One last point – the clustering effect

Most of you are familiar with Michael Porter’s work on industry clusters. Porter in the 1990s did a pile of research and concluded industries that are clustered in a geographic location have a far better chance of success in the long term than onesy and twosy orphaned plants. For example, if you have a cluster of 20 confectionary manufacturers that industry will be far more viable long term than if you have one single chocolate factory.

The logic behind this is solid. If you have 20 firms, then the training industry will start developing customized confectionary industry training. Suppliers will set up in the community. Universities will conduct confectionary research. Etc.

And that is why I don’t understand why our guys in New Brunswick (the NB Biz Council) don’t want the province to be attracting industry. If I was Ganong, I’d be the first one pushing for the development of a cluster of confectionary firms. I have said on these pages before that literally several dozen European confectionary manufacturers – including the big names – Lindt, Nestle, etc. have set up plants in North American in the past 10 years. Why not in New Brunswick?

Sure, there are some ‘negative’ effects such as the elevation of wages, competition for specialized talent. Sure some of the weaker firms go under or are taken out. But the research is clear, in the long run, companies have far better chance of success when part of a cluster than not. And this applies not only to manufacturers. IT firms, animation firms, the film industry, etc. all benefit from clustering effects.

Ganong himself was quoted a couple of years ago as saying he would be far better off with his plant in Mississuaga and that he was only in St. Stephen because of his deep roots in the community.

For me, ‘deep roots’ and nostalgia are not good long term reason for firms to be located here.

So when 70 of Alabama’s biggest firms and institutions get together and form a partnership funded with a budget of millions of dollars to attract industry to the state, you can see why. Mercedes-Benz wants more auto manufacturers and suppilers in Alabama. Aerospace manufacturing firms what more of their kind in that state. Why did Alabama just attract a $3 billion steel plant? Because there are several hundred manufacturers that will use the steel.

Our guys, the provincial business leaders, need to stand up and lead efforts to grow and attract industry here – not impede it.

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0 Responses to One last point – the clustering effect

  1. mikel says:

    That’s a little faulty logic, because ‘clusters’ were defined AFTER they were created as a justification for pouring money into them. That’s why rural people are cheesed.

    Hypothetical examples aren’t really useful though, there are now only TWO sugar importers for all of Canada. Saint John was once a ‘cluster’ for confectionary because it had a sugar plant and that went bye bye.

    FatKat is a single company and doing remarkably well. In the ‘new economy’ of animation geography means little. They are not part of any cluster but I suspect many small animation companies in Quebec may have gone out of business since they started out.

    For the auto cluster that makes a little more sense, but only a little. Far more important, particularly right now, is how much government help they get. A company can keep going even with transportation costs so long as lower other costs equal the transportation costs. IF there were enough skilled workers for Magna to set up shop in NB and ship their parts to Ontario they would do so-if they wanted to.

    But ontario’s community college is geared to that industry, just like the colleges in NB are geared to those industries. Graham wants a ‘cluster’ of energy projects in Saint John, but what will that do? A nuclear plant would ‘succeed’ whether it was isolated in Doaktown or by the ocean-depending on other factors.

    However, once again you are believing what you read without questioning it. It MAY be true about Ganong himself, but he has also said that the secret to Ganongs is their WATER. Which makes a PERFECT economic platform, much like beer. IF they move, they lose the quality of their product.

    However, here’s where your bias is showing a bit, are you saying that its BAD that a company has roots in a town? Come on now. Sybian has been in a remote little New Brunswick town for half a century giving many people there good jobs. What is wrong with that? In fact its FAR better than the alternative, which quite simply is a race to the bottom is how much can be given to companies.

    Of course there is no reason you can’t do both, it depends on the policies.

    One final point for Ganongs is that they may be even BETTER situated in China. Why not? Or mexico, they’d be that much closer to the cocoa. So essentially the only other option is to satisfy the unlimited greed of company x in the hopes they won’t leave.

    Again, like NBT’s point below, even if you believed that, I can’t for the life of me understand why you think New Brunswickers or their representatives would WANT to take that view as policy. However, in most cases it IS policy, at least for the companies that will locate in NB. We’ve seen how ‘low’ the province has to go for foreign direct investment, lets recap:

    1. Belledune: a soil incinerator that was even denied in Mike Harris’ ontario is set up with no environmental impact assessment and the province paid the company to give it some samples for its tests.

    2. Pig farms in rural areas flourish while tourists flee the areas from the smell. Many ulitimately closed, but not because of anything government did.

    3. Molson sets up with lower non union wages than Barrie and with significant portions paid by province.

    4. Forestry-too much to go into, forests are essentially given away and taxpayers fund technology enhancements which put more workers out of work. This over the objections of small woodlot owners who number more than forest workers in all five big companies put together.

