The draw of cost advantages is one of the most common reasons we encounter from businesses looking to expand. After all, finding ways to cut costs can make a business more profitable – or even make a business viable.
This is the sixth part in our “Guide to Foreign Business Expansion” series tackling the 12 questions every business needs to ask. Download the full guide now.
But, it’s one thing to say “we need to cut costs” and quite another to identify the cost centres where you’re best able to save via expansion.
Cost advantages can be broken down into five common categories: talent, real estate, location/logistics, taxation/operations and research/innovation. Here is how evaluating new locations for each can help your business save money through expansion.
Talent
Costs for talent vary widely between communities around the world, as does the availability of specific types of talent. The same economics that drive the free market – supply and demand – dictate talent costs. For example, in Silicon Valley, the competition is so fierce for tech talent that salaries are growing quickly, and this demand has helped increase salaries in the tech industry around the world.
Companies looking to find cost savings through talent must find communities with a strong talent pipeline in their industry, low cost-of-living relative to other communities with similar talent and additional advantages like exchange rates, which can help lower the per-employee cost.
Finally, retention rates are important for reducing disruption and recruitment costs.
Real Estate
Real estate cost advantages are straightforward: is the lease rate more competitive than in your current jurisdiction and/or possible expansion locations?
Some additional considerations include the type of real estate required. In the simplest terms, you are first going to define whether you are looking for industrial or commercial space.
Then, you should consider the use case for your new site. Are you setting up a full-scale manufacturing facility or a prototyping/research lab? Are you establishing a large tech office or an innovation outpost? Do you prioritize direct access to transportation routes or convenient access for potential employees? Do you need direct access to university research labs or tech startups?
All of these questions should be asked prior to pricing out options in target expansion locations because lease rates are dramatically different depending on location within a community, proximity to transit or transportation routes, etc. You should always seek to evaluate real estate costs across locations using the same set of criteria.
Location/Access
As a cost advantage, location boils down to one simple question: how easily can I get my product to market?
The costs saved via location are wrapped up in shipping costs – whether that is mail, transportation services, etc. – and ability to deliver products in a timely manner. If you sell consumer goods, it is advantageous to be close to major consumer markets simply because it reduces transportation costs.
The same can be said for suppliers working in manufacturing – the closer you can be to companies seeking your product, the lower your transportation costs.
The second half of this advantage is related to global access. Does your target location have helpful trade agreements? If so, this can reduce tariffs on your company’s products. Access also includes proximity to foreign markets, including convenient access to international airports and border crossings.
Taxation and Other Operational Fees
Every jurisdiction has a different tax code, which may help reduce business costs. Some of the types of taxes you should consider when researching a location include corporate taxes, land/property taxes, payroll taxes and, if you’re building a new facility, development charges.
You should also investigate available exemptions, incentives and tax credits, which often exist to encourage new investments in a community.
Other operational considerations include energy costs, health care for employees and other government fees, including mandatory pension plan contributions.
Research and Development
For companies looking to develop new products or services, research and development support can represent a significant cost centre. Finding a way to reduce research and development costs can offer a significant advantage.
Research costs are dependent on a wide array of variables, including subject, industry, required equipment, availability of expertise and more. Different jurisdictions provide additional variables, including whether students and researchers are publicly funded, the amount of overhead that universities charge to partner businesses and the availability of incentives and tax credits. Intellectual property ownership laws, as well as institutional intellectual property rules, may also provide an additional advantage.
In Canada, many companies take advantage of Scientific Research and Experimental Development (SR&ED) tax incentives, which include deductions and credits (15-35% of expenditures). These incentives seek to encourage Canada-based research and development. Economic development corporations, including Waterloo EDC, can help your company navigate this and other applicable related tax credits.
Contact the Waterloo EDC team. We’re here to help.