Over the last few years, the Quebec government has granted sizable tax exemptions to certain “new economy” companies, luring them to set up shop within designated perimeters such as Montreal’s Cité Multimédia and Cité du commerce électronique.
The main aims of this approach are to revitalize depressed urban zones and to create synergies between companies operating in the same sector. A document from the finance ministry states that Quebec “has truly played a pioneering role” through this initiative. No other government has ever created so direct a link between tax policy and geographic concentration of an economic sector.
However, the people who came up with this policy never bothered to support their approach with detailed studies or with examples of success abroad – quite astonishing when you consider that conservative estimates put the cost at more than $2 billion over the next decade. This made it only natural for the Montreal Economic Institute (MEI) to analyse the soundness of this approach in detail. Pierre Desrochers, our research director and a specialist in local economic development, took on the job.
According to his study (available on our Web site), nothing indicates that industrial “cités” are a financially sound policy for Quebec taxpayers or an effective development tool for Quebec companies. Desrochers notes first that geographic concentrations of businesses that operate in the same sector have been found in various places at various times (think of Hollywood or the Montreal fur district). These concentrations help companies reduce the costs of transactions with suppliers and customers. They also lead to creation of a more stable job market for specialized workers, though their physical size varies from one industrial sector to another. For example, New York diamond wholesalers are nearly all concentrated around 47th Street in Manhattan, while the Los Angeles aerospace industry is spread out over a sprawling metropolitan area.
No serious analysis of the phenomenon of concentration has identified a need for quite the degree of proximity that the originators of Quebec’s industrial “cités” seem to envisage. There is no reason to believe in any need to spend billions of dollars bringing firms closer geographically when they would do so spontaneously on a more appropriate scale in any event.
The Desrochers analysis also points out that contacts with suppliers and customers located outside a company’s home region or with companies operating in other areas of activity are just as important in terms of innovation. Several studies indicate that more jobs are created in cities with above-average levels diversification. If this is the case, Quebec’s “cités” policy hurts business development by forcing excessive specialization.
Moreover, by providing financial incentives for companies to move from one area of the city to another, this policy is seriously detrimental to industrial parks, to real estate owners and to businesses located outside the designated zones. Ironically, one of the main victims of this process is the Quebec government itself. Through the Caisse de dépôt et placement, the government is Montreal’s biggest landlord.
The owners of many older buildings that offer affordable rents also suffer negative repercussions from this policy. New companies with only limited financial resources have often tended to occupy these types of buildings, thereby bringing new life to the buildings themselves and to the surrounding neighborhoods. Subsidies that encourage companies to move out have produced a major exodus. The creation of designated sites has also led to deferral of several office building construction projects in other areas because they cannot compete with subsidized rents.
It is true that Finance Minister Pauline Marois finally expanded the limits of the Cité du commerce électronique in her last budget, but the principle of a designated perimeter still poses problems. We have been reminded of this by certain Montreal companies and organizations such as the St. Lawrence Boulevard Development Corporation, the area of which is still excluded from the expanded perimeter.
The Quebec government’s intention of reducing the tax burden on business to promote job creation is commendable, but there is no reason to believe that adding a geographic dimension to these tax advantages is beneficial. Instead of offering targeted tax incentives, the Quebec government should lower taxes for everyone and let business people make their own decisions in such matters as where they locate their companies and what links they develop with others in their areas of activity. Our multimedia and e-commerce entrepreneurs are among the most dynamic in the world. They are fully capable of making these decisions themselves.
Michel Kelly-Gagnon is President of the MEI.