Attracting Dyno Industries To Newfoundland

In November 1990 the Newfoundland Economic Recovery Commission had to decide if a Norwegian plastic fish tub manufacturer should be provided with financial incentives to move to Newfoundland. Dyno Xactics was the Canadian division of Dyno Industries of Norway. The Norwegian company had already taken over two plastic plants operated by Xactics in Saint John, New Brunswick and in Vancouver. A local entrepreneur had interested Dyno in establishing a new factory in Newfoundland, to access directly the province's large fishing industry market. Before making its decision to support the move, the Newfoundland government commissioned a study to determine the success of Dyno Industries' first fishery-related plastics factory located in the community of Salangen, in Northern Norway. If the factory in Northern Norway could prosper in conditions very similar to those in Newfoundland, a strong case would be made in favour of attracting the foreign manufacturer.


This case was prepared by Professor Robert Greenwood of Memorial University of Newfoundland for the Atlantic Entrepreneurial Institute as a basis for classroom discussion, and is not meant to illustrate either effective or ineffective management.

Copyright 1993, the Atlantic Entrepreneurial Institute. Reproduction of this case is allowed without permission for educational purposes, but all such reproductions must acknowledge the copyright. This permission does not include publication.


Background

Attracting branch plants of foreign manufacturing firms had been a central strategy of regional development policy throughout the post-war period. Federal, provincial and local governments all took part in promotional activities and offered tax incentives, loan guarantees, infrastructure provision and outright grants to induce outside firm to move into depressed regions. By so doing, it was believed that new jobs would be created, spin-off industries would be generated, and the local labour force would gain new skills. Eventually, government expenditure would be recouped through taxes on future profits and incomes.

The experience of branch plant development initiatives often fell short of government expectations. Plants developed few linkages to the local economy, importing production inputs - other than locally available raw materials - from outside the region, usually through head office supply networks. Other than taxes levied by local governments, most profits flowed outside the region, with little impact on scarce capital reserves in depressed regions. Direct employment was created, but normally only low-paid, unskilled or semi-skilled jobs were available - relatively low-paid labour was one of the attractions of peripheral regions. Firm continued to conduct research and development activities through their parent companies in regions abundant in skilled technicians and close to universities and other research institutes. Finally, when the original incentives ran out, branch plants established by mobile capital were often dosed in favour of regions offering new incentives, pitting one area against another.

Disillusionment with such outcomes led to an emphasis on ''endogenous development' in the 1980s. Fuelled by findings on the job-creation potential of small businesses, development agencies in peripheral regions looked to local potential for economic development. If resident entrepreneurs could be assisted in establishing new businesses, profits would be kept in the region - new investment would possibly be generated, supply networks would be developed locally, and depressed regions would be less vulnerable to the vicissitudes of outside decision makers.

The Newfoundland Economic Recovery Commission (ERC) was established by the Provincial Government in 1989 to pursue long-term development strategies consistent with this new thinking in regional development. The ERC was inspired by the 1986 report of the Newfoundland Royal Commission on Employment and Unemployment, which called for a more balanced approach to economic development. While traditional resource industries would continue to play a significant role in the province's economy, more emphasis would be placed on the stimulation of entrepreneurship and community development.

Efforts to attract outside firms did not have to be abandoned entirely by such an approach. Where entrepreneurial attitudes were absent, investment capital scarce, and access to production knowledge and technologies limited, outside firms could provide a stimulus to local firm development - if production and supply linkages could be established with the incoming firm. The study of Dyno Industries' experience in Salangen revealed an exemplary model of such an approach, albeit with some qualifications.

Salangen Kommune

Northern Norway consisted of the country's three northernmost counties (Fylkes in Norwegian) (see Exhibit 1). Norway was a unitary state, so the counties were essentially administrative agencies for the national government. Like many unitary states, where there was no strong level of intermediate government, local government took on greater importance. Salangen was a relatively small kommune (the lowest level of local government in Norway) situated in the southern end of Troms County. Salangen covered 457 square kilometres and had a population of just over 2,500 people in 1989. Like all Norwegian kommunes, Salangen consisted of a number of individual communities which shared a common local government.

