International Economic Development Journal

Quebec has been pretty good at convincing high-tech, bio-pharmaceutical, aerospace and light manufacturing companies to set up shop in the province. But while attracting new investors is important, keeping them there is just as crucial.

The statistics speak for themselves. During the year ended March 31, 2002, Invest Quebec, the agency responsible for developing growth and investment in the province, authorized more than 1,000 financing operations totaling close to $1.04 billion. These are expected to generate investment projects of $4.5 billion, and create 18,400 jobs.

"The Quebec economy has been doing well lately, and a lot of the credit is due to new players setting up shop," said Dominique Bonifacio, vice-president, foreign Investment at Invest Quebec. "But if we want continued success, we have make sure these businesses succeed too."

Retention and "after care," strategies are an increasing part of regional economic development, and Canada's second largest province has become a leader in the field.

While many regional development organizations take care of after-market management informally, Invest Quebec has fully 13 staff members that constantly monitor foreign subsidiaries operations. The goal is to make sure investors are successful, and to provide help to those who need it.

"We provide a one-stop shopping approach," said Guy Leblanc, director of the subsidiaries department. "Our people have contacts with all the key Quebec public and private sector players, whether it be for financing, finding new workers, or getting access to government grants."

Leblanc has 10 specialists working for him, who closely monitor their allotted sectors. "When we go to a pharmaceutical conference, we don't need introductions. We know the people already," said Robert Blondin, a bio-pharma specialist.

Unlike many U.S., states, which are seeing signs of weakness, the Canadian economy is going great guns. Canada is expected to lead the G-7 in growth next year and Quebec is providing much of the fuel. Yet Quebec's economic development officials are far from resting on their laurels.

"Our needs are different from those of most U.S. states," said Bonifacio. "Our primary competitive advantage is a strong, highly-educated, affordable, dependable workforce. But we are further from some geographic markets. So we focus on attracting sectors where there is a high value-added labour component."

Encouraging regional development is a big challenge at the best of times. But getting American companies to invest new money in Quebec, while many of them are cutting back domestic operations is doubly challenging.

As a result Invest Quebec, has been increasingly broadening its focus from strategies to increase new investment, to strategies based on retaining and building upon existing operations.

Quebec's attraction strategy

Part of the difficulty in defining Quebec's attraction and retention strategies, is the fact that many of their features overlap. "If we attract a bio-pharmaceutical because of our favorable R&D credits, those credits will likely play a big role in keeping them here," said Bonifacio. "The next step is to help these businesses expand. If a company develops a new product in Quebec, we also want them to manufacture it here."

The case for investing in Quebec is strong. The province has world-class brainpower, an unparalleled R&D infrastructure and sound public policy that that encourages growth and investment.

Through NAFTA, Quebec has access to 410 million consumers, of which 45% live within 600 miles of provincial borders. Montreal, its largest city is only a one-hour flight from New York City.

At the same time. Quebec's multi-cultural heritage, makes it an ideal start off point for European companies who want to develop a foothold said one key player.

"We could have chosen Seattle," said Guillaume Casella, general manager at Mecachrome Group," which recently announced that it will build a 30,000 square meter aerospace components plant in Mirabel, Quebec. "But we felt much closer to Quebec. There's respect, a competitive spirit and a driving determination that is rare in Europe."

Quebec's workforce of 3.7 million persons is highly skilled, motivated and fairly stable. The province's commitment to education is evidenced by its seven universities and four medical faculties, which hand out close to 50,000 graduate and undergraduate degrees each year. In fact Montreal has the highest number of university students per capita of any city in North America, more than even Boston.

Indeed Quebec workers were a key element in Computer Sciences Corporation's decision to set up an advanced software development center in Montreal's $300 million E-Commerce Place, a 1.5 million square foot development in the city's downtown area.

E-commerce Place was launched by Quebec's then finance minister Bernard Landry in 2000, to stimulate new economy development in Montreal, and make the city an attractive pole for new foreign investment. Tenants of the new project, which will be completed in 2003, will receive key tax breaks calculated according to the total wages related directly to E-commerce development activities.

"Quebec's educated workforce was a definite criterion in our choice to locate here," said Kevin Gaulin, president of the Computer Sciences Corporation's applications service division in an interview earlier this year. "The quality of our services demands real brainpower. The ERP team for example will conduct vital technology research and assist with new business an account expansion initiatives."

But Computer Science Corporation won't just have smart employees. Quebec's workforce is also relatively inexpensive, especially when fringe benefits such as retirement programs and private health insurance are taken into account.

Fringe benefits represent 22.3% of gross pay in the U.S., compared to only 14.3% in Canada according to a KPMG study. Just as important, Quebec's cost of living, especially housing, is very reasonable.

Another key strength of Quebec's workforce is its reliability. Quebec workers are far less mobile than those in most other provinces and U.S. states. This provides investors huge cost savings. According a study by Domicity, the productivity cost of an employee departure is equal to 10% of his annual salary, and 50% of first year's salary in the case of a new employee.

