Cluster development and alignment key to boosting Toronto's worrisome productivity

Institute for Competitiveness & Prosperity

The Toronto region has a productivity problem and a new report points towards steps that need to be taken to capitalize on its deep clusters by innovating and improving on a continual basis. Despite its huge concentration of wealth and skilled forceful, the Greater Toronto Area (GTA) is experiencing negative productivity growth with GDP per worker declining 6% between 2000 and 2010. That places it dead last among a list of 12 North American comparator regions

The report — entitled Toward a Toronto Region economic strategy — advocates for a strategy built on a strongly articulated economic vision , business-led clusters, foundation initiatives (smart technology, energy, transportation, human capital) and strong regional governance to grow the region's economy 10% by 2025.

Produced by the Institute for Competitiveness & Prosperity (ICP) in conjunction with the Toronto Region Board of Trade, the report is the third document to be released under the Board of Trade's Think Twice, Vote Once — Decision 2014 campaign to stimulate discussion on pressing issues facing the region. A leading priority is the development of a strategy based on the research of economic theorist Michael Porter, Harvard Univ.

"This (strategic framework) is the first of its kind for the Toronto region and aims to highlight areas where businesses can work toward heightened prosperity," states the report. "It will take some time to reach the level of alignment, sophistication and funding of the strategies of our competitors".

In line with Porter's theories and those of the ICP, the greatest potential for growth and productivity is in the area of traded industry clusters — as opposed to local or natural resource clusters — which are important contributors to the manufacturing and service industries.

What makes the argument for greater productivity even more compelling is the size of the Toronto region's economy relative to Ontario and Canada as a while. Toronto accounts for 45% of the province's GDP and 18% of national GDP — a ratio far higher than those of its comparator regions.

"These clusters ... have tremendous potential for growth and spillover effects. It is hoped that actions within these clusters will help boost others. Of course, many other clusters could also be considered for the development of coordinated business strategies," states the report. "A number of bold changes are needed, some long debated and overdue, and some largely overlooked."

Traded clusters account for 38.1% of Toronto's total employment — the second highest in concentration and fourth largest in absolute size when compared to its peer regions. Financial services and business services are by far the largest of Toronto's traded clusters, employing 263,000 and 168,000 respectively.

Of the top 10 traded clusters, however, only five experienced positive growth between 2001 and 2012. The report suggests that collaboration between clusters, defined by a coordinated strategy, holds considerable promise for improving their competitiveness in the areas of innovation, workforce development and export promotion.

Of particular importance within Toronto's 41 traded clusters are the 21 considered to be specialized. They include six high-performing clusters that are "gaining rapidly in share of national employment". The report identifies five — financial services, IT, processed food, education and knowledge creation and life sciences — as particularly important for their "broad and positive spillover effects across the region".

When combined together and with other clusters, their impact could be even greater.

"Strong Financial Services, Education and Knowledge Creation and Information Technology clusters have the potential to produce a multiplier effect on the economy, as these clusters are the key drivers of productivity for all businesses," states the report.

But for sheer impact, the financial services cluster possesses the greatest potential. Employing 10% of the labour force and second in employment size to New York City, productivity increases will "deliver big gains for the region as a whole".

The financial services cluster is defined by a stable financial regulatory regime, highly educated workforce, increasing foreign direct investment and lower business costs compared to peer regions.

The report notes that the cluster is challenged by the possibility of frequent changes in global regulations and compliance requirements and should consider diversification of revenue sources by exporting and investing in new global markets.

"Federal and provincial governments must balance the stability and reliability that come from a sound regulatory environment with the burden and unintended consequences of phasing in too many regulations too quickly or failing to streamline them to spur the competitiveness of the cluster," states the report. "This is particularly important because of the size of the cluster and the relationships it has with other sectors, such as Information Technology."

IT is also considered key to Toronto's future competitiveness. The cluster contains several sub-clusters including hardware and software, computers, electronic components and assemblies, peripherals, fibre optic cable and communication services.

With strong public support, IT has the potential to lift the fortune of many other clusters, although the report notes that most IT firms are small with 95% employing fewer than 100 people.

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