Clusters, creatives, chickens, eggs, oh my!

I think I blogged on this exact topic a few months ago but I felt in light of the high Canadian dollar it would be worth bringing the topic back.

Michael Porter’s cluster theory – Cliff Notes Version
Industry clusters have a greater propensity to grow so governments should support and nurture these clusters. An industry cluster is loosely defined as a critical mass of companies and related economic activity in a specific sector of activity (for example: car manufacturers, auto parts suppliers, auto industry trainers, auto industry R&D, industry consultants and support professionals, etc. all located within a local geographic market). A non-cluster would be onesy and twosy auto parts manufacturers located in an ‘isolated’ market. They have, in Porter’s view, little chance of success in the long term.

Richard Florida’s creativity theory – Cliff Notes Version
Florida believes that ‘creative’ communities achieve above average economic growth over time. His theory is that creative ‘types’ – artists, artisans, musicians, etc. end up weaving a culture of innovative thinking into local industry. In addition, this wedge of artistic creativity makes the community more liveable and attractive to people moving in.

David Campbell’s clusters, creatives, chickens, eggs – Cliff Notes Version
These are two examples of the chicken and egg theory of economic development. You need a cluster to grow a cluster. If clusters feed on themselves and grow, how did the original cluster come about to begin with? Same with creative communities. Do successful communities attract creative people (because there is surplus money around to fund the arts, etc.) and then those creative types end up benefitting the community or is it the other way around?

In other words, who is at the top of the hill starting the snowball rolling? Who is pushing those first logs to get the logs rolling? Or who is putting the slop in the barrel to get the pork barrelling started?

Ooops. Wrong metaphor. Scratch that last one.

You see, in my opinion, 15 years ago we could sell cheap and available labour for call centres and a $0.65 cent dollar. Now we have almost no available people and a $1.01 dollar.

The value proposition has fundamentally changed and I don’t see the economic development infrastructure changing with it.

Now we need to scrap ‘price’ as the centre of the value proposition ((i.e cheap labour) and move to ‘quality’ as the centre of the value proposition.

Take Toronto for example. It positions itself as ‘cheaper’ than Geneva, New York and London but doesn’t even try to compete with Winnipeg, Moncton or Halifax on cost. It competes on quality. Toronto has one of the most developed financial services infastructure environments in North America. I read that over 50% of the region’s lawyers have financial industry experience. Couple that with dozens of industry trainers, research centres, head offices, back offices, IT firms specializing in financial services products, etc. – and you have a true cluster.

I firmly believe that – maybe at a different scale – New Brunswick has to start doing this. If Moncton wants to attract financial services firms, it should design a financial services district downtown and attract the, I don’t know bear with me here, Gilles Ouellette or Frank McKenna Centre of Excellence in Financial Planning Research. U de M should have an advanced financial sector training faculty. Our immigration policy to should be geared towards attracting Indian finance professionals. The NB government should skew its tax policy to a favourable environment for financial services. The city of Moncton’s brand should have a financial angle such as “Cheque us out”. The Province should have a whole team of specialists working to attract major players here. BNB should encourage startups focusing on this sector.

Then you aren’t just competing on ‘cheap labour’, you are competing on quality.

PS – the example above is not to be taken literally. “Cheque us out” is a joke. But you get the point.

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0 Responses to Clusters, creatives, chickens, eggs, oh my!

  1. Anonymous says:

    Its not often I laugh when I read one of your blogs, David, except of course when they refer to knitting or (dare I say it) bingo.
    I refer, of course, to your chicken and egg scenario. You suggest that we attract some financial service providers to the province and then further suggest that we get BNB to support these starts ups.
    OK, first up these firms go looking for money. They may try the government (BNB) who will sit on it for a year, read a book about the business model to try and understand it while placing the file in the hands of someone with an agricultural or forestry degree and then, when they realise that they have to do some actual work, pass it on to another department who will stymie it further. The investor loses interest and departs.
    The next investor has a chat with the first one and decides that he will go the private way. He approaches one of the banks in NB and is told that they wont lend him any money unless he gets a guarantee from the government.
    Back to square one again.
    Investor 3 is approached by the government who give him tax breaks, free food, bingo tickets, a place to work and start up capital. They go to work and begin to make a profit. Irving sees this and opens his own financial service centre in competition with the first one. He opens up in the next building over or even takes a floor in the same building as number 3. He undercuts and nearly gives the service away for free until investor 3 begins to lose a fortune and decides he has to pull out of the porovince.
    This news is carried on every Irving newspaper and we all moan and talk about the amount of money that is leaving the province in foreign hands and about how stupid our government really is. Meanwhile Irving takes over number 3’s investment for peanuts as a favor to us all and continues his inexorable march onwards to total monopoly while we pat him on the back and thank him for making us see sense.

