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March 21, 2014

Chrysler, Cisco and the business of government subsidies

Two weeks ago Chrysler Canada CEO Sergio Marchionne shocked many by announcing that he would withdraw his company’s request for government assistance (read: an investment subsidy) for investment in the automaker’s Windsor and Brampton production facilities. Public reaction was split. On one hand many cheered the move, believing that government should stay far away from intervention in the market. On the other, a certain sense of trepidation took hold for many as the company’s future in Ontario grew far less clear.

Now Marchionne vehemently disagrees that the support he was seeking was a subsidy. As he noted during the announcement, “…the designation of the support mechanism which is available globally to everybody who invests in the car business today is referred to as a handout. A handout is not what Chrysler wants. Chrysler is not in the business of accepting handouts. And if provincial and federal authorities in Canada think that’s the way to attract foreign investment, I think they are in for a big shock.”

The semantics of handouts vs. subsidies vs. partnership is a tricky one. Moreover, it’s quite easy to argue that such “support mechanisms” are antithetical to taxpayer interests. Why should any single company get preferential access to capital and support? On the flip side is an argument around the gravitational pull of large anchors. Chrysler’s facilities in Ontario aren’t the only ones at risk should the company decide its best option is elsewhere. Rather, the significant supply chain of tier 1 and tier 2 parts suppliers will be at risk as well.

In Ontario, while some 35,000 work directly for one of the five auto manufacturers in the Province (GM, Ford, Fiat-Chrylser, Honda, Toyota), another 70,000 work for vehicle parts manufacturers that feed directly into those production lines. And while some might argue that there is not a 1:1 relationship between job losses at the OEMs and job losses in suppliers, the DEEP Centre’s recent interview work with Canadian CEOs does indicate that the movement of major customers south of the border places significant pressure on parts suppliers to consider new investment closer to those OEMs.

Turning to another recent case of government support for private industry, this past December  Cisco Systems and the Government of Ontario announced a deal that sees Ontario allocating upwards of $190 million towards what could be a $4 billion research and development hub. According to both parties, the deal could mean upwards of 1,700 new jobs in the province.  In theory, one might argue that the mix of academic institutions and hi-tech companies in the GTA, as well as a competitive tax and research incentive mix, would land such deals without cash. However, as Robert Lloyd, Cisco’s president of development and sales, notes when asked whether the provincial contribution was necessary, “the company gets approached “every day” by policy makers from Poland to North Carolina who are vying to bring such jobs to their own jurisdictions.”

The reasons for this competition are that, like in auto manufacturing, attracting a hub like Cisco’s isn’t just about the 1,700 direct jobs. Rather it’s the benefits to employment across the sector in the supply chains, spinoffs from research investments, and local partnerships on commercialization and technology transfer. My academic research on North American economic policy highlights that this type of competitive subsidization for anchors is a key plank of most state and provincial-level economic development policy. Building strong clusters requires not just academic and entrepreneurial assets, but also corporate anchors to facilitate the transfer of management, capital and experience to turn local assets into highly-competitive national ones.

That said, what’s important to note, is that policy makers aren’t simply throwing cash at anchor-companies. Behind the scenes, there’s a significant shift towards ‘growing your own,’  and helping domestic firms scale into the type of global leaders that every jurisdictions seeks to attract. The costs of moving shop are significant, especially for younger firms, and so the more policy makers can do to keep firms grounded domestically by helping them access private and public capital, as well as facilitating access to the growth markets that aren’t on this side of the border , the less we’ll pay in the long-term.

To be sure, this doesn’t address the concerns of those who think government should sit on the sidelines. However in a hyper-competitive global economy, and as a plethora of our CEO interviews indicated, playing the role of ‘boy scout’ while other jurisdictions seek to provide their firms and entrepreneurs with a leg up, won’t get us very far. Rather, our government has a strong role to play in ensuring that Canadian firms face a level playing field both here and abroad, and ensuring that the domestic environment, be it framed by firms big or small, is the most conducive to growth as possible.

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