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The Competitive Challenge While the literature on economic development is vast and varied, the gold standard belongs to Michael Porter of the Harvard Business School, who is the author of close to 20 books and is viewed as one of the leading thinkers on competitiveness.
“National competitiveness has become one of the central preoccupations of government and industry in every nation,” writes Porter in The Competitive Advantage of Nations. “Yet for all the discussion, debate and writing on the topic, there is still no persuasive theory to explain national competitiveness. What is more, there is not even an accepted definition of the term “competitiveness” as applied to a nation.”
As Porter writes, some people view national competitiveness as something driven by key economic variables, such as government deficits and exchange rates. However, countries such as Japan and South Korea have enjoyed “rapidly rising living standards despite budget deficits; Germany and Switzerland despite appreciating currencies.”
For some, competitiveness is something driven by cheap and abundant labour (e.g.: China and India), but there are numerous examples of countries that have proved thisnot to be the case, such as Germany, Switzerland and Sweden.
In its most recent Global Competitiveness Report, TheWorld Economic Forum (TWEF) came up with its definition of competitiveness: “We define competitiveness as the set of institutions, policies and factors that determine the level of productivity of a country,” says TWEF, an independent, not for profit foundation. “The level of productivity, in turn, sets the level of prosperity that can be earned by an economy. The productivity level also determines the rates of return obtained by investments in an economy, which in turn are the fundamental drivers of its growth rates. In other words, a more competitive economy is one that is likely to grow faster over time.”
TWEF came up with “12 pillars of competitiveness,” including higher education and training, the macroeconomic environment and market size. Canada earned a ranking of 12th out of 142 countries, down from last year’s ranking of 10th place. In 2008, Canada ranked ninth. On the surface, one might draw the conclusion Canada isn’t performing as well as it once did; this isn’t exactly true. Canada’s score this year (the score of course determines the placement ranking) is higher than it was last year. In other words, other countries are improving at a faster rate than Canada.
With that being said, where does that place Halifax and Nova Scotia in terms of its competitiveness? Traditionally, these two jurisdictions (along with the rest of Atlantic Canada) have lagged behind the rest of Canada, meaning if Halifax or Nova Scotia was included in TWEF’s rankings, the result would put us well outside the top 20.
This region is challenged when measured on key competitiveness components such as innovation, productivity, taxation and the regulatory environment when compared to the global market. While we have many strengths and all the factors to be a player on the global stage, there’s a lot to be done before we are viewed as being a leader in global competitiveness.
As a developed province within a developed country, Nova Scotia scores very high on many, if not most, of the pillars of global competitiveness. (See sidebar on the pillars.) Even areas of weakness are subtle and fairly small, but with such a mobile and integrated global economy, even small gaps can make the difference between attracting investment, immigration and securing markets, and being left in a competitor’s dust.
The issue that dogs Nova Scotia the most is PRODUCTIVITY, a key ingredient to prosperity when challenged by a tightening labour market. Productivity is a broad topic and contained across a number of the pillars. While nobody will dispute that Nova Scotians are good, honest, hard working people, boosting productivity will be crucial to improving Nova Scotia’s competitiveness.
“A nation’s standard of living depends on the capacity of its companies to achieve high levels of productivity – and to increase productivity over time,” writes Porter in The Competitive Advantage of Nations. “Sustained productivity growth requires that an economycontinually upgrade itself. A nation’s companies must relentlessly improve productivity in existing industries by raising product quality,adding desirable features, improving product technology, or boosting production efficiency. They must develop the necessary capabilities to compete in more and more sophisticated industry segments, where productivity is generally high. They must finally develop the capability to compete in entirely new, sophisticated industries.”
“What we know in terms of output performance [is that] on a per worker basis, we are low,” says Elizabeth Beale, the president and CEO of the Atlantic Provinces Economic Council (APEC). Beale was also a member of Premier Darrell Dexter’s Nova Scotia Economic Advisory Panel.
Compared to the average amount of Canadian productivity, Nova Scotia is “well below,” she says. This isn’t a new development as Nova Scotia has lagged behind the Canadian average for years, along with the otherMaritime provinces. Beale says Nova Scotia’s lower productivity explains why wages are lower here, as productivity is what determines wage levels. She says there are a few reasons Nova Scotia lags behind other provinces. One reason is geography and Beale points to British Columbia, which because of its location is tied to the booming Asian economy. On the other hand, Nova Scotia has been traditionally linked to the slower growing economies of Europe and the Northeastern U.S. The fact Nova Scotia isn’t a large resource producer also keeps its numbers down. A lack of investment in training is another reason.
