KPMG report: Non-cost factors help Canada compete globally, offset high dollar

April 1, 2008

The depreciated US dollar has eroded Canada’s previous cost advantage and has challenged the country to become competitive in other ways, according to KPMG’s 2008 Competitive Alternatives study that compares business costs in 136 cities in 10 counties in North America, Europe and Asia Pacific. Canada and the United States now lead the G7 countries for affordable business costs. Mexico, new to the 2008 study to allow a comparison among the North American Free Trade partners, is the least expensive place to do business, with costs approximately 20.5 percent below the US baseline, while Germany and Japan remain the most expensive countries in which to do business.

The results were determined using recent exchange rates, with the Canadian dollar valued at US$1.00, up 17.4 percent from 2006.

“With the Canadian dollar at par, Canada is challenged to maintain the competitive edge it once held,” said Mark MacDonald, Global Director, Competitive Alternatives, KPMG. “Canada has to present a clear value proposition to businesses in other areas. One example of this is the federal government’s recent cuts to corporate income tax rates, which are among the lowest for a wide range of operations among countries surveyed.”

Among major Canadian cities, Montreal and Halifax have the greatest cost advantage relative to comparable US cities. In the past two years, business costs have risen most rapidly in British Columbia and Alberta, reflecting the western economic boom of recent years. Previously, Vancouver and Toronto were ranked as the most costly cities in Canada. Vancouver still holds the number one spot, but now it is followed by Calgary and Chilliwack, BC, then Toronto.

“What stands out in the 2008 survey is how strong Canada ranks globally in terms of the non-cost factors that were considered,” said Glenn Mair, MMK Consulting, one of the study authors in association with KPMG. “Canada consistently ranks well when we consider environmental regulation, education attainment, housing affordability, labour force and energy availability—all of which are important business location considerations.”

The study measured 27 significant cost components that are most likely to vary by location, including labour, taxes, real estate, and utilities, as they are applied to 17 business operations, over a 10-year planning horizon. The study also compared data on a variety of non-cost competiveness factors. The 6 month research program covered 136 cities in Australia, Canada, France, Germany, Italy, Japan, Mexico, Netherlands, the United Kingdom and the United States. For the first time, the study includes all 3 NAFTA countries and all 50 US. states, in addition to its traditional G7 coverage.

Canada and International Comparison

Canada

• Canada statistically ranks 2nd overall and first among G7 countries for affordable business costs, with a nominal 0.6 percent cost advantage over the United States.
• Canadian corporate tax rates, incorporating future effects of the tax cuts announced in last October's mini-budget, are now moderately low in comparison to the US and a number of the other countries studied.
• Drawing on the data comparison of non-cost factors, Canada was strong in the following areas:
• Canada ranks second in terms of environmental performance after France; it is perceived as a country with environmental laws that are most compatible with business competitiveness.¹
• Total labour costs are lowest in Mexico by a significant margin; however, Canada ranks much higher than Mexico on quality of life issues, such as healthcare, crime rates and education, which are included in the study for the first time.
• Globally, Canada ranks second for educational attainment and expenditures, and achieves top ranking in terms of educational outcomes.
• Canada is one of the top rated countries in terms of ethical business practices, ranking second for perceived low levels of corruption ² , while the US ranks eighth and Mexico last.

¹ International Institute of Management Development (refer report exh. 6.14)
² Transparency International (refer report exh. 6.13)