How to get one over the Aussies by using cunning Canadian plan

Friday 8th March 2002

News that a deal is under way over transtasman imputation credits is a positive development and may make it more attractive for New Zealand companies with Australian shareholders to remain headquartered here.

Possibly it might even be tempting for some Australian firms to relocate to New Zealand if the price was right.

Certainly the possibility exists for firms to move to New Zealand if we can offer them a lower cost structure than they face in their home countries.

The economic downturn in the US has caused many companies to shift to lower cost parts of the country or across the border to Canada. The move to Canada is intriguing because it represents a parallel case to that of corporations relocating from Australia to New Zealand.

In each case firms can save money on lower costs for the likes of wages and leasing.

Last Friday, in a story headlined "When a city's costs are bad for business," CNET News.com reported on the high- tech exodus from San Francisco under way. Citing a survey by corporate location planner The Boyd Company, the report stated it cost an estimated average $US43 million a year for a major corporate to operate in San Francisco.

By shifting to Baltimore, a company would face annual costs of around $US34.4 million, a saving of 21%. And moving is just what many firms are doing.

One symptom of the relocation from San Francisco's Bay Area is that unemployment has risen from 1.7% in January 2001 to 7.5% in January 2002, with further increases to follow. The national average for unemployment is 5.6%, so San Francisco is being hit hard by its loss of businesses. Many relocators are heading for Washington DC. to grab their share of George Bush's war on terrorism pork barrel. But a lot of others are quitting the US altogether in order to operate out of cheaper Canada.

Boyd estimated that the next most expensive place to do business in the US after San Francisco was Santa Clara County, home of Silicon Valley, at $US41.7 million. New York was next at $US40.9 million and Boston cost $US39 million.

By contrast Vancouver was the most expensive Canadian city at $US35 million and Calgary the cheapest at $US27.7 million. The lure of lower costs, including lower taxes, in Canada is being backed up by an ambitious campaign by the Canadian government to encourage US high- tech firms to make the move.

A related story on CNET.com - "Canada: the great tech north?" - reports on the charm offensive led by Canada's Minister for Industry Brian Tobin. "There's a revolution in Canada. The country has become entrepreneurial," he was quoted as telling the Digital Economy and North American Growth forum hosted in New York last year by the Committee for Economic Development.

The Canadians are actively touting their country to American high-tech firms with the aim creating "Silicon Valley North."

Canada is pursuing a broad-based strategy to get US companies to operate from there. The strategy includes tax cuts deliberately pitched at undercutting American tax rates.

Mr Tobin calls its objective a "competitive tax environment". By 2005 the country aims to have average corporate tax rates set at 5% belong those in the US.

Capital gains tax on assets held less than a year has been reduced to 23% as against 40% across the border. Canada has also cut red tape to the point where it was rated number one for the way it eased the path for entrepreneurs in a World Bank/Harvard University study. By contrast the US ranked fourth.

Canada is using education as another piece of its strategy. It already has a population highly educated as knowledge workers. Indeed, it stands at number one out of 59 countries surveyed for per capita knowledge workers in the 2000 Global Competitiveness Report.

Eighteen out of the 40 top electrical engineering courses offered in North America are based in Canada, yet the country's economy is just one-tenth the size of the US'.

It has a knowledge economy strategy aimed to maximise the percentage of the population who have access to high-speed broadband internet service. Already 5% of Canada's population has this service versus 2% in the US and the plan is to have all Canadian communities hooked up by 2004.

Government intervention has been effective in converting Canada into an entrepreneurial economy. But it is intervention of a highly specific sort, described by Mr Tobin when he said "Canada is grounded by strong economic fundamentals: budget surpluses, low inflation and low unemployment, meaningful tax cuts and forward-
looking policies."

Canada has converted itself into a free-market economy that is now attracting US firms in the way Ireland did. But Canada is a more realistic model for New Zealand to follow because it has had to bootstrap itself whereas Ireland had the luxury of EU subsidies.

Can we learn from Canada? Surely. But are we likely to follow its example? Not under the present government which likes to talk the talk of the Knowledge Economy but not walk the walk.

There appears to be marked lack of co-ordination between the government's mouth and its feet. Virtually every policy initiative that has emerged from the government to date has been in some way opposite to what the Canadians have done. Another three years under such government will represent a lost and perhaps final opportunity to catch up with the likes of Canada.

It could be quite some time before we have a minister who says to the Australians something akin to what Mr Tobin is quoted as telling his American audience: "Canada has changed. We're not complacent, we're ambitious. We're at your heels. We're nipping. Before long, we're going to invite you to follow."

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