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:

indicator
k =1

[{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

0.00
Ca 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 GDP
i i lya t

lya

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 =

VentureCapital
i

lya

GDP
i

lya

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

( Deaths + Expansions + Contractio ns + NoChange )

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 _ SmallEstablishments
i

lya

WorkingAge
i lya i lya i

lya

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

NumberOf _ L arg eEstablishments WorkingAge

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 0
19 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 0.000

Ca 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

infrastructure, Newfoundland and Labrador also provides lucrative business incentives and a competitive tax environment. One of the incentives that have been offered to lure businesses to open up a branch in Newfoundland and Labrador is the Business Attraction Fund. It provides for large-scale, strategic investments in business ventures and infrastructure for the purpose of attracting business to Newfoundland and Labrador. Using this fund, the Department of Business will be able to provide loans and equity investments to firms and industries in running operations and conducting business in the province. The Oil and Gas Manufacturing and Services Export Development fund is designed to support strategic investments in new business opportunities for large-scale, exportbased petroleum fabrication, manufacturing and service provision. The Fund helps to increase export capability and technology transfer, and also provides Newfoundland and Labrador's oil and gas supply and service sector to extend its range and take benefit of opportunities beyond local industrial projects. Finally, Economic Diversification and Growth Enterprises (EDGE) provides advantageous position to businesses in Newfoundland and Labrador with lucrative scheme of tax exemption, credits and incentives, and makes the province an appealing location for companies and firms to invest in Canada, and as well as in North America. The businesses that are assigned with EDGE program receives tax incentives as a ten year tax holiday from provincial corporate income tax and payroll tax, and usually followed by a five year period of partial rebates. Municipalities in the province take part in the program by offering the businesses a ten year tax holiday from property taxes and/or business tax. The designated companies under the EDGE program are given option to lease the unserviced crown land for a nominal fee, usually $1, and they are also provided the services of a dedicated government facilitator to businesses that are new entries or expanding. The EDGE program is available to all new and existing businesses that has establishment in Newfoundland and Labrador. In order to receive the incentives companies must qualify certain requirements set by the provincial and municipality government. According to the Department of Innovation, Trade and Rural Development, the first criterion is that the company must create and maintain at least 10 new permanent jobs in the province. The second specification as mentioned by the respective department is that the company must have a minimum capital investment of $300,000 or have incremental annual sales of $500,000. The program is not meant to give direct advantage to new businesses over existing businesses in the province. EDGE program welcomes new businesses and helps them in their operational activity and establishment, so that the companies become able to provide substantial economic benefit to the province. The last criterion mentions that any company or industry whose business activity may grow due to EDGE incentives is eligible to receive the endowment from the program. 5. Taxation index: Methodology

There are two major studies that have been carried recently to index the taxation system. One of the studies to measure tax efficiency and citizens compliance with the tax system is carried by International Finance Corporation of the World Bank and the detail has been mentioned in their report Doing Business 2012 (2012). In the report, the study recorded the taxes and mandatory contributions that a medium-sized company has to pay in a given year as well as measures of the administrative burden of paying taxes and contributions. The research has been developed and implemented in cooperation with PricewaterhouseCoopers (PwC). Taxes and contributions measured 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. Similar to PwC, we need to rank the efficient and effective tax system based on the simple average of the percent on its components. There are three components used for ranking: number of tax payments made per year, the amount of time needed to prepare, file and pay tax, and total tax cost. The first variable takes into consideration of the total number of taxes and contributions paid, the method of payment, the frequency of payment, the frequency of filing, and the number of agencies involved in the study. The following variable mainly focuses on consumption taxes, like GST or HST, and do not affect the income statements of the company, but it is a concern for the companys administration to comply with such taxes, and therefore, they are included in the indexation calculation. In our study, we will record both electronic filing and filing by third parties while measuring the number of payments made in a year. We will need to measure this respective variable through survey study in the twenty zones of Newfoundland and Labrador, and our target group will remain to business personals due to their active involvement in the workforce of this province. 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. The provincial and regional data for the respective variable can be obtained from the Department of Finance and Statistics Canada. The second variable is the amount of time needed to prepare, file and pay tax. It is measured in hours on an annual basis. In our study, the variable mainly targets the three major taxes: the corporate income tax, sales tax and labor taxes. The time needed to prepare the taxes includes the hours to accumulate information to determine and calculate the amount of tax payable. PwC explains that even if separate accounting books are made for tax purposes or separate evaluation made, then the time associated with these processes should be captured by the variable. The time required to file the tax calculates the completion of tax return forms and then to file the relevant returns at the tax authority, that is Canada Revenue Agency, provincial or municipality government. The payment time calculates the hours necessary to make the tax payment through online or tax authorities. PwC also mentions that the delayed time will be counted where taxes are paid in person. Similar to the study carried by PwC, we need to compile data for the respective variable through survey study with focus group being the business personals due to their

progressive nature to drive the economic growth of Newfoundland and Labrador. Similar to the approach above, the indexing is carried by taking Canada as the base (100), when evaluating among the provinces, and Newfoundland and Labrador as the base (100), when comparing among the twenty zones, and then the distribution range of each measure is compiled. The provincial and regional data for the respective variable can be obtained from the Department of Finance and Statistics Canada. The last variable, total tax cost, is an important variable that will help us to carry comparative assessment among the twenty zones, and also between the other major regions of Canada and the regions of Newfoundland and Labrador. The variable is a comprehensive measure of the cost of all the taxes that a business bears after receiving the tax exemption, credits or incentives, and presents us with an understanding of tax competitiveness among different regions in Canada. According to PwC, the variable is calculated by dividing commercial profit of the actual tax payable. However, due to the fluctuant characteristics of commercial profit, the measurement is less viable than the process suggested by KPMG in their report titled Competitive Alternatives 2010, Special Report: Focus on Tax (2010). KPMG suggested two measures of total tax costs: Total Tax Index and Total Effective Tax Rate. However, we will use Total Tax Index in our regional study since it will help us to carry a comparative analysis to comprehend the competitiveness of the twenty zones in Newfoundland and Labrador. According to KPMG, the total tax cost is comprised of corporate income tax, other corporate taxes and statutory labor costs. KPMG measure these variables for various countries and cities in relative to corporations in the Unites States. KPMG reports that St. Johns with a total tax index of 46.1% is ranked fifth among the major cities of Canada, and the city proves to be in a better standing than Vancouver, Halifax, Montreal and Toronto. In our study, we would like to broaden the horizon beyond St. Johns and carry a study to calculate total tax index in the twenty zones of Newfoundland and Labrador, and other important cities of the province. The provincial and regional data for the respective variable can be obtained from the Department of Finance and Statistics Canada. Table 2 shows the methodology proposed in this paper to calculate total tax index for the twenty zones. The calculation of the index is carried by taking Canada as the base (100), when assessing among the provinces, and Newfoundland and Labrador as the base (100), when doing the regional comparative analysis, and then the distribution range of each measure is compiled.

Figure 10: Showing the % of per-tax income for major cities of Canada.

In our case, we will measure the total tax index of the regions in relative to corporations in Canada in order to make it simple for a comparative analysis. Table 2: Proposed methodology for calculating Total Tax Index. Total Tax Cost Total Tax Index (Provincial Comparison) Total Tax Index (Regional Comparison) Corporate Income Tax + Other Corporate Tax + Statutory Labor Costs Incentives/Tax Credits ((Total Tax Cost)X/(Total Tax Cost)Canada)*100 ((Total Tax Cost)X/(Total Tax Cost)Newfoundland and Labrador)*100

6. Conclusion An active business sectors with companies and firms creating investments, producing jobs and enhancing productivity helps to boost economic growth, and therefore, the region becomes appealing to people from other provinces and countries likewise. For a consistent economic development, local and regional governments enforce reformation in their respective fiscal and monetary policies. However, governments need to ensure sustainable economic conditions, and look beyond macroeconomic features. Both national and regional governments are required to maintain enriched law and order, enforcements, rules and regulations, so that citizens comply and commit to foster economic growth and betterment of economic health. In this global competition, investors, skilled workforce, and research and technology will diffuse in an economy that provides encouraging taxation system and improved standard of living.

National and regional governments are finding it difficult to set a tax policy that would ensure development at all stages. They need to decide an efficient taxation system that will enable companies to accomplish an adequate and evenly return, and thus, allows reinvesting and growing their business. However, the perspective of both public and private sector may differ on what the optimum amount of taxes to set. Both sectors common target is to ensure a simple and efficient tax system which is easy to administer and where all levels of compliance are high. The feature of the rules and regulations that establish the administration of the taxation system is vital for the policy makers. If all the focus is given to form a system which is comfortable to administer, then it will be less likely that a business would run within the informal sector, and they will have establishment within the formal sector enabling the government to collect the revenues that it needs to fund expenditure on strengthening the infrastructure, medical facilities and education system. This spending by the government will boost the productivity, a significant player of economic growth, and therefore helps to foster an intelligent community and promote a sustainable loop of development. In this paper, we have established a methodology to comprehend the taxation system of provincial and regional level. Canada made paying taxes easier and less costly for companies by reducing profit tax rates, eliminating the capital tax from most of the provinces and harmonizing sales taxes. However, the variation can be seen across the provinces and the twenty zones of Newfoundland and Labrador in the administrative system and benefits that are offered to attract investment and businesses. Our methodology will provide the standing of the provinces and regions in regards to tax administration, compliance and effective tax rates; all of which are needed to make a comparative and competitive analysis, and will act as an assessment to encourage investment and new businesses.