Because of its relatively small size, residents of Salangen had close daily contact with the inhabitants of neighbouring kommunes. Like them - and like most coastal communities in Atlantic Canada - the people of Salangen traditionally depended on the fishery for a living. The kommune was at the base of a long fjord, which allowed subsistence farming to be combined with fishing. Like the Atlantic Canadian fishery though, employment in the Norwegian fishery was in decline due to diminished stocks and increased use of large fishing trawlers. In the 1950s, Salangen had the benefit of military employment, but by the early 1970s the population had dropped by 20 percent after the local base closed and no new sources of employment materialized.

To the benefit of its own residents and those in neighbouring kommunes; though, Salangen became a leader in promoting local economic development in the mid 1970s. Attracting a plastic fish tub manufacturer was one of its great successes. Salangen Kommune Mayor, Per Tonder, was credited with turning the region's economic fortunes around, resulting in a net immigration of people in the 1980s.

Community Entrepreneurship in Salangen

Per Tonder was the personification of the 'community entrepreneur.' He drew on a range of formal and informal positions to enhance his economic development activities. The 1970s was a decade of public sector expansion in Norway, fuelled by North Sea oil revenues. Most of this expansion took place at the kommune level, providing innovative local politicians with the means to increase local employment and improve the level of service for residents.

Tonder drew on his Labour Party connections - his father had been a member of the national parliament - and his position as chairman of the county school board, to have Salangen designated a regional centre, gaining a new high school and health care facilities for the kommune. His role as parish priest enabled him to attract a rheumatism convalescent home run by a Christian nursing organisation to the community. When teachers or health care workers moved to the kommune to work in one of the new facilities, he encouraged them to build houses there by making land available and expediting planning permission. Tonder reasoned that once people owned a home in a community they were less likely to move away

Tonder also used his government contacts and resources to attract private sector investment to the kommune. In 1971, the national Regional Development Fund paid for the kommune to establish a serviced industrial site, which Tonder insisted be located between the existing communities to reduce competition for new firms. He then used his position as chairman of the county transportation company to support, and finally purchase, a bus assembly plant attracted to the industrial site using Regional Development Fund support. The twenty-five jobs created by the bus operation were supplemented by fifteen jobs in a furniture manufacturing plant lured to the kommune using more national funds. Like the bus company, the furniture plant experienced financial problems, and while it was not taken over by the public sector, additional government funds were required to keep it in operation.

While these activities could hardly be considered an example of private sector revitalisation, they did establish a reputation for the kommune as a place where firms could expect full financial and regulatory support, and where employees would have access to modern services and facilities. Significantly, by 1980, 45.5 percent of the workforce was employed in public and private services, 24.3 percent in manufacturing and construction, and only 12 percent in primary industry. Salangen was one of the few kommunes in Northern Norway with a growing population.

The best example of the kommune's transition in this regard, was the establishment of a plastic fish tub manufacturer in the industrial site. Attracted to the kommune with financial and infrastructure incentives, the factory produced manufacturing inputs for a traditional industry, and led to spin-offs of producer services and inter-linked firms. It would seem to have been the epitome of successful local economic development.

Dynoplast A/S Cipax Nord

SIVA was a national government agency introduced in the 1960s, when the Norwegian government was attempting to encourage centralization and concentration of industry. Inspired by the British Industrial Estates, SIVA was initially intended to support industrial operations employing one to two thousand workers. As the Norwegian government revised industrial policy in the 1970s to accommodate the dispersed populations of Northern Norway, decentralization to the kommune level replaced efforts to establish 'growth poles.' SIVA estates subsequently provided funding for industrial establishments with fewer than one hundred workers, and Salangen managed to get SIVA support for an enterprise with twenty-five industrial workers.

Per Tonder saw SIVA as yet another resource to draw upon for his economic development initiatives. With a commitment to provide 50 percent of the cost of buildings and infrastructure from SIVA, Tonder approached a company called Cipax near Oslo, which was a manufacturer of moulded plastic products. He convinced them of the potential of producing plastic fish tubs using their moulding technology, and offered to have a factory constructed to their specifications. Further loans and grants were attained from the Regional Development Fund for capital investment and development work.

