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A Journey From Coal and Steel to Economic Innovation - Cape Breton Style

Keith G. Brown is Dean and Managing Director of the Department of Economic and Technological Innovation at the University College of Cape Breton, and an Assistant Professor of Marketing in the School of Business. He holds a Ph.D in Marketing from the University of Bradford, Bradford, United Kingdom.

The paper examines the transition of the economy of Cape Breton Island, Nova Scotia, Canada, from a heavily industrialized region reliant upon coal and steel, to one moving towards development based upon knowledge and culture. A closer look at multimedia and entertainment sectors illustrates the breadth of the diversification that is taking hold.
Key Words: Cape Breton Island, economic diversification, multimedia, entertainment

Introduction

Cape Breton Island

Located on the Northeastern tip of Nova Scotia in Atlantic Canada, the economy of Cape Breton Island entered the mid-nineteenth century with rapid development of the heavy industries of coal and steel, while mainland Nova Scotia remained, by and large, a rural, agricultural Province.

The ensuing economic development, rise of trade unionism, and demands for independence from the British industrialists who controlled the economy of the Island, continued through the first half of the twentieth century, finally culminating in the formation of a Federal Crown Corporation in 1967, the Cape Breton Development Corporation (DEVCO).

The corporation played a major role in the economic redevelopment of Cape Breton. Though initially established for an orderly closure of the coal mines and to attempt to diversify the economic base, the oil crisis of the early seventies increased demand for coal internationally and the Nova Scotia Power Corporation embarked upon a plan to convert its oil based power generation to coal.

DEVCO began a modernization program that included closing several mines. Its Industrial Development Division invested in tourism infrastructure, industrial parks, aquaculture, agriculture and forestry.

During the same time frame, the Sydney Steel Corporation (SYSCO) was purchased by the Province of Nova Scotia, which embarked upon a major modernization program. The end result saw the termination of a coke oven based blast furnace and the implementation of electric arc furnaces.

The two industries that drove the industrial revolution in Cape Breton, coal and steel, had been modernized at great capital cost and with tremendous reduction in workforce. The combined industries that once had fifteen thousand employees now have less than two thousand.

At the dawn of the twenty-first century, coal and steel are but a mere shadow of their former selves, in 2000, now employing less than four per cent of the workforce, down from a time when one in two worked in these sectors. The transition from an industrialized to a knowledge and service based economy has been traumatic. As Figure 1 shows, the restructuring of the Cape Breton economy during the past twenty-five years closely mirrors that of the region and the country. Over the last 30 years the Cape Breton economy has been enduring the transitional pains moving from a goods-producing economy to a service-producing economy. For example, almost 47% of all people employed on the Island in 1961 worked in the goods-producing sector. By 1996, that was down to 20.5%. (See Figure 1)

FIGURE 1
Employment Shifts % Distribution

While thousands of new jobs have been created in new sectors, the continued downsizing of coal and steel, coupled with the movement of the "baby boom" into the workforce, has witnessed an economy unable to absorb all those seeking work. The result has been an unemployment rate twice that of the provincial average. To clearly understand the Cape Breton economy and where it is going, we must understand from whence it came and the structural forces that have been affecting it over the last 30 years.

Cape Breton's economy has been undergoing major long-term structural shifts due to employment shifts coupled with an inability to produce enough jobs for the baby boomers. Another structural change having an impact on the Cape Breton economy is the long- term growth of the working age population (15 years of age and over). The working age population for Cape Breton went from 106,000 in 1970 to 125,600 in 1996 an increase of 18.5%. This increase has caused the labour force (labour supply) to increase from 42,000 in 1970 to 65,200 by 1996, an increase of 23,200 or 55.2%.

