Big fish/small fish

Every see video of the sharks and the little tiny fish that follow them around?  It’s interesting because the shark will feed and the leftovers will be scooped up by the little guys.

In my column today, I have some research that I completed to show the linkage between big and small business in economic development.  I made a list of all 280+ Census Divisions (basically counties) in Canada and looked at their population growth rate from 2001 to 2006.  I then looked at the Canadian Business Patterns database for June 2009 and ranked the Census Divisions by percentage of large firms in their regions (I used 100 employees as the definition of a large employer).  Regions that had at least 2 of firms with 100 employees or more had a much faster population growth rate, on average, than those that had under 2%.

I also looked at the small business growth rate (establishments with under 10 employees) in communities that had a higher percentage of larger businesses.  Across Canada, communities where there are at least 2% large businesses collectively added 40,000 new small businesses (net) from 2003 to 2009.  In communities where there are less than 2% large businesses, there was a collective loss (net) of 10,000 small businesses.

Now I am not saying that all regions with a higher percentage of large businesses will grow faster than others but on average the evidence is quite conclusive.  In New Brunswick, all six nothern New Brunswick counties are all well below the 2% threshold.

Of course my reason for putting this together is my longstanding belief based on research and observation that successful economies have a mix of export-oriented larger firms (product or service) and smaller service firms supporting the economy.  Certainly, within the mix we need to see entrepreneurs bubble up that are driven to grow successful businesses – but in my reckoning many of these will end up as larger businesses some day (isn’t that the goal?).

Coupled with this longstanding belief has been my even longerstanding frustration with economists such as Desjardin over at UdeM that in a cavalier way serve up that we must focus on small business as a response to large forest products plant closures.  People listen to guys like him because their position gives them credibility.  I wonder outloud if he has ever looked at the data to support his conclusion on this.

While there have been some high profile large business support projects in recent months (AV Nackawic for one), the vast majority of economic development in New Brunswick from ACOA to IRAP to the bulk of BNB’s programs are targeted towards small and maybe medium sized businesses.  We need to rebalance this equaation and we also need to understand that if we get the mix right, we will see entrepreneurs emerge with less government stimulation.

I’ve talked about this before but it is worth reiterating that large businesses are an excellent incubator for entrepreneurs.  They get experience in the big biz and then get frustrated, leave and start their own business.  Think about NBTel.  There is a thread of exNBTelers in a large percentage of the ICT firms in this province. I think if we had a few more NBTels, we would have a lot more tech. entrepreneurs over time.

18 thoughts on “Big fish/small fish

  1. Great work David.

    It is concerning that with talk starting about restructuring our ED efforts, it has been focused on the entity itself. The reality is, our strategy over the past 2 decades has failed us and we have to revamp our approach. You are providing ideas backed up with data. Others seem to be shuffling the deck chairs on the titanic or advocating the status quo. We have to remember that there will be resistance to change; those with cushy jobs and politicians with photo op money to hand out with few accountability strings attached, like what we have.

  2. Seriously David, why is it that you always try to put down P-M Desjardins every chance you get? You afraid he’s movin’ in on your turf or something? He’s a smart economist and has a different point of view alot of the time. He begins his theories with things that exist here right now and works from there. Yeah sure, it would be great if we had more NBTels and it would great to have a big business just plop here in the province and large industrial projects in the North of the province but I haven’t heard of any leads recently. This makes it easy to dream scenarios of what we could be doing if we had this and that.

    Part of the problem is that our biggest companies here don’t want any other big companies coming in and making this place better. That’s a part of the problem. And our politicians let that happen cause they’re fearful of our big companies and do whatever they’re told to do.

    Sure the government should move some departments up North; that’s a good start. Let’s not forget your recommendation of building more roads…

  3. 2,400 blog posts (over 4000 if you include comments) and I have made five references to PM Desjardin. I would hardly say I mentioned him every time I get the chance. I am sure he is smart. You don’t get to where he has by being dumb but I fundamentally disagree with him on this point.

  4. The fundamental problem with economists is that they operate on theories which are completely insulated from reality and the contextual factors that affect economic development. They are only functional in a vacuum, and fall to pieces when unforeseen variables are introduced.