“Businesses have not always been willing to invest a lot in on-the-job training,” Beale says.
Lars Osberg, an economist at Dalhousie University who also sat on Premier Darrell Dexter’s Nova Scotia Economic Advisory Panel, cautions not to make apple-to-apple comparisons about productivity statistics. He says with Nova Scotia’s small business sector being larger than it is in other parts of the country, it’s no surprise Nova Scotia lags behind. Small businesses are generally not heavily capitalized firms and have lower output averages compared to larger firms as a result.
The easy answer to improving productivity is to invest more in on-the-job training and capital equipment, but that’s easier said than done. Osberg believes Nova Scotia has all the right ingredients for productivity success; the key is in finding the right recipe.
“We have all the ingredients of good productivity: good infrastructure, a well-educated labour force, good communications to markets,” he says. “We’ve got all the ingredients, it’s really up to the entrepreneur to combine them.”
One way of boosting innovation (and thus productivity) is through immigration, which is something the Conference Board of Canada wrote about in an October 2010 report. “Immigrants are making Canada more innovative,” states the report. “Making such a proposition does not require any stretch of the imagination. Indeed, one could logically argue that immigrants are by definition motivated go-getters who are prepared to face adversityand take risks in hopes of greater gains. They are seekers of a better way – the very embodiment of innovation.”
The report adds that immigrants help expand Canada’s trade relations and immigration rates are linked to greater foreign direct investment. Because of the province’s aging demographics, Nova Scotia needs as much help as it can get through immigration. Boosting productivity is a priority of the provincial government and it now has a Productivity Investment Program (PIP) to do just that. The program encourages businesses “to become more productive, innovative and globally competitive.” PIP includes two options: a Capital Investment Incentive (CII) and a Workplace Innovation and Productivity Skills Incentive (WIPSI). The CII contributes 20 per cent, up to a maximum of $1 million, toward the cost of technologically-advanced machinery, clean technology, equipment, software and hardware, with preference given to exporters in qualified industries. The minimum amount that can qualify for assistance is an investment of $25,000.
Whereas PIP is focused on capital upgrades, WIPSI is focused on investing in people’s skill developments and certification. A company can apply for support toward the cost of the following activities: purchase of training from a formal training institution or qualified external or internal training provider; registration, tuition or course fees; international training; management skills development; skills development training leading to certification; training that supports workplace diversity; and other skills development and training based on a valid business case. For WIPSI, the minimum threshold is $5,000.
Closely related to productivity is the concept of INNOVATION. To maintain acompetitive edge, firms must “design and develop cutting-edge products and processes,” says TWEF’s 2011 Global Competitiveness Report. To achieve this, it recommends investing in research and development, having high-quality scientific research institutions, ensuring extensive collaboration between universities and the private sector, and the protection of intellectual property.
The good news is Canada pretty much has all of these things in place. The policy framework supports research and development and the protection of intellectual property is considered sufficient. In the case of Nova Scotia, the appropriate research institutions are in place. The key will be greater collaboration between the post-secondary education institutions and the private sector, particularly the commercialization of ideas that are developed in the post-secondary institutions, but taken to market through the private sector. However, one area of concern is the number of patents filed. This number is viewed as being symbolic of the amount of creativity happening. In the Toronto Board of Trade’s 2011 Scorecard on Prosperity, a ranking of 24 worldwide cities on how they fare on key economic indicators, Halifax ranked 20th amongst the 24 cities used in the analysis. Per 100,000 population, Halifax filed six patents. Other Canadian cities included in the rankings fared better: Vancouver (17.3), Toronto (17.0), Calgary (16.0) and Montreal (13.6). The leader was San Francisco with 177.7.
Another important component of competitiveness is market size and it’s included in TWEF’s 12 pillars of competitiveness. “The size of the market affects productivity since large markets allow firms to exploit economies of scale,” says its 2011-2012 Global Competitiveness Report. For Halifax and Nova Scotia, this means firms can’t achieve large economies of scale. The small market size also means firms don’t face as much competition, thus they don’t face as much pressure to refine their products orservices. These factors thus place an emphasis on seeking out new global markets because the only way of growing the economic pie is through finding new markets, which means exporting.