The ability of the Cape Breton economy to handle this increase has been limited. Job growth has not matched working age population growth on the Island. Employment on the Island from 1970 to 1996 had an average annual growth rate of 1.2%. In terms of numbers, employment for the same period went from 38,000 to 50,100, an increase of 12,100 or 31.8%. Clearly jobs have been created and the economy has grown in sectors other than the goods-producing sector. However, the number of people entering the work force, the baby boomers looking for work, has increased as well. This added pressure has contributed to the high levels of unemployment.
Today the single largest segment of the economy is the service-producing sector which represents 79.5% of the workforce. Other major players are the wholesale and retail trade sector as well as community business and personal services which has more than doubled in size since 1961.

Preliminary estimates for Real GDP indicate that 1997 was a recovery year for the Cape Breton Economy. Total value of all goods and services produced on the Island for 1997 expressed in constant 1986 dollars was $1,729 million, slightly below the 1995 level of $1,733 million, but well above the 1996 level of $1,654 million. While the economy improved in 1997 it is still below the high of $1,780 million for 1989 (see Figure 2).

FIGURE 2
Real Gross Domestic Product
Cape Breton Island 1986 - 1997

Declines in employment over the same period have been deep and long. Employment peaked in the late 1980s followed by a decline from 54,500 in 1990 to 46,900 by 1993 (see Figure 3).

FIGURE 3
Employment Cape Breton Island
Annual Averages 1986 - 1997

According to Statistics Canada's Labour Force Survey, the last time employment on the Island was at or below the 47,000 mark was in 1973. After 1993, employment climbed to 52,700 by 1995. Preliminary estimates reveals a recovery in the job markets for 1997, after another decline in 1996 (see Figure 3).

These figures reflect national trends. The Canadian economy as a whole went into a recession in the early 1990's. Unlike Cape Breton, the rest of Canada recovered from this recession much more quickly.

Employment growth in the goods-producing sectors like manufacturing and other primary is a reflection of the increased growth of export sales, especially for natural resources. Trading partners like the US have been undergoing a period of strong economic growth. The employment growth in the Trade sectors is mostly a function of more household income on the Island due to more jobs. The public sector downsizing effort over the last few years may have worked its way through the system resulting in the positive growth for Educational Services. There are more jobs in the private sector especially related to multimedia and information

The key question now is whether or not economic diversification can take a stronger hold on the economy and produce employment levels better than those of the late 1980's?

As an advocate of the development theories of Dr. Michael Porter, and in particular his work on developing competitive advantage through innovation and competition in key sectors through the clustering principle, there are at least three areas in which Cape Breton has definite competitive advantage to fuel economic growth and diversification: knowledge based, tourism and culture and offshore petroleum exploration and production.

Two Cape Breton approaches, one in entertainment and one in technology are presented as a portion of the "made in Cape Breton" solution to sustainable community economic development. The anchor of the knowledge based industries, particularly in information technology and environmental remediation is the University College of Cape Breton (UCCB).

The Role of Universities in Innovation and Economic Diversification

Cape Breton, Canada, and indeed the world economy, is in the midst of one of the greatest transformations since the industrial revolution of the nineteenth century. Globalization and the birth of supranational trading blocs has rewritten the rules of international commerce and the creation of economic wealth. These rules continue to be rewritten at astonishing speed.

How then does Canada and a sub-regional economy like Cape Breton prosper from these changes? The country or the region must innovate. It must introduce new goods, services or processes that increase the value of what we produce relative to the cost of production. Innovation is increasingly reliant upon advances in science and technology.

To formalize his theories on global competitiveness, Michael Porter examined the economies of twelve countries, including that of Canada. He was openly critical of the practice of regional economic development policies that attempt to lure industries to regions that are economically depressed. He does however, espouse the notion of clustering, building on already existing or nascent areas of strength and attempting to expand or upgrade them. At the center of his cluster theory, is the requirement for continuous innovation in the production of products or services. Dr. Porter believes one of the primary responsibilities for governments in improving economic growth is to create world class infrastructure and central to that point is the strengthening and development of universities that have a strong scientific and technological base. The key is to transfer this knowledge directly to industry.