    5. Health care: province is about to embark on privatizing numerous health fields.

    6. Province goes deeper into debt to build one piece of highway (north of woodstock where ‘citizen’ use is nominal).

    7. Atlantic Yarns, Caissie Populaires, need I say more..

    8. Irving: would require a book. I mentioned the coleson cove issue, add the LNG issue and stretch your mind back to Elizabeth Weir’s comment during the refinery strike (oh yeah, new refinery when virtually no jurisdiction in North America would allow a refinery)- that they should ‘call in’ all Irvings loans. Now, why would a multibillion dollar company have loans from the province…and at what rate?

    Thats’ just off the top of my head. That’s the REALITY, (oh yeah, and that bridge building company in Miramichi), thats why it always surprises me when you guys say ‘new brunswickers won’t support these policies..’. Because they KNOW all this stuff. They know that to get foreign direct investment you need to get on your knees or grab your ankles. Of course the ones affected will support that, their jobs depend on it.

    NB is ALREADY far friendlier than BC in its wildest dreams, so you can’t go there. The assumption here is that the province isn’t working hard enough, but there isnt any proof of that, thats something we don’t know. But we do know that Bernard Lord was traipsing around the southern US pitching, and we know they do the same for gas.

    However, like I said, it comes down to policies. We know the policies that got RIM to go to Nova Scotia, but it has to be more than taxes, because NB doesn’t have much different taxes than most places. Again, you want an animation ‘cluster’, build a television station and you’ve got an INSTANT cluster.

  2. David Campbell says:

    I am glad you put ‘little’ in front of faulty. Certainly there are many examples of ‘orphaned’ firms that do exceedingly well. But there is statistical evidence to back up the notion that clusters are an environment that has more elements needed for long term success. Your example of the sugar refinery is actually a fairly good one. Although like all agriculture, that was a mirky blend of oligopoly, government subsidies, international trade, etc.

    As for roots in a town, I will reiterate what I have said 100 times. I think local firms are more committed to their local communities, more apt to reinvest profits into the community and less likely to fold up the tent and move production to a cheaper location. However, history has shown that we can’t find the right blend of government policy and community action to generate enough Sybians to ahve sustained, successful economic development. So, we need more of the big, bad, evil multinationals. IMO

  3. mikel says:

    I’m glad YOU mentioned the ‘mix of oligolopy’ there, because thats essentially my point in a roundabout way (it usually takes somebody else to point out my points before I figure it out myself:)

    The auto sector is most definitely in that ‘oligopoly’ blend, in fact as you’ve pointed out yourself, virtually EVERY industry in Canada is in that ‘blend’. Industry does not exist separate from government or vice versa.

    However, MY point on the other is if you can wade through that lengthy rant on that other post is that i’ve shown, or at least I think i’ve shown but anybody is free to post the other view, that there has NEVER been an attempt to foster that entrepreneurial spirit.

    I’d like to see an example of just ONE policy that has been like that. As you’ve said, lower taxes did nothing, companies still went out of business and far fewer new ones opened than in any other province.

    And of course we know WHY that doesn’t work. Starting out you need cash, so tax savings don’t do much if you don’t have the profits to be taxed. That’s why NBT’s platform (and that his ‘friends’ are CEO’s says that we know at least where he’s coming from) only works for companies already making pots of money. He wants lower taxes so they can have more money, and obviously there is LESS money to help out others, something he doesn’t think should happen anyway.

    However, ‘structural supports’ are far different than simply giving some money. THat’s worth something, but in today’s economy its often not enough.

    Let’s look at some examples. Say you WANT ‘entrepreneurial spirit’ in something like food production as an example. What policies would you enact? Well, you CERTAINLY wouldn’t let two companies take over the entire food distribution system and even the retailing system.

    NB at least has the Co-op, but in retailing they aren’t markedly dissimilar, they operate more as a savings co-op. While they buy cheap chinese goods just like everybody else, people are still struggling to get by selling homemade clothes seasonally in malls (early coops ALWAYS bought locally before bringing in goods).

    Sobeys and others also like to buy nationally because they are chains which mean they can get lower costs. Of course that means that small local producers are out of luck and you have to be national in size to compete, which is why virtually every grocery store in the country only has products from about 20 companies, if that.

    People have been paying more attention so finally you see grocery chains at least TALKING about buying local produce, but even that is VERY seasonal.

    Which is why, of course, there are virtually NO small food producers left. Lots of people would do it, and love to do it, just take a look at any farmers market.

