Regional Competitiveness Index: An Understanding of the Methodology

By Ayaz Mahmood Ghani

Submitted to: Christine Snow Executive Director NorthEast Avalon Regional Economic Development Board

Abstract Why do some regions grow so much faster, and have much better economic performance, than other regions? What are the important players behind such differences? Which policies can governments pursue to improve the relative performance of their economies? Is there a way to measure the performance? These are the kind of questions that motivate an analyst or policy makers for the competitiveness of regions. This sort of idea has been strongly criticized by some theoreticians; however, the importance of the underlying challenges makes it unlikely that this issue will lose the attention of policy makers soon. The main goal of this paper is to present a methodology to calculate a competitiveness index with significant economic and societal indicators that best fits to understand Newfoundland and Labrador and its surrounding regional economies.

I. Introduction Provincial and regional governments are struggling to find ways to manage the present economic challenges while preparing their economies to perform well in an increasingly complex global arena. Given the extensive and necessary short-term efforts related to addressing the most pressing fiscal concerns, it remains an important issue for a region to establish the platforms building economic growth and development for the longer period. The issue of regional competitiveness is at the forefront of the economic debate during the last two decades. The role of the regions in this new global economic environment is vital, and not only limited to being national, geographic and financial subfields, but also very important in driving economic growth forward. Elements of globalization, such as international trade, FDI, human resources specialization and mobility, and regional competitiveness (Best 1991) have influenced deeply the regions competitive profile, and therefore, enhancing the levels of regions attractiveness. According to Kotios and Tselios (2002), a form of new competition with major component being international and local investment on industrial reconstruction is taking place regionally and globally. The new competition ideology is mainly used to explain the competitiveness of a place, and regarded as being an extremely interesting research topic for many analysts and policy makers, since it has been related to dramatic changes in the economic power distribution. According to Lever and Turok (1999), places are unlikely to compete like business enterprises, but they compete in order to increase their attractiveness to the potential target markets, such as R&D investments, tourism, specialized human resources, transportation infrastructure, high technology, innovation activities and efficient education systems. The regions also compete in order to increase the quality of living (Wong 2001), and the environmental standards. The complexity of current global economic environment has made it more important matter to recognize and encourage the qualitative and quantitative aspects of growth, integrating such concepts as inclusiveness and environmental sustainability to provide a better explanation of what is needed and what will work. Hence, we need to explore which factors are necessary to ensure that national and regional competitiveness remains sustainable over the longer term.

II. Regional Competitiveness Index The term regional competitiveness is used for explaining the ability of a region to satisfy the needs and demands of goods and services in the national, regional and global markets, incurring an increase and sustainable level of income, comprehending that the differences in infrastructure, and human capital are primarily recognized as contributing significantly to the changes in regional competitiveness (Commission of the European Community, 1994). Canova (2000) explains the case of European Union where economic integration and the arrival of the euro currency have created the competition among the regions as the national borders have stopped to identical with the economic borders. Moreover, Cheshire (1999) agreed with Canova (2000) adding that the European Union integration increased the range of competition between local economies since the obstructions to movement are minimized and the restructuring produced by integration created new local opportunities. The impact of these factors combines together to generate increased incentives for the regions to develop competitive policies. The importance of competitiveness of a region has increased during the recent decades. The features of competitiveness gradually become one of the vital components in regional development policies. A lot of regions in Canada, including Northeast Avalon, are looking for perspective openings where they could increase their competitiveness, and economically and socially develop. One of the most important stages in strategic planning and the improvement of regional competitiveness are the measurement of present competitive position and potential of a region. Regardless the vast amount of research on regional competitiveness, the researches about the methodologies and techniques of measurement of regional competitiveness are inadequate, particularly in Newfoundland and Labrador. The indexation systems are considered to be one of the methods to analyze the problem, but the methodological aspects of the measurement of regional competitiveness by a composite index have not been analyzed profusely in empirical literature. The indices of national level competitiveness (Global Competitiveness Index, 2011) have been formed and widely applied in the world, but they are generally intended for the measurement of the competitiveness of a country. However, the lack of the researches in the measurement of competitiveness within a country is mainly due to its limited application to policy makers and analysts working towards macroeconomic results. Hence, a regional competitiveness index is abstained methodologically, and therefore, the ability to measure the competitiveness of regions within a country or a province is still absent. Limited means of complex measurement of competitiveness has become a constraint which prevents from measuring a competitive potential of a region and forming effective strategies of increase in competitiveness. The aim of our paper is to build a methodology, with significant economic and societal variables, that will enable Newfoundland and Labrador to create a regional competitiveness index. The theory of competitiveness is still vague and a difficult field of research because of complexity of the concept, large number of variables, and underlying complication of competitiveness process. In this paper we will use the definition by Global

Competitiveness Index (2011) where a regional competitiveness is defined as an ability to use factors of competitiveness in order to make a competitive position and maintain it among other regions. The definition is also fitting for provincial and regional purpose, and allows considering the competitiveness as a self reinforcing process, where current inputs of competitiveness produce future factors of competitiveness, and sequentially outputs become inputs for a new cycle of competitiveness process. However, there is a possibility that the whole process can operate in the opposite direction (Global Competitiveness Index, 2011). This characteristic is fundamental for strategic planning, where the process of improving regional competitiveness is an ongoing and cyclical process. Hence, the strategic decisions should be based on the up to date results of the measurement of competitive position and potential of a region. Several indicators are driving productivity and competitiveness of which emphasis has been given on investment in physical capital and infrastructure, and more recently, to interest in other sectors such as education and training, technological progress, macroeconomic stability, good governance, firm sophistication, and market efficiency, among others. Most of these indicators are important for competitiveness and economic growth, but they are not mutually exclusive. This means that two or more of these variables can be significant at the same time, and as a matter of fact that is what has been shown in the economic literatures. This flexibility between the indicators and competitiveness and growth is captured within the competitiveness index by including a weighted average of many different components, and each component is set to measure a different aspect of competitiveness. In order to fit the conditions of Newfoundland and Labrador and its surrounding regions, the components are grouped into five categories. 1. First Category: Innovation The first category that is used to explain competitiveness of a region is innovation. Innovation is still a vague idea regardless of the interest it now produces among the policy makers. There is no particular way defined to measure the respective variable since it has a wide spectrum of factors influencing it. We even do not have enough information about how new products and ideas come about in the regions, how innovation enters and diffuses in the markets, and what concerns are caused by its impacts. According to the Global Innovation Index 2011, the variable is defined as an integrated metric based on carefully selected and weighted variables. The report mentioned that developing innovation index had constraints mainly due to unavailability of data and no information on which factors interact and influence innovation. However, its importance lies as a tool to assess relative positions and to refine regional and national innovation policies. Similarly our goal is to create an innovation index to comprehend the position where each zone in Newfoundland and Labrador lies, and therefore forming an understanding of intelligent community. 2. Second Category: Taxation The second category is taxation. The effective use of this variable is significant in maintaining good market efficiency. Countries with efficient market system are well placed to produce the exact mix of products and services provided they know the demand and

supply. An efficient market system is also built to ensure that these goods and services can be effectively traded in the economy. National and regional market competition is crucial in boosting economic growth and business productivity by providing that the most efficient business or industry, supplying goods and services demanded by the consumer, are those that advances. The optimal condition for the exchange of goods needs a minimal hindrance to business activity through government intervention. One significant indicator to measure such impediment is distortionary or burdensome taxes. The recent study measuring the regional competition using efficient tax policy has been carried by Djankov et al. reported in their article The Effect of Corporate Taxes on Investment and Entrepreneurship (2010). However, the study discussed the global impacts and limited to only corporate taxes. Another research carried by Pricewater Cooperhouse and details reported in their article titled Paying Taxes 2012 Global Picture showed how governments can create an environment through fair and sustainable tax system to foster business investment and economic growth. However, the study generated a set of indicators that measured the general tax systems from the point of view of business and how business complies with the different tax regulations in each economy. In our study, we will carry survey analysis on tax systems similar to the study carried by Pricewater Cooperhouse in the twenty economic development zones in Newfoundland and Labrador, and to take it further, we can apply our analysis and procedures at provincial level. 3. Third Category: Property Rights The third indicator is property rights, an important indicator needed to understand the state of judicial and legislative rules and regulations of a state or a region. Prosperity and property rights may not seem related at first instance, but both the variables are correlated. Nations and provinces likewise, prosper when the property rights are well defined and protected. Rights will be defined and protected when the benefits are greater than the cost; once the transaction cost and policing cost are taken into account. If there is no transaction or policing cost, then it does not affect when rights are assigned or partitioned. Insecure or weakly enforced property rights increase the risk of expropriation, which decreases incentives to invest and to produce, decrease productivity by necessitating the need to defend property, fail to facilitate gains from trade, and will not be able to serve as an important tool in supporting other transactions such as obtaining financing via its role as collateral. Hence, to comprehend the state of the property rights in Newfoundland and Labrador and its surrounding regions we need to take into consideration while creating a regional competitiveness index. 4. Fourth Category: Red Tape The fourth indicator is red tape, a measurement that is used to calculate the efficiency of institutional environment. The quality institutions have a compelling influence on competitiveness and economic growth. Red tape, a bureaucratic constraint, has the ability to influence investment decisions and the organization of production. The respective indicator is also a significant element playing a key part in the ways in which societies distribute the benefits and bear the costs of development strategies and policies. An example of red tape can be found in the case where the land owners, corporate or