The good news is Halifax enjoys some advantages because of its location. “Our geography, time zone and proximity to air and sea ports give us a strong competitive advantage,” says Stephen Lund, president and CEO of Nova Scotia Business Inc. “In Nova Scotia, you’re only an hour’s flight from New York City and a five hour flight from London, England. This strategic positioning is very attractive to companies who want to work internationally.”
Given Nova Scotia falls nearly halfway through the western U.S. time zones and the European time zones, it’s possible for businesses in Nova Scotia to conduct business with people and companies in those jurisdictions during the same business day. Nova Scotia also benefits from having nearly 100 per cent access to broadband internet capabilities, meaning communications are instantaneous.
Seeing firms increasingly tap into global markets is a priority of the provincial government. The next phase of its jobsHere strategy will be an international business strategy. “The international commerce strategy is designed to help Nova Scotian companies build international capacity, to increase international economic activity in Nova Scotia, to strengthen Nova Scotians’ access to international markets and networks and to build an integrated approach to international commerce,” says the strategy.
Part of establishing new markets will be to take advantage of the global gateways that are our ports. While traditionally viewed as something that brings in goods, the ports are a two-way street and this connection is onethat will need to be better leveraged. Another part of finding new markets will come from changing our attitudes. AsNova Scotians, we aren’t known for tooting our own horns and pride ourselves on that (it’s part of what makes us so darn likeable). While thatmay be an admirable trait, suppressing this modesty gene would be helpful in the business world.
“We need to let people know we are here and what we offer,” says Lund. “We’re a great region, and perfectly positioned to do business.”
T
he labour force is traditionally cited as oneof Nova Scotia’s competitive advantages.“The biggest asset we have in Nova Scotia isour people and people tell me this all thetime,” says Percy Paris, minister of economicand rural development and tourism. “We’vegot a dedicated workforce that’s eager to work.Companies say when we hire a Nova Scotian,we know we’re going to get a day’s work outof that person.”It will be key to grow and attract the highwage, high-value employers who can use thisasset to their advantage. Nova Scotia is nolonger a low skill labour market.However, Halifax and Nova Scotia – andmost developed countries – are facing a similarproblem when it comes to labour: therearen’t enough people because of aging demographics.People aren’t having as many kids asthey once did and in the case of Nova Scotia,outmigration continues to be a problem. Theonly way of making the population grow isthrough immigration, which is somethingNova Scotia has traditionally struggled with.
However, the tide is turning. Retention rates of immigrants are up significantly. Statistics show Nova Scotia’s retention rate improved from 37 per cent in 2001 to 63 per cent in 2006. Immigration will be a crucial component of filling the void in skills that will come from an aging population. Even with the progress Nova Scotia is making on the immigration front, it’s still at the mercy of Ottawa when it comes to immigration. Immigration falls under federal jurisdiction and, every year, the federal government establishes a number for how many immigrants it would like to allow into Canada and also has the final say on who is approved.
So while a strong labour force might be an advantage, it won’t really be one if there aren’t enough people to fill positions. However, the ability to respond to the challenges that come from aging demographics and adapting the economy will be crucial to being competitive in the future. In this regard, Nova Scotia is well-positioned to meet this challenge with its highly educated labour force, but it will also be important for all workers to continue to develop and upgrade their skills to keep up, if not lead the charge.
Part of what will determine our success in this rapidly changing economy will be our education system. It will need to create students with the right skill sets, be connected to the business community and flexible and responsive to its needs. “What’s attractive about Nova Scotia is that it’s also the academic capital of Canada,” Paris says. “We’ve got a workforce that can be trained and students can be educated in any field.”
Lund shares a similar line of thinking. “We have the highest provincial concentration of post-secondary schools: 11 universities and 13 community colleges,” he says. “Our workforce is talented and diverse. However, we need to identify what the high-valued jobs are going to be over the next 20 years and this where our institutions should be training people. We have to match our skills and our schools with the jobs of tomorrow.”
Love them or hate them, the world is full of rankings for the world’s top cities. Whether it’s Monocle’s ranking of the top 25 cities to live and work or The Economist Intelligence Unit’s liveability ranking, everybody has an idea on what city is the best one. For 2011, Monocle said it was Helsinki, Finland, while The Economist’s Intelligence Unit said it was Melbourne, Australia. A favourable ranking can lead people to boast about how their city ranked well, while a poor showing can result in someone discrediting the list.