  2. David Campbell says:

    I am not necessarily recommending ‘financial services’ as a growth sector – it is a crowded field these days. Secondly, the Irving thesis that they control the government and industry like a puppeteer and his marionette is a theory. I am not discounting it as many people that I respect hold to it. I just think something like that is hard to say for sure.

  3. Anonymous says:

    “the Irving thesis that they control the government and industry like a puppeteer..”

    Politicians have stood up to the Irivings before and gotten away with it (e.g. LJR). Does Graham have the balls?

    In NB, Irving is a giant, but outside NB Irving is a mid-sized oil business. A large global corporation that could be attracted to NB would not be that concerned about the attitudes of local bank branch managers, and perhaps might be more interested in skilled labor pools, cheap real estate, and an attractive environment than anything else.

  4. NB taxpayer says:

    Good post, David. However, I feel obliged to add a few things left out in your post. Firstly, the government has never been highly successful at developing so-called clusters in areas of exceptional inadequacy of opportunities for productive employment.

    In other words, corporate investors take the path of least resistance. And unfortunately for New Brunswickers, that means the place that offers an ideal economic climate (low taxes, less government). Not one where winners and losers are picked by bureaucrats.

    Furthermore, you decribe the solution above from a traditional economic development and growth strategy perspective or “demand-side” strategy (i.e. attract jobs to get the people). A solution that was/is attempted through DREE, DRIE, BNB and ACOA. With very little success I might add.

    But as Richard Florida says, “today’s economy requires a ‘supply-side’ strategy. Such a strategy depends upon understanding the 3T’s of regional economic development – Technology, Talent and Tolerance — by essentially improving the ability of places to compete for people as well as for companies. Places must offer substantial and balanced performance across all three to sustain long-term growth and prosperity.”

    Again, these places (as I said above) will be the ones that offer the best economic climate, less government interference and (as Florida says) the path of least resistance (3Ts).

    As it stands right now, government has created a climate where they believe they can force the hand of business and people so as to move them into the province against their own sound judgement (dangle free money in front of them). Unfortunately, as you can see from our longterm inability to retain immigrants and our under-developed economy, this strategy is seriously flawed.

  5. David Campbell says:

    NBT, where does Richard Florida’s $50 million research institute in Toronto fit into your analysis? For me, it is an example of government and university trying to build a competency – which is exactly what I am calling for in New Brunswick. It’s two people looking at the same thing with different eyes.

  6. Anonymous says:

    That’s it, you’ve helped identify the economic development slogan:

    New Brunswick: GIANTS born here.

    Let’s celebrate NB as a busy-friendly environment that incubates ‘local giants’ and ‘global intermediates’; born and bred in little old New Brunswick.

    We should be promoting our successes with slogans like: “Irving, McCains, Gannog, INSERT YOUR COMPANY HERE”

    At the end of the day, most business people, apart from a few government funding vultures, want most to operate where they can sustain success.

    The fact the Irvings and McCains started and operate from NB and have been/are in the top 10 wealthiest families in the world should be inspirational to other business leaders. If all the people that pass their time criticizing successful NB business were to channel their energies into helping other businesses locate/develop here, guess what, the perceived power and influence of the current successful companies would be diminished.

    Our sand box is way too small to start throwing out the big kids because they are too successful; a lot of our challenges would be addressed if we simply had more successful companies here to compete for the resources. Let’s focus our energy and resources on attracting more successes rather than tearing down the ones we have.