    I tend to favour economic developers, such as David, as they rely on substantiated evidence (derived from reality) in formulating their opinions and recommendations. I will be quite frustrated if the Northern renaissance focuses on small businesses rather than large industrial operations. Large businesses provide the population and workforce participation that small businesses need to survive. At this time, the population in the North cannot provide this.

  5. “Part of the problem is that our biggest companies here don’t want any other big companies coming in and making this place better.”

    That might indeed be a big part of the problem. The guys with money and power that are here have naturally more influence of govt policy than guys that are not here. All the more reason that we need some political leaders with the guts to bang heads.

    I enjoyed your TJ article, David, but was very disappointed to see Charles Cirtwell described as an economist and a policy analyst in the same edition of the TJ. We will not get very far if the media keep sanctifying babble as expertise.

  6. 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.

  7. Believe it or not I usually avoid the personal references. However a few people bug me. It is clear from some posters (and some I have to censure for language) that I bug some people as well. Par for the course I guess.

  8. @David Campbell
    Personal references are good, because they create a dialogue. But they should be to specific things that the person said, rather than a hand-wave to “so-and-so”. When I comment on you in my blog, I always link back to this blog, so people can see what I’m commenting on. It’s not just good blog etiquette, it’s common sense.

    You haven’t had to censure my comments for language in the past and it’s very unlikely you will have to in the future. Thus far you appear to be on the other side from me politically, which means the criticisms will probably continue. That, again, is nothing but a good thing; if you really bugged me, I wouldn’t make the effort to respond.

  9. Well, again we come back to policies. The best example is to look at RIM. From some sources we see RIM may be making a presence in NB, but if we look at WHY that is, it wasn’t exactly ‘hard work’ from Graham. The articles seems to state that all he did was corner Balsaillie at a couple of trade missions and talk about NB. Unlike Nova Scotia there was no bureaucratic attempt to lure them to the province-that we know of. There has been NO provincial attempts to ‘beef up’ education in the province. RIM is not likely to be impressed with high school graduates, they need computer engineers.

    There are no public policies aimed at such companies except the cut in Corporate Income Tax. This is hardly going to impress RIM, I’ve read interviews with both the founders and these guys have said repeatedly that they feel guilty over the amount of money they have, and Balsaillie has stated that the hardest thing is to find places to spend money.

    If the founders of RIM actually took a close look at the educational facilities and priorities in NB they’d be horrified. The recent status of women report came out showing that pay equity in the private sector is getting worse, and the government’s policy to address that is to get more woman in construction and as journeymen. Meanwhile, the biological sciences at the graduate level here in ontario are now over 60% women.

    As mentioned above it is the economist here who is being sensible, and the economic developer who is the dreamer (nothing wrong with either). A government has the power to create small businesspeople-they are people already in the province who are looking for opportunities. It is NOT a given that large industrial anchors can be found, they can barely be found in southern ontario, its highly unlikely they can be found in northern New Brunswick. There’s a reason why it cost $60 million to keep Atlantic Yarns up north-if we consider that the ‘going rate’, then imagine the actual cost to the province to ‘keep’ industry up there.

  10. Well Mikel, not all of us subscribe to the culture of defeat that Ontario accuses us of nuturing. Viable opportunities exist. NB does have the right ingredients for an appropriate business to succeed.

    When those of us motivated for New Brunswick to enjoy the prosperity of other provinces, or at least live in an area where our children have a chance to work in their home province, talk about attracting new business, we are talking about quality companies with a solid business plan and some acceptale rationale why they can prosper in NB.

    Atlantic Yarns gets thrown up as a lightning rod for eliminating efforts to attract business. Can anyone provide data why this business should succeed in NB in the first place? On the surface, it looks like there is no rationale except for huge grants. This is an example of bad ED, business operating only for the hand outs.

    For more positive examples, look at our neighbours with Michelin, Pratt and Whitney and more recently RIM. Solid companies with good plans and a reason why they can succeed in NS. Similarly with companies located in the Summerside aerospace park.