business shareholders or intellectual property are reluctant to invest in the improvement and maintenance of their property if the property rights are not safe or protected. We will conduct the study on managers perception of red tape in their respective organization using survey analysis. The survey will have questionnaires for which the managers need to indicate the extent of their agreement on scales of one to ten. The larger scale in our study will enable us to evaluate the perception in more depth and understand the impact of red tapes vividly and precisely. A scale of informal red table, external and internal red tape has been established from certain survey items. 5. Fifth Category: Transportation The last category used to understand the state of competitiveness of a region is transport infrastructure. The competitiveness of a region is not only limited to micro and macroeconomic indicators, but they are also dependent on social aspects. Although, competitiveness is a measure that is being used to make comparative analysis between the Provinces or regions, it is widely used for categorizing and understanding the competitive level of local and regional government; therefore, creating an image of a prosperous city in front of public eye. A strong network and well developed transport infrastructure depends upon the investment made on the transport industry by government and non-government organizations. Since investment in transit projects can result in economic benefits, both national and provincial government need to focus on transport system and availability. Due to lack of involvement of the Federal government, the provincial government often relies on benefit-cost analysis when dealing with transport infrastructure project. Policy makers, to a greater extent, are weighing the potential economic returns of competing highway and transport infrastructure investments cautiously when selecting projects. 6. Model of Regional Competitiveness Index In this section, we present the model used to define the regional competitiveness index of Newfoundland and Labrador. The weight of the variables required to calculate the sub-indices are mentioned in each block of the model. The calculation of regional competitiveness index is based on successive aggregations of scores from the indicator level all the way up to the overall regional competitiveness index score. Unless suggested different procedure to calculate any particular variable, we use an arithmetic mean to aggregate individual variables within a category. For the higher aggregation levels, we used the percentage shown next to each category, and will represent the categorys weight in respective to its primary category. The percentages calculated for sub-categories are reported to the nearest integer; however, actual results are used in the calculation of the regional competitiveness index. Figure 1 below shows the main model that will be used to compose the regional competitiveness index for Newfoundland and Labrador and its surrounding regions. The model is show with the respective five categories discussed earlier, and the weighting of the sub-categories are determined as per the instruction followed by Global Competitiveness Index (Global Competitiveness Report, 2011) where the sub-index weights are chosen in relative to the income thresholds for stages of development.

According to Statistics Canada (2011), the per capita GDP for Newfoundland and Labrador during the year 2010 was $55,213, and has been following a rising trend. Since the per capita GDP is more than $17,000, Newfoundland and Labrador is in innovation-driven stage. Hence, the weight will be given more on the innovation category in relative to others. Figure 1: The primary Model for Regional Competitiveness Index.Regional Competitiveness Index

Innovation (40%)

Taxation (15%)

Property Rights (15%)

Red Tape (15%)

Transportation (15%)

Similar to Global Competitiveness Index (Global Competitiveness Report, 2011), for a category i composed of K indicators, we have:

category Formally, we have:

i

=

indicatork =1

K

k

K

[{6 x (country score sample minimum)}/ (sample maximum sample minimum)] + 1 The sample minimum and sample maximum are the lowest and highest country scores in the sample of economies covered by the regional competitiveness index. In some instances, adjustments were made to account for extreme outliers. For those indicators for which a higher value indicates a worse outcome, the indexation formula takes the following form, thus ensuring that 1 and 7 still corresponds to the worst and best possible outcomes, respectively: [{-6 x (country score sample minimum)}/ (sample maximum sample minimum)] + 7 The next couple of section will extensively explain the respective five categories. The variables that are used to calculate the sub-indices will clearly be defined, and each of

their characteristics associated with the parent category will be studied. The formula and methodology will be discussed along with the explanation on the use in our main models.

III. Innovation Index

1. Introduction Innovation is all about adaptation to change. Innovation is the stage of transforming information into beneficial and relevant knowledge that is put together to produce an effective and efficient outcome. According to Singh, Gambhir and Dasgupta in their article Innovation in India: Affordable Innovations (2011), a systematic innovation management philosophy follows through the entire process from ideation, analysis, and prioritization to implementation and monitoring. Newfoundland and Labrador went through significant changes during the last five decades in its infrastructure, education system, transportation system, demography, and in market structure. It is through innovation that the province was able to cope with the changes, and directed these changes to our advantage against the national and international competitors. As most of the study on this subject suggests that innovation index needs to be divided into two factors: Input and Output. According to the Global Innovation Index 2011, inputs are those conditions that promote innovation and create knowledge. Inputs are comprised of two segments: Human Capital and Economic Dynamics. Outputs, as defined by Global Innovation Index 20111, are the direct outcomes and economic improvements that result from Inputs. A study by U.S. Economic Development Administration (2009) shows that Outputs are lagged to amplify the cause-and-effect element or measured as the rate of change to comprehend the level of improvements in the economy. Outputs are captured through two categories: productivity and competitiveness, and economic welfare. The latest study on this subject has been published in 2006 by the Department of Innovation, Trade and Rural Development2 on the report titled Innovation: A Blueprint for Prosperity. The competitive analysis mentioned on the report was completely based in innovation from inputs and outputs, but failed to recognize the economic well-being which is a primary result showing innovation at work. In this paper, we have established a model using the methodology followed on the report by INSEAD titled Global Innovation Index 2011. However, we have employed the variables that are more suitable in explaining the innovation nationally and regionally. The main task with the design process of the regional innovation index is to develop a series of indices incorporating data that are available or obtained by using survey study at the local and regional level, and then try to capture the impact, as much as possible, on macro and micro level indicators due to innovative activity. Figure 2 is showing the model used to measure the competitiveness, and the interrelationship between the inputs and outputs. The model also shows the weights given to each indicators of innovation. For our study, we need to compile data of the twenty zones representing Newfoundland and Labrador. As we have to generate most of the data for the various indicators of innovation, we need to make sure that potential biased is avoided. However,1

The Global Innovation Index by INSEAD is an annual publication of INSEAD which features, among others, the Global Innovation Index (GII), a composite indicator that ranks countries/economies in terms of their enabling environment to innovation and their innovation outputs.2

The department has changed its name to the Department of Innovation, Business, and Rural Development on December, 2011.

some of the macro-level data can be easily obtained from Statistics Canada. The calculation of the index is carried by taking Canada as the base (100), when indexing among the provinces, and Newfoundland and Labrador as the base (100), when indexing among the twenty regions, and then the distribution range of each measure is compiled. In this paper, we will mainly discuss about the model and variables used to explain the innovation index. In Section 2, we explained the five input variables noted as human capital inputs to understand the drivers of the growth in innovation. In Section 3, macro and micro level variables are explained to identify their impact on innovation growth. In Section 4, we discuss the output from the inputs through productivity and competitiveness variables. In Section 5, we reviewed the economic well-being sustained because of the growth in innovation. Lastly, we provide our concluding remarks in Section 6.