Historically, the approach to innovation at UCCB has, strategically, not been a centrally coordinated function. Services and centres developed as faculty, had particular research interests, that mirrored those interests of funding agencies. With the signing of a Memorandum of Understanding (MOU) between the Federal Crown Corporation, Enterprise Cape Breton Corporation (ECBC) and UCCB, in 1990, the focus on innovation became more intensive.

ECBC in their Corporate Plan, in conjunction with the strategic economic development plan of the Cape Breton County Economic Development Authority (CBCEDA) recognize the role UCCB must play in the expansion of the economy of the region. To that end, there have been substantive investment in infrastructure and specialized programming at UCCB, funded in large part by the governments of Canada and to a lesser extent, Nova Scotia.

The University of Saskatchewan has recognized the critical link between university resources and economic prosperity: more than 60 Saskatchewan companies have roots in University of Saskatchewan research. Of these, more than 25 have based their products in university technology. University of Saskatchewan Technologies Inc. (UST), the university's technology transfer company, has filed more than 35 patents and licensed 13 technologies developed by university researchers. It is estimated that four to six spinoff companies will develop in each of the next five years. Many of these companies are located at Innovation Place, a 30hectare research and development park on campus. It is one of the largest and most successful development parks in Canada with 100 organizations and more than 2000 employees. Companies are involved in areas as diverse as agriculture biotechnology, telecommunications, animal vaccines, pharmaceuticals, and environmental sciences.

In the early 1980's when the development of fibre optics was in its infancy, Silicon Valley in California and Route 128 in Massachusetts, home of Massachusetts Institute of Technology, (MIT) created enormous industries by enabling inventors and researchers with the tools and resources to develop large scale sectors in knowledge based industries, and both had universities with strong technical, engineering and science departments.

Herbig and Golden (1993) identified several similarities between Silicon Valley and Route 128, one of which was timing: in each innovation hot spot the founding of the innovative firm and the rise to fullblown hot spot is somewhere between 15 and 20 years. Similarly, the Innovation Centre at University of Saskatchewan (announced in 1977) was first occupied in 1983 and reached full capacity of 100 firms in fourteen years. Another interesting point that Herbig has made is the "agglomeration" or clustering to create critical mass with others involved in closely related activities. In fact, Herbig has attributed clustering as one of the points that capture the essence of Route 128's success (Herbig, 1993).

Each of these innovation hot spots were linked to a basic industry that provided a foundation for research:

* The boom of high tech in the Silicon Valley revitalized the defense industry, and to some extent, the agriculture industry;

* Route 128 developed high tech manufacturing components and Highly Qualified Personnel (HQP) in the downfall of the textilemanufacturing and machine industry ; and,

* Saskatoon sprang from research and development needs directly related to the agriculture industry.

In Cape Breton, environmental remediation, information and communications technology and petroleum development will be these basic industries.

The development of Silicon Valley began when William Stockley, one of the inventors of the transistor, decided to set up labs in the Santa Clara Valley. Spinoffs quickly appeared, the most famous of which is Intel. "An historical account of these spinoffs would bear an uncanny resemblance to a family treewith lines going in all directions" (Herbig, 1993). Route 128 developments are rooted in innovations in computer development, usually for armaments. Commercialization ensued as researchers collaborated with financiers and business people. An electronics boom led to prolific development of other new firms.

The entire concept of technology and 'hightech' solutions to chronic unemployment may seem a panacea to many in Atlantic Canada. However, hightech industry development cannot be viewed in isolation. It requires several factors to generate significant economic activity and longterm sustainability including clustering of knowledgebased industries, community involvement, enabling technologies and facilities and equipment.

A Definitional Approach

The trend towards globalization juxtaposed with community based economic development programming may present itself as an oxymoron. World forces move capital across ever increasingly transparent international boundaries while the small rural community may look to its credit union or co-operative to finance the equity portion of its project. An inherently local approach to financing within the global medium of New York, London and Hong Kong. Economist speak of comparative advantage, and often view it through raw materials, access to capital and the human resource. Economic development practitioners also look to these inputs in the econometric model to develop their local strategy.