V. Property Rights Index 1. Introduction

Property rights index is an assessment of the ability of individuals to accumulate private property, secured by clear laws that are fully enforced by the state. The index measures the degree to which a countrys laws protect private property rights and the degree to which its government enforces those laws. Property rights index also assesses the likelihood that private property will be expropriated and analyses the independence of the judiciary, the existence of corruption within the judiciary, and the ability of individuals and businesses to enforce contracts. In our regional study, the zone with strong legal protection of property will receive a higher score. According to Karen Selick in article The Status of Property Rights in Canada (2001), we can create a property rights index to rank where the regions stand since in Canada the regions in the provinces have exclusive jurisdiction over property and civil rights. Additionally, the index is also implemented at regional level to understand the competitiveness and comfort to do business in the zones. However, such index at regional level will only look at the efficiency and quickness of the enforcement of the legal system, since the private property is guaranteed by the government and no sign of corruption or expropriation in the judiciary system. 2. Variables and Methodology For creating property right index we can focus on seven areas as shown in the report, International Property Rights Index, by Alexandra C. Horst (2007). The final index score will be calculated by taking the simple average of each of components (discussed later in this section). The following seven areas mentioned in the authors report are judiciary independence, confidence in court to uphold property rights, property rights protection, procedures/days to register property, ease of access to loans, and intellectual property rights protection. According to H. Demsetz in the journal Toward a Theory of Property rights (1967), since we are creating regional indexing to understand the competitiveness, we do not need some of the international level variables, such as political stability, corruption perception index, strength of patent rights and copyright privacy level as used by the author to study world-wide indexing of property rights among countries. 2.1. Judiciary Independence Judiciary independence will be used to examine the judiciarys freedom from influence by political or business groups. The independence of judiciary system indicates the smooth flow of protection and nations support of the court system with respect to private property. World Economic Forum (2010) formed a survey to reflect experts answers to the survey questions: Is the judiciary in your country independent from political influence of members of government, citizens or firms? The original scale started from 1, defines no heavily influenced, to 7, yes, entirely independent. The survey data have been rescaled to a scale of 0 10 to form the indexing and rank the nations to understand their performance in regards to judiciary independency. Hence, we can follow similar survey analysis as carried by World Economic Forum, and in our case, we will take government institutions, educational institutions and business environment personals to

represent the expert panel. The respective three sectors play an important role and are chosen to represent the expert panel since these three segments comprises of a large set of people involved in the economy as suggested on The Economic Review of 2010 published annually by the Government of Newfoundland and Labrador. 2.2. Confidence on the Judiciary System Confidence in court to uphold property rights is used to measure the extent to which the residents have confidence in and follow the regulations set by the society and the government. According to Alexandra C. Horst (International Property Rights Index, 2007), the following variable mainly measures the quality of contract enforcement, police and courts, as well as the probable outcome of crime and violence. The author combined several indicators, fairness, honesty, enforcement, speed and affordability of the court system, protection of private property rights and judicial accountability, to form a confidence indexing on the judiciary system. The data from the survey analysis on the World Development Investments (WDI) investment climate from the World Banks Investment Climate Surveys (2007) measures the opinion of experts who do not agree with the statement: I am confident that the judicial system will enforce my contractual and property rights in business disputes. The standardization formula has been implemented by WDI to rank the nations confidence level in their respective judiciary system. In Newfoundland and Labradors zonal ranking, we can form up a survey study with the similar indicators as that of Alexandra C. Horst (International Property Rights Index, 2007), and participating experts will be comprised from the set of people representing the government, educational and business institutions since the people from these three categories are more active in the economy (The Economic Review, Newfoundland and Labrador, 2010). 2.3. Protecting Property Rights Property rights protection explains clearly the strength of a countrys property right system and also includes the quality of judicial protection of private property and financial system as defined on International Property Rights Index (2011) by Kyle A. Jackson. The respective variable has been able to merge experts opinion on the clearness of the legal definition of property rights. The survey study as suggested on World Economic Forums Global Competitiveness Report analyzed the survey participants where they were asked to comment Property rights, including over financial assets are poorly defined and not protected by law as to clearly defined and well protected by law. The original scale started from 1, poorly defined and not protected, to 7, clearly defined and well protected by law. The survey data have been rescaled to a scale of 0 10 to form the indexing and rank the nations in regards to property right protection. Similar survey analysis can be carried while doing zonal study for Newfoundland and Labrador with expert panel comprised from personals participating in Government, educational and business sectors. 2.4. Registering Property According to World Bank Groups 2010 Doing Business report, procedures/days to register property is used to explain the difficulty level for registering property in terms of

the number of days and procedures necessary. According to the report, the variable is able to record the full knowledge needed to transfer the property title from seller to buyer when an individual or business purchases land and a building. The knowledge of the full sequence of the procedure is critical since the harder the registration procedure is, there is a high likelihood that the assets stay in the informal sector; thus confining the broader perspective on the respective subject matter will restrict the public support for a strong legal and property rights system. Additionally, obstruction in registering property discourages the transfer of assets from lower to high valued uses. The data involved to define the respective variable is the number of procedures or days required for a business to secure rights to property. Kyle A. Jackson in International Property Rights Index (2011) has used weight average of 30% of Procedures to register property and 70% of Days to register property to calculate the variable. The variable is then standardized for ranking purpose. Similarly, we need to collect data for the procedures to register property and the number of days required to register property, and use the weighted average method and standardization to rank the zones in Newfoundland and Labrador. 2.5. Ease of Access to Loans Ease of access to loans has been identified as an important variable by World Economic Forums 2010-2011 Global Competitiveness Index. According to the report, since access to a bank loan without collateral serves as a proxy for the level of development of financial institutions in a country, that is why the respective variable has been included in the International Property Rights Index. Along with the clearly defined and well enforced property rights system financial system play a significant role to bring economic assets spread into the formal economy. A survey analysis has been carried by the World Economic Forum and the results have been displayed in the Global Competitiveness Report (2010). The survey reflects experts answers to the survey question: How easy is it to obtain a bank loan in your country with only a good business plan and no collateral. The original scale started from 1, impossible to get the bank loan, to 7, easy to get bank loans with a good business plan and no collateral. The survey data have been rescaled to a scale of 0 10 to form the indexing and rank the nations to understand their financial performance in regards to the ease of access to loans. Similarly we can carry survey analysis for the zonal study in Newfoundland and Labrador to understand how each zone complies with access to loans. 2.6. Protecting Intellectual Property Intellectual Property refers to creations of the mind, such as inventions, literary and artistic works, symbols, names, images, and designs used in commerce. The intellectual property rights segment is to assess the protection of intellectual property. According to World Economic Forums Global Competitiveness Index (2010) report, the respective variable is comprised of opinion surveys demonstrating a nations protection of intellectual property, and it has been branded as one of the most critical component to describe Intellectual Property Rights segment. The survey study in World Economic Forums Global Competitiveness Index (2010) report asked participants to comment on Intellectual property protection in their respective country as weak or non-existent as to equal to the

worlds most stringent. The original scale started from 1, property protection as weak or non-existent, to 7, rigid intellectual property protection. The survey data have been rescaled to a scale of 0 10 to create indexing in order to form ranking of the nations which will tell how they fare in protecting intellectual property. We can ask the expert panel from government, educational and business sector in Newfoundland and Labrador to participate in the similar opinion survey study to comprehend how each zone in the province handle the intellectual property rights protection. 3. Conclusion For our study, we need to compile data of Newfoundland and Labrador and its surrounding regions. Since we have to generate most of the data for the above components, we need to make sure that potential biased is avoided. The overall grading scale of the Property Rights index ranges from 0 to 10, with 10 representing the strongest level of property rights protection and 0 reflecting the non-existence of secure property rights in a country. Similarly, each component and variable is placed on the same 0 to 10 scale. The final index score will be calculated by taking the average of each of components mentioned earlier. According to Kyle A. Jackson in the International Property Rights index (2011) report, weighting method has been applied by putting arbitrary weights on the components which the author thought was more significant in explaining the property right. However, the results generated were similar to the simple average procedure; thus the author went for the simple average calculation for its simplicity. While doing regional analysis, Besley and Ghatak (2009) suggested the weighting method since some of the components play more role in the economy compare to others. In the zonal study for Newfoundland and Labrador, we will form the indexing using both the procedure as to find whether there will be any difference in the results. The indexing study needs to be continued annually in order to find a theoretical relationship between property rights institutions and economic development; thus giving the province an opportunity the overall situation empirically using more strong econometrically approach.

VI. Red Tape Index 1. Introduction Red tape is a concern of all sorts of governments, institutions and businesses, and streamlined at all levels of public and private sectors. The term, Red Tape, derived from the red ribbon once used to tie up legal documents in England. Since the law and enforcement

gives significant value to precedent, the judicial system made decision relying much on the records for guidance and authority. This type of procedures requires the records of every transaction to be filed and cross-filled precisely. Hence, large crowds of clerks and lawyers spent a good deal of their time opening and closing the ribbon-tied folder. This tying and untying would slow down the administrative work. People at all levels and sectors trying to achieve some goal would become annoyed and much would add to their discontent if no precedent could be found, and therefore, people would seek the assistance of informal sectors. Hence, the emergence of red tape as an abhorred symbol, and although the ribbon has long since disappeared, the conditions and practices it represents continue, thus keeping the legacy of the badge alive. In modern times, red tape remains a despised and yet a popular term, but to some extent vague. In scholarly literature the term is less used, defined occasionally, and open to a variety of interpretations. According to Buchanan (1975), Baldwin (1990), Jones and Gartner (2004), and DeHart-Davis (2008), red tape is defined as excessive constraints or barriers, usually in the form of laws, rules, regulations and procedures. Similarly, this paper defines red tape to be constraints or hindrances to an institutions freedom as a result of rules, regulations and procedures. The definition is focused mainly on the constraints experienced by employees in government or non-government organizations. The hindrances faced by employees in institutions will directly hamper the citizens through delays, shifting of responsibility and excessive filling and filing of forms, all of which are regarded as the red tape. Both internal and external formal red tape are discussed in this paper. Internal formal red tape refers to the constraint that is self-imposed by an agency or firm; whereas, external formal red tape refers to the constraint that is self-imposed by government agencies. The distinction between external and internal is relevant in order to explore the idea whether public organizations experience greater external red tape while private organizations experience equivalent or greater internal red tape. According to Buchanan (1975), private organizations experience more red tape than public organizations. Distinct to formal external and internal red tape, personnel red tape has not been defined, conceptualized, and operationalized before administering the survey by Buchanan (1975). The author restricted the use of formal red tape to explain personnel red tape since a factor analysis showed a correlation among survey items associated with the functions of personnel management, such as selection, promotion, compensation, and so on3. In this paper, the notion of informal political red tape will be explained. The term refers to the constraints or obstructions to an organizations freedom caused by the influence of key components in the political system. The key components can be comprised of media, public opinion, political parties, interest groups, and public officials. The influence of these figures will lead to the formalization of constraining rules and procedures, but Baldwin (1990) explains that these bodies are meant to apply a short-run constraining influence on the behavior of public agencies and employees. The literature
3