A Salangen native, Olav Foshaug, who trained as an engineer and had conducted research and development work in the defense industry, was employed by Cipax in Oslo. He jumped at the opportunity to return to his home region to start up the new operation in 1978. Shortly thereafter, Cipax merged with the Norwegian multinational Dyno Industries, putting the Salangen plant under the control of Dynoplast A/S Cipax Nord.

Foshaug worked closely with Tonder in rooting Dynoplast's new factory in the regional economy of the area. Wherever possible, Foshaug stated, 'we purchased supplies locally, although most specialized services were not available and had to be imported.' A local electrical company, nevertheless, established an ongoing relationship with Dynoplast, developing a specialised. expertise in the process. The company's employees installed the plant's machinery, and the company was paid a retaining fee for having its employees on call in case of electrical problems during production. Dynoplast also purchased all its electrical supplies from the company.

The plant's supply purchaser had also extended Dynoplast's linkages with the local economy by establishing his own supply company. Foshaug supported the move as it reduced the number of employees on his payroll while leaving a local company with the responsibility for ordering, shipping and stocking supplies. The spin-off supply company was still dependant on Dynoplast as its main customer, but it gradually expanded its customer base to gain greater independence.

Foshaug later worked with the kommune's economic development officer and the local Chamber of Commerce in collecting and circulating an inventory of goods and services available from local suppliers. By local sourcing, it was hoped, more economic linkages would be captured within the local economy, improving the sales of the suppliers and perhaps the performance of the buyers, by reducing the shipping time for orders and gaining the advantages of reduced inventories provided by a just-in-time delivery system.

Relations between buyers and suppliers could also assist product and process innovation and development. Indeed, Tonder sold Cipax on the idea of locating its production facility in the peripheral kommune so that it would be able to consult local fishermen in developing the product. Foshaug used his engineering and defense research experience to develop an R&D capacity in the plant, using design assistance from the company's main factory in southern Norway. By the mid-1980s, a research laboratory employing three people, including a draughtsman and a mechanical engineer, was established next to the main factory. Foshaug contended that the unionised workforce which was hired locally played an integral role in product development as well: 'If we described the problems we were having in the lab, and described the customer's needs, they helped solve many complex problems!

Product development expanded beyond the confines of the Dynoplast plant. The production process for Dynoplast's fish tubs and other plastic containers required steel moulds into which the molten plastic was poured. As a native of the region, Foshaug; used personal contacts to contract out the manufacture of the steel moulds to a mechanical workshop in a neighbouring kommune. That firm then developed an expertise in the manufacture of moulds for plastic products, assisting in Dynoplast's product development, but also expanding its production beyond the needs of the Salangen plant. It was soon producing moulds for Dynoplast's other factories in southern Norway, as well as for other plastic manufacturers.

Working in this manner, the Salangen plant developed and produced specialised fish tubs adapted to the needs of the fishery in Britain and the Egyptian fresh water fishery. By 1990, it had captured 80 percent of the Irish fish tub market and 75 percent of Norway's. When fish stocks dropped dramatically in the late 1980s, however, sales plummeted and the research staff was reduced to one. Efforts were made to diversify the plants production into plastic products unrelated to the fishery, Prototypes were developed for fuel containers required by the defense industry, and Norway's tough environmental regulations created demand for non-corrosive fuel and chemical disposal containers. Other uses for plastics, such as road markers and children's slides were investigated, taking the plant a long way from its original links with the fishery, potentially increasing its viability in the long-term and reducing its dependence on the unpredictable resource sector.

The fact that Dynoplast's Salangen branch plant was run by a native of the region also led to some unconventional linkages with the local economy. In 1990, Dynoplast requested Foshaug to move back to the company's plant near Oslo. Having lived away from his home region for many years and then getting the opportunity to return home, Foshaug decided that the sacrifice in the quality of life was not worth staying with the company. Life in Salangen, like most peripheral communities, was lived at a different pace than urban areas. Traffic was never a problem, housing was less expensive, and easy access to the countryside made outdoor recreation accessible from your back door. With well-developed educational and health care facilities at hand, common in most Norwegian kommunes, but even more so in Salangen because of Tonder's efforts, there were few disadvantages.

