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by Daniel Gloade on February 18, 2014

An interesting article appeared in the Record recently.   You can read it at:  The budget for the tri-cities includes approximately $7 million for economic development.   Currently, the majority of funds are allocated to attracting foreign investment from the tech sector.  Councillor Sean Strickland argues, however, that more money should be allocated towards business retention.  He cites the relocation of the Schneider’s Meat Packing Company to Hamilton this year.

I acknowledge that there is more stability if we keep jobs in Kitchener rather than having constant business opening and closings.   With instability comes an increased management and start-up cost.  On a personal level, I can sympathize with those whom lost his or her job and may have to move out of Kitchener- Waterloo to find work.

I believe, however, that using tax payer funds to keep businesses from closing or moving can lead to tax dollars being used to keep unprofitable businesses open.  Soon this can lead to “corporate welfare”.  I acknowledge that ‘corporate welfare” can be in the form of tax breaks and other financial incentives so that a business will locate here in the first place.  In any event, it should be avoided.

The foundation of any economy is a majority of people engaging in for-profit enterprises.  It is the only source of revenue for public services and for charitable work.  Money invested in non-profitable businesses erodes on revenue and ends up costing in the long-run.  The more inefficient the allocation of scarce resources the less competitive we are in a global marketplace.

The best thing the tri-cities can do to retain business is to find and maintain a good balance between low taxes and effective community services.  Most of the community services will involve transportation (good roads easily accessible from the highway, railroad station airport etc.).  A community needs to either have inexpensive places to park cars or an effective public transportation system.  Local government can also advertise the community’s benefits to potential new business.  Finally, a community can invest in tourist attractions that will encourage individuals to spend.

According to the M.I.T. study, unit cost is the key factor when assessing the attractiveness of a potential location for a business start-up.  Unit cost not only includes the employee’s wages, but also the worker’s productivity (good education and health-care), its accessibility (highways, airports, rail), and the efficiency and stability of the local government.  A community with an efficient public/private mix, therefore, is essential for keeping unit costs down.

The second factor is whether there is a local concentration of resources and similar businesses to create a “critical mass” of efficiency.  It makes it easier for business to acquire the necessary resources and to and delivering those the goods and services to the customer.  Having local University’s focused on the tech sector makes it easier for businesses to recruit.  Having so many businesses focused on the tech sector makes the supply chain more responsive and inexpensive.  Finally, potential customers will more likely come to your area if there is “one-stop shopping” for your type of good and service.

I believe, therefore, that it makes sense for the tri-cities to try to specialize in one sector.  Although there is a risk in investing in one area (see Detroit) I believe that it is the only why a community can survive in the global marketplace.

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