Due to strong fiscal incentives, Quebec has been particularly successful at getting companies to conduct research and development in the province. Combined federal and provincial measures have brought the after tax cost of $100 worth of research and development to $31.

Better still, those credits are reimbursable. So unlike in the U.S., companies can claim refunds even during years in which they incur losses. In addition, through one Invest Quebec program, companies are able to get financing for up to 80% of their refundable R & D credits.

Financial support measures made available to new investors have also seen considerable success. Among these are regional development programs that encourage companies to locate into areas designated as innovation centers, by extending tax credits equal to 40% of the payroll increase attributable to eligible employees.

Companies that generate significant equity funding outside the province are also eligible for loans at favorable interest rates with a three-year grace period under the Bio-Levier Capitalization Loan Program. There are also a variety of additional incentives such as substantial tax holidays for projects exceeding $300 million and for companies that create more than 50 jobs, as well as special recruitment and training assistance in certain cases.

Many of these incentives are targeted to the bio-pharmaceutical centers, an area in which Quebec has a significant presence. For example DSM Biologics, part of the DSM Fine Chemicals group, recently announced a $300 million investment for a facility for the production and purification of monoclonal antibodies and recombinant proteins based on mammalian cell culture technology.

Quebec companies also benefit from sound public policy that encourages growth and investment. Nowhere is this more evident than in the tax rates than in corporate tax rates, which are among the lowest in North America. The effective tax rates on manufacturing and non-manufacturing corporations (31.2% and 35.2%) compare favorably with those in other Canadian provinces and key U.S. states.

One of the best analysis of the benefits of doing business in Canada, was provided by KPMG, which conducted and after tax comparison of the after-tax cost of startup and operation for 12 specific types of business 85 cities throughout Europe, the U.S. and Japan.

Canada came out ahead with a 14.5% cost advantage over the U.S., scoring well in areas such as taxes, transportation, facility and labour costs. And when the fact that Quebec is one of the most affordable places to do business in Canada is added to the mix, it's not surprising the province has been so successful in attracting new investment.

Quebec's retention strategy

Quebec's after-market strategy goes beyond just making sure that new investors do well. "Our goal is to make them grow, reinvest their profits, and then expand to add new products and production lines," said Leblanc. "That means staying constantly in touch, and identifying potential problem situations while they are still correctable."

Invest Quebec officials have formed networks with development officials in other public and para-public organizations such as the Ministry of Industry and Commerce, Regional Development Centers, Employment Quebec and with partners such as Hydro Quebec, the province's electrical power utility.

"We keep our ears to the ground. If we hear that a plant is shipping out only two trucks of products a week instead of the usual four, we'll find out why," Leblanc said. "It's a proactive strategy that focuses on solving problems before they become serious, as well as identifying opportunities."

In fact Invest Quebec officials rarely use the word "retention," in internal discussions to describe their after-market strategies. "By the time you read about a plant closure in the newspaper, it's too late," Leblanc said. "You have to get involved early, before potential problems get out of control."

"Many of the subsidiaries of U.S. companies that are located here, like GE for example. are competing just as hard against other plants in their own organizations for new productions contracts, as they are competing against other companies," said Leblanc. "Our job is to help them."

Those subsidiaries are now a big part of the Quebec economy. Close to half of all of Quebec's exports and 100,000 jobs, come from foreign subsidiaries. And these conduct more than half of all the R&D conducted in the province.

Among the assistance measures that Invest Quebec regularly provides are feasibility studies, connections with other financial partners, and help in obtaining support from the provincial government.

"But we have to be modest," said Leblanc. "In many cases we work with partners such as the Société Générale de Financement, venture capitalists or government agencies. And although we have several programs that can help, our primary role is as a facilitator."

The problem with these kinds of efforts is that their benefit is hard to quantify. Informal surveys have shown that companies are often impressed just by the fact that an interest is taken in their particular problem, even if no immediate remedy is at hand.

Sometimes the results show up in unexpected ways. For example when Swedish wireless giant Ericsson went through its recent massive restructuring, that brought its workforce from 107,000 down to about 60,000 the company decided to leave its Montreal research facility and its 1,600 employees intact.

In today's economy, with many telecom and information technologies companies seeing massive cutbacks, being able to hand on the what you've got back not be a huge victory, but it is a pretty good consolation prize.

Another victory was Invest Quebec's participation in the diversification of Bridgestone Firestone's production plant in Joliette. The $36 million investment will enable the company to broad its line of tires for cars, light trucks and SUVs.

The project received $2.5 million in financial support from Invest Quebec. Ironically, the expansion was rooted in discussion that began when Quebec development officials became worried that productivity issues were putting the plant's future in doubt. So what started out as retention initiative ended up as a major expansion.

The bottom line is that in today's economy, regional development agencies that focus merely on attracting new businesses and investment are doing only half the job. To be fully successful these organizations also need to better monitor there subsequent progress, and to encourage new growth and development down the line. And that's what makes Quebec's attraction and retention strategy so effective.

peter@peterdiekmeyer.com
-30-