  7. Anonymous says:

    Yes, to paraphrase another poster, libertarians must do a lot of praying, because the above certainly paints a distorted view of why companies move into areas.

    First of all, recognize the obvious. Take a look at economies worldwide, its not like there is massive growth and expansion, if anything it is contracting in many areas.

    Second, look at the rest of Canada. As we’ve mentioned numerous times, Ontario has one of the highest tax burdens, and also the most growth and densely populated industry.

    We saw the study ages ago from Maine that showed that tax rates were way down at the bottom of the list. That’s because it doesn’t matter what the rates are to newcomers, like energy royalties in the US and in Alberta, government simply doesn’t ask for it. All these super wealthy family businesses and NB gets 3% of its budget from them.

    So thats horseshit, admit it. Like I’ve said, and will keep saying, federal funding to the Perimeter Institute, a building with a bunch of physics geeks doing theoretical physics gets more federal money than all the research in NB.

    But also, it gets far more PRIVATE investment. Most of the new research places here in Waterloo have been bankrolled by the guys who made billions off the blackberry (which also was built with subsidized money). How many research institutes have you seen Irving and McCains build?

    But for new investment you guys should at least be talking about northern new brunswick. Those are the areas hardest hit which need to be built up just like Moncton was rebuilt.

  8. Anonymous says:

    Re Irving/McCain research Institutes.

    You raise and prove a great point. How many times has the RIM research investment been talked about on David’s blog in the last couple weeks while we overlook the Irving and McCain investments in our research facilities.

    The list is long but to get things rolling, here is a starting list of institutes they invest in, started, or otherwise collaborate with:

    Canadian Rivers Institute (UNB)

    The Arthur Irving Academy for the Environment (Acadia)

    K.C. Irving Chair in Sustainable Development (Universite de Moncton)

    J.D. Irving, Limited Chair in Forest Ecosystem Management (The University of Maine)

    The Irving Eco Centre (La Dune de Bouctouche)

    Various contributions to the Hugh John Fleming Forestry Complex

    Marion McCain Arts and Social Sciences Building (Dalhousie)

    $1M support to UNB libraries

    G. Wallace F. McCain Institute for Business Leadership (UNB)

    Margaret Norrie McCain Hall (STU for Social Work)

    And the list goes on with scholarships, research chairs sponsorships, NSERC chairs, etc.

  9. NB taxpayer says:

    Good point, David. For the record, I’m not fanatical and will admit that there are a few examples where it works. But in NB, where government intervention is off the charts, I don’t see a long list of successes.

    Furthermore, if corporate welfare worked, the majority of companies that receive it should be out-performing their competitors, but they aren’t. Regions that receive the majority of the funding should be booming, but they aren’t. And the very firms that receive the most $$$ should be creating countless new jobs, but they aren’t. Not to mention, some companies lay off workers and move operations out of Canada.

    Take the auto sector in Ontario as an example. It is a prime example of failed corporate welfare. The government has shoveled hundreds of millions in handouts to General Motors and Ford. Politicians are always from and centre touting these so-called investments as massive job creators. In reality, both companies continue to lay off thousands of workers (and the bleeding still hasn’t ended).

    To mikel’s point regarding “Ontario has one of the highest tax burdens, and also the most growth and densely populated industry.” Did you ever ask why Ontario has a large tax burden?? It’s because the Corporate Welfare practice [federally] has served neither business nor taxpayer there, that is why. Excessive government meddling in the economy is expensive, unequal, unfair and unnecessary. Which is why Alberta’s economy never suffered from that desease provincially after passing a “corporate welfare ban” into law a few years back.

    And since you’re a Waterloo boy mike, you should know better than to try to spew that garbage about RIM being, as you call it, a government “subsidized” success story. They’re definitely no Pratt & Whitney…if you no what I mean.

    You’re right on one point though, it definitely is a success story. Just not a corporate welfare success story. A closer look reveals that a much greater investment from the private sector preceeded TPC involvement. The company received its first TPC c grant during the 1997/98 fiscal year, just months before Blackberry hit the market. In other words, TPC played a minor role in theor overall success.

