fiscal austerity.

Second, not all elements of the current fiscal challenge will respond to cost-reduction surgery. Current government revenues need to increase. The government is quite aware of this and stated as much in the recent budget. It made references to supporting the economic development of priority industries. It increased user fees and added new ones in a host of areas of provincial jurisdiction. It undertook other measures to increase revenue from Real Property Transfer Tax rate from 0.25 per cent to 0.5 per cent although the budget did not include any corporate or personal income tax rate changes.

New Brunswick can expect increases in economic growth as Invest NB gains traction in selling the province’s value propositions to potential investors, although it is too early to tell what the scope and scale of that investment will be or when it can be expected. New Brunswick has experienced difficulty attracting foreign direct investment and this situation may improve over time. Universities can improve their technology transfer capability, increase its commercialization capacity and take a more activist role in educating entrepreneurs. Greater infrastructure support, changes to the tax code (New Brunswick’s corporate income tax is among the lowest in Canada, but greater simplification is the real target), market development assistance, the reduction of interprovincial trade barriers and assisting firms who are experiencing a shortage of labour are commendable ways to increase the prospects of economic growth. Each of these measures will be productive over time and we should follow through on each of them.

But none of these measures will bear fruit quickly enough to address the fiscal challenges New Brunswickers are experiencing today. There are two additional measures that can be deployed to supercharge revenues in the near term. Increasing the HST is one of them. The sale of certain public assets that do not undertake activities directly related to the public good is the other. Politically, neither tax increases nor the sale of government assets are attractive propositions and a significant resistance to both would be inevitable. But to achieve fiscal stability may require transforming our ideas about what the purpose of government really is.

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Filed under economic development, HST, New Brunswick

Finally, A Good Start

Published in the Telegraph-Journal 30th March 2012

New Brunswick’s Finance Minister Blaine Higgs received mostly complimentary reviews on this week’s provincial budget. The deficit numbers are encouraging. His government has forecast $471.1 million deficit for the 2011-2012 fiscal year and is projecting a deficit of $182.9 million for 2012-2013, a distinct improvement over the government’s last budget.

Reviewing these numbers, the provincial budget reflects the priorities that Mr. Higgs has underscored since he was given responsibility for the government’s finance portfolio 18 months ago. His commentaries, in the Legislature and in speeches across the province, have consistently focused on key themes: balancing the books, maintaining taxes at a low level and rationalizing government operations to reduce cost. And there is every sign that Mr. Higgs will continue to pursue those goals for the balance of this government’s mandate.

There is no doubt that cost-cutting was necessary. For a small province with a substantial reliance on federal equalization and transfer payments, and with persistently flat economic growth, achieving fiscal stability must be a high priority. This is not an ideological proposition. The crowding-out by the fiscal pressures associated with escalating deficits placed real restrictions on the capacity of the New Brunswick government to achieve other objectives including investment in innovation and research, investment in training and infrastructure and the sustainability of social programs. As it is, Mr. Higgs has admitted that “fiscal consolidation at all levels of government will serve to weaken overall economic growth.” He has also warned that “reduced levels of public sector capital spending along with the absence of any new major projects in the private sector will limit the contribution of capital investment to economic growth.” New Brunswick can expect no large government-sponsored initiatives to create jobs and spur economic development.

That places greater responsibility for job creation and economic growth in the hands of the private sector. The budget revealed its support for what it considers priority industries: aerospace and defence, biosciences, information and communications technologies, industrial fabrication, value-added food and value-added wood. But many of firms in these industries lack the necessary critical mass to be serious export drivers in the New Brunswick economy and will need hand-holding and support to survive.

A substantial amount of that assistance has come in the past from key federal government programs. Prime Minister Harper has branded his government’s Economic Action Plan 2012 as a vehicle to create jobs, foster growth and create long-term prosperity with supporting entrepreneurship, innovation and world-class research earmarked as priorities. How that will be supported by funding remains to be seen. Federal Finance Minister Jim Flaherty has stated that his budget will clarify his government’s strategy for supporting economic development including modifications to the Scientific Research and Economic Development tax credit. Changes are also expected to have an impact on the Atlantic Canada Opportunities Agency, a mainstay of stimulating economic development in New Brunswick. These and other federal government programs are important cornerstones of support for small-business creation and growth. If the federal government advances or retreats on historic commitments to backstop entrepreneurship is a critical question whose answer will have a heavy impact on prospects for economic vitality across Canada.

Mr. Higgs has one dragon at bay, even if it has not yet been slain. He has other pressing concerns as well. The province’s net debt is expected increase to $10.1 billion before the end of this fiscal year and debt service payments increasingly consume a substantial portion of the province’s budget. He will need to weigh in on how his government will manage burgeoning pension entitlements in order to make them self-sustaining. But the most intimidating dragons will not respond to measures such as making government smaller or to budget reductions. Education and health care consume much of the financial oxygen in the room and these challenges cannot be sidestepped. The lights will be burning late for Mr. Higgs for some time yet.

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Filed under economic development, Economics, Government transformation, New Brunswick, Tax policy

The Managed Decline of the Rural Economy

Published in the Telegraph-Journal 9th March 2012

In 2003, a major Ontario government report produced by its Panel on the Role of Government concluded that much of rural Canada is economically unsustainable, that “it is futile to try to artificially sustain rural industry, that population decline is inevitable, and that the government should abandon regional development programs.” Instead, the panel concluded, the government needs to make tough decisions that involve focusing on retraining young people in economically nonviable areas who are willing to move away from their communities as part of a rural restructuring. The implication of this strategy is an eventual abandonment of much of rural Ontario.

