Catalyzing Canada's Digital Economy — Report by the Expert Panel on Digital Technologies and Innovation

Submission (continued)

7. Complementary Policies

The two strategic policy levers described above – DTAP to foster uptake of ICT by enterprises, and catalytic public-sector procurement to stimulate certain ICT-producing subsectors – are primarily demand-side measures. These initiatives will increase the ICT intensity of the economy and thus generate growing demand-pull on the key supply factors of skills, infrastructure, and domestically based ICT producers. (Government procurement is only one means to encourage the latter.) A digital economy strategy should complement and amplify demand-pull stimulus with other measures to upgrade the principal supply factors.

The panel has not attempted to develop or evaluate a full menu of supply-side measures. Many submissions to the consultation will presumably address these, and most of the issues and ideas involve well-travelled ground – e.g., encouraging ICT skills acquisition, government promotion of broadband and wireless, fostering translation of publicly funded research into viable Canadian-based businesses, financing technology-based startups. The panel makes the following brief observations on supply-side policies to emphasize particular opportunities that complement and amplify the initiatives proposed in Section 6.

7.1 ICT Skills

Skills development programs should (i) emphasize management training to build awareness both of ICT potential and of how it can be successfully implemented; and (ii) complement DTAP by feeding into its internship feature, which would draw from both community college and university programs, and possibly from specialized training courses that address particular needs identified through DTAP's "learning" experience. It is important that MBA programs incorporate the latest understanding of the potential of ICT to improve business performance, and that science and engineering programs, specializing in ICT, provide students with a good grounding in business principles. More broadly, all education programs should provide for the development of ICT skills, much as mathematical and communication skills have always been a part of general education. Graduates with hybrid skills will lead the successful incorporation of ICT into all sectors of the economy.

The right skills are clearly a necessary requirement for growing the ICT industry. Based on the experience of some panel members, the quality and quantity of recent Canadian graduates in certain ICT-related science and engineering fields appear to be lagging that of international counterparts. (This is not universally the case since companies like Microsoft and Google regularly recruit from leading Canadian schools.) Education and industry officials should together, and on a regular basis, assess current curricula to ensure that Canadian university and college training in ICT disciplines is both relevant to industry's evolving needs and on a par with world standards.

7.2 Digital Infrastructure

The government's current infrastructure policy thrust is in the right direction: more competition; new wireless spectrum; improved access to capital and know-how via less restrictive rules on foreign ownership of networks; subsidized broadband in underserved areas; support for e-health infrastructure, via Canada Health Infoway; and support for high-capacity network and computing platforms for university research. Nonetheless, Canada remains a laggard in mobile penetration, ranking dead last among OECD countries (measured by the number of mobile subscribers per 100 inhabitants).^{Footnote 20} This is a significant shortcoming since mobile technology and applications, both for individuals and for enterprises, define the leading edge of ICT innovation today. It is hoped that a pending increase in domestic wireless competition will begin to remedy the situation.

Canada is also no longer a global leader in broadband penetration (Figure 7). Canada's broadband infrastructure is nevertheless still good enough for most current purposes – it is not now a major bottleneck to ICT development, though, given the pace of change in the industry that could soon change. For example, new wireless broadband technology is expected to have a major impact on the competitive landscape.^{Footnote 21} Market forces should continue to be relied on, in the first instance, to stimulate future upgrading. The measures suggested in Section 6 to enhance the ICT intensity of the economy would provide new market demand for commercially relevant broadband investment. Further leverage will be provided by the government's current policy direction (outlined above), and, particularly, by measures that increase competition among broadband providers. This should also have the important effect of reducing broadband subscriber prices in Canada which continue to rank among the highest in the major OECD countries.^{Footnote 22}

The federal government should re-evaluate its own ICT-related R&D facilities and mandate them, where feasible, to give priority to supporting the digital economy strategy – specifically, to address the relevant key needs that will be identified by DTAP, and to complement catalytic government procurement. Encouragement should also be given to the publicly-supported "4^th pillar" organizations (e.g., Precarn, CANARIE (Canada's Advanced Network and Research for Industry and Education), CMC Microsystems) to align their work, as feasible and appropriate, with the overall digital economy strategy. For example, the excellent facilities and work of CMC Microsystems could be more effective in translating intellectual property into successful business creation.

