Cash-based incentives least attractive

Once in a while one of my longstanding hunches gets validated with statistics.    The following chart is taken from the 23rd annual site selection survey of corporate professionals put out by Area Development magazine.  The people surveyed are mostly the VPs in charge of site selection decision at large U.S. companies (presumably the targets of investment attraction efforts).

I have said many times on this blog that cash-based incentives (grants, bonds, loans, etc.) are the least attractive to companies searching for a new location for a manufacturing site, software development centre, back office etc.   It seems to me that cash is really only of interest to firms that absolutely need it to fund their project – and if that is the case, there should be an automatic concern over the viability of the project. 

The survey validates my theory.  Tax-based incentives are far more important than cash-based incentive and even other incentives such as land and infrastructure trump cash.

The last time I checked, New Brunswick was primarily in the cash incentive business and Dept. of Finance folks are adamantly opposed to tax-based incentives.  Right in line with reality, once again.

 

Just as a PS to that – I know that some folks will say that access to capital is a uniquely Atlantic Canada problem and others will say we need to help out our own and shun the evil national and international corporations.  This specific post is not related to the FDI versus local growth argument.  It is specifically about how we attract FDI and the incentive tools that are most likely to be successful.

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8 Responses to Cash-based incentives least attractive

  1. Anonymous says:

    Dream on. Real companies are tax based, and political shared companies are taxpayer dollar incentiived.
    Real companies don’t come here.

  2. We get it. Companies don’t like paying taxes. They’ll tell you that every time you survey them.

    What I’m not buying is the whole ‘give them money and they’ll come’ line, whether expressed as cash or taxes. Companies are mobile enough (and international enough) that they will stay only so long as you continue to bail them out. That’s just not a sustainable based on which to build an economy.

    As for the “right in line with reality” remark, you of all people should know that there’s no reality in surveys.

  3. Anonymous says:

    “Companies are mobile enough (and international enough) that they will stay only so long as you continue to bail them out. That’s just not a sustainable based on which to build an economy.”

    I don’t buy this for a minute. Quality companies aand opportunities must be targeted. Take a look at Michelin Tire in Nova Scotia who expanded there in 1971; 40 years of employing 3500 Nova Scotians with well paying jobs is sustainable enough for me. Yes, I know they have received periodic funding for expansions but I’d hardly call these bail outs. Atcon is a bailout.

    Closer to home, Purolator, RBC, TD Inurance, Fairmont, UPS, Xerox, Delta and others attracted during the McKenna push are all still here going strong.

    Speaking of businesses that don’t pay taxes, an economy based on jellies and crafts at the farmer’s market is not going to build the education,and health care we’d like to have nor will it have any spin off.

    We need a balance of small and large business. We are so far behind in economic development, we can’t wait. Bring in the RIMs etc., get people to stay here for meaningful employment, invest in research then maybe we can grow some of our homegrown RIMs.

  4. mikel says:

    The truth is usually somewhere in between. A corporation will of course say it prefers lower taxes to cash-because no jurisdiction is going to see saw its corporate tax rate. A cash investment is a one time investment, hard to duplicate, and is why its reserved to companies starting up. It’s also a political world, it just ‘sounds bad’ to say that you want cash.

    However, lower taxes isn’t the only thing. To use the Michelin example above, the only difference between Atcon and Michelin may well be timing. Here in Kitchener they axed their entire workforce in 2006, but wages are much lower in Nova Scotia, so they are safe-for now. Michelin in South Carolina hasn’t paid Corporate Income Tax for five years, the current thinking is the same all over-‘just save the jobs’. Virtually all of Michelins growth has been in Mexico, so the writing may well be on the wall for Nova Scotia. Again, just because ‘things look alright’ that doesn’t mean its a long term success (in retrospect the analysis should look at what was invested, revenues from payroll taxes and employee income tax, etc., all the things David constantly mentions).

    But again I’ll reference that Maine study from a couple of years ago that pointed out that for many companies in the knowledge industry money is WAY down the line-it is employee’s they need. The biotechnology company my wife works for is now looking for an employee, which is usually a protracted process which often results in hiring internationally because no canadian candidates with experience can be found.

