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.