Because of 12 of Buchanans scale items are related to job descriptions and hierarchical relationships in organizations, they primarily are related to constraints originating in the internal environment of organization,

does not regard these constraints as red tape as commonly as the constraint of formal rules and procedures. More discussions about the different forms of red tape are covered in the sections below for the reader to understand the theory and definition before we move onto measure the qualitative variable. The measures of red tape is taken from the viewpoint of personnel holding the managerial position in a company, and the evaluation is based on the opinion on the number of rules and procedures to which the managers must comply or the amount of time spent complying with rules and procedures. Hence, the qualitative variables like personality, knowledge, productivity and experience of a manager will affect our survey study along with the recency effects that describes the managers recent experience with red tape. According to Rainey, Traut and Blunt (1986), one more factor that affects the study in measuring these concepts is the stereotypical views or shared myths of constrained public sectors and unconstrained private sectors that may not reflect the reality in any of these two sectors. Moreover, perceptual measures approved the managers to record their feelings of constraint despite the number of and time spent complying with rules and procedures. The managers who had limited opportunity, and faced oppressive rules and procedures will generally indicate high levels of red tape, but the managers subject to unchallenging rules and procedures will indicate low levels of red tape. The notion of perceptual measure will allow us to build a survey to be distributed broadly, and to a large extent, this will enhance the external validity of our study. The survey study will not only explain the behavioral attitude towards red tape, but will also enable us to understand the relationship between the perception measures and managerial motivation. The main task with the design process of the red tape 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 informal and formal level indicators due to red tape activity. Figure 11 shows the model with the several indicators of formal and informal red tape. In this paper, we will mainly focus on the importance of survey analysis to understand the standing of red tape dilemma in the public and private sectors. The section 2 of this paper will discuss the theories behind red tape differences, and provide brief explanation on formal red tape, public personnel red tape, informal political red tape, source of private sector red tape, and private personnel red tape. Section 3 will mainly focus on the operational side of Newfoundland and Labrador red tape reducing commission, and reformation policy implemented to prevent red tape augmentation. Section 4 explains the importance of survey analysis and methodology to understand the level of red tap in the twenty economic development zones of Newfoundland and Labrador. Section 5 concludes providing suggestions and further study on the analysis on red tape. Figure 11: Model showing Red Tape Scaling procedure

Red Tape Index

External Formal Red Tape (25%)

Internal Formal Red Tape (25%)

Informal Red Tape (50%)

Government Rules and Regulations (50%)

Organizations Rules and Regulations (50%)

Organizations policies and policy (50%)

Organizations day to day activity (50%)

Made difficult by elected public officials (25%)

Difficulty to fire employees (25%)

Being prevent from pay raise or bonus (25%)

Made difficult by elected public officials (25%)

Freedom in managers daily work routine (25%)

Freedom in firing employees (25%)

Interfered with by the media (25%)

Interfered with by the media (25%)

Hindrance in the hiring process (25%)

Case few problems in managers promotions (25%)

Influenced a lot by political parties (25%)

Influenced a lot by political parties (25%)

Constrain managers advancement opportunities (25%)

Difficulty in hiring process (25%)

2. Theories of Red Tape Differences and their Impacts 2a. Formal and Informal Red Tape in Public Sector Public institutions experience more formal red tape since they are involved and accountable to larger client group, which is the general public. Private organizations experience low formal red tape in relative to government organizations since their involvement with general public is limited and narrowed. According to Baldwin (1990), all explanations for greater public sector red tape either directly or indirectly share this colossal and intricate liability. Public programs are used to reflect the necessity and desirability of the citizens, and meant to defend the rights of endless concerns of the general public. Hence, broad range of rules, regulations and procedures are implemented to ensure that the public programs reflect the needs of general public. Formal red tape arises as a consequence of transparency between different government and non-government sectors. In Canada, national and provincial laws generally divide and overlay the authoritative task among three operational branches. The government set the law not to increase efficiency of the departments, but mainly to prevent the abuse of power. As a result, supervision of public departments is comprised of executive, legislative and judicial branches (Ciccone and Papaioannou, 2007), whereas the private institutions are maintained by sole proprietors or a group. The Federal government monitors and controls the resources and activities of the national and provincial government departments. Provincial governments monitor the activities and ensure the resources have been supplied to regional and municipal governments. Regional and municipal governments directly work with the concerns of general public, and analyze the issues to come out with a solution which is then implemented to solve the societal problems with the help of federal and provincial governments. However, not only do these external controlling and monitoring operatives impose constraining rules, regulations and procedures, but the provincial and regional governments respond to these hindrances through enhancing the internal mechanisms of control. According to DeHart-Davis (2008), the common responses by the government bodies are procedural standardization and hierarchical control, and therefore requiring continual surveillance of these bodies. The most constraining branch of government for public institutions is the judicial branch. Judicial branch enacts law that is meant to achieve multiple goals and mechanisms of accountability since the lawmaking results from interests of various public and private organizations. The law specifies the minute details of an institutions multiple goals, explains the structure and means of achieving those goals, explains the procedures to control the financial resources, and specifies the operating authority. The following way is very efficient to keep rules and regulation intact, but the multiple mechanisms of accountability can sometimes be constraining and inefficient for the general public. Moreover, the amendments in judicial system are very time consuming and a difficult task which can derail the mechanisms away from the original intentions. According to Jones and Gartner (2004), current demands for a politically influenced bureaucracy have created provisions for general public to participate in bureaucratic

decision leading to broader directives, goals, and bargaining processes, and more post decision litigation that would generally be the by product of the system. The bureaucratic system also have brought open-door policies and information-access policies allowing for a continual investigation of public agencies, resulting in public demands for more stringent regulations than those seen in less accessible private agencies. Red tape is also prominent in public administration. Newland (1976) stated that the most pervasive and persistent problems of public administration are the impersonal, slow, unresponsive, rigid, and expensive personnel processes. Although there have been numerous reforms by the Federal government to abate red tape, the public organization and its administrative personnel still faces an abundance of constraints and obstructions that are not experienced in the private sector. A suitable example to clearly explain this situation is that in order to prevent politics from intervening in the affairs of public administration, the judicial system disallows public employees the right to run for public office or become part of a political party. The legislature prevents public employees from taking part in collective bargaining and usually denying them the right to strike for better conditions, like higher wage rate or better working conditions, in order to respect and protect the broader public interest. However, the case may not be suitable at all government sectors. The regulation also supports veterans and their surviving spouses getting recruited and in retaining processes, but also requires the public administrative positions to be compensated relatively to their private sector counterpart. The judicial system provides adequate and similar process of law to both public and private employees, but public administrative system are constrained by internal grievance and appeals procedures (Jones and Gartner, 2004) that can delay the whole process by a year or two. Therefore through limiting the rights of public personnel, the government constrains the behavior of public employees and through granting rights to general public employees, the government creates more rules and procedures that hampers and complicates the public personnel functions. Formal red tape can also yield from ambiguous public goals, inadequate performance measures, and the absence of market tests for agency outputs.(Ciccone and Papaioannou, 2007) Societal goals, like improving living standards, assuring equality, encouraging general welfare, and so on, are complicated and hard to comprehend, measure, or promote. Hence, the public employees often rely on rules, regulations and procedures to understand and evaluate such goals. According to Jones and Gartner (2004), these rules and regulations are central to decisions concerning manpower planning, retention, advancement, dismissal, wages and training. However, such evaluation criteria will be unable to change working condition, and therefore becomes red tape that invalidates the evaluation process. Informal red tape defined throughout this paper is the influence of elements or actors in the political environment of public organizations. These elements include the media, interest groups, elected officials, political parties and public opinion. These elements do not affect in the short run, but in the long run they apply a constraining informal influence by convincing that their support is needed for the existence of the public

programs and creating perceptions that their support is essential. Characteristics of an open government increase the influence of informal red tape by increasing the number of elements seeking to influence the system. With rising information sharing devices, various interest groups can now resist or encourage the activities of public employees through various means. According to Dahl and Lindblom (1976), if the group seeking to influence the system has input rights and avenues, then public employees must accumulate countless viewpoints and tradeoffs in reaching at a desirable conclusion. Unlike the private employees, the public officials are limited in using their full capability due to constraints. An example related to the above is that public sector continuously faces evaluation, thus leading to more informal red tape. Therefore to avoid this continuous scrutiny from media, elected officials, political parties and interest groups the high visible public employees are forced to temper their speech and act moderately. According to Nijland (2008), indifferent statements or slip of tongues will let media to report unforgiving and misleading headlines. Nijland (2008) also reported that infuriating others department can result in bitter letters and phone calls from elected officials. Heedlessness and laxness can provide the interest groups, media, political parties and opposition candidate the opportunity to humiliate an administration. Hence, to refrain from such unpleasant experiences public employees act within the limit and in a restrained manner. Along with the democratic society, the various elements of political environment of public organizations cause the public sector employees to experience informal pressures that constrain their ability and responses. Although interest groups, media, and political parties may not be able to take legal actions against the government department, but they are inclined to cause problems and continuous scrutiny which, therefore, will constantly abridge public employees behavior. 2b. Red Tape in Private Sector Many cases involving red tape can be identified in the public organizations, but there are many sources of public sector red tape that exist in the private sector as well. Private institutions have multiple accountabilities that dictate both formal and informal checks and balances on the use of power. According to the article titled Cutting Red Tape: National Strategies by OECD Policy Brief (2007), the multinational corporations are accountable to a national and international clientele that often exceeds the population of most states and regional governments. Moreover, the report states that the multinational institutions are also accountable to stakeholders, government bodies, judicial system and public opinion. However, Murray (1975) found out in his study based on postindustrial society that of all the accountabilities, government bodies are the most constraining to private organizations. Murray (1975) noted the regulatory agencies as one of the most significant constraint for the private organizations since a business cannot be established without the influences of agencies that charter, license, and zone, nor can they exit from the business without merger, antitrust regulations or bankruptcy. Additionally, government has established more agencies, services and commissions to regulate general public safety from harmful products, impure foods, tainted or false advertising, imperfect markets, pollutants, unfair wages, insufficient benefits, hazardous working conditions, discriminatory practices, and so on.

