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ICT Investment

Key Messages

  • Most provinces are weak performers relative to international peers on ICT investment.
  • The top-ranking provinces, Ontario, New Brunswick, and Alberta, score only C grades and trail 10 of the 16 international peers.
  • Nearly every province slips by a full letter grade on ICT investment since the previous innovation report card, while P.E.I. falls by two—from a B to a D. Only New Brunswick improves its relative grade, from a D to a C.

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 to exchange ideas and data, both within and across organizations. This 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 through ICT adoption 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. Ontario, New Brunswick, and Alberta are the top-performing provinces but score only C grades and trail 10 of 16 international peers. Most of the remaining provinces receive D grades, while Saskatchewan gets a D–.

Ontario has ICT investment of 2.39 per cent of GDP, earning 11th place, and well behind leading countries, Switzerland (3.83 per cent), Sweden (3.43 per cent), and Japan (3.4 per cent). With ICT investment of 2.37 per cent of GDP, New Brunswick manages to rank in the top half—in 12th place. Alberta claims 13th with ICT investment of 2.29 per cent of GDP.  

Canada barely manages to get a C with ICT investment of 2.16 per cent of GDP, while all other provinces receive D or D– grades, with ICT investment ranging from 2.04 per cent in Quebec to 1.49 per cent in Saskatchewan. Among international peers, only Finland (1.84 per cent), Germany (1.72 per cent), and Ireland (1.51 per cent) perform worse than Canada on this indicator.

How do the provinces rank relative to each other?

Ontario, New Brunswick, and Alberta are the highest-ranked provinces and the only C performers on ICT investment, while Saskatchewan is the lowest-ranking province and receives a D– grade for falling behind the lowest-ranked country, Ireland. ICT investment in Saskatchewan (1.49 per cent) is nearly a full percentage point lower than it is in Ontario (2.39 per cent).

The performance of the remaining six provinces, all of which earn D grades, is relatively similar, with ICT investment in Quebec at 2.04 per cent of GDP and in Manitoba at 1.69 per cent.


How has provincial performance on ICT investment changed over time?

Since the previous innovation report card, seven provinces have fallen by a full letter grade, while only one, New Brunswick, has improved from a D to a C.

Between 1981 and 2013, seven of 10 provinces had improvements in ICT investment as a percentage of GDP. But in the three following years (from 2013 to 2015), six provinces saw their ICT investment as a share of GDP slip. The largest dips were in Manitoba (–0.27 percentage points), Saskatchewan (–0.22 percentage points), and Nova Scotia (–0.19 percentage points). Canada overall slipped slightly from ICT investment of 2.16 per cent of GDP in 2013 to 2.14 per cent of GDP in 2015.

Three provinces saw their ICT investment climb from 2013 to 2015, including Newfoundland and Labrador (from 1.58 to 2 per cent of GDP), New Brunswick (2.09 to 2.37 per cent of GDP), and Alberta (2.03 to 2.29 per cent of GDP). But because a few leading international peers—namely, Switzerland, Sweden, and Netherlands—experienced much greater increases, the improvements among provinces did not generate higher grades or rankings, except in New Brunswick.

Why do the provinces lag on ICT investment?

The weak performance of the provinces on ICT investment relative to international peers—including 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 for improving 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 small and medium-sized enterprises) with management advice and support—could improve the adoption and effective use of ICT.11

Footnotes

1     Expert Panel on Business Innovation, Innovation and Business Strategy: Why Canada Falls Short (Ottawa: Council of Canadian Academies, 2009), 87.

2    Michael Fitzgerald, Nina Kruschwitz, Didier Bonnet, and Michael Welch, “Embracing Digital Technology: A New Strategic Imperative,” MIT Sloan Management Review (2013), 5–6.

3    Roger L. Martin and James B. Milway, Enhancing the Productivity of Small and Medium Enterprises Through Greater Adoption of Information and Communication Technology (Toronto: Institute for Competitiveness and Prosperity, 2007).

4    Richard Dion, “Interpreting Canada’s Productivity Performance in the Past Decade: Lessons From Recent Research,” Bank of Canada Review (Summer 2007), 19.

5    Ibid., 19.

6    OECD, Information and Communication Technology (ICT); Statistics Canada, CANSIM table 031-0007, Flows and Stocks of Fixed Non-Residential Capital, Total All Industries, by Asset, Canada, Provinces and Territories. Statistics Canada data were used for Canada and the provinces. These data are based on Statistics Canada’s redeveloped capital stock program (released in November 2014), which uses new methodologies and classifications that, in turn, have resulted in revisions to investment levels. As a result, the OECD’s investment figures for Canada do not match the latest Statistics Canada figures. In the older CANSIM series based on the previous method, computers, telecommunications equipment, and software were three separate ICT components classified under machinery and equipment. In the new CANSIM series, there is no longer a separate category for telecommunications equipment; instead, it is classified under computers and electronics. Therefore, total ICT investment for Canada and the provinces is now calculated as the sum of investment in software and investment in computers and electronics.

7    Centre for the Study of Living Standards, What Explains the Canada–U.S. ICT Investment Intensity Gap? (Ottawa: CSLS, December 2005), 79.

8    The Conference Board of Canada, Investment and Productivity: Why Is M&E Investment Important to Labour Productivity? (Ottawa: CBOC, 2011).

9    Ibid.

10    Daniel Munro and Jessica Edge, Improving Innovation Management Decision-Making: Thinking Like an Innovator (Ottawa: The Conference Board of Canada, 2014), 20–21; Daniel Munro, Navigating and Managing Technology-Driven Change (Ottawa: The Conference Board of Canada, 2015), 17–18.

11    Daniel Munro, Navigating and Managing Technology-Driven Change.