Harvard business professor Clayton Christensen is, ahem, missing the point

Spare me the clichés but here we go again.  Newspaper wants to find someone who will criticize NSBI.  Finds Harvard professor.  And totally misses the point.

From the article:

Payroll rebates and other incentives designed to attract businesses to Nova Scotia kill rather than create jobs, says one of the world’s foremost experts on innovation.

Harvard business professor and author Clayton Christensen said in an exclusive interview Thursday with The Chronicle Herald that subsidizing companies to become more efficient — what he calls efficiency innovation — and enabling them to sell their products more cheaply amounts to “buying jobs temporarily.”

“So if you invite RIM to come here to assemble their BlackBerrys, for example, they will keep doing it as long as you keep giving tax breaks. The minute somebody else can assemble them cheaper, pow, they’re gone,” said Christensen, named the World’s Most Influential Business Management Thinker in 2011 in the Thinkers 50 ranking.

The best way to create jobs, Christensen said, is through “disruptive innovation,” a concept he pioneered that describes how industries transform themselves to provide cheaper and more accessible products and services to consumers.

 

Professor Christensen it seems didn’t even take the time to look at the payroll rebate program or see what it is and what it isn’t.  First of all, it isn’t a ‘tax break’.  Second, it has never been large enough to tip the balance in an investment decision.

Payroll rebates are not balance tipping subsidies meant to be the main reason why firms locate in Nova Scotia.  They are a small incentive – normally a few percentage points on the total costs of a new facility meant to help offset some the costs of integrating new workers (i.e. recruiting, training, etc.).  Professor Christensen – no matter how brilliant he is (and the article says he was named the World’s Most Influential Business Management Thinker in 2011 in the Thinkers 50 ranking) – is blending the efforts of other jurisdictions with the relatively limited payroll rebate program.

So, let me give you an example – and maybe Harvard should read this to see the point:

Company x invests $10 million in a new facility in Halifax and agrees to hire 200 jobs at $70,000 per year.  The payroll on that project is $14 million per year.  Over 10 years, the payroll is $140 million in nominal dollars.  Now a typical payroll rebate deal (I haven’t forensically audited them all but the few I have seen) for project like this might be around $2-$3 million to be paid out only as the payroll is created (no risk to the taxpayer).  So $3 million equates to about two percent of the 10 year payroll of the firm.  At the same time, the province can expect to generate about $30 to $35 million in new tax revenue (direct, indirect and induced) off that one project – or a payback to the taxpayer over 10 years of 10 to 12 times the initial payroll rebate.

What Christensen is talking about are deals that if/when they go away make the business case for being located in city x go away.    I have a hard time believing that any firm would build a business case that hinges on 2-3% of the 10 year labour costs of a project (probably around 1.5% of the total costs).

The bottom line is that payroll rebates were developed to provide some help for firms in the startup phase of setting up in Nova Scotia.  The underlying business case for investing in the community must stand alone.

Having said that, it is true that some governments spend too much to try and ‘win’ projects and that isn’t good for the firm or the taxpayer in the long run.

Why Christensen is the smartest person in the world is because of his real expertise – disruptive innovation.   On that score, you should listen to him and listen carefully.  But when he cavalierly lumps all support programs into the same basket and dismisses them as business case altering subsidies?  You’ll have to ask him to dig a little deeper next time.

 

 

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3 Responses to Harvard business professor Clayton Christensen is, ahem, missing the point

  1. Mary MacKinnon says:

    Go to any town NB and ask all of the unemployed call center workers here if companies go away in the night. Those of us in the industry became so aware of this process that we could predict our mass lay off dates a year before they occurred. Yesterday my friend was laid off after years of working for an insurance call centre. Here they operate in about eight year rotations and at the seven year mark you are able to notice the beginnings of the shut down process. The seven year magic starts with employees being strictly policed and written up for minor infractions which would have been over-looked in previous years. An infraction may be taking too long to go to the bathroom, we were on a three minute timer when not on break. Yes, it is Canada and yes I am referring to the years 2006 to present day.

  2. mikel says:

    The above sounds similar to what I have heard. And often there are a lot of devils in the details, just because a deal is REPORTED saying payroll rebates of X dollars, doesn’t mean thats all the company is getting. And companies are international now, so often they can use their clout to extend rebates or raise them higher just by ‘threatening’ to go elsewhere. Look how well it works for Irving whenever they talk about moving their pulp mill to Quebec.

    But I get a kick out of ‘brilliant’ professors who make statements like that. Imagine that, ‘disruptive innovation’ is the ONLY thing which creates jobs, and all these years the ONLY thing that creates jobs is something nobody had a term for until this guy came along! That puts him right up there with Einstein!

    But lets say Radian 6 aren’t such nice guys willing to stay in NB, so say when they first started out the government said “we’ll pay your staffs entire salary as long as you sign a contract to never leave while we do so”. They agree, and all those jobs stay in New Brunswick, subsidized by the government. So that ‘payroll rebate’ created all those jobs, and keeps them in New Brunswick (and we’ve all seen examples where the government rebate is MUCH higher than the 3% referenced in Nova Scotia so thats not just hypothetical). I may be wrong, but that pretty much kills his theory. If its his OPINION that payroll rebates are not good because they lead to a ‘race to the bottom’, thats a different story and one that may well be true. But stating that only ONE THING creates jobs sounds pretty sketchy. But I read the article over three times, and can’t really say I understood much of it so what do I know.

  3. mikel says:

    Just wanted to add a couple of the comments from the article:

    “They’re also doing this in New Brunswick—offering tax rebates and the like to get a bunch of second-rate jobs. It kind’ve works, but it’s not very much bang for your buck. Global businesses have a lot more on their minds than relative tax rates when deciding where to set up shop.”

    “Chronicle Herald Business Section May 14, 2012:
    >Minacs was given a $2.5-million payroll rebate through Nova Scotia Business Inc., when former Premier Rodney MacDonald announced the company would locate in a building vacated by another call centre. At the time, the number of jobs slated to be created was about 350Signature Styles was known as Spiegel Brands when Nova Scotia’s Conservative government gave it $1.2 million in January 2009The provincial government provided On-Line Support with a payroll rebate that totalled $1,138,234 in return for the company’s initial creation of 159 jobs.<

    Opened 2006, closed 2012.

    The list is much larger than this but these examples should suffice."

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