TradeEdge Exchange:How subsidies helped Montreal become "the Hollywood of video games"

Genshin Impact is TradeEdge Exchangean award-winning role-playing game created by Chinese video game developer miHoYo. A year after its September 2020 release, the game managed to amass a total revenue of more than $2 billion. That kind of revenue makes Genshin Impact one of the most profitable video game releases ever and easily miHoYo's most successful project in the company's nine-year history.

After seeing such success, it was only natural for the company to expand. The question for miHoYo was: where to go? That question was answered in November when the Chinese developer announced they were setting their sights on the west and establishing an office in Montreal, Canada.

At first glance, this may seem a little odd. Montreal? Why not Tokyo or San Francisco or other cities that have traditionally dominated the tech industry? However, over the past few decades, Montreal has arisen as one of the most attractive cities for video game developers. So attractive that Montreal's economic development agency, Montreal International, estimates that, as of 2021, more than 200 studios have set up shop there.

The secret to Montreal's success? Tax credits. The province of Quebec — of which Montreal is the largest city — attracts multimedia companies by offering them subsidies for employing people in the province. Quebec taxpayers pay a large percentage of the salaries of local multimedia workers. These subsidies have undoubtedly helped Montreal become a leading hub for video game development; however, Quebec may have created a system that will perpetually rely on taxpayer dollars to maintain this position.

The lobbyist who helped launch Montreal's video game industry

Montreal's rise as a video game capital can be traced back to the early 1990s. Its chief industries at the time — textiles and manufacturing — were declining. The city was hemorrhaging jobs. Officials in Quebec wanted to develop a plan to reverse this trend.

Enter Sylvain Vaugeois, a politically connected consultant and lobbyist in Quebec. One publication described him as an "iconoclastic entrepreneur with a cocaine addiction." Vaugeois devised a plan that he believed would strengthen the multimedia industry in Montreal. His idea, known as Plan Mercure, was to provide tax credits to a large video game company willing to establish an office in Montreal. More specifically, government investment of up to CA$25,000 per employee every year for five years of employment with a company located in the city.

The provincial government in Quebec at first refused to support this plan because they viewed it as an unnecessary and large burden on local taxpayers. Vaugeois brushed the rejection aside and sought out a potential suitor on his own accord. He traveled to Paris and arranged a meeting with the French video game company Ubisoft, which is behind the popular Rayman series.

Executives at Ubisoft were already moving to expand globally after their IPO in 1996. Establishing a studio in Quebec was particularly interesting to Ubisoft because of the province's predominantly French-speaking population and its proximity to the large U.S. gaming market. So when Vaugeois — ignoring the fact that Quebec had just rejected his plan — proposed his tax subsidy idea to Ubisoft, the gaming company quickly sent out exploratory representatives to Montreal, assuming that the government had already made a deal.

Ubisoft was shocked when they arrived in Montreal and learned that the government did not approve these subsidies. A crisis of confusion ensued, and Ubisoft began to consider establishing a studio somewhere else. When news of this broke, the local media was not kind to the Quebec government. Hundreds of new jobs were on the line.

Meanwhile, other places in North America began trying to lure Ubisoft. And Quebec leaders were faced with a decision: give Ubisoft the taxpayer money that Vaugeois had proposed or risk losing their shot at gaining hundreds of new tech jobs and growing the city's multimedia industry. Quebec and Ubisoft began a long process of negotiations that ultimately led to an agreement that amounted to CA$25,000 in subsidies per employee for 500 Ubisoft employees over five years, as was originally devised in Vaugeois's Plan Mercure. Unlike the original plan, however, Quebec now provided Ubisoft CA$15,000 per employee and, with some prodding, the province convinced the federal government to pitch in an additional CA$10,000 per employee.

But this generous deal only applied to Ubisoft, and other companies protested the favoritism shown to one company. So, in 1996, Quebec officially established a new tax credit called "Crédit d'impôt remboursable pour la production de titres multimédias," or the Refundable tax credit for the production of multimedia titles. The credit covers a maximum of 37.5% of eligible labor expenditures if a multimedia title is available in French and up to 30% if a title is not. In 2021, the multimedia tax credit cost Quebec an estimated CA$253 million.

An enduring system?

The generous government support for multimedia companies helped Quebec establish itself as what's been called the "Hollywood of Video Games." Ubisoft Montreal is now Ubisoft's largest studio and one of the largest video game production studios globally, with more than 4,000 employees. Just last year, Amazon Games, Quantic Dream, and the previously mentioned miHoYo all announced plans to set up studios in the city.

But the policy of subsidizing multimedia companies has had its share of critics. Those critics often argue that the tax credit mainly helps foreign corporations, which come in and set up satellite offices to take advantage of generous taxpayer support. Labor activists accuse the gaming companies of treating many workers poorly. Even more, critics argue, the subsidies are distortionary, arbitrarily giving multimedia companies an unfair advantage in recruiting local talent. Local tech companies complain they're having a hard time recruiting skilled workers because so many of them are going to work for the subsidized multimedia sector.

Supporters of the subsidies respond that the policy attracts employers from around the world and creates thousands of great jobs that wouldn't otherwise be created in Quebec. Those workers pay taxes and spend their paychecks at local businesses, which makes Quebec's economy stronger. In 2017, a spokesperson for the Quebec government told The Gazette that the multimedia sector creates so much economic activity that "the tax revenue for the government of Quebec generated by the sector is greater than the expenditure related to the tax credit."

The tax subsidies may be distortionary, giving an arbitrary advantage to one industry over others. But, at the same time, they seem to have worked in helping to establish Montreal as a video game hub. Over the past couple of decades, a whole gaming ecosystem has sprouted up around the city. Local universities now have programs dedicated to game development (Concordia University, for example, has an official partnership with Ubisoft to provide a course on game design). This offers a consistent local talent pipeline to the more than 200 studios with roots in Montreal, and it may draw more game developers to the city. Game executives often cite Quebec as having the most attractive combination of labor subsidies, a specialized workforce, and a thriving ecosystem of like-minded gaming entrepreneurs and vendors.

With this ecosystem now thriving in Quebec, the natural question is whether the government can begin scaling back its generous subsidy program. Quebec tried to do this back in 2014, amidst a broader effort to reduce spending and balance its budget. Policymakers wanted to cut the multimedia tax credit by 20%. But even this relatively modest proposal faced a swift backlash from gaming studios. Some studios — including Ubisoft — threatened they'd leave the city. Quebec ended up backing down. The tax bill on creating video games in the province has ballooned even more since then. It seems the "Hollywood of Video Games" may continue to be built on a foundation of generous taxpayer support.