    If that’s what you consider a corporate welfare or subsidy success story? then so be it.

  10. mikel says:

    RIM’s product was ENTIRELY subsidized from the University of Waterloo’s royalty payment system. One of the reason so many companies have ‘spun out’ of the University of Waterloo is because in the seventies they revamped their royalty system giving company heads bigger pieces of the pie-and of course less to the taxpayers who paid for the research.

    The blackberry was certainly not some invention that some guy made in his basement. It’s original programming (although the verdict is still out on whether it was simply stolen) came from programmers at the university.

    Meanwhile, its initial sales were ALL to government, I know many in government who say they were simply told to buy it, and the feds were the main salespeople in the states. The feds were even involved in dealing with the lawsuit. Meanwhile, use of the public airwaves was also handed out readily without any input from government. And I guarantee you that if the lawsuit had continued there would have been more money flowing into the coffers.

    Next point, as for the Irvings, corporate ‘sponsorships’ are different than investments in research. For example, go and look at much of the research done in those departments mentioned above. You will notice quite quickly that virtually any area where an Irving company has a stake they do not fund. Plus, there are lots of organizations that do similar funding, but we’re not comparing three entirely new research institutions to some money donated by the Kiwanas either.

    There’s no doubt that Irving handouts some money, certainly nothing in comparison with its size, and nothing that creates any new industries. Like I said, by privately creating these institutions, they now are available for government money, as well as having more name power for other private institutions.

    They used to have a computer company, but that seemed to exist only to suck out money from NB Power and NB taxpayers. It seems NB power didn’t know how to purchase computers or network them, so they hired Irving to do it. Once that cash cow contract ended, Irving promptly dumped the company.

    I agree with NBT on that point, when government is the ONLY, or chief subsidizer, private industry takes a low opinion. But when private industry takes a significant hand, other private interests get involved, as we saw in Moncton.

    However, per capita and per resource New Brunswick isn’t that different from any other province, the issue is where the money is spent. Federal money DOES subsidize industry in NB, just as it does the auto sector, where NBT is wrong, it is a resounding success, otherwise Ontario would be devastated. To him that’s good, thats ‘productive’ and ‘tough love’. But in New Brunswick, the subsidies flow directly to Irvings wallboard, or to build highways.

    However, Alberta is not off the hook. Federal money kept flowing into Alberta whenever oil companies greedily looked elsewhere. And of course the feds do what is FAR more beneficial than simply handing cash out, which is ensure that natives can’t get access to their own land.

    ANd of course then there is the mad cow cash giveaway. People confuse what subsidies actually do. They don’t exist (much) while companies make money, then they have tax breaks. It’s only when they run into trouble that cash is actually needed.

    There is more than one way to subsidize a company. And governments in Canada primarily exist to help out businesses-large businesses mind you. It always has.

    That’s where I think NBT is off the mark, and David as well. The guy who posts here griping about the IRvings is closer. The government very clearly operates to service the large industrial holders of the province, and the problems with funding rest right there.

    Politicians behave VERY differently in New Brunswick, and Canada in general, than in other areas of the world-even the states. WHich is another reason why media never shows you how governments operate, so you can’t see the difference.

  11. mikel says:

    Just to correct a point, I said above that Irving doesn’t ‘create new industries’, which isn’t what I meant. They don’t create industries which THEY don’t control.

    Obviously the LNG terminal is a ‘new industry’, but the verdict is still out. Its provided short term jobs but I’ve never seen mention of how many people are even hooked up to gas in St. John or how much cheaper it will be.

    The make ‘Majesta’ but that is also with all the government handouts of both trees, lack of regulations, and direct tax breaks.

    They have started this new wallboard factory, with money from the feds and with supplies from Coleson Cove.

    In other words, where Irving invests, they remain tightly affixed to the government teat, which is the same as the auto sector in Ontario. I still don’t know why NBT always brings up these penny ante deals like NB yarns and the Caisse, when Irving and McCain are by far the biggest corporate welfare freaks in the maritimes.

