Vancouver, the pros and cons of our splendid isolation

The guest post was originally published on Thirdi Software‘s Blog on February 12, 2010.

270px-PacNW_satelliteThis is the 2nd post in a series of 3 that look at Vancouver’s position relative to other major centres of innovation and development. In it I draw from the perspectives of experts at Vancouver’s economic think tank the VEDC (Vancouver Economic Development Commission) and from a growing software development and internet marketing firm based in Yaletown, Thirdi. The first installment looked at availability of office space and inter-city economic competition as factors in firm location. Today we look at the broader implications of our business climate as it relates to our overall geography.

Vancouver is an entrepreneurial hotbed. We have one of the strongest and diverse entrepreneurial sectors of any city in North America, but there’s a dark side to this statistic. We have little in the way of large management structures, the kind that major companies and government offices offer. This means that graduates from SFU, UBC, BCIT and other schools often  have no clear-cut career path and difficulty even finding entry level positions. In a city like New York or Chicago the abundance of large employers means more opportunities for graduates right out of the gate. A few years with these companies and the large scale projects they tackle, means skill sets can be developed that enable workers to either advance within the large management structure or build upon their accomplishments by starting their own thing. A city like Washington DC, with a massive administrative pool of government offices also offers similar opportunities for career growth and lifelong learning. Vancouver however, has comparatively far less in the way of large management structures from the private or government sectors found in these kinds of cities. To make up for this, in typical west coast fashion, we do our own thing.  And our business culture has a big impact on what kind of companies begin here and stay here. It’s one of the key reasons for our strong entrepreneurial sector and for our position in relation to other major centres. As Matt Friesen, founder of Thirdi puts it:

“Business in Vancouver is shaped by the West Coast lifestyle. No other city in North America puts as much emphasis on live/work balance as Vancouver does. That is great for small businesses like Thirdi, where our culture can accommodate unconventional hours and telecommuting employees. Many large corporations, however, don’t have the flexibility to work like this and fail to attract the best talent because of it.”

It’s hard to argue the fact that Vancouver is indeed perhaps the awesomest place on the planet but our location also has distinct challenges that shape the business climate. Because Vancouver is so stunningly beautiful (with amazing restaurants and lifestyle options) the cost of living for both individuals and companies is extremely high. High rents, severely unaffordable housing prices, and the fact that an average glass of wine in an average restaurant can go for $11 all add up. Cost of living is a major factor to a company deciding where to put itself or a company trying to grow, the costs of doing business is another. Once again Vancouver’s geography is both a blessing and a challenge here too. Nick Molnar, Thirdi’s Web Strategist and resident economist, emphasizes the challenge of cost. “Vancouver’s high cost of living can be a killer for small companies. New businesses grow at an intermittent pace, and sometimes the difference between survival and death during the lean periods is literally a few hundred dollars a month in rent or a few thousand dollars in taxes. Subsidies, grants, and incentives do not solve this problem; in fact, they make it worse through their corresponding tax burden. A lean startup is a healthy startup, and it is incredibly difficult to run a lean startup in this city.”

Though a corresponding tax burden is often a reality of subsidization, BC has one of the most competitive taxation structures of any province-despite recent outrage over the new HST. Our general corporate income tax rate has been reduced from 16.5 % in 2000 to 10% in 2011. Our combined federal and provincial tax rate will be at 25% by 2012, well below the average US rate of 35% and further reductions in small business taxes will bring them down from 3.5% to 2.5% (VEDC). We should be swimming in large corporate offices if we just took into account those numbers, but we’re not. Clearly we’re beautiful and fun to be around, our taxes are competitive and welcoming to businesses. So why aren’t large corporations flocking to us with their thousands of cubicles, pods and boardrooms? They can afford an $11 glass of wine after all.