Figure 2: Innovation Index model underlying Newfoundland and Labradors regional competitiveness.Innovation Index

Input (50%)

Output (50%)

Human Capital (50%)

Economic Dynamics (50%) Venture Capital Investment (20%)

Productivity Competitiveness (50%)

Economic Welfare (50%)

Educational Attainment (25%)

R&D Expenditure (20%)

Growth Rate of GDP per Person (20%)

New Business Density (15%)

Average Weekly Earnings (20%)

Population Growth (25%)

ICT Density (20%)

Churn (20%)

Patent Applications Filed at the National Office (10%) Proportion of Nonresource based Exports (15%)

Export as a share of GDP (20%)

Personal Disposable Income per Capita (20%)

Occupation Mix (25%)

Small and Large Business Establishment (20%)

Multi-factor Productivity Growth (20%)

Unemployment Rate (20%)

High Tech Employment Share (25%)

Proportion of private expenditure on Health Care (20%)

In-migration (20%)

2. Input: Human Capital Human capital index suggests the extent to which a provinces population and labor force are able to engage in innovative activities. Provinces with high level of human capital are those with enhanced knowledge usually measured by high educational attainment, growth in younger age category of the work force, and a sizeable number of innovation related occupations and jobs relative to the overall labor force. Human capital index is measured using four variables: Education, Population growth, Occupation Mix, and High Tech Employment Share. 2.1. Educational Attainment Educational attainment measures the skills and knowledge that contributes to a population capacity to innovate. For our purpose, educational attainment with some college or an associate degree and Bachelors degree or higher will serve the need to capture the skills of people of Newfoundland and Labrador. Both the data are useful in our zonal study in order to distinguish how the different zones will value the two categories of workers: one with some college or an associate degree, and the other with a bachelors degree or higher. We observe that higher concentration of bachelors degree tend to surround metropolitan areas, such as St. Johns, Mount Pearl and so on; whereas college or an associate degree tend to be more in the rural areas, such as Whitbourne, Gambo and so on, where a small proportion of residents have the resources or ability to travel to a distant institutions where four-year degrees or higher are provided. According to the report titled Crossing the Next Regional Frontier by U.S. Economic Development Administration (2009), community colleges and vocational schools are more widely dispersed and near to rural residents. The report also explained that these respective institutions provide education at a cheaper price and the curriculums are flexible enough to fit the rural citizens needs. Similar situation is seen in Newfoundland and Labrador where Bachelors degree or higher is provided in Memorial University located in St. Johns. There are total of 47,690 Bachelors degree holders residing in Newfoundland and Labrador, and about 19,136 of them are residing in St. Johns metropolitan area (Census 2006). Hence, the overall view of this situation shows that 40.1% of Bachelors degree holders tend to stay within the city in search of better job opportunity and higher standard of living. However, as for Newfoundland and Labrador we observe that institutions that offer some college or an associate degree are more likely to support regions economic development needs than larger universities. According to Census 2006, Newfoundland and Labrador has approximately 88,405 people with some college or associate diploma; hence, we need to focus on this category as well since they are an important component driving regional economic development. According to Census 2006, there are approximately 26.3% of the total labor force ages from 18 to 64; therefore we will use people from ages 18-64 to fulfill our criteria to be a part of innovation index due to its high participation rate in the economy. Figure 3 shows the completion rate of post-secondary certification of Canada and the provinces. According to the figure, Newfoundland and Labrador has the highest

percent of population completing college or trade certification; thus, signifying the need to use the respective variable. Figure 3: Shows the population with ages 18 to 64 with College or trade certification and the population with ages 18 to 64 with Bachelors degree or higher.

Sour ce: Statistics Canada 2010.

We will follow similar methodology as the U.S. Economic Development Administration (2009) to form the sub-index: Some college or associate degree (SCAD) and bachelors degree or higher (BDH). Both the sub-indexes are measured as a percentage of the population ages 18 to 64 (for our study). SCAD Populationt =2011 Where PerSCAD = percent of the population with ages 18 to 64 with some college or associate degree SCAD = number in population with some college or associate degree, ages 18 to 64, 2011. Population = total population in 2011, ages 18 to 64 BDH PerBDH i ,t = 2011 = Populationt =2011 Where PerBDH = percent of the population with ages 18 to 64 with Bachelors degree or higher BDH = number in population with Bachelors degree or higher, ages 18 to 64, 2011. Population = total population in 2011, ages 18 to 64 PerSCADi ,t = 2011 =

2.2. Population Growth Population growth is friendly for an economy. However, growth in the number of newborns or retirees does little to suggest whether those persons are most likely to engage in innovative activities. Hence, for our purpose we need to focus on the growth of population aged between 15 and 65. Moreover, population growth in this age category suggests that more people are getting involved in innovative activities. The lower bound of this limit represents mainly students typically aged 15 to 24 and they are less likely to influence the overall rate of growth; whereas, the upper bound represents populations whose geographic location would likely remain more stable. According to the report titled Crossing the Next Regional Frontier by U.S. Economic Development Administration (2009), the group of people associated with the age bracket 25-65 are less risk averse and more entrepreneurial. Additionally, people from this age bracket are more likely to broaden the innovative culture and business characteristics of the province. We will be using the same formula by U.S. Economic Development Administration (2009) to calculate the population growth.

( Popt Popt n )Annual _ Average _ Pop _ Growth _ rate = Popt n n

100

Where Popt = current total population, ages between 15-64 Popt-n= total population at the starting year, ages between 15-64 n= total number of years used for the study Figure 4: Shows the annual average population growth rate of Canada and the provinces for the period 1981-2010.2.00

1.50 Average Annual Growth Rates

1.00

0.50

0.00Ca na Ne da Pr wf in ou ce nd Ed la w nd ar d Is la No nd va Sc Ne ot w ia Br un sw ick Q ue be c O nt ar io M an Sa it o sk ba at ch ew an Al Br be itis rta h Co lu m bi a

-0.50

Average Annual Growth Rates

Linear (National Level)

According to Figure 4, Newfoundland and Labrador is experiencing a negative population during the period 1981-2010. This is mainly because of out-migration to Alberta where the province experienced economic boom due to petroleum production, and they have been able to provide employment to the highly skilled workforce of Newfoundland and Labrador. 2.3. Occupation Mix Occupation mix has been suggested as another sub-index to be taken into consideration when forming the human capital index. According to Richard Florida (2005), occupational mix is a social concept that describes a regions population by identifying the types of occupations in the workforce. According to Florida, areas with large creative class populations have a more socially tolerant populace and experience greater economic growth. Similarly Locke and Lynch (2003) stated that local and regional occupational mix will define how well the region and its communities are to participate effectively in a knowledge-based economy. The variable will determine how well occupation and skill cluster strengths align with the regions business and industry cluster strength (Markusen and Barbour, 2003). Donegan et al. (2008) analysis suggested that when occupational mix is merged with other significant determinants that explain growth in economic productivity, higher percentage of innovative class occupations convey negative relationship. However, the research did suggest that certain occupational mix favors innovative growth. The research defined occupational mix as to limited to six technology-based knowledge occupation clusters unlike Richard Floridas (2005) numerous occupational mixes. The theory explained in the report titled What does Newfoundland and Labrador need to know about the knowledge-based economy to strengthen its place in Canada? by Locke and Lynch (2003) explained that the agglomeration effect of occupation cluster are also possibly present at the Provincial level. They concluded that occupational mix boosts the innovative expansion and drives the economic growth in the regions of Newfoundland and Labrador. We will use the procedure by Donegan et al. (2008), but we will be focusing more on the elements that defines the occupational mix in Newfoundland and Labrador and the twenty zones. In our case, we will define the technology-based knowledge occupation cluster, where it is more likely to develop new and innovative ideas, products and processes, to be comprised of: 1. 2. 3. 4. 5. Health (mentioned in Donegan et al.) Education (mentioned in Locke and Lynch, 2003) Processing and manufacturing (mentioned in Donegan et al., 2008) Primary Industries (mentioned in Florida, 2005) Construction and related (mentioned in report by U.S. Economic Development Administration, 2009)