7.3 ICT-producing Subsectors

The domestic producers of digital economy goods and services will benefit, in varying degrees, from all measures that increase the ICT intensity of the economy. DTAP would be one helpful instrument to this end. The proposal for catalytic public-sector procurement is a further response designed to help kick-start certain subsectors.

The climate for new ICT ventures in Canada has, on the whole, been favourable in view of:

• A strong base of research and training in universities and colleges; in major industry players like Nortel (formerly), IBM, and RIM; and in areas of specialized digital content creation (e.g., games and animation);
• Government supports, such as the Scientific Research and Experimental Development (SR&ED) tax credit, and various laboratories and programs; and
• Supportive clusters of ICT subsector activity in several centres across Canada.

Although business ambition has not been in short supply, the early-stage financing of ICT start-ups exhibits many of the weaknesses seen generally in Canada's venture capital sector, though not to the extent experienced by biotechnology.^{Footnote 23} Unfortunately, the sharp decline in the telecommunications technology sector since 2001 has hit Canada particularly hard due to this country's specialization in several of the most heavily affected market segments. Canada's hard-won advantages are now at risk. This challenge underscores the need to give priority attention to policies that encourage the formation and growth of new ICT companies, since this is an area where Canada has an unusually strong base of experience and entrepreneurial and technical skills on which to build, thereby giving supportive policies greater traction.

For example, Canada is recognized for the quality of software development in many areas. It would be timely to create a "software mission," focused on attracting world-leading players like Google and Apple to establish global software development facilities in Canada as, for example, Microsoft and Electronic Arts have done in Vancouver and Burnaby, B.C., and as IBM has done with the creation of a global software lab in Toronto. Despite these examples, Canada unfortunately has been less aggressive than most countries in seeking to attract global missions from multinational corporations. Whenever such a presence is established, there is a great deal of induced activity in the form of start-ups, spin-offs, vendor businesses, new concentrations of skills – in short, a cluster of capabilities.^{Footnote *}

There is also still potential for sophisticated ICT manufacturing in North America and western Europe. Automation has greatly reduced the disadvantage of high labour costs, and the need for intellectual property protection looms larger now in certain product areas. While it has long been the case that chip design could be separated from a fabrication foundry (i.e., "fabless" semiconductor companies), there is now a movement in certain advanced sub-fields – e.g., motion-sensing micro-controllers integrated on a chip – to reintegrate design and physical manufacture, and these activities are not necessarily being outsourced to Asia. GlobalFoundries recently announced that it will establish a US$4.2 billion state-of-the-art semiconductor manufacturing facility in upstate New York.^{Footnote **} Investments in ICT manufacturing on this scale will be relatively uncommon and unpredictable, so Canada's strategy should be opportunistic. In the particular case of the GlobalFoundries project, there is a unique opportunity to foster Canadian participation in the new ecosystem of supplying businesses that will be needed.

The larger message of this entire section is the need to mobilize all of government's relevant resources (both federally and provincially), aligned and working in concert, to support the key thrusts of the digital economy strategy. Here is where the need for political leadership is most acute and where dogged persistence is most required.

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Footnotes

^* IBM's creation of major facilities in Canada many years ago is instructive. For example, IBM Canada established a significant presence (both in manufacturing and R&D) to position itself as a Canadian supplier to government. The Canadian operations were specialized to serve a market beyond Canada to ensure that the benefits of economies of scale could be obtained. IBM's presence has been expanded over time through the value of skilled employees and the acquisition of Canadian firms.

^** The particular location choice was influenced by US$1.2 billion of assistance from the State of New York. GlobalFoundries is also making a substantial new investment in its existing facility in Germany, further evidence that high-cost countries are not to be ruled out of this global game.