Private organizations are more compelled to constrain personal favoritism and promote merit system; therefore, they have always relied more upon selection process, evaluation techniques, and incentive system to attract and retain employees. Additionally, in order to minimize matter being taken to court and encourage more amiable working conditions, corporations have not been averse to instituting internal grievance and appeals procedures (OECD Policy Brief, 2007). Grievance and appeals, though, are more common in the public sector, but they are one of the effective ways to reduce red tape (Buchanan, 1975). In this way, the employees are provided with job security, which enhances their freedom of expression and increase their productivity, by providing alternative trail for unjust and discriminatory motives. These characteristics can be obtained once the public employees successfully complete their probationary periods. However, small business establishments often do not face red tape associated with complicated personnel system; instead, they are affected by political or personal influences to enter into personnel decisions. Like the public organizations, private sectors also are subject to numerous vague goals that help management to advocate the idea to establish rules, regulations and procedures. In doing so, they are able to enhance performance evaluation and personnelrelated decisions. Most corporations are not only limited to production and profit margin, but they go beyond this general ideology to enhance innovativeness, organization autonomy, reputation, competitiveness, and so on. Since most of the employees in the private sector are not in production and sales, through which output can be measured, the corporations enforce more rules and regulations to maintain standards of performance and behavior to measure the capacity of employees ranging from clerical and maintenance work to executive management and highly technical staffs. Hence, this continuous scrutiny will lead to an increase in red tape in the private organizations. 3. Newfoundland and Labrador Red Tape reducing Commission In February 2005, the provincial government of Newfoundland and Labrador established the Red Tape Reduction Task Force to explore ways for government to reduce such things as regulations, forms, licenses, reporting and paperwork; all of which have been identified as a constraint to efficient business operations. Under its targets, the committee studied numerous jurisdictions across the country and around the globe including British Columbia, New Brunswick and Ireland. The committee also met with stakeholders to receive input on how government could better streamline its operations. The directive of the Red Tape Reduction Task force been simple and straightforward to comprehend, its first aim was to examine the regulations, government paperwork, irrelevant and cumbersome administrative and unnecessary regulatory burdens and identify regulatory red tape barriers to private sector job creation and business growth, particularly for small and medium-sized businesses (Report of the Red Tape Reduction Task Force, 2007). Secondly, the taskforce used a consultation process with external and internal stakeholders through acknowledging their primary goals on reducing red tape. Next, the taskforce was to make recommendations on strategic opportunities to

reduce, streamline or eliminate regulatory red tape barriers instantly, and over the long term, in order to strengthen the competitiveness and productivity of the economy (Report of the Red Tape Reduction Task Force, 2007). Their fourth mandate states that the taskforce will make recommendations for monitoring, evaluating, and reporting procedures in the long-term. The last initiative ensures that the recommendations maintain a level playing field for businesses, and do not compromise important public policy objectives, such as environment, health and safety, public and consumer protection. Table 3: Percentage of Employees in Public and Private sector
200 0 % Employmen t: Canada % Employmen t: NL % Employmen t: Canada % Employmen t: NL 22.6 200 1 22.5 200 2 22.3 200 3 22.3 200 4 22.6 200 5 22.8 200 6 22.9 200 7 23.0 200 8 23.6 200 9 24.2 201 0 24.4

Public Sector

33.5 200 0 77.4

32.7 200 1 77.5

32.7 200 2 77.7

32.5 200 3 77.7

30.9 200 4 77.4

30.6 200 5 77.2

30.0 200 6 77.1

31.1 200 7 77.0

32.4 200 8 76.4

32.7 200 9 75.8

32.7 201 0 75.6

Private Sector

66.5

67.3

67.3

67.5

69.1

69.4

70.0

68.9

67.6

67.3

67.3

The provincial government is very keen to make sure that the businesses that want to grow and develop its establishment in Newfoundland and Labrador will be given the support to do so. This can be seen in Table 3 where business in private sector is increasing in Canada and Newfoundland and Labrador. The new businesses and the ongoing ones require a congenial atmosphere in which to start and develop their business activity. Business growth and expansion will increase investment, labor productivity, innovation activity, and economic growth in this province. Hence, the rising business sector will be a benefit to the residents, directly, through the creation of employment, or indirectly, through taxes. However, there are regulatory hurdles that small and medium enterprises face that hinder their establishment in the province. According to report by Canadian Federation of Independent Business (CFIB) entitled Rated R Prosperity Restricted by Red Tape (2005), small and medium sized businesses must comply with the same rules, regulations and procedures as their larger counterparts. The statistical analysis by CFIB showed that businesses with four or less employees pay a disproportionate red tape expense of $5,317 annually, but a company of hundred employees or less pays an expense of $1,104 annually. The cost of complying with rules, regulations and procedures enforces a relatively large burden on the owners of small and medium enterprises and affects the company on financial scale as well.

The report by CFIB has provided the platform on which the Red Tape Reduction Task Force piled up the problems and solutions to reduce red tape from the public sectors that are directly involved with private organizations. The report included observations in the way private enterprises conduct business as compared with the public service, and according to CFIB, it is a clash of cultures4. Red Tape Reduction Task Force has goals set to reduce red tape in the short run by distinguishing the target and needs of public and private organizations. However, in the long term it is everyones interest to support the growth of business activity in Newfoundland and Labrador since it helps to maintain the rising trend of job growth and also helps to generate wealth for the province. Therefore, the purpose of the task force is to forge closer and stronger connections between the two sectors as they are interdependent and important for the well-being of the residents in the province (Report of the Red Tape Reduction Task Force, 2007). The Red Tape Reduction Task Force also studies the impact on local businesses because of their overseas trading partners rules, regulations and procedures. An example of this relationship is between Canada and United States or Mexico through North American Free Trade Agreement, and therefore, Canada has to consider how using regulation impacts with the respective neighbors. The task force studied various rules, regulations and procedures of countries ranging from Europe to North America, and reviewed regulation and its impacts on businesses, the economy and social well-being. Since excessive enforcement and regulations can dampen the relation between public and private sector, it has become a significant concern for provincial and regional governments to create an optimal compliance level. The Red Tape Reduction Task Force have also reviewed the characteristics of global marketplace and their regulations since many companies in Newfoundland and Labrador export goods and services all over the world. The Red Tape Reduction Task Force examined the regulatory reform of the public service departments of Canada, the nine major provinces and Finland. The model developed by British Columbia has been endorsed since it is compatible with Newfoundland and Labradors commitment to regulatory reform. According to CFIB, the model has been chosen because of its four components: demonstrated political leadership and commitment; baseline counting of regulatory requirements; targeted reduction objectives, and regular public reporting of reductions. The Red Tape Reduction Task Force made a target to reduce 25% of red tape activity from the provinces public administration by 2012. According to a news release by the Regulatory Reform Initiative in January 2010, Newfoundland and Labrador had surpassed its initial objective set in 2006 by reducing regulatory requirements by over twenty-seven percent. The Provincial Government continues its strong commitment to improving the regulatory environment in Newfoundland and Labrador by implementing a target of no net growth in requirements and a regulatory impact analysis of all new legislation and policies. In addition to reducing requirements, the steps being taken are fostering greater innovation and efficiency in the way the Provincial Government operates,
4

Organizational model is different in private sector in relative public sector. This difference is defined as the clash of cultures.

delivers services, and interacts with the public through streamlined processes, improvements to regulations, increased access to e-government and online services like Bizpal, less paperwork, and more efficient service to clients and the public. The task force gave importance to commentaries from business personnel to understand the problem that they are facing because of over-regulation, and only made such changes as to reduce the amount of red tape from those sectors. Open commentaries are effective way to connect business with public administration, but the task force failed to come up with any methodology that would measure the course of the red tape annually. In our study, we will use open commentaries, but priorities will be given to owners or managers perception red tape impact on their business or activity. Unlike Baldwin (1990), the study will not be limited to business owners and managers, but it will also evaluate the red tape inside public administration (personnel red tape). The measurement is required for empirical purpose which will be useful to policy makers and administrators to understand the level of red tape in the public and private administrations. The measurement will also help investors to understand the ease of opening up business in Newfoundland and Labrador. The study will provide us with adequate information in distinguishing between formal and informal red tape or public and private red tape. In this paper, a qualitative study made through survey analysis is proposed to evaluate the level of red tape in our society. 4. Methodology Similar to the survey analysis by Baldwin (1990), we will conduct the study on managers perception of red tape in their respective organization. The survey will have questionnaires for which the managers need to indicate the extent of their agreement on scales of one to ten. Baldwin (1990) used scales of one to five, but 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 tape, external and internal red tape has been established from certain survey items. Similar to Baldwins (1990) analysis, our study will go beyond the comparisons between public and private, and analyze the impact of personnel and informal red tape on a significant dependent variable, worker motivation. According to Wherry and South (1977), worker motivation was defined as working long and intense hours or putting effort into ones work. Often personnel red tape is ignored in the study of red tape as there are no certain measurement techniques to understand its level. However, an indirect methodology5 has been applied to understand the level of impact of personnel and informal red tape on public and private organizations. The questionnaires of worker motivation will be tested on managers of both public and private organizations. We will work also work with another variable, timeliness and predictability of government service, which has been noted as one of the key issues raised by Canadian business. The focus will be given to elements that are particularly related to compliance and enforcement of regulatory requirements. The variable is a very good measure to evaluate the efficiency of the public and private bodies due to formal and informal red tape.
5

Indirect methodology is to understand the state of worker motivation on mangers of both public and private organizations. This is achieved by providing survey to the workers.