  12. Anonymous says:

    If you call the relatively minor support that the Irvings and McCains recieve “corporate welfare” I will readily support my tax dollars going to support it. These guys have been generating good jobs and contributing to our economy for decades.

    I frown on “politcal welfare” such as the yarn factory or Caisse bailout.

    Guys, we need intelligent economic development strategies that result in sustainable success. This can take the form of ‘hand outs’, tax incentives, transportation subsidies, strategic policy or whatever but let’s not piss away the scarce resources we have on useless politically-motivated efforts that might when a few seats but that is it. The north and all areas of New Brunswick deserve better and should be demanding it.

    I look forward to the day when we add 8 more globally-successful New Brunswick companies to the list of organizations most of you like to bash and bad mouth. NB’s economy will be far better off.

  13. Anonymous says:

    Mikel: “Just to correct a point, I said above that Irving doesn’t ‘create new industries’, which isn’t what I meant. They don’t create industries which THEY don’t control.”

    Hmm, maybe I studied business at an Irving-controlled univerity and have a tainted view, but companies that can control or dominate their industry are the ones I learned to invest in. It seemed to work for Bill Gates (maybe he took the same course I did ?)

  14. Anonymous says:

    This is a good discussion. Mikel makes a good point about direct government investment but I must take issue with anon 4:56.
    While it is a recorded fact that Irving invests, supports or sponsors various initiatives throughout the province it would be vastly preferable if he paid his proper taxes and stopped this constant dependency on shafting the taxpayer via the government purse for every spare penny he can screw out of us. I would love to see a breakdown of everything he sponsors / supports, remembering all the while that he is most likely offsetting this against tax. I would then like to compare that to the taxes he actually pays in proportion to his income. I would then be interested in seeing exactly what taxpayer money he receives on an annual basis and what the total tax he SHOULD be paying would be if he werent being subsidised by the people of NB.
    It would also be interesting to see just how much provincial land he has control over and what the cost to the taxpayer of NB is on that because there is a cost even if we cant see it.
    This would be an interesting comparison.

  15. richard says:

    “Take the auto sector in Ontario as an example. It is a prime example of failed corporate welfare.”

    Good grief! What planet do you live on?

    The auto sector in ON has been a huge success; it is THE economic engine in SW Ontario (sorry RIM supporters). For a relatively small investment (small in auto sector value terms, huge in NB terms), thousands of high-paying jobs have been created.

    The auto sector in ON is prrof positive that taxpayer investments in industries can bring tremendous economic benefits.

    Another nail in the coffin of libertarian woo-woo.

  16. NB taxpayer says:

    Another nail in the coffin of libertarian woo-woo.

    When people start getting bitter in their arguements, not to mention, defending corporate welfare to an industry giant like Irving (laughable), I know I’m winning.

    Furthermore, I guess the above never heard of the 1965 Can/US auto pact agreement. In other words, it’s not corporate welfare that made the auto industry strong in southern Ontario, it was strong trade policy (i.e. breaking down tariffs and opening up borders) Much like an industry pact with specific focus would help the maritimes. But that is a debate for another day.

    So factors like weakened bilateral relations (United Auto Workers policy), the high dollar and trade policy are really bigtime game changers for General Motors, Ford and Chrysler (big three). I’m not sure corporate welfare grants will keep them from closing their doors and laying off thousands. As you know with many failing manufacturing companies, you can stop the bleeding for a little while, but not for the long haul.

    Good global and domestic economic policy usually win the day. Not corporate welfare.

  17. mikel says:

    That would be an interesting study. As we saw, the Irvings got $50 million to CLOSE the shipyard. Just that one ‘investment’ is larger that virtually all federal spending on R&D for the entire province.

    The tax break for the LNG terminal fixes property tax at $500,000 per year. In Maine, the property tax on their LNG terminal will be $1.5 million a year. I can’t remember what the savings were over the life of the plant, but they are BIG, far bigger than anything going to Atlantic Yarns or any other little company.

    And the LNG terminal will create less than 8 jobs. Which means the savings of the life of the project added to the cheif expense of building it pretty much means YOU are paying to build the LNG terminal. I’m sure Irving thanks you.