We turn to two definitions.

Local economic development is a general but diverse social process whereby actors and institutions mobilize to take initiatives to transform the local economy and create new activities, businesses and jobs, or consolidate existing ones by exploiting and enhancing local resources and local potential. These often scattered and spontaneous initiatives trigger off a process of sustainable development inasmuch as they are part of coherent local approaches, they lead to the emergence of innovative mechanisms and new patterns of organization, they foster new projects, and help to cultivate entrepreneurship, and, finally they bring together and involve all partners in the local economy.

The research of Dr. Michael Porter of the Harvard Business School, and most particularly his clustering theories have been drawn upon to assist in the formulation of government policies for regional economic development in Cape Breton. Dr. Porter has written widely on competitive advantage, most recently in The Competitive Advantage of Nations. On the issue of regional economic development policies, he writes:

Regional economic development policies, another popular government initiative, are also often misguided. Many nations and states attempt to lure industries to remote areas or to regions that are economically depressed. Large subsidies, for example, have persuaded steel and auto companies to build greenfield sites in such areas of Italy and the United Kingdom. The result is usually disastrous. The investments fail because they are not connected to a critical mass of suppliers or research institutions. A better approach to regional policy employs the concept of clustering, building on already existing or nascent areas of strength and attempting to expand and upgrade them.

There is no dichotomy in these two positions, and through closer examination the two positions are in fact analogous. While Dr. Porter builds his case for the development of an industrial/knowledge base that is internationally competitive and global in nature, he returns to the local community to do it. Granted his definition of local may at times appear to be national in scale, but on further examination he presents cases of international competitiveness rooted firmly in localized renewable activities.

On the discussion of local he states:

Home-based competitors in related industries with similar skills, technologies, or customers, provides similar benefits: information flow, technical interchange, and opportunities for sharing that increase the rate of innovation and upgrading....The process of innovating and upgrading is inherently local. A company’s home base...where its strategy for global competition is set and where its research on products and processes is carried out--is vital to its competitive advantage. To explain the role of the home base is to answer the key question about international competitiveness today: what are the attributes of a nation, state or city that foster the ability of its companies to innovate and upgrade in a particular industry?

Let’s explore this more closely. We have arguably one of the leading minds on global economic development strategies saying in essence do what you do well, refine it, do it better and export to the world. And, this global competitiveness is inherently local.

The OECD definition talks of innovative mechanisms and Dr. Porter of cluster innovation. Can we apply these two theories within a Cape Breton context? CED is based upon local ownership and control, maximum use of local resources, enterprise activities that create new businesses, linkages of education, enterprise development and employment creation and healthy working environments. Dr. Porter argues that we must do this within a global context. Two cases are explored.

Multimedia: Cape Breton style

Because of a unique combination of academic interest and research, technological knowhow, a culture rich with music and storytelling and the entrepreneurial spirit to diversify, a few local entrepreneurs began to experiment with multimedia. To put this in context; a multibillion dollar global industry that is at home in Orlando and Los Angeles with the Speilbergs and Disneys can take root and flourish in Cape Breton; surely this would be seen as folly or hallucinogenic government policy. These few local firms were in large part completely undercapitalized, lacked marketing expertise and were located on the periphery of the continent. A 21st century type CED vehicle, the Technology Advisory Group (TAG) came together with the common interest of sharing information and transferring knowledge and technology to Cape Breton. The TAG provided a forum for exchange of knowledge and of equal importance, networking. With several hundred members, more than one hundred of whom meet every third Thursday at the University College of Cape Breton, the synergies were and are palpable. More and more people began to showcase their interest and talents in the rapidly growing world industry of "edutainment" (education and entertainment) Research and debate, travel to trade shows, more debate and discussion and as the process continued, a group, or one could argue in Porter terminology, a cluster began to take shape. Too small to effectively compete with the major players, too small to be taken seriously in the boardrooms of Houston or New York gave way to the germ of an idea of coming together to share resources, but remaining independent and autonomous. Silicon Island was born.

