Canada comes out on top in new business costs report

According to a report released earlier this week by audit, tax and advisory firm KPMG LLP, Canada ranks as the least costly place to do business — in part due to the country’s technology market.

The study compared business costs in 11 industrialized countries in North America, Europe and Asia-Pacific. Canada stole the top spot with a cost index of 91.0, and was followed closely by Australia at 91.5. According to the report, both countries had average business costs that are approximately eight to nine per cent below that of the U.S.

The U.S. showed a cost index of 100.0 but experienced the greatest improvement in cost competitiveness since 2002. According to the KPMG, U.S. costs have improved relative to all countries included in the previous edition of the study because of the lower value of the U.S. dollar against all major currencies over the past two years.

Japan was highlighted in the report as the most expensive country in which to do business, with costs almost 33 per cent higher than in Canada and almost 24 per cent higher than in the U.S.

Canada ranked number one with the same cost index — 91.0 — in KPMG’s last report released in 2002 and has come out on top in all of KPMG’s five published reports. In an unpublished version of the study released in March 1994, the U.S. came out ahead of Canada. According to Stuart MacKay, the Vancouver-based co-author of the KPMG study, Canada moved into its advantageous cost position in 1995 and has remained there ever since.

The report, entitled Competitive Alternatives, the CEO’s Guide to International Business Costs, measured 27 cost components including labour, taxes and utilities applied to business operations in countries including: France, Germany, Iceland, Italy, Luxembourg, the Netherlands and the United Kingdom as well as Canada, Australia, the U.S. and Japan. The study’s basis for comparison was the after-tax cost of startup and operation for 12 types of businesses over a 10-year span, according to KPMG.

The decline of the U.S. dollar in comparison to all other major world currencies has been the most important factor affecting international business competitiveness since 2002, KPMG said, adding that this is why the U.S. had the greatest improvement in cost competitiveness among the 11 countries studied.

The study indicated that there are significant cost differentials between countries when it comes to establishing manufacturing and corporate services operations and that labour costs typically represent 56 to 72 per cent of location-sensitive costs for manufacturing operations and 75 to 85 per cent for non-manufacturing operations.

Other location-sensitive cost factors included facility costs and taxes. According to KPMG, taxes represented five to 11 per cent of total location-sensitive costs for manufacturing and three to eight per cent for non-manufacturing businesses.

Canada and Australia also came out on top when it came to comparing international cities with populations of two million or more. Montreal ranked as the most cost-competitive followed by Melbourne and Toronto, according to the firm. Japan’s Yokohama was the city with the highest costs. When all cities were included in the study regardless of size, the least costly city to do business in is Sherbrooke, Que.

Canada’s work in the wireless and software sectors were both huge factors in making the country attractive to businesses, according to the study. According to KPMG, it “scrutinized telecommunications equipment costs” when performing the study, comparing production costs in the 11 countries and discovering that the production costs in Canada of telecommunications equipment were the lowest recorded in any of the other countries studied.

The firm said that the cost gap between Canada and the U.S. was 4.3 per cent which is, according to the group, enough to make a significant impact on any wireless company’s bottom line.

On top of the 4.3 per cent cost advantage over the U.S., another factor KPMG attributed to Canada’s leadership position in this sector is its 13.6 per cent cost advantage in related software development and 24.7 per cent in research and development.

The study cited companies and groups providing wireless research, products or services including the Ericsson Centre of Excellence in Montreal, Research In Motion Ltd. (RIM) in Waterloo, Ont., the Siemens’ Technology Innovation Centre in Ottawa and Sierra Wireless in Vancouver as examples of why Canada is doing so well in this sector.

KPMG also reported that software design costs in Canada were the lowest recorded in North America, and second lowest in the countries studied. The Canadian advantage over U.S. costs for software design was 13.6 per cent.

The firm included multiple reasons in its report as to why Canada is excelling in the software market. These reasons included superb high-tech infrastructure, long-term assured access to the North American market, the most generous research and development and tax incentives in the G7 and proven cost advantages over the U.S. and other competitors.

According to KPMG’s MacKay, companies that are looking to set up shop in North America, “can’t afford not to look at Canada” as an option.

“Our study is focused very much on costs, it doesn’t pretend to be a total picture of…other issues that businesses have to think about, but the cost fundamentals are so strongly in Canada’s favour versus the United States, particularly in software applications that you really can’t afford not to be looking at that pretty closely,” MacKay noted.

He added that the differences in salary ranges in Canada versus the U.S. for professional, senior level, technical and semi-skilled positions are substantial, another reason why companies may want to make Canada their home.

“There is more than 20 per cent cost advantage in many of the positions that are of interest to IT-based firms. That’s a huge cost driver,” MacKay said. “The other huge cost driver is that there are research and development tax credits that are available on a much more generous basis in Canada than in the United States.”

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Jim Love, Chief Content Officer, IT World Canada

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