Foshaug decided to resign his position with Dynoplast and attempt to use his expertise to develop new economic activities in the kommune. Dynoplast kept him on as a consultant to the Salangen plant, where he assisted in the diversification initiatives. But he also entered into a consulting relationship with an R&D company established by Salangen kommune, with assistance from Troms Fylke. The company was originally set up to pursue technical contracts with the off-shore oil industry when exploration was conducted off Northern Norway No significant discoveries were made, however, so the company turned to other potential growth industries.

One of these was the development of a computer software program for kommune administration, which built on the kommune's expertise in managing innovative financial arrangements. Applications of Computer Aided Design in servicing companies located elsewhere were also researched. But Foshaug's primary interest was in developing expertise based on the existing plastics industry in the kommune. He worked with the company's two employees on research into plastic welding, and extending environmental awareness in Norway to potential inter firm linkages. They pursued a Joint initiative with Dynoplast into productive use of the plant's waste plastic as an input into further production. Such innovative approaches, it was hoped, would build on existing strengths to generate new products or processes which could foster further production in the kommune, and create knowledge-based service industries which could be exported to other areas.

Despite all these linkages to the local economy, both planned and unplanned, the original Dynoplast operation was far from dependent on the local economy - at least as far as the parent company in Oslo was concerned. Despite its success in tapping the domestic market and in expanding overseas, as well as generating significant innovation and diversification, Dynoplast still threatened closure of the Salangen plant to extract further concessions from all three levels of government.

The plant's success in expanding its market to southern Norway had been assisted by the country's long-standing system of transportation subsidies. As these were reduced in the late-1980s as part of the national government's fiscal restraint measures, common throughout the industrialized world during this period, the kommune administration scrambled to lobby the fylke and national governments to repay the company's transportation costs. The kommune also had to arrange cheaper electricity rates for the plant, and lobby SIVA for a new repayment scheme for an additional building which had been constructed. These efforts were in addition to further grants and loans provided to the company from the national Regional Development Fund.

Whether the network of inter-linked firms would survive if Dynoplast did pull out was a hypothetical question. There seemed little doubt that they were more dependent on the branch plant than it was on them, despite the exemplary spinoffs and linkages it had generated in the local economy. The skills created in the local work force and the local business community would likely lead to further development possibilities, but replacing the original propulsive industry would be difficult to achieve, without attracting another outside company. Such a strategy would no doubt serve to continue the kommune's vulnerability to the dictates of outside decision makers, but in time, perhaps sufficient indigenous business development would be stimulated to create an economically self-sustaining regional production system

A Newfoundland Dynoplast?

Based on the experience of Dyno Industries in Salangen, it was not a simple question whether or not the Newfoundland government should offer incentives to its Canadian subsidiary. Even if the same spin-offs could be achieved as had occurred in Salangen, the continued vulnerability of the host region to Dyno pulling out - or threatening to - would remain.

There were significant differences between the Salangen and Newfoundland contexts. In Norway, it was the kommune which played the primary role of attracting and working with the firm, albeit with fylke and national funds and programs. In Newfoundland, the Provincial Government took the lead role, enabling Dyno to choose the site. The entrepreneur promoting the move to Newfoundland stated that it was his understanding that Dyno was really only interested in St John's, the province's capital city. He explained that 'they were looking at the community infrastructure and transportation infrastructure and everything. The benefits that would derive from going into some of these other remote places - I don't think they took much comfort in going there.'

If the Newfoundland government provided incentives for the facility to be established in St John's, however, the depressed rural areas outside the capital could complain, with some justification, that government funds were supporting development where it was least needed. Without a community entrepreneur such as Per Tonder, it was unlikely that any rural Newfoundland municipality would be able to lobby effectively to alter such thinking, despite the fact that Salangen was just such a 'remote place.' Furthermore, without a plant manager from the region, such as Foshaug in Salangen, building on personal networks, in addition to working with an active municipal administration, it was questionable if the linkages to the local economy achieved in Salangen could be replicated. Finally, Dyno's apparent preference for taking over existing facilities - as in Salangen, Saint John and Vancouver - would seem to preclude any move to Newfoundland unless a similar operation was situated there.

Providing incentives to a firm playing one region off against another, looking for pre-existing operations, and anticipating continued demands for incentives once the plant was in operation, gave the Economic Recovery Commission officials reason for pause. But for a depressed regional economy in search of development, was it not worth the risk?