    Again, look at animation. I’ll repeat it again, IF NB had a television station all of a sudden you have an entire MARKET for content. If you want to see entrepreneurial spirit just take a look online. Go to Youtube and look what people are producing. Of course people, like industry, haven’t figured out how to make money out of it, but people are producing stuff by the mountainfull anyway.

    Every high school class would be putting on their own ‘Minto idol’ or some such thing. Like I said, look how much work a small group in St. Andrews went through to get a local TV station. THAT is entrepreneurial spirit.

    The ONLY reason that doesn’t happen is because you are completely and utterly wrong. The entire television market locally has been ‘given’ to Rogers. A company making billions, buying all new equipment, but not hiring any new people. They want it all volunteer run and of course government doesn’t even LET them invest in ‘culture’. They are not allowed to produce dramas or ‘tv shows’ locally even if they wanted to. They somehow got an exception with acadieman.

    But whenever some local group wants a tv station Rogers starts screaming bloody murder and governments listen. So there are two examples, you can literally go industry by industry and do the exact same thing, in fact if you can find ONE example of this ‘favouring the small guy’ policy I’d love to hear it, because I don’t see it anywhere, and I’ve read a lot of stuff online.

    But as for clusters, again, the clusters existed FIRST. I would LOVE to have a look at some of that research you are talking about, so feel free to post it. If all you are saying is that an automaker will do better in southern ontario because parts makers are close by and the schools service them as well as governmnet policy, that has nothing to do with ‘clusters’. Thats simple economics, but like you say, politics is the bigger reason. Toyota is still in Ontario because the Prime Minister went to their headquarters and promised them they’d never have to pay a dime in training costs.

    They also reminded them that unlike environmental movements in the states and mexico, Canadians have only a marginal interest in the environment and no political ability to affect policy even if they did. Theres a reason why Toyota in Kentucky is actually a landfill. That’s right, since the late nineties it has been a ‘zero environmental output’ producer, so much so that municipalities began sending their landfill to have it recycled.

    And thats in the oft maligned, redneck, will pollute at any cost southern US (or so we canadians are supposed to think). However, remember also my point about workers thinking of unionizing in Kentucky. You’ll find no such rumblings in ontario, and I know people who work at Toyota and they are quite literally being worked to death (I know of several examples-and one forthcoming lawsuit).

    So again, thats a mix of oligopoly and government, its not an example of ‘clustering’. There are simply too many factors in business, the biggest one being public policy. And you really have to be careful, because as you lobby for more corporate investment, at the same blog you are admitting that there are no clusters in NB, which means you are making arguments for corporations NOT to locate in NB-after all, there are no ‘clusters’.

    And again, in the ‘internet economy’, a cluster is irrelevant, geography simply is not an issue.

  4. mikel says:

    Just an interesting aside, I did some searching on some of those companies. Lindt for example only has a main manufacturing plant in New Hampshire. They have a plant in Toronto, which has 20 employees (fewer than a popular restaurant), and sales of 20 to 50 million (For all you socialists out there that means each employee produces over a million dollars worth of revenue for probably 40 grand:)

    For comparison, I looked up our local physicians clinic, it has 18 employees, and ‘sales’ of 20 to 50 million. Hmmmm, I’m starting to see why there is so much lobbying going on for private health care.

  5. Anonymous says:

    Hey guys, Sabian is a company located in Meductic that manufactures cymbals.

    Sybian manufactures, ahem, other stuff.

  6. Danny D'Amours says:

    From “Fascination” post.
    Well put anon:
    “While clustering is an over-used government buzz phrase, there is no doubt that the presence of U of Waterloo and elements of clustering helped RIM become successful.”

    RIM (and Waterloo tech companies in general) have been successful because of proximity to U Waterloo. Why? Because the University attracts the best and brightest people wanting to study computer science, engineering and other areas from across Canada and around the world. Their co-op program gets student into the workforce and contributing to these companies early which encourages them to stay on after graduation.

    UNB attracts great students and is known for its forestry, education and engineering programs. With forestry currently hurting badly, engineering is probably strength which should be focused on.

    There are several examples of companies that have come about due to UNB and its concentrating effect of people focused in one area. ADI, Neill and Gunter, RPC and Precision Metal Works are all companies that have emerged or have greatly benefited from UNB’s presence and its clustering effect.

    Clustering concentrates people with specialized skills which draws in additional companies in the sector. For example if I want to find the best automobile engineers, I’m more likely to find them in Southern Ontario than in Halifax. Likewise if I’m looking for the best of breed programmers and IT specialists I will have a better chance of finding them in Silicon Valley than elsewhere.

    Unfortunately as pointed out here, going from one company to a cluster is the difficult part.