The study underscored that hard choices will need to be made about the future of most communities in the periphery that cannot be made self-sustaining, economically, socially or fiscally. “The provincial government cannot provide subsidies to everyone everywhere in the province,” the study stated, “Nor can all small communities survive, and provide a reasonable minimum level of services and jobs, within a climate of population and economic decline.”

The study reviewed the reasons that these communities on the periphery were doomed to be perpetual welfare dependants. They possess a rapidly aging population that tends to decline as young people leave. They have few industries and almost none that are self-sustaining; weak labour markets and little ability to attract educated labour, entrepreneurs or immigrants. As for the purported panaceas for rural areas, including programs to bring high-speed connectivity to rural Canada, the study deemed them all but worthless as economic development tools, and is highly critical of other government bodies for raising false expectations about rural areas’ viability.

The panel’s solution was the managed decline and retreat from communities that cannot survive unaided. “The province should phase out regional economic development programs, such as the provision of subsidies and tax incentives to businesses, which risk promoting permanent government-induced dependency,” the panel stated. “The province, in co-operation with the federal government, should consider providing appropriate transitional arrangements, such as those aimed at retraining for those willing to pursue opportunities beyond their home community.”

The panel concluded that the future of the province lies in its urban centres but that future won’t allow the government to be all things to all people, adding that “if the government were to commit to [the report’s] priorities, it will only be able to implement them if it is prepared to make a number of wrenching decisions.”

The real question for society, in 2003 and today, is how to compassionately and effectively manage the decline of rural areas. The panel suggested doing so slowly and incrementally, by “maintaining basic services for the mostly older, less mobile rural residents who wish to stay in their home communities.” Simultaneously, it would cut off subsidies designed to develop the rural economy, encourage the young and mobile to leave, and even “walk away from government’s traditional responsibility to provide public services in future northern settlements.”

How much of this study could apply to New Brunswick today? The people of this province are beginning to recognize that they need to face difficult trade-offs in a number of areas, including support for economically unsustainable communities. These communities exist in northern New Brunswick, the Acadian Peninsula and throughout the province the farther one gets from the main cities in the south. The future for many of these communities is bleak. While government restructuring, fiscal reforms and working smarter are important, these measures will not be enough to prevent the continued need for massive and unsustainable cash transfers.

In 2003, the Panel on the Role of Government had, as part of its mandate, the task of determining for government “what and how it should start doing, stop doing, or keep doing either on its own or in partnership with others.” On one element of what the government should stop doing, the panel opened a door in 2003 to a critical dialogue across Canada that we have avoided for too long.

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Filed under economic development, Government transformation, New Brunswick, Social contract

The New Federal-Provincial Government Relations

Published in the Telegraph-Journal 2nd March 2012

Finance Minister Jim Flaherty insists that his government’s March 29th budget will feature jobs and growth alongside the expected belt-tightening measures that have been the hallmark of the Conservatives’ austerity drumbeat over the last year.

While it’s reasonable to assume that measures to foster and support growth will be included in the budget, we have already had a glimpse of the new federal-provincial relations governance model that provides the rationale for its future actions.

“We ran on a clear mandate to create jobs and growth, and to do that by making investments while at the same time making sure that our deficit falls and we return to balance,” Prime Minister Stephen Harper said, adding that “other governments will have to make their own decisions in their own context.”

The provincial context to which the Prime Minister is referring is without the involvement or even interest of the federal government. Harper’s vision of federal-provincial relations has come more clearly into view since his party received a majority last May. Recent actions include the federal government’s unilateral take-it-or-leave-it plans for health transfer payments to the provinces. Ottawa has committed to continue increasing health payments to the provinces at six per cent annually until 2017 after which the rate would be tied to economic growth and adjusted for inflation. That currently is estimated to be about four per cent but Flaherty has said that the rate would never fall below three per cent. Flaherty has said that every province has its own situation to deal with, and the federal government is being generous with its new plan.

Harper has given increasing attention to areas in federal jurisdiction, such as financial institutions, international trade and aboriginal affairs, while emphasizing that the federal government has no interest in provincial areas of responsibility. When asked whether there might be national ramifications to provincial jurisdiction, Harper responded that “we understand that obviously some of the administration of that is the responsibility of the provinces and territories, but we’re acting on a clear mandate of the people.”

This has significant implications for the future of New Brunswick. Federal transfers and equalization are most frequently and immediately brought forward as examples of how smaller provinces could lose out in the face of the new federal government drive to download responsibilities to provincial jurisdiction. The federal government line is that the authority to proceed down any path, unencumbered by federal constraints would give the provinces unlimited scope to design their own futures. Many will welcome the federal government’s retreat from the provinces’ business. They will emphasize the opportunities offered by the no-strings-attached funding that will accompany this devolvement.

They will also have discounted the profound role that the federal government has played in the economic development of each province. From the 1970s to the early 1990s, federal government organizations such as the Science Council of Canada and the National Advisory Board of Science and Technology undertook research into innovation systems, technology extension systems and the industrial policy that became world-renowned. The results of those studies emptied into the famed granting agencies that include the National Research Council that are now indispensable innovation and productivity growth engines. Academics at universities across the country prepared studies elaborating on specific regional experience. The blueprints created by these and other organizations were subsequently used to design and develop innovation-fostering zones in areas such as the Ontario Technology Triangle. In Atlantic Canada, the work of academics studying the importance of federal-provincial cooperation and collaboration resulted in the formation of the Atlantic Canada Opportunities Agency, the cornerstone of economic development for this region.

Each set of research findings underscored that government has a complex but critical role in the development of regional and provincial competitive advantage, involving support for both horizontal and vertical productivity-improving investment. Canada’s economic reality reinforces those findings.  We need a national dialogue on federal-provincial relations that emphasizes the future of competitiveness and prosperity for all Canadians.

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Filed under Business attraction, economic development, New Brunswick, Tax policy