Our location clearly impacts not only the business culture of the city but the cost of operations. And it’s not just for small companies trying to run a lean startup as Nick points out. Vancouver is also a relatively isolated city, in some ways splendidly so, and while many innovative and young companies might value that it can be an issue for large companies in particular. As I spoke with Jonathan Kassian, Manager of Research & Communications at the Vancouver Economic Development Commission, earlier this week he used an example from close to home, Boeing’s decision to relocate to Chicago from Seattle.

For nearly 90 years Boeing had been a major employer and technological innovator in Seattle, a driver and supporter of the aviation and high-tech industries in the region. But in 2001 the company moved their offices to Chicago, while some manufacturing and design facilities remained behind. Access to both government and markets were the main factors. Chicago’s O’Hare airport was the busiest on the planet at the time and a two hour flight from Washington and New York. So no matter how small we’re told the global village is getting, geography is still a major factor, and that wasn’t all. The State of Illinois offered nearly $50 million in incentives while the City of Chicago also put in about $20 million. It was impossible for Boeing to say no basically. The lifestyle and beauty of the pacific NW lost out in the end to the better integrated and positioned Chicago (and Scrooge McDuck bags full of money).

To begin with, Vancouver has even fewer large corporate offices than Seattle and is comparatively restricted to the American market by our international border. Restricted is perhaps a harsh word, but despite the barriers that have been broken down over the past 20 years international borders still mean transaction costs, politics and paperwork. So if Seattle can be hustled by Chicago then Vancouver can too (or by Toronto or Montreal).  In Keeping with the aviation theme, Vancouver’s connection to international destinations i.e. markets and centres of production, is also affected by our protective airline regulations that favor our own domestic carriers. High-tech goods are most often shipped by air rather than ocean liners and if YVR is less integrated with certain important locations (Taipei,The Benelux, Tel Aviv, Mumbai, Singapore) then the costs of transporting goods both internally within a company structure or externally to markets, of which once again Vancouver is geographically removed from, means increased time and increased costs; neither of which make a company more competitive. So when thinking about why we have fewer large offices and management structures in comparison even to our pacific NW neighbours just down the road, the answer is clearly more nuanced than one might first think.

So what’s Vancouver to do? What’s BC to do? And what have we been doing? Aside from being beautiful…

Well a lot actually. The City of Vancouver has been focusing on increasing density and allowing more housing to come on the market (STIR, Laneway Housing and other initiatives) and hopefully this will help to bring down home prices and the cost of living. Taxation policies have been increasingly favorable to businesses and incentives have been introduced. Just last week the BC government announced a package of industry incentives supporting video game, film and television production. According to Phil Heard, CEO of VEDC “The Province’s move is well-timed, and helps make BC and Vancouver one of the most competitive jurisdictions for digital entertainment, one of the cornerstones of our growing knowledge economy.”

That growing knowledge economy that Herd acknowledges, and that Mayor Gregor Robertson recently recognized at the opening of W2 Culture and Media House, is comprised of thousands of startups, innovative entrepreneurs and even a few big fish that know the value of lifestyle as a “Second Paycheque”. Vancouver will likely never be like New York, Chicago, or Toronto. But that’s precisely what so many people out here like about it.  We’re fresh, we’re young, we do our own thing, we innovate, we cluster and network, and frankly we like it. But can we, with our high-tech, biotech, greentech and software industries, get to the top echelon of globally competitive cities on fresh thinking, good looks, networking and innovation alone? Will not having the large management structures that government and corporate offices create hold us back?

Though we’ve looked at some of the factors influencing why our business climate is the way it is, and why when it comes to major technology and software production we’re positioned this way, we still haven’t found the answer we’ve been searching for. What will it take to put us at the top? We’ve addressed a few of the reasons why we’re not quite there yet perhaps, but many more still remain. Taking into account what we’ve looked at in the past two articles, my third installment will go out on a limb and attempt to answer how we might just get there.

Wes Regan is an industry trends blogger with Thirdi and the Communications Liaison at Building Opportunities with Business, a community economic development non-profit in Vancouver.