Eye on Ottawa
By Peter Diekmeyer

August 9, 2000

Canada lags in adopting new technologies

While Jean Chrétien likes to brag that Canada is the best place in the world to live, two new Industry Canada documents are casting doubt on the economic foundation underlying that claim.

The first, Challenges of Rapid Technological Change, is largely a collection of previously released data that highlights some of Canada's shortcomings relative to its largest and most direct competitor in world markets: the U.S. Among them: Canada's lag in adopting new technologies and its poor investing record in knowledge-based industries and research and development.

The second document -- A Regional Perspective on the Canada-U.S. Standard of Living Comparison, demonstrates one consequence, which is in part caused by those shortcomings: a significant gap in living standards between the two countries.

A blatant example of Canada's lag in adapting new technologies is in the area of computer products and the Internet, which comprise a far greater share of GDP in the U.S. than in Canada.

Applications software for example, generates $83.5 billion of annual economic activity in the U.S., compared to $800 million in Canada -- a 100:1 ratio. Based on the relative size of the two economies, you would expect this ratio to be closer to 10:1. That high American total is also produced with only 55 times as many employees ­ a conspicuous example of Canada's productivity deficiency.

A similar gap exists in E-commerce activity, which in 1999, Industry Canada pegs at $160.3 billion south-of-the-border -- 38 times larger than the $5.5 billion recorded in Canada. What's more, of that low Canadian online spending total, 63% went to U.S. Web-sites.

In fact, only 26% of Canadian retailers conducted business online last year ­ versus half of American companies. This is a significant deficiency for Canadian firms that are looking to get a bigger cut of worldwide E-commerce revenues, which are expected to hit $93.7 billion by 2003.

Canadian companies ­ especially small to medium sized enterprises ­ are also slower than their U.S. counterparts at adopting leading edge methods and processes, and are only half as likely to be technologically advanced as American companies.

Although Canadian domestic patent filings are increasing rapidly, they are lower, even on a per capita basis than all other G7 countries. Foreign bound patent filings by the U.S. are also much higher and totaled 1.18 million in 1996, compared to 65,651 Canadian filings ­ an 18:1 ratio.

The Canadian lag in patent applications is largely a result of low investment in research and development. In 1997 business research and development spending totaled $153.7 billion compared to $7.1 billion for Canadian companies ­ a 22:1 ratio. Put another way, American companies spend twice as much per capita on research and development as their Canadian counterparts.

As if these problems were not enough, Canada is having a hard time attracting and keeping workers who are at the cutting edge of technology. These, according to tax records and permanent immigration data, are increasingly heading south in search of more lucrative opportunities.

With our sluggishness in adapting to technological change, it should come as no surprise that Canada's standard of living also lags behind our southern neighbor. Industry Canada estimates in the living standards report, that the U.S. has on average a 22% higher living standard than Canada.

In fact all U.S. regions post levels well above the Canadian average, and when the Canadian provinces and American states are ranked, only Alberta (18th place), Ontario (37th) and British Columbia (49th) rank in the top 50.

To deal with rapid technological change, which is expected to accelerate, the first report concludes that Canadian businesses, government, and universities need to do a better job encouraging investment, building and promoting a knowledge workforce and commercializing new ideas.

As useful as both these documents are in defining the problem and proposing solutions, they fall short in key areas.

For one, the weakness of the Canadian dollar, and the conversion method used ­ purchasing power, rather than actual exchange rates -- mean the living standard gap is likely much higher than that claimed by Industry Canada. Since taxes are higher in Canada, American families have higher disposable incomes.

Neither document adequately addresses these high taxes -- the key reason Canadian companies are under-performing their American counterparts.

It's not just Canadian businesses that are competing with American businesses; the Canadian federal, provincial and municipal governments are also competing with their southern rivals for investment, jobs and research and development facilities.

As long as the price of Canadian government -- which is reflected in tax rates -- remains high, all the studies in the world are not going to reverse the technology adaptation and living standard gaps that separate the two countries.

Peter Diekmeyer can be reached at peter@peterdiekmeyer.com

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