  5. Anonymous says:

    Mikel, talk to me when Atcon employs 3500 New Brunswickers at above average wages for 40 years. There is no comparrison. Michelin is a world leader in their industry; Atcon is one construction company in a bookful of competition. Even if they pull out completely after 4 decades, it has been a good run.

    I would welcome companies willing to set up in NB and provide 3500 good jobs for 40 years.

  6. mikel says:

    Again, that may be just a question of ‘when’. So we’ll wait and see if Atcon is around in thirty years. Being a ‘world leader’ doesn’t necessarily mean a guarantee of good jobs, just look at the Molson deal. Michelin laid off close to sixty workers in the spring, and reneged on an agreement to provide 200 more. We also know that it is heavily subsidized, always has been. The question is the extent.

    That goes back to an old debate-how to decide on the level of subsidy. As we’ve seen with close to 90 banks going bankrupt in the US and 90% of Fortune 500 companies ‘on the dole’ at some level-‘name brand’ doesn’t mean everything. The difference here is hindsight, we know at least on the surface that Michelin has been a good deal for Nova Scotia, but hindsight is 20/20. With tire production moving to Mexico, the chances of NB getting Michelin is about zero. That’s becoming true with almost all types of manufacturing, and even call centres. Atcon is simply a company that is ‘still around’, meaning that its easier to ‘buy off’ a company already operating than to bring one in.

  7. Anonymous says:

    Canadians have subsidized Ontario’s automotive sector and Quebec’s aerospace sector for decades but there is outcry from central Canada if New Brunswick looks to susidize anything beyond hockey rinks and community halls.

    New Brunswick needs to stop the bleeding and get some industry on the move. These need to be quality opportunities with good business cases to succeed in NB. If it takes a combination of tax releif and subsidies for that to happen,as it has in Ontario and Quebec, so be it. Yes, industries will mature and may even decline after half a century but the prospect of good employment for 50 years is pretty attractive to out of work forestry employees and our children leaving the province to work.

  8. Anonymous says:

    Major Drilling Reports First Quarter Results and Declares Dividend
    MONCTON, NB, Sept. 8 /CNW/ – Major Drilling Group International Inc.
    (TSX: MDI) today reported results for its first quarter of fiscal year 2010
    ended July 31, 2009.

    Highlights

    ————————————————————————-
    In millions of Canadian dollars Q1-10 Q1-09
    (except earnings per share) —– —–
    ————————————————————————-
    Revenue $ 62.5 $ 178.2
    ————————————————————————-
    Gross profit 17.2 63.3
    As percentage of sales 27.6% 35.5%
    ————————————————————————-
    Net (loss) earnings (3.3) 26.3
    ————————————————————————-
    (Loss) earnings per share (0.14) 1.11
    ————————————————————————-
    Cash flow from operations ((*)) 7.6 36.5
    ————————————————————————-
    ((*)) before changes in working capital

    – Cash flow generated from operations during the quarter was $7.6
    million.
    – Cash on hand at quarter-end was $52.2 million while total debt was
    $33.0 million, for a net cash position of $19.2 million.
    – Major Drilling posted quarterly revenue of $62.5 million, down 64.9
    percent from the $178.2 million recorded for the same quarter last
    year.
    – Gross margin percentage for the quarter was 27.6 percent, compared to
    35.5 percent for the corresponding period last year.
    – Excluding restructuring charges and impairment charges, earnings before
    taxes for the quarter were $0.2 million.
    – The Company posted a restructuring charge of $1.2 million related to
    further retrenchment and closedown costs and also posted a goodwill
    impairment charge of $2.0 million during the quarter.
    – Net loss (including restructuring and impairment charge) was $3.3
    million or $0.14 per share for the quarter, compared to net earnings of
    $26.3 million or $1.11 per share for the prior year quarter.
    – The Company has declared a semi-annual dividend of $0.20 per share to
    be paid on November 2, 2009.

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