Analysis

Why Toronto won by losing its bid for Amazon's new headquarters

Toronto’s bid for Amazon’s HQ2 fell short, but some say the city may be better off without the American giant.

'Toronto should be proud of itself that it didn't win': how tax breaks don't pay off

Toronto didn’t win Amazon’s HQ2 competition, but some experts say there may still be reason for the city to celebrate. (The Associated Press/Rebecca Blackwell)

Toronto's bid for Amazon's second headquarters, known as HQ2, lost out to not just one location, but two — New York and northern Virginia — yet the Canadian city may be better off without the American retailing giant.

Amazon's initial HQ2 pitch promised as many as 50,000 jobs wherever they ultimately picked. As it turns out, those jobs will be split in two, with 25,000 in each new hub, along with another 5,000 jobs to a third city, Nashville, Tenn.

Some people in Toronto's tech sector, however, say they were worried Amazon would be a very big fish in a small pond — capable of eating up much of the talent in the pool.

"We already have a significant talent shortage, and Canadian growth companies need the talent that multinationals like Amazon will consume," said Anthony Lacavera, the founder of Toronto-based Globalive, a company that helps entrepreneurs grow their startups through investment and partnerships, in an email.

Toronto's reputation as a tech hub is growing: it's thriving off of early investments in artificial intelligence and financial technology, a strong university research community, and an ecosystem that supports startups.

According to commercial real estate and investment firm CBRE, for two years in a row Toronto has been North America's fastest growing tech market, adding 28,900 tech jobs last year, up 13.6 per cent from the year before.  

But it's yet to be home to a Canadian-born Amazon equivalent.

The arrival of an 800-pound gorilla like Amazon would be more likely to squash Toronto's thriving ecosystem than help it grow, said Lacavera, who also founded his own startup in Toronto, WIND Mobile, which later sold for $1.3 billion US.

"Canada needs to build its own global winners and end the branch plant economy once and for all," Lacavera said.

Selling Toronto

Still, Toronto's bid laid out why it was "ready to become the home for Amazon's HQ2." It promoted Toronto's strong, diverse and affordable talent, quality of life, competitive corporate tax rates, and the country's universal health care.

We know that health care costs are top of mind at the company. In January, Amazon teamed up with Berkshire Hathaway and JP Morgan to create a new venture aimed at bringing down health care costs for its employees.

But health care wasn't the only sales pitch. Organizers touted what Toronto had to offer by bringing together multiple different perks from different places in and around the region.

The city's pitch had the backing of nearby cities such as Hamilton, the tech hub of Kitchener-Waterloo and many more to tout the abundance of high skilled workers — all of whom could be hired for far less than American workers paid in U.S. dollars would demand.

Toronto's bid had the backing of other nearby cities that, collectively, are home to almost 8 million people across the region. (Toronto Global)

Markham, Ont., which was part of Toronto's bid, tried to get Amazon's attention by adding "Possible Future Home of Amazon HQ2" to its welcome sign.

 

There's something Toronto didn't do, though: woo Amazon with financial incentives. 

Even though Amazon was worth more than $1 trillion US earlier this year, as the battle between cities heated up, some tried to lure the company with billions of dollars in tax breaks and other enticements.

In the end, both cities that will share the new Amazon HQ2 were more than willing to ante up to play the game, with New York offering around $1.525 billion US in tax breaks and wage subsidies, and Virginia kicking in $573 million worth of incentives of its own.

"It's disgusting," said Richard Florida, who was on the board to craft Toronto's bid, but resigned in order to speak out against cities that were putting expensive carrots on the table, and to try to convince them to compete on merit only.

However, he says the mayors he spoke with insisted they couldn't do that.

"If everyone would've behaved like Toronto and Ontario, this would've been a much better process," said Florida, likening the competition to American Idol.

An influx of thousands of workers could create costly problems for a city, from driving up housing prices, to crowding public transit.

"If Amazon's going to come you don't want to give them anything — you want them to be a partner in addressing many of the issues they're going to create," said Florida. 

Incentives that don't pay off

Cities that compete for professional sports teams often roll out a red carpet and offer incentives such as subsidizing new stadiums. But according to Stanford economics professor Roger Noll, it's never worth it. 

"In terms of local economic activity, there's essentially zero benefit," said Noll.

The Amazon case is more complicated though, because unlike a sports franchise, Amazon will derive most of its revenue from outside the chosen city and attract a high-end labour force that pays more taxes and spends money locally.

"It's probably better for a community to buy Amazon, than a basketball team … but it's still a huge amount of money to pay and extremely unlikely to be worth it," Noll said.

Toronto likely would've needed to match the other cities' massive incentives in order to win, which would've been a bad deal for the city, he said.

"It's never worth multiple billions, and Toronto should be proud of itself that it didn't win this." 

Toronto's consolation prize

Last week, Toronto Mayor John Tory said the city already got its payoff for its Amazon bid: the proposal it posted online has been downloaded more than 17,000 times.

"The other 16,999 that read that book beyond Amazon are people that today are making decisions about coming to Toronto…. This city is a beacon for investment, for people, for companies," Tory told reporters.

On Tuesday, the mayor added that Toronto's bid organizers are still in contact with the company and are "pursuing follow-up opportunities," with Amazon that could lead to more investment down the line.

 

Toronto may have already landed a headquarters of sorts, if the Sidewalk Labs project that plans to transform a neighbourhood in downtown Toronto goes ahead, according to Florida. Sidewalk Labs is a sister company to Google.

"We could have a Google HQ2," said Florida. "People don't think of that." 

If the Sidewalk Labs project is able to address concerns over data privacy and other issues that come up in public consultations, Florida is optimistic that it would benefit Toronto more than an Amazon headquarters. 

"For Toronto's sake, I think it's better it ended up this way," said Florida

About the Author

Jacqueline Hansen

Senior Business Reporter

Jacqueline Hansen is a senior business reporter for CBC News. Based in Toronto, she's been covering business and other news beats since 2010.

With files from Reuters