Wednesday, August 19, 2009

The Large Industries, and Development

Responding to David W. Campbell, Big Fish/Small Fish

The small point first: could we have a link to Desjardin where he asserts "a cavalier way" that "we must focus on small business as a response to large forest products plant closures?" This would allow readers to make their own decisions about whether your treatment is fair.

That said...

From your column in NB Business Journal, this seems right: "strong regional economies must have a considerable number of economic anchors - large manufacturing plants, commercial or government offices or other large employers that are primarily exporting products or services outside the region."

I am aware of no successful economy that thrives without such large employers.

I am also aware that small companies circle around the large like pilot fish, often feeding on the leavings. So there is a multiplier effect from the presence of large businesses.

So there is a factual basis to the assertions made in the column. But that said...

- having one, or only a few, large businesses in a region can be more harmful than helpful to a region. Small businesses have no alternatives, and proivide services to the large business at cut-rate prices. Salaries are depressed by the lack of competition. And the large business has an unreasonable influence over government and the media. We see this typically when large resource industries set up shop in a region.

- not all large businesses are created equal. To cite one extreme example, the presence of Union Carbide in Bhopal left the majority of its citizens dead, poisoned by a chemical leak. Other businesses have less extreme, but also detrimental effects, on the environment or infrastructure of a region. A company that simply removes trees and exports raw pulp, for example, not only leaves little room for secondary in dustry, it also harms the creation of other industries that could have used the land and forests in a more sustainable way.

- additionally, the presence of a large business may result in a net economic drain on the region. While it is true that a large business will produce a certain number of jobs and spin-off benefits, these may be offset by concessions and direct payments to the business. Companies that make major infrastructure demands, but leave the tax-base under-resourced, are net harms to a community.

- additionally, as Gary stated above, large businesses can be anti-competitive, especially when there are few in number already present in an economy. They can require suppliers to pay differential rates to prospective new businesses, tie up supplies and services, interfere with government support and provision of infrastructure, and more. Even if they do not compete directly, they have an incentive, in keeping wages and supplier costs low by being the only major customer.

An astute reader will note that the conditions described above currently prevail in New Brunswick, and are (in my opinion) a major cause of the province's relatively poor economic performance. Indeed, insofar as Moncton has demonstrated some increased economic activity over the last years, I attribute this solely to the arrival and establishment of non-local businesses in the region.

So, while I can agree that we ought to include support for the establishment of large first (and especially export-driven firms) in the region, I would qualify this by saying that such support must not include support to existing large industries in the province. Such support would do nothing to improve the economy, and indeed would exaggerate the problems we currently face.

What would have been desirable would have been to land a large employer like Research in Morion (RiM). Inexplicably, the previous government did not even attempt to attract the company. Having a significant RiM presence based in, say, Moncton, would not only have created spin-off opportunities, it would provide a large high-tech employer that would create a fertile environment for similar knowledge-based enterprises. It would have given people an alternative to working in trucking, forestry or oil, and hence would have helped keep graduates in the province.

So, I would support a set of measures that would encourage similar companies to the region - an IBM or a Microsoft, a Google or a Yahoo. Such a company should not replace the industry we are trying to develop here, but would certainly augment it, and provide a fertile ground for its incubation. We have had some limited success with medium sized tech industries in the past, but they were not sustained. We will need to encourage their development (a large tech company won't relate in to a tech vacuum) and continue to develop an electronic infrastructure and advanced education and training.

I don't know what efforts the government is taking to land such industries, and of course they won't tell us. But I am quite sure there are opportunities, and we should focus on incentives not only for the large fish but also some of the pilots that play an important role in the ecosystem. We can do both - provided we don't yield to the constant pressure to waste our money subsidizing already-successful incumbants.

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