The indexing calculation used by Donegan et al. (2008) is similar to the one used by U.S. Economic Development Administration (2009), but he replaced the creative class occupational component with technology-based knowledge occupation (TKOC) cluster. The difference between the two clusters is that the former does not include artists, musicians or designers. TKOC i ,t = Where t = latest year available 2.4. High-technology Employment Share U.S. Economic Development Administration (2009) has also suggested that Hightechnology Employment Share be taken into consideration when forming the index. They focused on the number of the labor forces who are involved in high-technology firms and provided a calculation of the labor force as percent of total labor force. The high-tech sector is mainly comprised of such industries as telecommunications, Internet providers, computer manufacturing, and scientific laboratories, and so on. Mining is one of Newfoundland and Labradors largest and oldest industries, and a major contributor to the provinces economy. This specific high-tech sector provides job province-wide and have supported communities across Newfoundland and Labrador. Mount Pearl, one of the major cities of the province, has identified high-tech industries as a growing sector (Growing Sectors 2011). Another high-tech sector that has been prioritized by Locke and Lynch (2003) is information and communications technology sector. The respective variable is being used to measure the innovative capacity of the region. High _ Tech _ Employment _ Share = High _ Tech _ Employment t Total _ Employment t Employment _ at _ TKOC t Total _ Employment t

Where High _ Tech _ Employmentt = number of employment in High-tech sector in year t 3. Input: Economic Dynamics Economic dynamics measures local business conditions and resources available to entrepreneurs and businesses. The concentration of our study is on the input flows, such as research and development funds, that promote innovation in the economy; otherwise, if such resources are not present, it can limit innovation activity. 3.1. Research and Development Expenditure Inputs to innovation can come in the form of funds or knowledge transfer that may originate outside the region but benefit firms and individuals inside the region. Compared to Canada and other developed countries the research and development (R&D) among the Atlantic universities and industries are low. According to a report titled Innovation

Strategy by Department of Innovation, Business and Rural Development, Atlantic Canada represents about 7.7% of Canadian population, but only 1% of the nations total industry investment in R&D is spent in Atlantic Provinces; whereas the Universities receive about 6.7% of the investment spend in Canada on university R&D. Although Newfoundland and Labrador has ample capacity for innovation, the R&D in the province is the lowest among all the other provinces in Canada, and amounts to about 1% of GDP in comparison to the national average of 1.8% (Statistics Canada). The report states that the education sector has dominated this activity capturing 50% of federal investments and accounting for 63% of all research spending throughout the province compared with the national rate of just 30%. The involvement of the private sector in boosting economic development and investing in innovation is a significant criterion of a regions investment condition. Figure 5: Shows the gross expenditure on R&D by all funders, all performers, and for all sectors.Real gross expenditure on R&D (millions of 2002 dollars) 30,000.00 25,000.00 20,000.00 15,000.00 10,000.00 5,000.00 0.00

Newf Princ Nova New Sask Britis Cana Queb Onta Mani Alber oundl e Scoti Brun atch h da ec rio toba ta and Edw a swic ewan Colu

2009 24,74 221.8 60.73 455.1 271.9 7,126 12,58 489.2 393.1 2,253 2,529 2010 24,07 234.3 64.39 467.5 284.5 7,188 12,73 496.9 393.9 2,362 2,644 2009 2010

Source: CANSIM II database. Figure 5 shows the gross R&D expenditure of Canada and the ten provinces. The major spenders in R&D are Ontario and Quebec, and the lowest spending is seen in the Atlantic Provinces. R&D expenditure is only taken as an indicator of innovation since research may not always be a marketable product, but it is a vital precursor. R&D investment data are collected and coded from company headquarters, and not the research sites. Since the data may not reveal the true location of the original site, the U.S. Economic Development Administration (2009) proposed that R&D be operationalized for each state by dividing total R&D expenditure by GDP, and lead the volume of R&D expenditures adjusted for the

level of productive activity in the province, and to extent, the local cost of living and doing business. The data for total research and development fund for Newfoundland and Labrador is possible to extract from Statistics Canada, but the regional data on the respective variable is not available.

R & D _ per _ GDP =

R& D GDPi i lya t

lya

t

Where R&Dt = Total research and development fund in year t GDPt = Total worker compensation in year t i = starting year lya = latest year available 3.2. Venture capital Investments Venture capital investments are used to launch new ideas or expand innovative companies. The investment is provided to companies or institution with high potential and high risk at early-stage. The Business Attraction Fund, a venture capital fund provided by Newfoundland and Labrador government, provides for large-scale, strategic investments in business ventures and infrastructure for the purpose of attracting business to Newfoundland and Labrador. Through this fund, the Department of Business can provide loans and equity investments to companies interested in establishing operations and conducting business in the province. Kortum and Lerner (2000) found in their empirical analysis that approximately 14 % of all innovative output activity in the counties in United States is due to the venture capital investment by the nation. According to the U.S. Economic Development Administration (2009), the absolute volume of venture capital investment can vary widely; hence, in our zonal study we need to adjust the variable to reflect the relative size of a regions economy. The data for total venture capital of Canada and the provinces are available from the Department of Innovation, Trade, and Rural development, but the regional data for the respective variable is not available.

Average _ VentureCapital _ per _ GDP =

VentureCapitali

lya

t

GDPi

lya

t

Where VentureCapitalt = total venture capital in year t GDPt = current dollar GDP in year t i = starting year lya = latest year available 3.3. ICT Density

Information and communications technology (ICT) density has been used by U.S. Economic Development Administration (2009) as a variable that encourages innovation. According to International Telecommunication Union, ICT transforms economic relations, increases productivity and it has the possibility to become the basis of creating new services and markets. ICT and the internet sector have the potential to diffuse to other sectors; hence, this suggests that the impact should be measured at a higher level than the firm or disaggregated sectors. The respective suggestion has been made on the basis that higher levels of aggregation internalize the externalities or spill-over impacts that arise at low levels of aggregation (Bresnahan and Trajtenberg, 1995). ICT and internet products and services improve and gets sophisticated over time. The returns from this respective industry and any sectors using such industry have the ability to lower the cost for the users, and create increasing economic rate of return with time. An ICT and internet sector has the ability to make it effortless and manageable to devise new products or processes. New possibilities are created and specialization raises productivity (Bresnahan and Trajtenberg, 1995). The density of ICT and internet users can be measured by knowing the number of people using the internet service from the service providers. There is a possibility that individuals use the internet from different service providers in Newfoundland and Labrador. This makes our task difficult since we need to collect all the data involving the use of internet service through any means, like internet use on personal computer, laptop, and smartphones and so on. To analyze and comprehend the real use and capability of ICTs, it is necessary for the zones to carry out representative household and individual ICT surveys. Global Innovation Index 2011 report categorized information and communications technology (ICT) into three segments: ICT access, ICT use, Governments online service and online participation. The first category, ICT access, weighs five ICT related indicators, fixed telephones line per 100 inhabitants, mobile cellular telephone subscriptions per 100 inhabitants, international internet bandwidth (bit/sec) per internet user, proportion of household with a computer, and proportions of households with internet access at home. Each of these variables data are found using survey methodology explained in the report titled Manual for measuring ICT access and use by household individuals (2009) by International Telecommunication Union. The second category, ICT use, weighs three indicators, internet users per 100 inhabitants, fixed broadband internet subscribers per 100 inhabitants, and mobile broadband subscriptions per 100 inhabitants. Similarly we need to obtain the information about these variables using survey study related to the ones stated in the report by International Telecommunications Union (2009). The third category, Governments online service, assessed each countrys national website and the website of ministries of government institutions, education, health, social service and so on. The study in Global Innovation index 2011 tested the websites for a minimal level of content availability and accessibility. The research followed citizencentric approach to cover the four stages of governments online service development focusing mainly on emerging information service, enhanced information service, transaction service, and a connected approach. The final category involves online participation and it is based on the survey with questions emphasizing quality in the connected presence stage of e-government. The questionnaires mainly focused on the use

of internet to assist the progress of information by government to citizens, intercommunication with stakeholders, and involvement in decision making processes. The last two categories are very effective in our regional study since the citizen-centric governance is very relevant at the local level, where individuals are most likely to come in contact with public agencies. The respective categories are useful in our study to measure the extent at which the provincial governments, regional boards and municipalities are providing helpful information, active consultation, and engagement in decision-making line of course. The main purpose of using the last two indices is to capture the view of how the provinces and zones fare in using online tools to promote interaction between citizen and government, and as well as among the citizens. Both the indices range from zero to one, with one showing greater participation by government and citizens alike. 3.4. Churn To be in the innovation race with the national and international innovators, the institutions, companies and government sectors of Newfoundland and Labrador need to provide a competitive market. Jadlow in his article New evidence on innovation and market structure (1981) stated that market model plays an important role to influence innovation; therefore clarifying that markets with high rates of firm entry is related to increased levels of innovation. On the contrary, the rate at which the businesses close down or shrink their establishment size will decrease the growth of innovation and indirectly hamper regional competitiveness and economic growth. The overall idea of growth and shrink, and new entries and exits provides us with the notion of economic Churn. Churn is an efficient indicator of innovation that measures the extent to which the innovative companies take the place of outdated ones that are unable to modernize techniques and processes. This indicator has been mentioned in Plummer and Heads research article titled Rural and urban establishment births and deaths using the U.S. Census Bureaus business information tracking series (2000), where the study showed that the indicator is positively related to employment growth, and it is not subject to change because of agglomeration effect that often distinguished between urban and rural market structures. Churn is defined as the total establishment births and deaths, and expansions and contractions, relative to the total number of firms in region k for all years available to obtain.