    Let’s not give up because of past poor decisions. We should learn from the mistakes and become more effective. As David has said, there is little reward in gloating about our economy not being devastated by the recession because it is already in a constant state of devasatation. We deserve better and have to work for it by attracting new business.

  11. “We can do both – provided we don’t yield to the constant pressure to waste our money subsidizing already-successful incumbants.”

    I think that is one of the major issues. NB has little cash to throw around, and will likely have less in the future. The pressure from current employers and employees (threatened with losing their jobs) is always going to be hard to counter – after all, these people are voters and some of the employers also control the hard print media. The other source of pressure comes from organizations controlled by some of these current employers, organizations such as AIMS, that are mainly interested in tax cuts and de-regulation.

    Its my view we need to spend more effort on creating conditions that allow govts to resist pressures from the above sources. Until that happens, we can list all the industries etc that should be brought in and discuss what they need until the end of time. But it will make little difference, when govts are spending time and money dealing with the existing pressure points.

  12. If the province can barely attract BAD companies, what makes anybody think that GOOD ones are going to locate there? As we’ve seen, the province frequently throws money at companies, and taxes for corporations are among the lowest in canada. That’s not working.

    As for Atlantic Yarns, that company still operates in Toronto, there is nothing ‘on paper’ that makes it look any different than any other exporter, in fact AS an exporter it would be the kind of company David likes to see supported. As for RIM, people forget that it was less than a decade ago that the company was in serious financial straits. It was laying off people all over the place, its patents were being questioned. Even THIS year the company executives were discovered in fraudulant trade practices. Now, imagine if or when they become a GM, how much tax dollars will they require?

    That’s the problem with companies, there is simply no predicting. Who would have thought the most profitable companies in the world would be now bankrupt, and others needing massive bailouts. So the above criticism of Atlantic Yarns is not accurate, the company even stated that they would have been profitable had the feds implemented trade policies that were promised.

    The NB government SAYS its doing certain things when its not. It SAYS it is creating a viable environment for companies, and it SAYS that it helping out new entrepreneurs. However, apart from taxation its not implementing the policies. RIM stated how impressed they were with Nova Scotia’s six universities all doing serious research. They were impressed with the organization that NS has to get new industry players who pushed RIM for YEARS. Those initiatives don’t exist in NB. We KNOW that knowledge industry companies are not looking for a massive quantity of barely educated people-IRVING is, and SaskPotash is, and the refinery is, and Ganongs and Moosehead are, construction companies are, trucking companies are, but NOT new knowledge industry companies. When you read NB policies it is CLEAR what is being said here, that the large industry players are dictating policy.

    So the next question is HOW do you attract those anchors. My point is that you don’t do it by the methods so far used. You do it by ACTUALLY focusing on entrepreneurial spirit and education. You create that workforce that knowledge companies are looking for, and it also has the added benefit of making a more active and productive society. David thinks that ‘salesmanship’ is the answer, but take a look at RIM. If they DO come to NB its because they are buying up a company. That’s also how Google came to Waterloo. So FIRST you need that small company that the big guys buy into. THAT is the entrepreneurial spirit, and once you see that, then there is little of that ‘culture of defeat’. Foreign companies come into NB and look around and say ‘why would I set up shop here?’

    But there really needs to be more analysis of what ‘anchor’ means. For many NB towns, there really doesn’t need to be much. And as Mr. Downes says, in many cases it is the CURRENT ‘anchors’ that have become the problem.

    But again, saying ‘we need to attract new business’ is like saying ‘we need to win the lottery’. In SOME cases its blatantly not true, but the whole point of this blog has been evaluating HOW to do that attracting. So for example, if Graham sent Mr. Campbell an email and said, “oh yeah, we’re TRYING to get anchors for all our regions” then thats really the end of the story. What could David reply? “Oh, Ok, well, I thought you weren’t because this guy said….”

  13. “You do it by ACTUALLY focusing on entrepreneurial spirit and education.”

    I think there is plenty of entrepreneurial spirit in NB already; the problem is that most NB entrepreneurs, like most entrepreneurs everywhere, serve local markets and our market is growing very slowly. So many entrepreneurs have trouble growing.