A group of local businesses would take a former sick municipal building and turn it into a state of the art multimedia cluster, located in a park setting, and market Cape Breton ingenuity to the rest of the world. Government was asked to provide the infrastructure. Porter argues this is one of the key roles of government in economic development. In the Autumn of 1998, Silicon Island opened its doors and ports to the world; minutes from the Atlantic ocean and seconds from Tokyo, London and New York. The facility is completed leased with 22 tenants and the waiting list grows. Digital animation, virtual reality, interactive distance education, media production, C.D. ROM development sent down the fibre cable to the world. A local idea to take on the world. A made in Cape Breton contribution to diversify the local economy. This one can argue is the definition of CED within a global context; Cape Breton Style.

Celtic Music with a twist

Is Silicon Island an anomaly on this Island rooted in heavy industry where one worked for the company but never owned it, drew from the natural resources without due consideration to the ecological toll and looked for solutions off island? Simply put; no!

Ten years ago before the celebrated success of Rita McNeil and the Rankins, before the Barra MacNeils, Ashley MacIsaac and Natalie MacMaster, a group of local entertainers and would be promoters, argued successfully to the Cape Breton Development Corporation that entertainment could be an industry on Cape Breton: for the vocalists and musicians but also for the recording technicians, lighting crews and technical staff. With Nashville and Toronto and Los Angeles supplying American music to the world, where would be the niche for home grown talent? The key here is the niche. The mass market was not interested in the traditional Celtic product so what does one choose to do. A long tradition of music in church halls and firehalls, playing for twenty dollars is fun, but not an industry. Groups came together and talked. Community groups wanting to celebrate their local festivals came on side. Artists took their traditional music and gave it a distinctive upbeat Cape Breton style or dug deep for the old, haunting tales from a time when there was nothing but community and neighbourly support and reminding urban Canada of a simpler, harsher life. The sound was marketed, the sound was showcased, the promoters were brought to Cape Breton to see and hear for themselves and the community performed. The sound was selling in Canada and the United Kingdom and five million disks later, Rita MacNeil and the Rankins were major players promoting the Cape Breton sound. Local technicians wanted to keep the technical side on the Island and recording studios are now charting the course for performers from Cape Breton and Toronto and Ireland as well. Once more, as in the case with Multimedia, Cape Breton is not only not on the periphery but increasingly at the centre of the cultural industries in Canada. This too as the result of home grown commitment and dedication done within a context of lawyers in New York, accountants in Toronto and technicians in Cape Breton. Millions of dollars of new income, hundreds of jobs, a renewable resource of endless talent; once again a Cape Breton solution wrapped within a Porter cluster.

Conclusion

Is there a contradiction to CED and globalization? This thesis suggests the two are inextricably linked and those of us who are practitioners or academics in the field must encourage local communities and community groups to embrace globalization and the resultant niche opportunities for innovative, entrepreneurial solutions for regional, national and international demands. Economic development practitioners on Cape Breton Island have embraced the notion than the two not only must coexist, but can do so in harmony. There is much for others to learn from the Cape Breton model of economic development, redevelopment and sustainability.

Historically, the natural resources of coal, timber and fish were exploited on Cape Breton with little to no regard for the resource or the impact on the environment. As the traditional industries are no longer sustainable, the residents of Cape Breton must look to a new natural resource; the ingenuity and talent of its people. One hundred years of heavy industry has taken a heavy environmental toll on the urban areas in and around Sydney. Ironically, as attention turns to remediation of these industrial sites, a new undustry based in knowledge, science, technology and research is developing.

The result of this full circle of industrial development, combined with emerging and enabling technologies, positions Cape Breton, once again at the dawn of a new century with knowledge development poised to replace industrial development.

Endnotes

References