Churn =

( Births + Deaths + Contractio ns + Expansions )t0 tn t0

tn

t

( Deaths + Expansions + Contractio ns + NoChange )

t

Where, NoChange explains the number of establishments that neither expanded nor contracted. 3.5. Small and Large Business Establishment The next two variables that we are going to discuss explain the market structure of a region and provide information about the fundamental market composition. The two variables are small business establishment and large business establishment. The

calculation involving these two variables measures the number of establishments for each category per 1,000 working age people (15-64). Small business establishment as suggested by U.S. Economic Development Administration (2009) is very compliant with changes and they are adaptable to new processes to incorporate new ideas. According to the Government of Newfoundland and Labrador (2004), business investment is 19.5% of GDP and following an increasing trend. The upward trend is due to the rising number of small enterprises in the province; thus increasing entries and provides suggestion that Newfoundland and Labrador has the capacity to incorporate innovation into its market formation. However, the recent recession in international markets had negative impact on the small enterprises in the province. High merger rates between small and large firms have been noticed during the last two years, but these acquisitions have coincided with increased technological influence of small firms (Government of Newfoundland and Labrador, 2004). Large business establishment drives innovation growth since they are able to provide ample funds in research and development, and have the resources to appoint researchers and scientists rather than hire out research consultants. However, the report by U.S. Economic Development Administration (2009) explains that the information is unable to identify the degree to which a large business enterprise is engaged in innovation activities since there is a possibility that a section of large business establishment only does processing and assembling, whereas the other section is involved in innovation activities at different location.

Small _ Establishment _ per1,000 wor ker =

NumberOf _ SmallEstablishmentsi

lya

t

WorkingAgei lya i lya i

lya

t

L arg e _ Establishment _ per1,000 wor ker =

NumberOf _ L arg eEstablishments WorkingAget

t

Where NumberOf_SmallEstablishmentst = small establishment with less than 100 hundred employees for Year t NumberOf_LargeEstablishmentst = large establishment with more than 500 hundred employees for Year t WorkingAget = in 1,000 working age people (15-64) lya = latest year available i = starting year or the base year 4. Output: Productivity and Competitiveness As mentioned earlier, outputs are the direct result and economic development that yield from inputs. In our study, we have divided output into two sections: Productivity and competitiveness, and Economic welfare. The first category discusses the context where the

regional markets are able to compete nationally and internationally through increased production and adaptation of new products and services. This segment will examine several measures indicating the broad aspects of productivity and competitiveness, the level of export provided by the regional markets, and the growth of innovative activity. The first section, Productivity and competitiveness, is comprised of six components: growth rate of GDP per person engaged, new business density, patent applications filed at the national office, value of exports as a share of GDP, proportion of non-resourced-based exports and multi-factor productivity growth. The first three components have been mentioned in Global Innovation Index 2011 report. Several other variables under Productivity were suggested, but we are only going to focus on the ones that capture the impact on the regional arena. The last three variables have been taken into consideration by the Department of Innovation, Business and Rural Development of Newfoundland and Labrador and mentioned in their report titled Innovation Newfoundland and Labrador: A Blueprint for Prosperity (2006). 4.1. Growth Rate of GDP per Person Engaged Growth rate of GDP per person engaged provides a measure for labor productivity, and is more generally defined as output per unit of labor input. This measure indicates the efficient use of goods and services, and therefore a reflection of increased investment and technology transfer. The Department of Innovation, Business and Rural Development indicates that the growth in the productivity is necessary for the economy since it signifies the expansion of production, boosts the competitiveness, and gaining market share. Firms that are competing nationally and internationally need to enhance the productivity level if they are to survive in the long run. GDP per person employed is gross domestic product divided by total employment in the economy. The data for this respective variable is available at Provincial and regional level from Statistics Canada. GDPt Total _ Employment t Where t = current year of reporting Gowth _ rate _ GDPperPerson = Newfoundland and Labrador posted a solid economic performance in 2010. The primary economic indicators have increased over 2009, specifically GDP per capita. According to Statistics Canada, real GDP grew by 5.6% in 2010 mainly due to investment and export growth, and to a lesser extent, consumer and government sector growth. Figure 6 shows the trend of GDP per capita maintained by Canada and Newfoundland and Labrador between 1981 and 2010. Both the economy had upward trend and took a slight dip during the recessionary period of 2009-2010. Department of Finance announced that most private sector forecasters ranked Newfoundland and Labrador at the top of the list for economic growth in the year 2010. Figure 6: GDP per capita trend of Canada and Newfoundland for the period 1981-2010.

45,000 40,000 35,000 30,000 GDP per capita 25,000 20,000 15,000 10,000 5,000 019 81 19 83 19 85 19 87 19 89 19 91 19 93 19 95 19 97 19 99 20 01 20 03 20 05 20 07 20 09

Canada

Newfoundland

4.2. New Business Density New business density measures the new entries in the market. If the business and market becomes lucrative for new companies and firms, then the new companies entering the market will lower the cost and increase the profit margin. According to the Global Innovation Index 2011 report, the number of new firms, defined as firms registered in the current year of reporting, divided by 1,000 working-age people (15-64 years) explains the new business density. In our regional study, we will also stick with working-age people between 15 years and 64 years as this group of people offer more activity in the economy. New _ Bu sin ess _ Density = Number _ of _ New _ firms t WorkingAget

Where t = current year of reporting 4.3. Patent Applications Filed at the national office A patent grants legal rights to applicants for inventions that meets the level of novelty, non-obviousness, and industrial applicability. The patent right is approved for a limited period of time, generally twenty years; during the validity period, the holder of the patent can use it for commercial, industrial or scientific purpose by disclosing their ideas to the public to repeat, duplicate or reproduce the invention. Patent right is set to encourage innovators by providing them the opportunity to yield monetary profit until the valid period. According to the Global Innovation Index 2011 report, patent applications filed at the national office are defined as the number of patent applications filed by the residents at the national patent office. The report titled Innovation Newfoundland and Labrador: A

Blueprint for Prosperity (2006) shows that between 1996-1999 Newfoundland and Labrador ranked fourth among the Atlantic provinces in filing applications for new patents, and has been shown in Figure 6. The current data for the total number of patent application is available from Government of Newfoundland and Labrador. Figure 7: Shows how Newfoundland and Labrador compares to selected other provinces, US states and European nations on a number of measures of innovation.

Source: Governmet of Newfoundland and Labrador.