According to CFIB (2010), small business owners or managers perceive that easing and simplifying the current regulations will help the business to understand the target of the government and will help them to better comply with regulations. Lack of predictability for business will arise when owners or managers face delayed response to requests from the public agencies, slow or no action taken to issuing judgments or decisions, below standard service, and negligence in inspecting and enforcing rules and regulations. Due to these factors, owners or managers of an organization find the system inconvenient and frustrating to start or continue business, and in the long term, these factors keep on contributing to major losses for both the public and private agencies. The survey questionnaires to understand the impact of timeliness and predictability of government service will be tested on managers of both public and private organizations. Factor analysis is used to determine which items in the survey are highly related and convey a common theme or meaning. According to Baldwin (1990), factor analysis resulted in the scales of formal red tape reflecting constraints in personnel procedures, and the scales of informal red tape reflecting the constraining influence of variety of political elements. It is also important in our study to carry reliability test in order to determine the consistency of the managers responses to the survey. The survey study is needed to be carried in the twenty zones of Newfoundland and Labrador since it will help business personals and investors in making a comparison between other parts of Canada or North America. 5. Conclusion The report of the Red Tape Reduction Task Force (2007) found through open commentary with public and private employees that several places in the organizational structure require amendments. The changes are based on the premise that what is good for business is good for public interest through economic development, job creation and the generation of wealth. The report has identified the cultural difference between business and the system of government with focus to narrow the differences. They also emphasized that government agencies are required to support the business and citizens to accelerate the processes and focus more on timeliness and predictability of government service. The system needs to view its processes from the perspective of the needs of the client. Some of the recommendations made by the Red Tape Reducing Task Force (2007) are to increase collaboration among government departments, encourage departments to consider ongoing service delivery improvements to clients, elimination of unnecessary duplication of regulatory requirements, and to assist business and general public to direct the system of government to achieve the primary economic goals. The survey analysis will help the task force to understand the standing of the red tape reduction level. The study, with the proposed methodology, needs to be 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 reduce red tape with ease. Further study on this subject matter will give importance to involve other micro and macro-level constraints that have impact on businesses and public organizations, or the indirect impact due to their presence. Moreover, if the criticism about red tape is valid and the effects are

genuine, annual survey analysis on this subject matter will determine whether the malfunctioned side effects of red tape surpass its benefits.

VII. Transportation Infrastructure 1. Introduction Prosperity and means of transportation may not seem related at first instance, but both the variables are correlated. Nations and provinces likewise, prosper when the infrastructures are developed and provide the ability to explore the resources needed to drive the economic growth. The economic and productive development of a province or region is strongly related to their respective transport infrastructure. With sufficient transport infrastructure, a province or a region allows industries or businesses to increase their production levels due to reduced logistical costs, inventory savings, and provide easy access to global supply and labor markets.

In this paper, we will focus mainly on consumer and business demand for public transit and transportation system of Newfoundland and Labrador. According to Northeast Avalon Regional Economic Development Board (NEA REDB) planning survey6, when general public were asked to mention Newfoundland and Labradors economic challenges, approximately 50% of survey participants have noted that cost of transportation is high in relative to their household income, 51.5% of the participants regarded the quality of transport infrastructure to be low, and 55.9% of the survey participants complained about access to transportation. From the respective survey, approximately 52.9%of the participants wanted NEA REDB to undertake research on finding the source of the problem afflicting the provinces transport infrastructure, 55.9% of survey participants prefer NEA REDB to develop strategy, and approximately 75% of the participants suggested public and private cooperation initiatives to counter the transport infrastructure problems. Hence, this report is an opportunity to develop a methodology to understand the state of transport infrastructure, particularly in this respective province. We will carry qualitative analysis through survey study in order to understand the consumer preference and quantitative analysis to understand the participation and consumption of transport infrastructure by general public. Studies regarding the relationship of competitiveness and transport infrastructure in Newfoundland and Labrador have not been carried much until three years back. Dillon Consulting Limited 2011 provided a Market Assessment and Strategic Directions Study for the St. Johns transit system. The study became inevitable due to the declining rate of transit ridership since the major service changes in 2007. Dillon Consulting Limited studied the accuracy of ridership reporting, and the integrity of the revenue collection and handling systems. The respective consultancy firm also carried a survey study to understand the consumer preference and to investigate the onboard passengers reactions to the recent service changes7. Moreover, their survey study also was conducted with post secondary students, local businesses, and general public through the Metrobus website. Survey analysis suggested recommendations and changes in current services for system enhancements and productivity improvements. The study also included suggestions by exploring market opportunities in the province to generate ridership growth and conduct an assessment for the resulting implications on Metrobus. Connections Research and Jim Winter (2008) undertook a feasibility study titled Feasibility Analysis of Establishing a Pilot Transportation Co-operative to address transportation issues for small and medium-sized enterprises. The authors explored to the potential of transportation co-operative to meet the interest of small businesses in the Northeast Avalon in solving the transportation problem affecting the province. Issues affecting the businesses in the province included increasing fuel price, need for improvements to marine cargo shipping infrastructure, constant upgrading of TCH and other major highway routes, cost and service quality of the Gulf ferries, maintaining combined highway and marine cargo routes, and withdrawal of Air Canadas direct air
6

As part of NEA REDBs strategic planning process, a survey study has been carried on 2011. Seventy responses were received. 7 Service changes include changing the direction of the routes, increase in fare, increase in the amount of fleet, and so on.

route to Europe. The report recognized the importance of freight transportation and the difficulties small and medium enterprises face in exporting and importing goods from the Province and the twenty regions. The primary objective of the study was to analyze current transportation issues encountered by local small and medium enterprises exporting and importing products into NL and assess the interest and feasibility of establishing a pilot transportation cooperative to address the need for more cost-effective import-export freight services. However, even though the paper was successful in detailing the problems regarding transport infrastructure, it did not provide any statistical or econometrical methodology to understand the state of the transport system in Newfoundland and Labrador. In this paper, we will focus on both the qualitative and quantitative approach to determine the consumer, and small and medium business preferences. Section 2 will explore the transport markets mainly focusing on intercity transits, aviation transits and interprovincial cargo transits by land. Section 3 will explain the empirical approach to understand the indicators representing the transportation sector and how to face the economic impacts resulting from transport system. Section 4 will explain the need to index the data since it will help us to follow the course of transport indicators. Section 5 concludes on the subject matter. 2. Transportation: Market Assessment The location of Newfoundland and Labrador has been a strategic and a business location for centuries. The proximity of the province to North America and Europe made it a vital place for business hub by land, air and water. The natural resources have made this province an appealing place, and therefore, the frequency of the using transport systems have increased during the last decade. 2.1. By water Being the oldest colony of Britain, Newfoundland and Labrador Sea ports enjoyed a good number of ships harboring during the 16th and 17th centuries. This happened because of the Newfoundland cod-fishery which was a commercial platform of western England and the Labrador whale-hunt which was a main source of income in north-western Spain (Cadigan, 2009). However, the importance of Newfoundland and Labrador ports declined as European settlement and exploitation of North American continent moved further westward during the 18th and 19th century. The significance steadily rose again from the mid-nineties and went on to maintain the rising trend in the last decade due to its traditional maritime resources, natural resources, minerals and especially power-generating resources which became prominent because of the increasing urbanization in the developing countries like China and India. According to the report titled The Economy 2011 (2011) by the Government of Newfoundland and Labrador, real exports are estimated to have increased by about 4% due to a significant boost in mineral output, particularly iron ore, and higher oil production. The report also mentioned the value of manufacturing shipments increased to more than $5.2 billion, and that is due to gains in value for refined petroleum and fish products. This rise in export value played a vital role in the development of water

transport infrastructure and the expansion of St. Johns harbor in order for the province to maintain the high frequency of vessels that are harboring for export and import purpose. 2.2. By air Another important transit market that picked up recently and became a significant component to economic growth and offers other direct and indirect markets to sustain in the current economic dilemma is the St. Johns Airport. A recently completed Economic Impact Study (2011) conducted by Strategic Concepts, Inc. and local economist Dr. Wade Locke on behalf of the St. Johns International Airport Authority clearly indicates that the St. Johns International Airport generates a substantial economic footprint on the Newfoundland and Labrador economy. St. Johns International Airport and its fifty-five operating partners contributed $400 million per year to provinces total GDP, and successfully generate over $80 million in tax revenues to all three level of governments (Economic Impact Study, 2011). The result from the report clearly shows that the airport authority and its partners play an important role in boosting the economic growth of Newfoundland and Labrador. The airport is a vital player to small and medium enterprises allowing them to have better access to global and diversified markets, and it is also an important component that enables growth in Tourism industry through efficient and easy to access transportation facilities. The corporate structure of the St. Johns International Airport Authority ensures that all excess revenues over expenses are retained and reinvested into the Airports capital assets due to it private and not-for-profit corporation characteristics. The Authority has invested $140 million, since 1998, on airport improvements, rebuilding the terminal building, upgrading the airfields, and offering efficient and effective customer service. According to Economic Impact Study (2011), these changes created 3,155 employment people per year and generated revenues of over approximately $30 million annually. Almost 6,000 indirect employments are created annually in Newfoundland and Labrador due to the operations that take place at St. Johns International Airport. These activities also earn $21 million in tax revenue to the Newfoundland and Labrador government and $3 million to Municipal governments located on the Avalon Peninsula. According to Wade Locke in Economic Impact Study (2011), the actual economic contributions of St. Johns Airport are difficult to outline in this study since the benefits to local and regional businesses accrued from the use of airport to conduct business with global and national markets are not incorporated in the study, but they are equally significant. St. Johns Airport authority announced a ten year expansion plan on 2009 with $150 million invested to develop the current infrastructure focusing mainly on increasing the accessibility of the Airport and expand the transit structure to accommodate the demand of 1.9 million passengers by the year 2020 (Economic Impact Study, 2011). This expansion plan, along with the availability of three hundred acres of land that the Airport has for commercial development, will ensure that the Airport continues to contribute to the economic growth of the region. 2.3. By land

