Greater cost of underinvesting

 

There is no question that information and communications technology (ICT) improves productivity when strategically applied. Yet Canada's adoption of ICT significantly lags behind that of our major foreign competitors — a fact that is considered a key contributor to our productivity gap.

Numerous research studies conducted over the past five years illustrate this point. The first major study on the impact of ICT investment on Canadian productivity growth was released in November 2000 by the Conference Board of Canada. This study concluded that, "IT investment increased its contribution to the GDP growth rate from virtually nothing in the 1980s to about 0.4 percentage points in the late 1990s, up 0.1 percentage points in early 1990s. This is a significant and accelerating change. In fact, the impact on GDP growth of investment in IT capital is almost as much as that of investment in non-IT capital. This is especially remarkable when IT capital accounts for only about five per cent of the capital stock, and non-IT capital the other 95 per cent."

The evidence has only grown since then as our competitiveness has continued to decline. The Global Competitiveness Report 2006-2007 released last month from Institute for Competitiveness and Prosperity notes that Canada has dropped from 13th to 16th on the Global Competitiveness Index.

The Information Technology Association of Canada (ITAC) commissioned a study last year with the Centre for the Study of Living Standards to examine why Canadian ICT adoption rates lag so far behind those in the United States. (The ratio of ICT investment to GDP for Canada's business sector was only 66 per cent of that of the US in 2004.)

Several factors emerged, including the disproportionately larger number of small and medium business in Canada versus the U.S., combined with the fact that SME's typically under-invest in ICT. The study also suggested that structural composition was a factor — the U.S. has a disproportionate share of IT-intensive industries compared to that of Canada. In looking at ICT investment per worker, the study found that Canadians under-invested in ICT in 15 out of 17 industries. The exceptions were arts, entertainment and recreation, and educational services.

Meanwhile other countries, from the Western world to emerging economies, have developed national strategies and are pouring time, money and energy into technology that has set them on a fast track to competitiveness.

In particular, small Nordic countries are all committed to offering public resources in education to help advance ICT. They also offer rigorous training programs to ensure the workforce is well-versed in technology. Finally, these countries all feel innovation is a priority, and encourage and support research and development. These efforts are paying off.

Scandinavian countries, Singapore, the U.K. and the U.S. — not Canada — are now leading when it comes to market readiness for IT adoption. And over the coming decades, Brazil, Russia, India and China — known as the BRIC economies — will be a much larger force in the world economy.

Our large foreign competitors are also employing methods to expedite ICT adoption. There are numerous countries of the Organization for Economic Co-operation and Development (OECD) that are using ICT tax incentives to spur the economy. They treat ICT capital investments more favourably than Canada. In particular, Japan, Korea and Spain have tax credits for ICT equipment. Emerging economies of China and India also have a variety of tax incentives for ICT adoption to help spur growth. In comparison, Canadian tax incentives for ICT adoption are mainly channelled through the capital cost allowances system (CCA). Tax credits directed at ICT capital assets are not available in Canada.

It's clear that Canada lags behind foreign nations. Now is the time to refocus. Real change can best be affected by changing buying behaviour, particularly in the SME space.

There's no doubt the ICT industry must work together to drive down the level of complexity and deliver solutions tailored to the SME market. First and foremost, ICT solutions must make it easier for SMEs to excel. As an industry, we must demonstrate the benefits of strategic investments in technology to help SMEs overcome many of the barriers they face, including minimal capital, lack of skilled IT professionals, and frustration with a shortage of standards or interoperability, or an inability to determine a concrete return on investment.

To further support SMEs and spur economic growth, I also believe it's important to support the Telecom Review Panel's recent recommendation, echoed by ITAC, that the federal government introduce an ICT adoption tax credit targeted at SMEs. This would be an effective incentive for smaller companies to adopt ICT. In order to facilitate any real change, we must evolve from the idea of simply removing barriers to the goal of creating real incentives for SME's to fully embrace ICT.

An international review of ICT adoption shows that the topic has not been a priority among Canada's policy makers and organizations until recently. Canada has been slow to respond, while other countries have been introducing plans to stimulate the demand for ICT for some time.

We can't afford to wait any longer — these issues have never been more important than they are today. Technology vendors and associations need to work collaboratively with government communities to implement change that will positively affect our productivity. Our future as a competitive nation depends on it.