The Economics of Site Location in the
North Country

by Colin Read, September 9, 2009

The choice of a commercial or industrial site is complex. Past articles have documented superior housing affordability, workforce steadiness, and location and distribution advantages in Clinton County. Ultimately, though, a site decision must be also driven by the economics of exchange rates, wage rates, and office space costs.

Clinton County has always been considered as a hinterland for Montreal industry. The century-old history of Montreal firms locating in the Plattsburgh region has accelerated of late on the strength of the Canadian dollar. The economic future of this region is invariably tied to the economic health of the Quebec economy and the relative strength of the U.S. and Canadian dollars.

The Canadian dollar has held its own relative to European currencies in a decade which saw the U.S. dollar weaken. With the European Economic Community emerging as a global financial powerhouse and with the economies of China and India growing rapidly, commodities rich Canada has shown world class economic strength. At the same time, the U.S. dollar has shrunk in value commensurate with its decreased prominence as the financial magnet for global capital.

This U.S. misfortune turns out to be Montreal's and Plattsburgh's fortune. The U.S. economy remains the largest economy in the world for the foreseeable future, and the weakened U.S. dollar opens a wealth of opportunity for manufacturers to the North. This tendency will continue to strengthen, as most economists expect the Canadian dollar to continue to rise against its U.S. counterpart.

Trends in the Value of the Canadian Dollar for One U.S. Dollar

Source: United States Federal Reserve Bank of New York

 

As the graph demonstrates, the Canadian dollar has demonstrated an upward trend against its largest trading partner. This pattern is expected to continue as a growing global economy clamors for the commodities and oil Canada produces.

Using data for wages from Statistics Canada and from the Bureau of Labor Statistics in the U.S., and using industry factor usage data published by the KPMG studies of global competitiveness, we can calculate the cost of industrial locations in Montreal and Clinton County. For this analysis, I focus on a few representative industries.

These industries of metals, precision, and plastics manufacturing, and call order centers each require land, office space, an investment in inventory and machinery, and various combinations of skilled and unskilled labor that differ in costs in Montreal and Plattsburgh. For the purposes of this study, I demonstrate Quebec's advantage in electricity and gas costs and wages in executive positions. On the other hand, land and office space costs, and wages for production workers, who constitute the largest share in the wage bill, are typically lower in Clinton County. These relative wage advantages are documented by comparing similar jobs as classified by the National Occupation Code (NOC) in Canada and the Standard Occupation Code (SOC) in the United States. The respective statistical bureaus of labor statistics in Canada and the United States document wages in Montreal and the North Country in 2007 and 2008 respectively for comparable job positions. The Montreal data is further adjusted by noting an average Montreal wage inflation of 3.37% in 2007, as reported by Statistics Canada.

The next series of tables shows comparable wages for a select group of occupations typically required for industry and back offices:

 

The 2008 Edition of “Competitive Alternatives:  KPMG’s Guide to International Business Locations” determined various labor, energy, and facility needs for representative industries. Of the industries considered, I selected Metal Machining, Call Order Centers, Precision Manufacturing, and Plastics Manufacturing as those industries representative of the types that have located in the Plattsburgh region recently. KPMG determines these industries use the following levels of employees:

 

I can take these salaries, and other amortized or upfront costs, totally expected costs for various representative industries:

Cost of Annualized Operations in Clinton County and Montreal for Various Industries

 

The primary driving forces are relative wage patterns in the two nations, which are not expected to change in the coming two decades, and the value of the Canadian dollar, which is expected to continue to strengthen in the coming decades. I document total facility costs for a Canadian dollar that is worth from $.90 to $1.20.

Clinton County Competitiveness for Various Exchange Rates

 

We can see a strong tendency from the wage data and exchange rate scenarios. Site location advantages for representative industries such as metal and precision manufacturing and back office functions are strong in Clinton County, and grow increasingly significant with a strengthening Canadian dollar.

Of course, other advantages, in distribution channels, access to the world's largest regional market along the Eastern seaboard of the United States, and in quality of life and housing affordability must also be taken into account. Throughout, though, the rising Canadian dollar is expected to make location in Clinton County increasingly profitable. As we have seen over the past century, the tendency is clear. A strong Canadian economy is good for Clinton County business, and Clinton County remains an ideal location for Quebec enterprise.

 

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