While the methodology varies from ranking to ranking, they generally look at how a city performs with respect to a series of key variables and assign weights to each. It’s fair to say no methodology is perfect as people have different preferences for what they consider important in a city. For Halifax, it’s tough to get on international lists given the city’s size and lack of international prestige. The research for the lists target certain cities and see how they perform, rather than researching every city in the world and seeing how they size up with the given criteria (after all, there are only so many hours in the day).
This raises an important question: how would Halifax fare on some of these international lists? Looking at some of the key factors Monocle (a U.K.-based global affairs magazine) often cites, how would Halifax do? Some elements they mention include traffic congestion, air quality and even the number of places open on Sundays to get groceries (we have Sunday shopping now!). On those three measures alone, Halifax would stack up pretty well. (In the Toronto Board of Trade’s 2011 Scorecard on Prosperity, it ranked number one amongst 24 worldwide cities for air quality.)
But as Monocle states on its website, “In the end the cities that make the cut are not just OK, but places that are benchmarks for urban renaissance and rigorous reinvention in everything from environmental policy to transport,” it says. Halifax’s leading-edge recycling program be an example of something that would earn it kudos from Monocle, but it will have to become more innovative and daring in other areas before it gets on the list.Another of the popular ranks is done by Fast Company, a U.S.-based magazine. Appropriately, the rankings look at Fast Cities, cities where people choose to live. As defined by Fast Company, Fast Cities have three components, the first being opportunity and “a culture that nurtures creative action and game-changing enterprise.” It is a place where the number of patents filed is high. The second component is innovation, while the third is energy.
On these factors, Halifax would have mixed results. There is no denying Halifax has an energy to it that’s attractive to visitors and residents alike. It’s this energy, this buzz, that helps make it the hub of Atlantic Canada. On the innovation front, Halifax is lagging and doesn’t file many patents, as evidenced by findings of the Toronto Board of Trade’s 2011 Scorecard on Prosperity. Above all else, Fast Cities looks at places that have the right ingredients to attract new talent and Halifax is a winner in that regard. It’s a place where people want to be.
In the case of The Economist, it scores 140 cities on a scale of zero to 100 on 30 factors spread across five categories: health care, culture, environment, education and infrastructure. Halifax would score pretty well given The Economist’s preferences. Halifax is the home to six universities and is the leading location for health care and health care research in Atlantic Canada. For the environment, Halifax enjoys good air quality, a world-class recycling program and also benefits from a provincial government that established tough environmental guidelines in 2007’s Environmental Goals and Sustainable Prosperity Act as part of its efforts “to become one of the most environmentally and economically sustainable places in the world by 2020.” Culture is considered one of Halifax’s strengths and with a thriving live music scene and arts scene (helped in part by our universities), key stakeholders might want to start a campaign to attract the attention of The Economist.
TAXATION is an important part of competitiveness and it reflects the size of government. Nova Scotia may have a tax regime that’s appropriate for the government’s level of debt and spending, but that doesn’t relieve the burden to be competitive. During a recent session of the Halifax Chamber of Commerce’s Roundtable on Taxation, Dr. Geoffrey Loomer, associate professor at the Shulich School of Law at Dalhousie University and a Research Fellow at the Oxford University Centre for Business Taxation, presented comparative evidence of Nova Scotia’s poor showing against other Canadian jurisdictions and how it would place internationally if separated from the Canadian whole.
“Tax may not be the only or even the major reason to choose one place to do business over another, but it’s a factor,” says Brian Rose, the Chamber’s staff lead on the roundtables. “But just as important as the financial implications of the rate of tax or the total tax burden, seems to be the message it sends to prospective investors and the people and companies we wish to attract and retain that this is a high tax environment.” One encouraging development is that the small business tax rate will fall by .5 percentage points beginning January 1, bringing the rate down to four per cent on the first $400,000 of taxable income.
There was already a similar reduction of . 5 percentage points last year, meaning the rate has dropped 20 per cent since 2009. Besides taxation, the cost of energy affects every person and is a major input cost for industry, as has been demonstrated by the recent NewPage plant closing in Cape Breton. But it isn’t just heavy industry that counts on energy costs as a competitive advantage or disadvantage. As the cost advantage of existing hydro versus fossil fuel derived energy increases, location becomes more important.
Our electricity is almost completely driven by expensive oil and coal, our gasoline and diesel are refined from oil extracted at the Brent North Sea and we’re only just beginning to convert our infrastructure to take advantage of natural gas. If there’s a bright side to this, it’s that as energy prices continue to rise, renewable sources of electricity such as wind, hydro (like Muskrat Falls) and tidal power become more and more competitive from a price standpoint, thus levelling the playing field for Nova Scotia against many competitor markets. High energy costs also provide an incentive for people and businesses to be more efficient and innovative with how they use energy.