Figure 7 shows the innovation ranking of Newfoundland and Labrador in parentheses in relative to Atlantic Canada, the ten Provinces of Canada, seven U.S. states (Alaska, Connecticut, Maine, Massachusetts, N.Y., Oregon and Washington), and five European nations (Iceland, Ireland, Netherlands, Norway and U.K.). 4.4. Exports as a share of GDP Exports made from these patented goods and services are an important player in boosting economic growth. Innovative firms are the ones that usually export in the first place, and their ability to export is not only limited to regional or national level, but also to world markets. By taking advantage of innovation overseas helps the firms innovation to be active and earn revenue, but also puts them in an advantageous position in the competition against the other local and foreign firms. According to Department of Industry, Business and Rural Development of Newfoundland and Labrador, exporting play a significant role in the growth of innovation processes as exporters in the province are major contributor in human capital. Export Development Canada (EDC) mentioned in their report titled The Moment of Truth (2010) that exporters help expose Canada to new ideas and technologies from around the world and indulge the nation to create new ideas to stay in the competition. In brief, competitive and innovative forces enter the domestic arena, and create spillover as the exporter knowledge flows on to the local market; therefore, this

enhances the growth in innovation and drives the economy. We will use the value of export as a share of GDP in our study to comply with the area of focus, which is innovation. This variable will capture the regional level of competitiveness, as well as the level of production and employment. The data for this variable is available in the provincial level, but it will become difficult to extract regional data since some regions do not take part in export. 4.5. Non-resource based Exports The non-resource based exports are mainly comprised of industrial sector that produces goods through the use of economic resources, and adds value to raw materials and products sold in local or international export markets. Hi-tech manufacturing, garments, electronic goods and so on, are some of the products that represent this sector. Most of the companies in Newfoundland and Labrador produce goods for the local market. However, regional study will provide information about the region that is most involved in supplying manufacturing goods to the provincial market. According to the report titled The Economy 2011 by the Research and Analysis Division, the province have been benefitting from a period of strong economic growth because of manufacturing sector, but that may have been dampened in the last two years due to appreciation of Canadian currency, and recession hitting United States, with which Canada does most of the bilateral trade. However, this gives us the opportunity to study the innovation capacity of the companies in the regional market since only the exported goods with low cost or highly engineered, both achieved through research and development, will stay in competition at regional, national and international market. In our study, we will use the value of the proportion of non-resource based export to identify the level of regions export manufacturer in regards to innovative ability. The data for this variable is available in the provincial level, but it will become difficult to extract regional data since some regions do not take part in export. 4.6. Multi-factor Productivity Growth The last variable that will be used to measure the outcome of innovation is multifactor productivity growth. The variable is defined as the ratio of the amount of output produced by both labor and capital inputs. Multi-factor productivity measures the efficiency level of all the factors of production that is being used to produce goods, and it is a significant measurement since it takes into consideration the usefulness of more than one input. According to Sharpe and Arsenault (2009), the empirical analysis that estimated the multi-factor productivity growth of the provinces showed that Newfoundland and Labrador had the highest labor productivity growth, capital productivity growth and multi-factor growth for the 1997-2007 periods. Their study involved growth accounting framework to estimate the multi-factor productivity growth. Similar study needs to be carried to measure the respective variable in the regional level. If we are to see rise in multi-factor productivity, then we can safely conclude that the economic resources blended with innovation has been efficiently used to boost the economic growth. The data for multifactor productivity growth for Newfoundland and Labrador can be obtained from the Department of Innovation, Business, and Rural Development, but the regional data for the

respective variable needs to be collected by the Government of Newfoundland and Labrador. 5. Output: Economic Welfare Economic welfare is one of the two categories used to explain the output generated as a result of the inputs. The following segment explains the indirect impacts that the community may see due to the innovation growth. Department of Innovation, Business and Rural Development explains that innovative economies improve economic well-being since the residents are well paid and have higher living standards. This category is comprised of five components: average weekly earnings, unemployment rate, personal disposable income per capita, proportion of private expenditure on health care, and inmigration of new residents. Improvement in economic well-being is noticed by an increase in average weekly earnings, personal disposable income per capita, and in-migration of new residents, and by a decrease in proportion of private expenditure on health care and unemployment rate. Innovation is not only limited in providing new technology, but also enhances abilities and skills of the workforce. The rising productivity of a labor increases the potential earning level. Therefore rise in average weekly earnings will show the benefits accrued from new skills achieved through innovation and increases productivity level. In our regional study, this component will help us to understand the level of skill of a workforce available for any sort of industry that relies on research and development. Similarly personal disposable income per capita captures the same view, but more on earnings on an annual basis. We will be working with real weekly earnings in order to adjust the effect from general inflation. Unemployment rate is one of the most significant indicators of well-being. Figure 8 shows the unemployment rate of Canada and the ten provinces during the year 2010. In the year 2010, Newfoundland and Labrador had the highest unemployment rate in the country at 14.4%, but with the rise in investment and export in 2010-2011 fiscal years the unemployment dropped to 11.1% by April, 2011. According to Statistics Canada, Newfoundland and Labrador was the only province to experience notable employment gains in October, 2011, up 4,100 person years of employment. Innovative economies tend to have lower unemployment rate because of diversified pool of companies that higher people with various skills, through the increase in the production of valuable goods, such as petroleum, and by increasing R&D activity in the regions which will provide assistance to acquire the target of recruitment and retention of skilled labor. Lower unemployment rate will show innovation effectiveness at work and will create heterogeneous workforce to provide the companies with opportunity to choose from large body of labor that best fits their business model. Figure 8: Shows the unemployment rate of Canada and the provinces for the year 2010.

Source: Statistics Canada 2010.

According to the Department of Innovation, Business and Rural Development, advancement in education and research will not only be benefitting the local economy, but enhancing innovative activity will improve literacy, self-reliance and finer health status. Therefore the proportion of private expenditure on health care is used as it directly impacts the well-being of a society through development of R&D sector. In our regional study, we will try to determine the decline in the proportion of private expenditure on health care. The reason behind the decline can be reported due to the rise in the growth in innovation, or vice-versa. Figure 9 shows that in most of the provinces the proportion spent on health care have increased, but for Newfoundland and Labrador, it declined. Migration may not seem a significant output occurring from innovation, but it does signal the regions attractive opportunities available for in-migrants and makes it easier for the policy makers. People usually migrate to a region because of employment opportunity and easy access to basic amenities, such as health care, better education and so on, and innovative economies provide appealing opportunities to in-migrants in all these sectors. In our regional study, the rise in in-migration of new residents will imply the attractiveness and effectiveness of the economy due to innovative activity keeping in mind that the increase can also be due to the change in Government policies.

Figure 9: Shows the proportion of private expenditure on health care spent by Canada and the provinces during the year 2009 and 2010.

Proportion of Private Expenditure on Health Care

7.000 6.000 5.000 4.000 3.000 2.000 1.000 0.000Ca na Ne Pr da wf in ou ce nd Ed la w nd ar d Is la No nd va Ne Sc ot w ia Br un sw ick Q ue be c O nt ar io M an Sa it o sk ba at ch ew an Br Al be itis rta h Co lu m bi a

2009

2010

6. Conclusion Economies need to comply with innovation in order to have a sustainable economic growth, and preserve the civilization and natural environment. Industries and business establishments need to integrate their business model in respective to innovation in order to survive in the competitive market. Provinces and region need to rely on innovation and implement an ideology of knowledge based society in all its major sectors, especially in health care, transportation, education system, infrastructure and so on. The integration of innovation with effective government policies will make the province and regions more appealing and a more congenial place to live and work. The study of innovation index, with the proposed variables, should carried at an annual basis. This will provide us the opportunity to carry empirical and econometric analysis to determine the challenges and help us to solve with ease. Further study on this subject matter may include other microeconomic and socio-economic variables that play a role in innovation activity.

IV. Taxation Index

1. Introduction Competitiveness of a nation or region depends significantly on market efficiency. An efficient market has lot of qualities that attracts investment and achieves competitive advantage in relative to its opponents. Cash in-flow through investment, ease to do business, trade tariffs and imports are some characteristics that are maintained to have an efficient and competitive market. The Global Competitiveness Report 2010-2011 by World Economic Forum carried comparative analysis by studying the competitiveness of nations, and highlighted the importance of market efficiency. The report mentioned that an efficient tax regulation needs to be applied in order to maintain an efficient market. Similarly, we are going to carry provincial and regional studies that will include the profit or corporate income tax, social contributions and labor taxes paid by the employer, property taxes, property transfer taxes, dividend tax, capital gains tax, financial transactions tax, waste collection taxes, vehicle and road taxes, and any other small taxes or fees to measure taxes and contributions. Generally, the term taxing means to impose a financial charge upon an individual or legal entity by a nation or any governing body maintaining the stature of a nation through enforcement of law. In Newfoundland and Labrador, both federal and provincial government collects taxes for various purposes from individuals or business companies. The tax policy is categorized through two criteria: personal and business. Similarly, incentives and business programs are divided in these two segments. Department of Finance discusses about different taxes with competitive rate that is meant to allure investment, increase the business growth, augments the innovative capacity, and increase in-migration, and so on. If we look at national level, Canada is ranked second among the OECD countries and eighth among all the countries implying the efficient tax policy enforced throughout Canada. However, to distinguish the competitiveness of the provinces or the regions, where provincial and municipality taxes will play an important role, and so will the other taxes, incentives and benefit programs, shows the importance and complicacy of our study. In this paper, we will briefly discuss about the necessity of taxes and its impacts on the economy, and provide a methodology to measure competitiveness using tax as the base of our study. Section 1 will explain the essentiality of taxes followed by the impacts on Section 2. Section 3 will give a general overview about the taxes, and benefits and incentives program available for the residents of Newfoundland and Labrador. Section 4 talks about the other benefits and incentives offered by the government of Newfoundland and Labrador. Section 5 will discuss the methodology to form a tax index for provincial and regional study. Section 6 concludes providing necessary suggestions and further study on taxes.