To comprehend the land transit system, we have divided them into two categories: intercity and interprovincial (includes transit in between regions as well). Both the categories have two consumer markets where one deals with transportation mode for general public, and the other involves the transportation system for goods market. According to Statistics Canada (2011), the intercity transportation mode for goods market has seen a recent increase in revenue due to the increased retail sales of $7.4 billion driven by employment and income gains, and solid consumer confidence (The Economy 2011, 2011). The rise in demand for goods and services from income gains made the small and medium enterprises deliver their products as quickly as possible to maintain efficient qualitiful service and to remain competitive in the current business market. Hence, the intercity transportation mode for goods market has been busy in transferring tangible products to consumers and has seen an increase in earning during the year 2011 (The Economy 2011, Government of Newfoundland and Labrador). The interprovincial transportation mode for goods market has seen a rise in the total revenue during the last year mainly due to $5.2 billion value of manufacturing shipments, 26.1% increase in market value of aquaculture production, 17.5% increase in iron ore shipments, and this increasing trend in the revenue sustained throughout the year even after 5% decline in newsprint shipments value, the stronger Canadian dollar, and the rise in the fuel price which directly increases the cost of the transportation mode (The Economy 2011, Government of Newfoundland and Labrador). The intercity transit system for general public had a decline in the total revenue mainly due to the relative increase in the sales of automobile and partially due to the labor strike at the beginning of 2011. Newfoundland and Labrador economy is seen to climb out of recession, and achieve prosperity which can be understood through the satisfactory real GDP of 5.6% in 2010 and 4.9% in 2011 (Statistics Canada, 2011). Indications of economic prosperity is primarily understand through more employment and increased levels of income, thus allowing the consumers to spend more on goods and services. With increased purchasing power enabling the consumers to buy more, and moreover with St. Johns recent rise in non-renewable resource production, the province has seen an increase in auto use during the respective period. According to Global Auto Report by Scotiabank group (2011), Newfoundland and Labrador saw 10,800 passenger vehicles sold from January to October in the year 2011, and 15,600 trucks sold during the respective period. It can be concluded that more general public in Newfoundland and Labrador are able to own and operate cars since 2009 leading to a decrease in the use of intercity public transit system. According to St. Johns Transportation Commission report titled Market Assessment and Strategic Directions Study (2011), the prosperity in Northeast Avalon region of Newfoundland and Labrador in recent years have lead younger generation to move out of their family household, and settled in peripheral locations with cheaper house rent. Due to this trend, the intercity transit system has seen a ridership decline in the recent years. Interprovincial transportation has seen an increase in revenue due to a rise in outmigration from rural parts of Newfoundland and Labrador to city areas. The only provider of trans-island passenger motor coach service in this province is DRL-LR. The company has twenty-five stops along the Trans-Canada Highway (TCH) between Port aux Basques and St. Johns, and offers service to most communities that are mainly around the TCH.

The in-migration to St. Johns started during the last decade and the trend continued due to decline in traditional industries, like the fishery and forestry, general economic decline in rural communities, restructuring and regionalization of government services, and increased access to employment opportunities, amenities and services in the cities. Concerns about future economic sustainability in smaller communities and continued population decline in rural areas are also the primary reasons of influencing migration from rural places to cities in Newfoundland and Labrador. The only mode of cheaper transportation to move between regions is the coach service offered by DRL-LR. Hence, the company has seen a rise in their revenue through accommodating the long route service to the migrants all across the province. 2.4. A possibility in 2012 According to the report Provincial Outlook (2011) by RBC, the real GDP of Newfoundland and Labrador will grow by 2.8% during the year 2012. The economy will mainly be driven by moderate capital investment growth and an increase in mining production, but the economy will have a slight downward impact from the decline in oil production. Therefore, the year 2012 will see a slower economic growth, but will still remain healthy. The transportation mode for supplying goods by land, water or air may enjoy favorable earnings during the year 2012 from the continued rising trend of retail sales, increasing mining production and non-residential construction activity. Similarly, the intercity and interprovincial transport system for general public may see an increase in the revenue due to continued trend of rising in-migration to urban areas of population aged between 15 to 25 years (Statistics Canada, 2011), and also due to an increase in aging population requiring assistance, a market that intercity transit provider like Metrobus should capture in order to have a high earnings in the year 2012 (Statistics Canada, 2011). 3. Empirical Analysis Transportation is an integral part of developed societies. It not only provides the means for personal mobility, such as accessing services, goods, and leisure, but it is also an important component in delivering goods to consumers. The efficient and safe functioning of transportation facilities have become an important economic issue at national, provincial and regional level. The challenges that transportation pose on economic and social aspects of modern society has become an area of research across a wide range of disciplines from economists to urban and regional planners, logisticians, consumer theorists and so on. Some of the challenges seen in the last decade included the development of transportation infrastructure, safety and efficiency in operating and maintaining the infrastructure, the efficient use of resources to improve existing transport system, and easing mobility to access basic goods, services and health care are only few to name. According to Jiwattanakulpaisarn (2008) in his article titled The Impact of Transport Infrastructure Investment on Regional Employment: An Empirical Investigation, most of the challenges related to transportation involve stochastic processes influenced by observed and unobserved variables in yet unknown and unavoidable circumstances. The author mentioned that the stochastic nature of the problem is mainly poised by the role that the general public plays in transportation. Jiwattanakulpaisarn (2008) explains that general publics are faced with choices in regards to transportation,

such as what means are they going to use for travelling, which vehicle to buy, where to locate their businesses and so on. Similarly, the personals at the Department of Transportation or other government agencies face stochastic challenges in determining how to estimate the consumer demand, how to measure the efficiency and effectiveness of transportation systems, and where to use the resources effectively to improve the transportation infrastructure. As a result of the complexity, diversity, and stochastic nature of the transportation problem (Jiwattanakulpaisarn, 2008), empirical analysis is required to understand the impact of different variables, macroeconomic and socio economic indicators, on transportation infrastructure. In our study, empirical analysis will be carried to explore consumer preference of transportation for each types of mode stated in the above section, the economic impact of investment on transportation infrastructure, and to check for empirical evidences on the importance of transport infrastructure development and economic growth. Through econometric analysis we will be able to apprehend and explain the trends and the evolution of the different components of the transportation system in Newfoundland and Labrador and the twenty regions of this province. Through econometric analysis, the policymakers will be able to lay a platform to support program development, transport infrastructure improvement and ease in decision-making. The analysis will look at the broad spectrum of all modes of transportation and all components of socio economic aspects of transportation service allowing us to understand the changes in demand and supply of transportation service in Newfoundland and Labrador and the twenty regions. In our econometric study, we will deal with matters regarding macroeconomic indicators, such as economic growth, employment, household income and so on, and socio economic indicators, such as housing units built annually, net migration and so on. 3.1. Literature Review Empirical analysis has been carried internationally and nationally to understand the various issues evolving around transportation infrastructure. Numerous studies have been carried out regarding direct and indirect economic benefits accrued from transport infrastructure investment and how they impacted on economic growth. Public investment is seen as a driving force for private investment, which in turn drives economic growth. Many of the benefits of public investment services accruing to firms are through infrastructure that makes mobility easier and lowers the production costs, expands market opportunities that positively affect competitiveness, encourage private investment and lead to economic growth (Fourie, 2006). Straub (2008) distinguishes additional entries through which infrastructure investment causes growth effect, which in turn provides economies of scale and opportunity. Straub (2008) in his article titled Infrastructure and Growth in Developing Countries: Recent Advances and Recent Challenges explained that better transport infrastructure lowers the costs of transportation, and therefore, leads to economies of scale and better management. A notable study by Sanchez-Robles (1998) titled Infrastructure Investment and Growth: Some Empirical Evidence explored empirically the relationship between transportation infrastructure and economic growth by including the data of spending on transportation infrastructure as a share of GDP through regression analysis. The initial

findings were inconclusive, and that provided adequate support for Sanchez-Robles to introduce new indicators of investment of infrastructure, and therefore, to employ physical units of infrastructure. The regression analysis on the updated model found the relationship between transportation infrastructure variables and economic growth to be positive and highly correlated. Barreda-Tarrazona (2008) studied the impact of transport infrastructure investment on Spanish regions, and documented in the report titled Transportation Infrastructure Investment in the Spanish Regions. In this regional study, the author emphasized optimal conditions for various regions, and hypothesized that the sharing of the budget is proportional to the combined effect of the population density and the scarcity of the already existing infrastructure. To validate this theoretical concept, Barreda-Tarrazona (2008) analyzed real data regarding transportation infrastructure investment costs, existing transportation infrastructure level, population density, and number of firms for eighteen Spanish regions. The research was comprised of regression analysis and non-parametric correlations and tests on the variables to which the relationship between transportation infrastructure investment and optimality condition have been found to be positive and highly correlated. The theoretical literature explaining the relationship between infrastructure and growth has been extensively studied by Barro (1990). The author stated that the benefits of infrastructure investments may be offset by the negative impact of additional distortionary taxes to finance the infrastructure. The negative effect of public spending on growth arises from the distortions to choice and the disincentive effects (Mendoza et al., 1997). Public sector activity competes with the private sector in the use of the limited resources, and therefore, increases the price. Moreover, when public investments are financed domestically, then this phenomenon leads to an increase in the market interest rates and increases the price of capital. The increased interest rates discourage private investments and spending since private investments contribute more to growth, and in turn leads to an increase in the size of the public sector at the expense of the private sector which hinders economic growth. The crowding out effect 8 reduces the ability of government to influence economic activity through fiscal measure. Boopen (2006) studied the contribution of transport capital to growth for a sample of thirty-eight sub- Saharan African economies using econometric methods. The author concluded that transport capital has been a significant contributor to the economic progress of these countries. Seethepalli et al. (2008) also proved in their study titled How Relevant is Infrastructure to Growth in East Asia that infrastructure is important for promoting growth in East Asian economies. Zou et al. (2008) analyzed data from China and found that higher economic growth level is highly related to better transport infrastructure, and that government spending on road construction in low-income areas is important for economic growth and poverty alleviation.

An economic theory explaining an increase in interest rates due to rise in government borrowing in the money market.