    Nor am I sure that education by itself is the solution. Its part of the solution, but only if our unis adopt the province as a mission rather than a location. Does UNB really care about NB? Are universities and businesses working together as well as they could to develop and market new technologies? Are university resources being prioritized in the right sectors? UNB for example had some realy worldclass leadership in organic chemistry and computing at one point, but we let that slip away.

    Making this happen might not cost GNB a lot of money and could very well be a way to get more export businesses going. It would also attract high tech outfits, or any business that sees value in R&D (unfortunately that excludes a lot of our current big players). Again, however, there needs to be a way to pressure GNB to move in that direction. Pressure that is greater than the pressure to protect old uncompetitive industries in some sectors and create instant low-wage jobs in other sectors.

  14. Okay, so let’s agree for thé moment that attracting evil profit seeking businesses are not the way for NB to get the economy moving. Instead, as some suggest, we need to keep forking money into small business development.

    But, there is general agreement what we are doing now is not producing results. What would a successful small business strategy look like?

    We have grown the small business agencies (CBDC, ACOA, BNB, Enterprises, CEDA, IRAP etc) to over a 1000 people in dozens of offices around NB. Do we need 2000? Maybe 5000? We have grown the research investment in UNB steadily to surpass $50 million annually or about $70 per resident. Do we need to committ $100 per person? $200? $500? We have doubled the threshold for SB tax for $200K to $400K. Does it need to be a million? 2 million?

    Just wondering what a successful small business development strategy might look like. We are putting substantial effort there now. We keep hearing results will come with more money and more time. How much more money and how much more time?

  15. “Just wondering what a successful small business development strategy might look like.”

    I think David just answered that question. Tha data show that anchors generate small business growth. The issue is the best way to attract the anchors.

  16. 100% with you Richard (and David).

    As a case in point, read Mike Lazaridis’s story regarding RIM. He dropped out of college to pursue an opportunity from General Motors, a nice anchor company despite recent problems, and that led to the forming of RIM. Anchors create opportunities.

  17. I disagree. New Brunswick is NOT entrepreneurial. Part of the problem is that ‘entrepreneurialship’ in NB is what you do when you can’t find a job-I know, that’s why I started a business there.

    The fact is that most businesses serve a local market because that’s what they can access. If you sell jams and jellies locally, how hard is it to set up an account on paypal and sell internationally? Not very. People service local markets for several reasons-they are making enough locally to satisfy them, they don’t know HOW to access larger markets, and they don’t have the money to access other markets. Simple as that.

    You can’t be ‘entrepreneurial’ in a world like NB when virtually all the markets are seized up, and your competition is getting subsidized by their local MLA’s party. That’s why entrepreneurs LEAVE, because there simply isn’t any economic reason to stay.

    It DEFINITELY has to do with education because if you only have a high school education and can hardly use computer software you are at a distinct disadvantage. Today there are markets all over the world, but how much training is there? Heck, NB can’t even talk about two languages without practically inciting a civil war.

    And again, it also partly comes down to policy, you can’t seriously talk about NB being serious in business when we still haven’t seen them match Nova Scotia’s tax credit scheme for film and culture. The day after NS announced their program NB said it was looking at their own-that was TWO years ago.

    It’s not throwing money at things, its simply a question of policy. If you don’t have the policies, you don’t get small business growth and you don’t get anchors unless you do like Molson and give them the farm for a measly 27 jobs.

    And to be fair, ‘data’ shows all kinds of things. There are LOTS of places where large anchors don’t exist and they have far more stable economies than ours.

  18. “And to be fair, ‘data’ shows all kinds of things.”

    If you don’t agree with David’s analysis, perhaps you could take the data (or other data) and perform an analysis that comes to a different conclusion. Otherwise, all you have are unsupported assertions, like your statment that NBers are not entrepreneurial. What data do you have for that? There is a difference between being entrepreneurial and being a successful entrepreneur. Those are two different things. The problem for most entrepreneurs in NB (and most tend to be in service-type industries that rely on local markets) is, as I said above, that the economy isn’t growing fast enough to support them. Consequently, many entrepreneurs leave the province. Quite a few of the ones that remain are export-oriented. Those are the ones that should be nurtured.

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