2. Importance and Impacts of Taxation

Cooley (2003) defines taxation as the process by which a sovereign nation, through its law enforcement body, raises income to meet the necessary expenses of government. The author mentioned in his book A Treatise on the Law of Taxation Including the Law of Local Assessments (2003) that the definition, in other words, meant that taxation is a methodology to divide the cost of government among those in need of the benefits from taxes and must bear its burdens. In simple terms, the main purpose of taxation is to accumulate funds for the functioning of the government bodies. There is no government body that can run its administrative office without funds and it has no such system incorporated in itself to generate profit from its functioning. In other words, a government cannot run its setup unless it receives public funding which is administered in the form of tax. Taxation is a powerful tool to achieve the goals of social and economic development. It acts as a device to boost economic and social growth by providing tax credits, discourages the use of certain products by imposing higher tax rate, such as tobacco tax, by supporting small and medium enterprises to increase profit margin through the use of tax rebate and exemptions, and so on. Taxation can increase the use of local goods and services by imposing high import duties or tariffs on foreign products. Additionally, taxation is a powerful tool to maintain inequities and inequalities in wealth and income implying progressive tax as seen in the case of income and real estate. The primary source of government revenue is obtained by imposing tax rate. The tax rules and regulations are meant to provide government with sustainable source to fund social programs and public investments in sectors such as education, infrastructure, health and other public necessities, and in order to maintain a prosperous, functional and orderly society. The use of taxation is not only limited to generate revenue, but it is a key component of the social contract between the citizens and the economy, and therefore, the way to form an effective government. Government takes the full responsibility of the spending from the revenue generated from tax-payers money, and they are accountable to the citizens on how they spent the fund. Hence, government institutions maintain their legitimacy by inciting effective administration and good public financial management. The challenge for the government lies on their policy to not only set the tax rate, but also to choose the tax base. The rules and regulations should be employed in such a way so that tax payers are not discouraged from taking part in the taxation system. According to Wassmansdorf (2011), the two main obstacles that small and medium enterprises face are tax rates and irksome tax administration. The World Bank Group Enterprise Surveys 2006-2010 analysis showed that one hundred and twenty-three economies noted tax rates and tax regulations to be the major constraints in their business. However, the report also clarified that the economies that fare better on the ease of paying taxes tend to see both the respective constraints as less of a barrier to do business. Tax rates are comprehended by the businesses as a cost and the size of the cost is a significant business context for investment and growth. If the companies or firms find the tax rates higher, then it will compel them to withdraw from the formal sector. According to the study by the World Bank Group Enterprise Surveys 2006-2010, higher tax rates are

associated with fewer formal businesses and lower private investment. However, the government needs to keep the tax rate at a reasonable level to encourage the development of private sector and formalization of business. Reasonable tax rates increase the growth of small and medium level enterprises, which boosts the economic growth and creates job, but do not add significantly to tax revenue. (Hibbs and Piculescu, 2010) On the other hand, high tax rates on businesses may affect small and medium enterprises, and therefore, they will not contribute much to government tax revenue; as a result, the businesses will become more informal or may not subsist at all. Government spends the tax money to build extensive and efficient infrastructure to provide smooth and operational administration in order to develop the economic activity and various functioning sectors. Intelligent community is an important tool to drive the economic growth. This can be maintained by government by spending the revenue from tax on education system and health service. A productive and healthy labor is important to sustain in the competitive markets, and therefore, increasing the investment in the provision of health service is essential for the economic purpose as well as conscientious reasons. Education is another factor that increases the efficiency and productivity of a worker, and according to Pablo et al. (2011), it allows the market to move up the value chain beyond simple production processes and products. In our study, another significant factor that encourages business to be registered with the formal sector and increases the economic growth is an efficient tax administration. An unfair and weak tax administration will blemish and question the legitimacy of the government. According to Birds article titled Smart Tax Administration (2010), in many transition economies, lower revenue and widespread tax evasion resulted from failure to improve tax administration when new tax rules and regulations were introduced during the 1990s. The other significant factor that is taken into consideration, when mentioning an efficient taxation system, is the compliance with tax rules and regulations. Government needs to enforce the law in order to keep the taxation system working for all and to support the programs and services that improve lives. Most government tries to keep the tax rules and regulations simple and avoid complicacy to encourage compliance. If the tax system is immoderately complicated, then it will be followed by people moving to informal sectors and avoiding tax, and therefore lowering the revenue generated to run the public sectors smoothly. However, an economy with well-designed tax systems helps to boost the growth of business, and indirectly increases the growth of overall investment and employment. During the last five years, Canada, its major provinces and Newfoundland and Labrador enforced changes mainly focused on easing the tax administration by implementing simplified tax system, and reducing the tax burden. One of the most common features that have been used to make compliance uncomplicated is the introduction of electronic system. According to Djankov et al. (2010), the most common features that have been added to the system during the last five years were reducing tax rates, introducing electronic systems, and simplifying tax compliance by reducing the frequency of filing or allowing joint payment and filing of several taxes.

In our research, the ranking on the ease of paying taxes is divided into two above categories discussed: taxation system and tax compliance. However, we will briefly explain the taxation system of Newfoundland and Labrador along with the number of tax credits, incentives and benefits programs that is offered by the province to individuals and businesses in the next couple of sections before moving onto the methodology. 3. Taxes, Programs and Incentives in Newfoundland and Labrador The personal and business tax system in the province is quite simple and friendly. In Newfoundland and Labrador, companies have to pay tax to the federal and provincial government based on net income, and pay tax to municipalities based on property and/or asset value. The Harmonized Sales tax (HST) implemented on April 1st, 1997, where the federal GST was harmonized with the provincial sales tax. The HST has resulted in the removal of tax on business inputs. The HST operates following the same tax base and regulations as the GST. The tax has been reduced on January 1st, 2008, with the general rate being 13% of which 5% is the GST and 8% is the provincial component of the tax. The respective tax is enforced and administered by Canada Revenue Agency. Newfoundland and Labrador does not impose a general capital tax which can be seen in the other provinces, but the province does impose a 2% Health and Post Secondary tax. However, the exemption threshold relieves virtually all small businesses from Health and Post Secondary tax. Retail Sales tax (RST) on insurance premiums has been eliminated since April 22nd, 2008, but such tax can still be seen lingering in the taxation of other main provinces. RST had been imposed on insurance premiums pertained to property, and casualty insurance policies, such as vehicles, homes and businesses. According to Department of Finance of Newfoundland and Labrador, the respective tax did not apply to life, accident and sickness, or health insurance premiums. RST on insurance premiums had applied only to consumers, businesses, municipalities and the not for profit sector, and made payable during the time of purchasing or renewing contract of insurance. However, insurance companies used to extend payment terms to the clients over a number of months, but at the same time they made sure that it was collected and remitted upon the full premium amount at the time of purchase or renewal of insurance contract. RST on insurance premiums being not in the taxation system of Newfoundland and Labrador provides the province with competitive advantage in relative to other provinces since it will attract companies with financial motives to open up a branch in the this province where they can minimize their cost and increase the profit margin. Retail Sales tax on purchase of vehicle is present in the tax rules and regulations at the rate of 14%, and applies to the private sale of vehicles in the province. However, vehicles sold by a HST registrant would not be entitled to RST since the 13% HST would apply to those sales. A gasoline tax is an excise tax implemented on the sale of fuel. In Canada, the tax is mainly imposed on fuels that are intended for transportation. Fuels used to power fishing, farming, logging, manufacturing and processing equipments are exempted from the tax. Similarly, transportation by boat, locomotives, generation of electricity and household fuels may also apply for tax exemption.