Another recent empirical study has been carried by Jiwattanakulpaisarn (2008) where the author researched on the relationship between transport infrastructure investment and regional employment. Jiwattanakulpaisarn (2008) used panel data of forty-eight states of U.S. and the county level data of the State of North Carolina, and applied panel econometric methods to comprehend the respective relationship. The author went further to study the impact of transportation infrastructure investment on economic productivity and private sector output using the similar econometric methods. The study found that the relationship between transport infrastructure investment and employment is positive, but small in magnitude after including spillover effect of addition in capacity. Similar findings have been noted on private sector employment from increasing investment in transport infrastructure. Like Jiwattanakulpaisarn (2008), Garcia-Mila et al. (1996) suggests that there is little evidence of an effect from infrastructure to income growth in a panel of U.S. state level data, particularly when fixed effects9 are included. The relationship between transport infrastructure and economic growth has been appealing to many economists, policy makers and politicians during the last two decades (Gramlich, 1994); however, it still remains an unclear area as to whether the direction of causation is from transport infrastructure to economic growth or vice-versa or both. Kessides (1996) notes that one of the main shortcomings of research on the economic impact of transportation infrastructure is that it has so far not adequately accounted for simultaneity of effects-economic growth can lead to development of the transport system as well as result from it. Previous studies based on Cobb-Douglas production function could not confirm the direction of causation between the development of the transport sector and economic growth. In addition, most of these studies have typically relied on cross-sectional or panel data regressions. A general problem associated with such studies is that they implicitly impose or assume cross-sectional homogeneity on coefficients that in reality may vary across countries because of differences in geographical, institutional, social and economic structures. Hence, the overall results obtained from these regressions represent only an average relationship, which may or may not apply to individual countries in the sample (Bloch and Tang, 2003). Results obtained by Ashipala and Haimbodi (2003), Canning and Pedroni (2008) and Egart et al. (2009) lend support to this view. There have been several studies that researched the relationship between consumer demand and transportation. A recent study by Tsekeris and Dimitriou (2008) investigated the Greek household travel demand for domestic interurban public transportation using cross-sectional micro-data from a countrywide Household Budget Survey10. The authors used econometrical procedures to explore the relationship between the household expenditures for travelling and the demand of different passenger transportation modes (coaches, railways, airplanes, and coast-wise sea ferries). Tsekeris and Dimitriou also used several macroeconomic and socio-economic variables to find their respective relationship with the demand of different transportation modes. The increase of income level was found to significantly and positively affect both the participation and consumption decisions for all modes. Other factors such as car ownership, motorcycle purchase expenditures, age,
9

Since fixed effect is assumed in the model, it implies that we impose time independent effects for each entity that are possibly correlated with the dependent variable. 10 A survey used by the Government of Greece to comprehend household related expenditures.

household composition, residential density, and education level were also found to significantly influence public transportation demand in various ways. A regression analysis carried out by Greer and Campen (2011) to cross-sectional data from the 2006 New Zealand census investigated the determinants of public transport demand for the purpose of commuting to work in the region. The authors used public transport ridership as a proxy to understand the public demand. The analysis indicated that public transport utilization responds positively to an increase in the total number of commuters, an increase in population density, and an increase in service frequency. It is negatively related to an increase in automobile ownership rates, an increase in the distance from where commuters live to the nearest commuter rail or ferry station, an increase in distance to the central business district, and an increase in household income. However, only the total commuters, car ownership, station distance, and service frequency variables have statistically significant parameter estimates. A qualitative study has been carried by Dillion Consulting Limited on behalf of St. Johns Transportation Commission. The importance for this study was due to the decline in reported transit ridership since the major service changes in 2007. The report titled Market Assessment and Strategic Directions Study collected information on ridership, revenue collections and the components related to handling transit systems. Onboard passenger surveys were carried on March 23rd, 2010, to understand the characteristics of current public transit users and to investigate their views on the service changes. The study conducted additional surveys to explore the relationship between consumer demand and the demographic variables, such as postsecondary students, local businesses and the general public of various age categories. A number of external factors are also seen as contributors to ridership decline. These include population growth in areas not served by Metrobus, employment growth in sectors/locations not easily served by transit, a pattern of land use development that is not supportive of transit (low density urban sprawl) and the increased economic prosperity of the region which favors automobile travel over public transit. Greater affordability of auto ownership combined with moderate operating costs, limited road congestion and parking policies/pricing that do not favor transit are also major contributors to the decline in transit usage. The respective qualitative study is currently the only research that has been carried out to understand the relationship between consumer demand and public transit system in Newfoundland and Labrador. A statistical analysis has been carried by Strategic Concepts, Inc. and Dr. Wade Locke (2011) on behalf of the St. John's International Airport Authority to provide information on the 2009 economic footprint generated from operating the St. Johns International Airport on the economies of Avalon Peninsula (the region under Northeast Avalon Regional Economic Development Board), Newfoundland and Labrador, and Canada. Statistical analyses on key issues, such as operating expenditures and revenue, infrastructure investment, employment data related to the airport, non-resident tourism expenditures, and expenditures related to military personnel and aircraft movement at the airport, have been identified and mentioned in the respective report. The

primary goal of this report is to evaluate the economic impacts of the Airport using InputOutput11 model and provide a quantitative measure of its growing contribution to the regional, provincial and national economies. 3.2. Variables and Data This paper suggests two econometrical studies in order to determine the relationship between consumer demand and transportation system, and economic growth and transport infrastructure investment. Since consumer demand and economic growth are used to explain different phenomenon in the economy, integrating the both to relate them to transportation system will complicate the matter and the result yielded may be ambiguous. This suggestion has been made after observing that none of the scholarly journals has mentioned study where both consumer demand and economic growth are independent variables to explain the transportation system. When carrying econometrical analysis on the relationship between consumer demand and transportation system, we will duplicate the study by Greer and Campen (2011) since the research has been successful in evaluating the consumer demand of public transit in New Zealand census area and employed simple econometrical methods to explain the regression analysis. The proxy used by the authors to determine consumer demand is public transit users. The similar variable has been used by Dillons Consulting Limited (2011). According to Greer and Campen (2011), the public transit users are the ones who represent the number of people within the census area unit who ticked public bus, train, or other on the census questionnaire item that asked participants how they traveled to work on census day. Dillons Consulting Limited (2011) used the same notion of the variable, but called it public transit ridership instead. Hence, this respective data can be obtained from St. Johns Transportation Commission or Metrobus. Similar data can be obtained from when the study takes other transportation modes, by air or by sea, into consideration. St. Johns International Airport will be able to provide us with ridership regarding aviation industry, and Department of Transportation and Works will be able to provide ridership information that relates to ferry service or water public transit. Table 4: Metrobus Transit Ridership Information, 2007-2009 2009 Service Area Population (major cities under Northeast Avalon Regional Economic Development Board) 2008 2007

127,455

127,455

127,455

11

An input-output model is a quantitative economic technique that represents the interdependencies between different branches of national economy or between branches of different, even competing economies.

Annual Ridership Revenue Hours Rides per Revenue Hour

3,014,073 125,660 24.0

3,156,854 126,486 25.4

3,168,594 125,646 25.2

Ridership in public transit ridership has decreased from 2007 to 2009 as illustrated in Table 4. According to Dillons Consulting Limited (2011), the overall decline is about 10 percent and the downward trend is a concern, particularly with the recent improvements to service in 2007. Since the reasons for decline are not clear to Dillons Consulting Limited (2011), this will give our study the opportunity to explore the problem using empirical analysis. Unlike the public transit of St. Johns, the airport has seen a constant increase in passenger traffic from 1998 to 2009. According to Strategic Concepts, Inc. and Dr. Wade Locke (2011), the passenger traffic has risen by almost 90% since 1998, representing an annual average of slightly more than 1 million passengers, the increase in passengers served in 2009 increased by only 0.1% over 2008. The report also mentioned that St. Johns International Airport was only one of six airports in Canada that actually exhibited growth in passenger traffic in 2009.

Table 5: St. John's International Airport Passenger Traffic

Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Number of Passengers 694,091 802,261 852,044 921,615 868,643 949,879 1,083,213 1,175,172 1,243,002 1,185,302 1,222,964 1,223,944

The explanatory variables used by Greer and Campen (2011) are comprised of socio-economic indicators since consumer utility or demand is well-explained by certain socio-economic variables (ZeyFerrell et al., 1977). Greer and Campen (2011) used total commuters, cars per household, population density, station distance, distance to city center, rush hour frequency, and median household income to determine the demand for urban transportation system in New Zealand census area unit. Similar study with same variables can be used to determine the demand for the urban transit system in Northeast Avalon. However, there will be additional variables added in our study that Dillons Consulting Limited (2011) mentioned will cause external effects

on consumer preference. Additional variables, population growth, employment growth, aging population, post-secondary population, distance to industrial park, are used to explain the demographic characteristics of the region. The data for demographic variables are found using Statistics Canada and CANSIM12 database, and the data for socio-economic variables can be extracted from St. Johns Transportation Commission or Metrobus for urban transit. Similar study can be implicated for transit system by air and water with minimal changes in the model. The data for socio-economic related to transit system by air and water can be extracted from St. Johns Airport authority and the Department for Works and Transportation respectively. The study to evaluate the business demand for transport system carrying goods within and across the province is limited. Since macroeconomic variables, such as economic growth, government expenditures, retail sales, oil production and so on, are involved with business demand, we need to examine this involvement empirically. Studies by Gramlich (1994), Kessides (1996), Canning and Pedroni (2008), Egart et al. (2009), Boopen (2006) and Seethepalli et al. (2008) have used the relationship between transport infrastructure investment and economic growth to explain the business demand. According to the authors, their study suggested that both the variables are directly related to each other; however, the theory behind the relationship still remains vague. The theory behind our study lies in the premise that the business demand is positively affected by an increase in economic growth, and economic growth occurs because of infrastructure development. Similarly, infrastructure development causes business to expand and induces demand, and therefore, requires an increase in output which directly encourages economic growth. Hence, to determine the bidirectional causality13 relationship between transport infrastructure investment and economic growth, we need to carry empirical analysis using modern econometrics procedures. The respective causality relationship will tell us how business demand is induced, and whether it is unidirectional or bidirectional. Moreover, we can check the causality relationship by adding significant macroeconomic and socioeconomic variables to the empirical model. In this way, we can understand the impact on transport demand from other economic and societal factors. 3.3. Policy Implication Provincial and regional governments are increasingly adopting policies aimed at changing transportation demand by general public and businesses. Rather than trying to solve transportation problems by building highways, increasing the number of vehicles, and transit routes, transportation demand management relies on incentives and disincentives to promote transportation use. These methods are meant to induce travel demand through utilizing the existing facilities efficiently and effectively. Residents and businesses respond to differences in travel time, cost, working hours, and other attributes of
12

