Encouraging scale – towards global competitiveness

I have been thinking a lot lately about competitiveness – specifically how New Brunswick firms can compete in an increasingly globalized economy.  Traditionally this was mostly a concern related to exporters but now even firms 100% focused on local markets have to compete with firms from around the globe for local markets.  Twenty years ago if you wanted to buy business cards you went to the local printer.  Now you order online from a firm based in Prague.

One of the ways our firms could drive competitiveness is by getting bigger – specifically through mergers and acquisitions.  The old term – economies of scale – does apply up to a point.

Take the example of translation services.  New Brunswick is an officially bilingual province.  We pump out university graduates with translation degrees.  We have a domestic market for translation worth $10s of millions per year.  This should be a sector where we have a distinct competitive advantage, right?

There are 72 translation firms in New Brunswick showing up in Statistics Canada’s Canadian Business Patterns.  61 have no employees.  11 have employees but 10 of those have less than five employees.  Only one hast 50-99 and none have more than 100 employees (as of December 2016).

Manitoba, a province of roughly the same size and a much smaller Francophone community, has three translation firms with between 5-10 employees, 2 between 20 and 49 employees and 1 with 50+ employees.

How is this possible?  We could engage in a long conversation about the translation sector – about how it is comfortable serving the local market in New Brunswick and has no real interest in exporting – why would it when it is almost exclusively freelance translators with a full book of business?  Why don’t we see a ‘Cooke Aquaculture’ of translation?    Where is the Gerry Pond of translation?   Where are the ADIs of translation?

If we were to do a full review, we would see that we have dozens of industries where there could be far more potential for exports but the firms are comfortable serving local markets and have little interest in scale.

So, in the words of Nikolay Chernyshevsky and his devotee VI Lenin, what is to be done?

Ideally for all of our export potential sectors we would have champions emerging – through M&A and just brute force of business development.  The tiny firms remain and feed on the scraps but the sharks get out there and compete in the open water.

Of course, governments don’t particularly like sharks.  They prefer minnows.   We have much lower tax rates for minnows.   The minute you get a little scale – bang – we double your tax rate.  If you need $100,000 – ACOA, CBDC, ONB, NRC – all lined up with bags of cash.  If you need $5 million – you had better be headquartered in Ontario.

What if we actually lowered corporate tax rate on firms as they grow?   Sure, when the rise to the level of global, evil empire behemoth we can tax them to death but to help firms get in the $50 million – $100 million sales range why not lower their tax rate?

Is there something we can do with capital markets policy to encourage tie-ups?  How about by bringing in more immigrant investment?

How about just ringing the fire alarm a bit?  Our PR/GR marketing industry has essentially collapsed in the past 15 years.  In some alternate universe we could have had a bunch of mid-sized creative shops doing cost competitive marketing out of New Brunswick.  In, I stress, an alternate universe.

The other thing is basic math.  A lot of NB business owners seem to think 100% of $100k profit is more than 25% of $2 million in profit.  They aren’t giving away even a portion of control even if it leads to scale, competitiveness and growth.

I’ll leave you with this.  There are lots of industries in New Brunswick that are quietly consolidating.   National and international firms are coming in and scooping up insurance brokerages, funeral homes and optometrist firms, among others.  These firms will benefit from scale but the ultimate decision making and control will be well beyond the borders of New Brunswick.  It might be nice if a few New Brunswick firms build global scale – from here – headquartered here.

 

 

 

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