In the short run gasoline tax will be an effective source of revenue because of the inelastic nature of demand for fuel. However, in the long run the demand is more elastic since people tend to consume less fuel as the price increases by switching to fuel-efficient vehicle or using different means of transportation. Since the price elasticity of demand for gas is very volatile and decrease in the cost of transportation technology may occur due to increasing economies of scale makes us ponder upon a question whether the demand for gas will be higher or not in the long run. Policy makers tend to use gasoline taxes as a tool to reduce pollution, a way to tackle global warming, and a mean to conserve energy. However, higher gasoline tax rate can affect secondary markets as well. Sectors like tourism, aviation, export/import and so on, which are indirectly linked to the use of fossil fuels may face a declining trend, if gas price rises. Likewise, tobacco tax is applied to discourage the use of tobacco related products. According to the Department of Finance of Newfoundland and Labrador, the current rate of tobacco tax on manufactured cigarettes and loose tobacco in the province is 19 cents per cigarettes, 32 cents per gram of tobacco and 125% on purchase price of cigars. A reduced rate of tax applies to cigarettes and fine cut tobacco in Labrador City, Wabush and the coastal area of southern Labrador. The reduced rates are provided by way of rebate to the retailer. The current rate in these regions is 8.25 cents per cigarettes and 8.64 cents per gram of tobacco as mentioned in the Department of Finance of Newfoundland and Labrador. The Taxation of Utilities and Cable Television Companies Act gives the authority to a council to charge utilities and cable television companies a municipal business tax at a rate of not more than 2.5% of a company's gross revenue for the previous year. The legislation also establishes a provincial business tax on utilities and cable television companies that provide services in unincorporated areas of the province. The provincial business tax is also based on a company's gross revenue from the previous year. Utilities tax is administered by Newfoundland and Labrador government. Corporate taxes are comprised of taxes charged on corporate income in Canada, and also count the other taxes and payments made by the corporations to the federal and provincial government, or municipalities. Corporations are required to pay taxes that include capital, payroll, property and indirect taxes, such as goods and services tax (GST), HST and so on. According to Section 115 of the Canadian Income Tax Act, corporations are required to pay tax in Canada on their total income earned locally and internationally, if they are assumed to be the resident in Canada for Canadian tax purposes. The Act also states that corporations not resident in Canada are subject to Canadian tax on certain types of Canadian source income. Corporate income tax is administered by the Federal Government on behalf of Newfoundland and Labrador. According to the Department of Finance of Newfoundland and Labrador, the provincial corporate income tax is applied to the same taxable income as is calculated for the purposes of the Federal corporate income tax system. According to the report titled Competitive Alternatives 2010, Special Report: Focus on Tax (2010) by KPMG, effective corporate income tax is the lowest in Canada among the OECD countries at 12.2%. Effective corporate income tax measures the total corporate income tax using the corporate income taxes, indirect taxes and also taking

incentives and tax exemptions into consideration. In Canada and other OECD countries, effective corporate income tax is found to be smaller due to inclusion of various incentives, such as Business Attraction Fund, Direct Equity Tax credit, Scientific Research and Experimental Development Tax credit and so on. Newfoundland and Labrador offers the lowest corporate income tax rate in Canada. The general rate is 14%; however, the corporations that carry manufacturing and processing from a permanent establishment located in the province makes an effective corporate income tax rate of 5%, and also those corporations that are regarded as small businesses pays an effective corporate income tax rate of 4%. Businesses in Newfoundland and Labrador paying corporate income tax may be eligible for tax credit through political contributions, scientific research and experimental development, and film and video development. Political contributions tax credit is a non-refundable credit equal to the lesser of $500 or the sum of 75% of the first $100 of contributions, 50% of the next $450 of contributions and 33.3% of the next $600 of contributions. These contributions can be made to a registered candidate or political party. Scientific research and experimental development tax credit is refundable credit of 15% of eligible expenditures made with respect to scientific research and experimental development activities carried out in this province. Film and video tax credit is refundable credit of 40% of eligible local labor costs provided to eligible local film projects, but that may not exceed 25% of production costs. Another requirement that needs to be fulfilled to receive this tax credit is that the corporation must also pay at least 25% of its salaries and wages to residents of the province. To support health and post secondary education, Newfoundland and Labrador government imposed Health and Post Secondary tax on corporations. The respective tax is effective from January 1st, 2011, and will be regarded as a payroll tax, at a rate of 2%, payable by employers whose annual remuneration in this province exceeds the exemption threshold of $1.2 million. Employers whose cumulative payroll for an annual year does not exceed $1.2 million are not required to pay this payroll tax. Newfoundland and Labrador do not excise any general corporate capital tax. However, banks, loans and trust companies with permanent establishment in the province are subject to a 4% capital tax. According to the Department of Finance, corporations taxable capital includes paid-up capital, retained earnings, other surplus, most debt and reserves. For companies with aggregate capital less than $10 million, only the first $5 million are exempted from the corporate capital tax. Tax exemption is provided to companies that made investments in other Canadian corporations. Likewise, tax exemption is provided to establishments that are non-resident corporation and not permanent. On top of that, the corporations that run insurance companies, such as Johnson Incorporation, Sun Life Financial and so on, are required to pay insurance companies tax. The tax is applied to the premium revenue of insurance companies. At an annual basis, the insurance companies are required to remit to the province a tax of 4% of premiums generated in Newfoundland and Labrador.

Table 1: Taxes of the average family (two or more individuals), 2011, preliminary estimates ($ CDN).Cash Income Income Tax Sales Tax Liquor, tobacco, amusements & other excise taxes 2,173 2,200 2,270 2,279 1,833 1,971 2,829 2,838 3,404 2,428 2,297 Auto, fuel, & motor vehicle license taxes 1,026 1,060 1,010 1,243 905 880 894 1,797 903 1,399 1,054 Social Security, pension, medical, & hospital taxes 4,713 5,579 5,283 5,902 8,567 8,768 6,468 6,741 8,640 7,728 8,558 Property taxes Import duties Profits tax Natural Resources Levies Other Taxes Total Tax Bill

NL PE NS NB QC ON MB SK AB BC CDA

68,128 72,909 77,829 78,135 81,398 95,776 89,173 99,127 120,970 85,745 93,831

8,175 9,114 11,038 10,039 10,733 12,498 12,521 13,106 18,870 10,149 12,668

5,316 5,596 6,521 5,670 6,552 6,734 6,165 5,657 3,264 5,818 6,44 1

1,156 2,380 2,856 3,416 3,317 4,652 2,985 3,103 2,643 3,466 3,751

204 224 256 235 256 317 278 311 412 295 311

2,773 2,132 3,490 2,511 2,964 3,680 2,939 4,647 2,948 3,222 3,361

4,889 0 142 190 39 20 88 2,734 2,410 797 555

1,110 714 450 571 493 851 1,640 1,189 1,769 1,309 965

31,525 28,998 33,317 32,056 35,660 40,373 36,807 42,122 45,264 36,611 39,96 0

Source: The Fraser Institutes Canadian Tax Simulator, 2011.

The mining industry bounced back in 2010 after being held back on 2009 due to recession. Demand and prices for mineral products increased, with many prices returning to high pre-recessionary period. Newfoundland and Labrador government imposed Mining and Mineral rights tax allowing them to collect funds or economic rents through this rising sector. There are two components to this tax: Mining tax and Mineral Rights tax. Mining Tax is the tax imposed on mine operators carrying out mining activities in this province. A 15% tax is imposed on the net income of the operator. Net income equals gross revenue less allowable expenses including, operating and processing, depreciation, pre-production, exploration, crown royalties, processing and smelting allowances, and other prescribed deductions. Mineral Rights Tax is imposed on the recipient of mineral production royalties. A 20% tax is imposed on royalty receipts less certain deductions including legal expenses incurred in the collection of the royalties and payment of rents or royalties to other persons. Table 1 shows the tax standing of Newfoundland and Labrador for an average family, with two or more individuals, in relative to the other provinces and Canada during the annual year 2011. From the table, we can observe that Newfoundland and Labrador has the lowest total tax bill, only second to Prince Edward Island, and the province offers the lowest sales tax, property taxes and import duties; thus, making the province a favorable place to do business. 4. Other Business Incentives provided by Newfoundland and Labrador The geographic location of Newfoundland and Labrador, at Canadas east coast, makes it an ideal place to do business with markets in Canada and around the world. The province abounds in natural and human resources, and plays a vital role in the nations economic growth. Along with stable and skilled workforce, and well-developed