Canadian Socio-economic Information Management System (CANSIM) is a fee-based service offering a range of statistical information about Canada, including census data, economic and health indicators, immigration economics, income distribution, and social and justice conditions. 13 Causality is the relationship between an event (the cause) and a second event (the effect), where the second event is understood as a consequence of the first.

travel in more proper ways that are predictable. Hence, the findings from the empirical analysis will entail certain policy implications for promoting transportation in Northeast Avalon and Newfoundland and Labrador. 4. Indexing the Transport Sector Studies involving indexation of the transport sector is limited and there has not been any indexing carried when Newfoundland and Labrador or Canada is taken into account. Indexing is a useful way of expressing pieces of information and collections of data. When we are measuring the level of a particular economic or socio-economic indicator we often make use of indexing to track the course of the indicator. One of the advantages of indexing is that it allows us to compare and contrast more easily different sets of economic data. Indexing of data is usually carried upon macroeconomic variables dealing with money market. However, rise in research activity in welfare economics have lead to indexation of socio-economic variables, one such index is known as Relative Happiness Index. Indexation carried on the indicators that explain the transportation system is rare and often neglected due to unavailability of data and costliness of collecting them. An advantage of indexing as suggested by Diewert et al. (2009) is that index number techniques based on the moving or rolling year14 concept can provide a good target measure of the trend. Therefore, indexing the indicators of transport sector will help us to understand the trend and allow comparative analysis to becoming easily available when understanding the level of the indicators in the current economic conditions. However, unavailability of provincial and regional transport data can be a major constraint when indexing the numbers. According to the study by Lahiri et al. (2003) which is reported in the article titled Monthly Output Index for the U.S. Transportation Sector, a monthly output index has been developed for the U.S. Transportation sector during the period 1980-2002 covering air, rail, water, truck, transit and pipeline activities. This is the only know indexation that measures the elements of the transport sector. The index covers the activities of for-hire freight carriers, for-hire passenger carriers, and a combination of the two. The transport service index explains how the output of transportation services has increased or decreased from monthly data. The index is used in conjunction with other economic indicators to produce a better understanding of the current and future course of the economy. The movement of the index over time can be compared with other economic measures to understand the relationship of transportation to long-term changes in the economy. The respective indexes were originally designed to serve as coincident measures of the transportation sector of the economy, but later they were recognized as a measuring tool that the Bureau of Transport Statistics of U.S. produced and provided to the general public. The monthly data was acquired by the Bureau of Transport Statistics for each mode
14

The concept of a rolling year can be somewhat confusing, but basically what it means is that each new day is a new end to a 12-month period. In other words, January 18th would be an end to one rolling year which commenced 365 days before, and January 19th would be the end to another rolling year, and so forth.

of transportation from a range of government and private sources. Lahiri et al. (2003) mentioned that since some data were not complete through the end date, they were found using forecasting procedure and statistical technique known as auto regressed moving average15. The main goal of the index is to reflect monthly shifts in transportation services output, and study the course of short-term trends. Hence, the authors had to adjust the data for the normal seasonal changes that impact the transportation sector. Lahiri et al. explained that since transportation is highly seasonal, so with no adjustment of the index would provide an inaccurate picture of underlying changes in transportation output. Hence, the Bureau of Transport Statistics of U.S. deseasonalized16 the data for each mode using standard statistical methodologies. After gathering all the seasonally adjusted data for each mode, the data from the different modes must be converted into an index. Lahiri et al. (2003) used 1996 as the base year and indexation has been formed by dividing the current monthly value by the average value for the twelve months of 1996. The Transport Service Index is formed by combining the individual mode indexes into the three categories of indexes, the freight index, the passenger index, and the overall, or combined. The weighting has been based on the relative economic importance given to each mode since not all ton-miles are equivalent in their economic importance and so are all passenger-miles. By using an economic measure for weighting, the authors recognize these differences and make the index more valuable as a transportation measure that can be used together with other economic measures, such as economic growth. However, there are some drawbacks that persist in Transport Service Index. Lahiri et al. (2003) mentioned that the index takes a macroeconomic view of transportation and unable to substitute for detailed data in determining local and mode-related transportation problems. Secondly, the indexes are unable to cover the wide range of the for-hire transportation industry. In some cases tons are used as a proxy for ton-miles and passengers as a proxy for passenger-miles. Since there is justification for these substitutions, it would be ideal to have actual ton-miles and passenger-miles for all modes. Similarly for some modes Bureau of Transport Statistics depend on privately collected proprietary data. Lastly, Lahiri et al. mentioned that there are some transport related economic problems that the Transport Service Index is unable to capture. Similar type of index for Newfoundland and Labrador and its regions will enable all level of governments and general public to monitor the health of transportation sector in real time. One of the major challenges that Provincial and Regional government will face is the collection of transport related data which will represent the indicators forming the index. However, such indexation is possible with help from Statistics Canada, Government
15

Models for a time series with no trend (the constant mean is taken as 0). They incorporate the terms in both an autoregressive model and a moving average model.
16

Deseasonalizing the data, also called Seasonal Adjustment is the process of removing recurrent and periodic variations over a short time frame, e.g., weeks, quarters, months. Therefore, seasonal variations are regularly repeating movements in series values that can be tied to recurring events. The Deseasonalized data is obtained by simply dividing each time series observation by the corresponding seasonal index.

of Newfoundland and Labrador and municipality government, and as a matter of fact, the index will be the only Transport Service Index in Canada. 5. Conclusion The transportation sector is a significant player of Newfoundland and Labrador and regional economies, and is essential to closing the provinces productivity gap. Transit investment decreases the amount of public money that needs to be spent on basic amenities from health care and education to municipal services, such as garbage collection or snow removal. If this is the case, then the general public will pay lower taxes, have more jobs, and a higher quality of life. Investment towards transport sector is a key component of a broader strategy to improve Newfoundland and Labrador and Northeast Avalons productivity, by addressing the economic and societal issues, and by creating urban environments that support the changing economy of the major cities and towns. Since employment growth in this province and Northeast Avalon has become increasingly concentrated in knowledge-based sectors, creating safe and thriving business environments is a central part of gaining competitive advantage over the competitors. Both the empirical analysis and creation of a transport indexation are required for Newfoundland and Labrador, and Northeast Avalon. For our study, we need to compile data of the twenty zones representing Newfoundland and Labrador, and the province itself. While collecting the data, we need to make sure that potential biased is avoided. The research surrounding regional economic development and competitiveness suggests that transportation investments can be powerful stimulants for economic growth. The development and operation of transport sector produce direct and indirect economic benefits throughout the economy through employment and the production of physical infrastructure. ECONorthwest et al. (2002) estimated that the economic multipliers ranging from 1.5 to 1.7 for various components of transit investments. Therefore, the study suggested that for a dollar spent on transit infrastructure, approximately $1.50 will be generated in local economy. In the same report, the authors suggested that one million U.S. dollar investment in infrastructure produces thirty to sixty jobs. A Canadian study (CUTA 2003) indicates that investments in transit system produced the highest return of all modes in terms of employment growth. Transportation infrastructure investments are known to accrue additional benefits for urban development. Vickerman (2008) presents an extensive review of theoretical and empirical analysis on the topic. The author used an analysis of British rail investments that indicated nontransportation related benefits, agglomeration effects, productivity enhancements, and increased regional competitiveness, of value seven billion British ponds, or approximately 35% of the total benefits from the project. Aschauer and Campbell (1991) were amongst the first to recognize the relationship between transit investments and worker productivity.

Transportation has been identified as a key component in attracting firms and employers to a region. Florida (2004) defines the creative class 17 as critical to urban infrastructure development. Florida (2004) stated that public transportation contributes directly to the attraction of these workers, and the small and medium business establishments employ them to a metropolitan area. Transportation sector is an industry that contributes to employment, income, and wealth to the Provinces economy. Efficient transit policy can reduce the amount of income a household has to spend on transportation, and therefore, increasing the disposable income18. The benefits of investment in transportation infrastructure result from other, less direct, but wide ranging impacts on the economy of Newfoundland and Labrador. In brief, transportation sector helps the economy run more efficiently and effectively, and therefore improving the prosperity of all the residents of Newfoundland and Labrador.

VIII. Concluding Remarks

17 18

Highly skilled and highly productivity young workers in search of urban vibrancy. Disposable income is total personal income minus personal current taxes. In national accounts definitions, personal income, minus personal current taxes equals disposable personal income.

The new global competitive environment creates a number of challenges for Newfoundland and Labrador and its surrounding regions. Both Canada and Newfoundland and Labrador are now more open to competition from international companies and businesses. The study to address the weaknesses and upgrade the strengths should be carried out on annual basis for the Province and the regions in order to be one step ahead of their foreign counterparts. The advantage of efficiently and effectively using the resources offers great promise in delivering even greater future prosperity. In order to ensure that more residents of Newfoundland and Labrador and its surrounding regions are equipped to take the advantage of the opportunities that the new economic environment offers, the Government of Newfoundland and Labrador need to provide a measurement tool to observe the indicators affecting the levels of competitiveness. One such effective tool that can keep the residents of this province in track is regional competitiveness index. The competitiveness index developed in this paper will be able capture quite well the relative competitiveness positions of Newfoundland and Labrador and its surrounding regions, when composed with the five categories. However, not all indicators will perform well for all the twenty regional boards, and further study should be considered whether to include all of them in the index. The methodology of regional competitiveness index is still at preliminary stage and several possibilities for further work exist. Moreover, empirical analysis should be carried to estimate the weights of various indicators from an econometrical and statistical outcome measures on the indicators instead of choosing arbitrarily. In conclusion, taking time, scope and resource limitations into consideration, this research study should be viewed as the beginning of a comparative competitiveness analysis for Newfoundland and Labrador and its surrounding regions. It would also be useful to carry out similar study against other provinces and regions in Canada, U.S., and O.E.C.D. countries to provide a wider reference or base for evaluating this provinces competitiveness.

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