Closely related to energy are transportation costs. As fuel costs rise, the disadvantage of shipping longer distances becomes a greater disadvantage if the market is central Canada or the Midwest U.S., but if the market is literally overseas, Nova Scotia has a definite cost advantage. And with Halifax’s status as a port city and the closest port to Europe and Asia through the Suez Canal, Nova Scotia truly is a gateway to the world. The cost of doing business includes inputs such as the ones above, but it also includes labour and office space. Nova Scotia’s labour force is considered less expensive than other jurisdictions, yet still highly educated.
This win-win situation for employers means labour costs can compensate for other areas where Nova Scotia may not be as competitive in. The loyal nature of Nova Scotians means that we also have reduced turnover rates, another boon for employers.
While Nova Scotia is perceived as being a more expensive place to do business than other jurisdictions, there have been some reports which have doused some water on that idea. In February 2011, APEC released a report titled Atlantic Canada’s Changing Competitiveness for International Investment. The report included corporate perceptions of Atlantic Canada’s business climate from foreign companies and included observations such as:
• “In general, a majority of foreign firms consider the business climate in the Atlantic region to be broadly comparable to other jurisdictions in which they operate.
• While Atlantic Canada was perceived to have some advantage in terms of low labour costs, its overall operating costs were only rated average due to higher energy and other costs.”
In the Toronto Board of Trade’s 2011 Scorecard on Prosperity, it ranked Halifax very favourably on some key operating costs. As the report looked at 24 worldwide cities, including leading world cities such asLondon, Berlin, Paris, New York and Toronto, it provided an interesting glimpse at how Halifax compares to the heavyweights. For the total tax index (TTI) economic indicator, Halifax had an A rating and was ranked in second place. The TTI included income taxes, sales taxes, property taxes and miscellaneous local business taxes. “Metro regions with lower tax burdens are more attractive to new business and investment,” the report says.
Halifax also placed second in the average office rents category. This economic indicator looked at the cost of renting downtown class A office space. Once again, the report says cities with lower office rents “are more attractive to new business and investment.” According to a 2010 KPMG study, Halifax offers one of the lowest 10-year averages on annual total location sensitive costs of other international cities. For companies looking to set up shop in Nova Scotia, there are a wide variety of programs in place to help strengthen the case for them to come. “If a company wants to come here, we have certain tools in the toolbox that we can utilize to help incent companies to relocate here,” says Paris, citing payroll rebate programs, loans through the Industrial Expansion Fund, the Productivity Investment Program (PIP) and the Digital Media Tax Credit as examples of some of the possibilities.
One final element of competitiveness is the REGULATORY ENVIRONMENT businesses must operate within. Part of having an effective regulatory environment is one tha minimizes the amount of red tape. In Nova Scotia, measures such as Bizpal (a one-stop shop for permits and licenses for the three levels of government) and enacting 10-day service standards for the provincial govern-ment to issue businesses permits and licenses will all help reduce red tape. For a Halifax example of how the regulatory environment is improving, one doesn’t have to look any further than HRMbyDesign, the downtown planning strategy that was enacted in June 2009. Prior to it, downtown development was guided by the previous municipal planning strategy and land-use bylaws, some of which were up to 60 years old.Written in vague language, some policies contradicted each other and these factors inevitably led to appeals. HRMbyDesign has cleared up much of the confusion that used to exist. While Halifax and Nova Scotia pride themselves on intangibles like the quality of life they offer, it’s clear on key competitive factors, such as taxation, productivity, innovation and the regulatory environment, there is room for improvement.
In its report titled Atlantic Canada’s Changing Competitiveness for International Investment, APEC states that, “Foreign firms’ priorities for improving the business climate focus on ensuring the availability of a skilled workforce, reducing corporate taxes, improving the regulatory environment and encouraging further offshore energy activity.”
Improving on these things will chart the course for Nova Scotia’s future, whether it’s one of prosperity or the status quo. Prosperity will be a future of self-sufficiency and excellent growth rates. The status quo will be a future of slow economic growth and continued reliance on equalization payments. Achieving competitiveness is a process, not a destination. The moment a jurisdiction stops trying to be more competitive, it will instantly become less competitive.
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