    By the way, because in Levi they had a referendum on the matter, the company wanting to build an LNG terminal there offered TEN MILLION a year in tax payments. So comparing that to the half a million Irving will pay, means corporate welfare beyond anything that even the auto sector gets-and thats ALL provincial.

    And that doesn’t even get into the other industries mentioned above. This isn’t Irving bashing, these are the straight facts whether it would be Irving or the similar subsidy argument made against Bennett Environmental.

    It also doesn’t get into the fact that much of the land needed by Irving for various projects is accomplished by the government expropriating land. CBC did a report on this about a year ago. Like I said, there is more than one way to subsidize a company. Even the governments refusal to enact its own competition laws on the media monopolies in the country are a form of subsidy-you simply don’t enforce the laws and let wealthy companies do what they want.

    But I agree with the above, IF there were eight other global companies, NB would be far better off. In fact if Irving were simply a public corporation the province would be better off because all those questions above could be answered, and people could actually ‘invest’ in a company that gets huge tax savings, and at least people would get a little back through shares.

  18. Raj says:

    It is flawed to look at taxation in other areas. If one looks at assessment of the property, it would not have and would not in the future be paying $1.5 million.

    Also, with the inferior services in the area, it seems flawed that anyone in Red Head pays full municipal taxes.

  19. richard says:

    “Furthermore, I guess the above never heard of the 1965 Can/US auto pact agreement.”

    Oh yes I’ve heard of it. Not very consistent with libertarian philosophy is it? In fact, it was just another example of ‘corporate welfare’; another nail in the coffin of libertarian woo-woo.

    Fact is, prov and fed sectors have pumped many millions to support the auto industry and the auto industry has been very successful in SW ON, in large part because of government involvement.

    You also need to look up the defnition of ‘bitter’. I think you meant ‘ridicule’.

  20. mikel says:

    That’s true, it wasn’t 1.5 million, somebody there probably knows the real figure, but I’m pretty sure it was tens of millions over the life of the project.

    However, thats a different issue but to put it bluntly, in Quebec and Maine it was not simply ‘assumed’ that the LNG terminals would go in. People VOTED on it. And since almost every town up and down Maine voted AGAINST having an LNG terminal, the companies involved had to continuously ‘sweeten the pot’, by offering not only tax guarantees but PROFIT SHARING, as well as guarantee’s of the number of jobs and their salaries, as well as guarantee’s of payments to fishermen. In case you didn’t know, you are fully allowed to OVERPAY your taxes, which is what these companies were promising so that people would vote for them.

    NONE of that is part of the NB deal, I’m sure nobody needs to be reminded that Irving essentially threatened the mayor that he’d go elsewhere. Then council had three hours of pressure before the vote. None of that is necessarily in the best interests of the city, but by ‘the city’ I mean the people who live there, NOT the elected officials. Apart from the construction jobs, the $500,000 a year isn’t a huge sum, considering municipal services to such a structure will be great, and there is a huge cost to any problems that can occur.

    As for the libertarian debate, the Auto Pact, it should be mentioned, did NOT ‘open trade’, it closed it down. Go and read it or even a synopsis of it. Canada agreed to manufacturing american cars for the canadian market in exchange for closing down markets for any canadian manufacturers. Why do you think a company with so much experience building cars doesn’t have its own auto name? Hell, even Sweden has a world class one.

    Corporate welfare is ALL that sustains economies. Just go look at the economies of every country, virtually every industry in most countries relies heavily on its dependance on the state. That’s why ‘economic libertarianism’ is just a theory, because it doesn’t exist anywhere in practice.

    The US economy, it has been estimated, is about 40% DIRECTLY tied into Pentagon and government spending. That’s DIRECT. Virtually all of the largest corporations in the world rely heavily on their local governments to prop them up. 20% of the largest corporations in the world were saved from bankruptcy by government bailouts.

    The libertarian philosophy works great only at a local level and excluding all variables (like most political philosophies). Ironically, libertarian and socialism USED to be virtually the same words, and such thinkers as Noam Chomsky outright describe themselves as ‘libertarian socialists’.

    Mull on THAT!