Provincial and Territorial Ranking
- Most provinces are weak performers relative to international peers on ICT investment.
- The top-ranking provinces, P.E.I. and Ontario, score “B” grades, but trail half or more of the international peers.
- New Brunswick, Saskatchewan, and Newfoundland and Labrador score “D”s, while the remaining five provinces achieve only “C” grades.
Why is ICT investment important to innovation?
Information and communications technology (ICT) investment is critical to innovation in two ways. First, ICT investment provides the essential digital infrastructure required for the exchange of ideas and data, both within and across organizations, which is essential to the development, commercialization, and marketing of new and improved products and services. Second, the adoption and use of ICTs constitute a process innovation at the firm level that contributes to efficiency gains and productivity growth. As the Council of Canadian Academies’ Expert Panel on Business Innovation notes, investments “in advanced equipment, and particularly in ICT, are hallmarks of an innovation orientation in virtually any sector or type of firm.”1
Firm-level benefits of ICT investments are many. A recent survey found that ICT-adoption leaders see significant improvements in customer experience, streamlined operations, and new lines of business or business models—leading to gains in revenue, profitability, and market valuation.2 Properly deployed, ICT helps firms build new products, services, and processes, and it enables better communication with customers and suppliers. A study of businesses in the OECD found that a 10 per cent increase in the number of staff using computers improved productivity by 1.3 per cent, and companies that made a series of ICT investments had 12 per cent higher productivity than firms that did not make such investments.3 Firms that fail to innovate by adopting ICTs face higher costs and lower revenues than competitors, and risk being squeezed out of markets by competitors using technology to their benefit.
At the level of the economy, significant productivity gaps can emerge between provinces and countries that invest in ICTs and those that do not. A study that examined Canada’s productivity performance from the 1990s to mid-2000s confirmed the link between ICT investment and productivity. It found that “Canada has taken less advantage of ICT than the United States and has realized fewer efficiency gains in the production of goods and services.”4 In particular, the decline in ICT investment and implementation from 2001 to 2005 “cut productivity growth in the Canadian business sector by 0.4 percentage points per year.”5 There are other factors that affect innovation and productivity, but ICT investment is a significant one.
How is ICT investment measured?
ICT investment is measured as a share of GDP in order to assess the level of investment of each comparator region relative to the size of its economy.
ICT investment includes investment in:
- software (including pre-packaged software, customized software, and software developed in-house)
- IT equipment (computers and related hardware)
- communications equipment6
How do the provinces rank relative to international peers?
Most provinces fare poorly relative to international peers on ICT investment. P.E.I. and Ontario score “B” grades and place among the top half of all jurisdictions examined, but among the remaining provinces, five achieve only “C” grades and three score “D” grades.
P.E.I. has ICT investment of 2.73 per cent of GDP, earning it ninth place, but far behind leading countries Denmark (3.51 per cent), Switzerland (3.28 per cent), and Japan (3.23 per cent). With ICT investment of 2.61 per cent of GDP, Ontario just manages to rank in the top half—in 12th place—though it trails 10 of the 15 countries assessed.
Quebec, Alberta, Manitoba, B.C., and Nova Scotia, along with Canada as a whole, hold all six “C” grades, with ICT investment rates ranging from 2.38 to 2 per cent of GDP. They out-place only Finland, Germany, and Ireland among international peers. With ICT investment rates below 2 per cent of GDP, New Brunswick (1.85 per cent), Saskatchewan (1.74 per cent), and Newfoundland and Labrador (1.48 per cent) score “D” grades, joining Finland (1.77 per cent), Germany (1.56 per cent), and Ireland (1.39 per cent) at the back of the class.
How do the provinces rank relative to each other?
P.E.I. and Ontario are the highest-ranked provinces and the only two “B” performers on ICT investment, while New Brunswick, Saskatchewan, and Newfoundland and Labrador are the lowest-ranking provinces and score “D” grades. ICT investment in Newfoundland and Labrador (1.48 per cent) is more than a full percentage point lower than it is in P.E.I. (2.73 per cent) and Ontario (2.61). The performance of the remaining five provinces, all of which earn “C” grades, is relatively similar, with ICT investment in Quebec at 2.38 per cent of GDP and in Nova Scotia at 2 per cent.
How has provincial performance on ICT investment changed over time?
Over the past three decades (1981 to 2013), 7 of 10 provinces have seen improvements in ICT investment as a percentage of GDP. With the exception of Newfoundland and Labrador (–0.44 percentage points), Nova Scotia (–0.39 percentage points), and New Brunswick (–0.24 percentage points), the provinces gained between 0.11 percentage points (Saskatchewan) and 1.06 percentage points (P.E.I.).
Notably, however, most of the gains were achieved between 1981 and 2000. Since then, ICT investment shares have declined in every province—in some cases, substantially. Between 2001 and 2013, Nova Scotia’s ICT investment rate slipped 1.15 percentage points, while significant declines also occurred in Ontario (–0.9 percentage points), Quebec and New Brunswick (both –0.82 percentage points), and Manitoba (–0.6 percentage points). Overall, ICT investment in Canada as a share of GDP fell 0.77 percentage points (from 3.08 to 2.32 per cent) between 2001 and 2013. Given that the provinces already perform poorly relative to international peers, the direction of ICT investment trends is troubling.
Why do the provinces lag on ICT investment?
The weak performance of the provinces on ICT investment relative to international peers—particularly the United States—is likely the result of a number of factors. Some possible explanations include:
- Industry structure: Canadians are less likely than Americans to work in ICT-intensive industries where investment tends to be higher. A study by the Centre for the Study of Living Standards showed that Canadian ICT investment might be 4.9 per cent higher if Canadians were employed in ICT industries in the same proportion as Americans.7
- Firm size: Canada has proportionally more small and medium-sized enterprises than many global peers; SMEs tend to be more risk-averse than larger firms and face greater challenges investing in and benefitting from ICTs.8
- Labour-to-capital cost ratio: Canada’s low labour costs, relative to international peers, and higher ICT costs create short-term incentives for Canadian firms to hire rather than invest in technology—even though this strategy contributes to a long-term disadvantage.9
- Management capacity: Canadian managers are less likely to have a bachelor’s degree or higher-level education than peers in the United States, and therefore fewer may have the skills and tools to systematically identify, assess, and address opportunities such as ICT investment. While 53 per cent of U.S. managers have a bachelor’s degree or higher, only 35 per cent of Canadian managers do.10 This is not to say that having a university or management education is necessary for making good decisions about ICT investments, but it does mean many Canadian firms lack managers with formal training in making a range of business decisions.
- Exchange rates: Historically, Canadian firms’ investment in ICT has been lower when the Canadian dollar is weaker because firms face higher costs for imported technologies. Despite the general downward trend in ICT investment shares from 2001 to 2013, ICT investment spiked in many provinces when the Canadian dollar rose relative to the U.S. dollar in the mid-2000s. However, exchange rates can explain only part of the differences with peers and changes over time.
How can the provinces improve?
ICT investment decisions are made by firms within a broader economic context. Recognizing that some structural factors—such as industry structure, firm size, and labour-to-capital cost ratios—cannot be changed easily, improving performance should focus on a range of contextual factors and firm-level decision-making. More competition in the ICT sector could lead to lower ICT costs for many firms, as well as stronger incentives to improve productivity and competitiveness through ICT investment among firms exposed to greater competition. Efforts to improve the management capacity of Canadian firms—by educating and training more and better managers and by providing firms (especially SMEs) with management advice and support—could improve the adoption and effective use of ICT.11