######################################## #Written by David Tam, 1994 # #davidkftam@netscape.net Copyright 1999# ######################################## The Global Economic Challenge Facing Canada -- OAC Economics Thesis -- The history of the world economy can be seen as a shift of the worker from the farm to the factory and finally to the office. In the past, the world economy was based on agriculture and machinery, producing physical goods. The measure of economic activity was simple because a count of the amount and value of the goods could be done. As civilization progressed, technology developed and changed the driving force of the economy. In the near future, Canada will not be able to rely on its natural resources as a major contributor to economic activity, nor will it be able to rely on the manufacturing industry for employment. The "new economy" of today is based on information and technology, which is intangible and cannot be measured using traditional methods. This situation causes conflict with the old economy, which has been the norm around the world, as countries are adapting to the new information-based economy. Some of the common economic goals of any country are to have increasing economic growth, to be globally competitive, to have a rising standard of living, and to have low unemployment. In order for Canada to succeed in the "new economy" and to meet these economic goals, it must concentrate its efforts in high technology industries. To encourage the development of the high technology industry in Canada, the government and businesses need to co- operate to provide venture capital, increased research and development, and an improved educational system. Venture capital, which allows new high technology companies to start up, is scarce, leading to the loss of potential economic growth. Research and development is inadequate in Canada and must be increased to allow the development and implementation of new technologies. Improvements to the quality of the educational system must be made to insure that graduates and youth are prepared for an information-based society. These three criteria are inadequate in Canada and must be improved. Co-operation among the government and industries is crucial in accomplishing these goals in the new economy. The new economy is present today because of the development of new technologies, the creation of global markets by trade agreements, and the occurrence of the economic recession in 1990.(1) Technology has greatly influenced the new economy. The wide spread use of computers has decreased middle management, assembly-line tasks, and low-skilled employees. On the other hand, the demand for highly-skilled and highly-paid "gold-collar" workers is increasing. Gold collar workers can be defined as both computer literate and skilled in corporate affairs. These changes in demand are causing the gap to widen between the technologically elite and the less educated workers. "For many Canadians the economy has become an unfamiliar landscape. Industries once associated with a strong economy have been dramatically restructured or have disappeared altogether as a result of the recession, technology and global markets. In their place are new companies that rely on technology rather than manpower, and computers rather than factories."(2) International trade agreements such at the G.A.T.T. have changed how the world conducts business. Specialization has become a key. Countries must re-evaluate their industries and initiate change to meet global market needs. No longer do they cater solely to domestic wishes. The economic recovery from the recession is different from recoveries in the past because a new philosophy has been imbedded into the minds of businesses. Companies have learned to restructure and are reluctant to hire more employees. Even though company output, earnings, and export levels are increasing, the number of jobs are not. Productivity growth is no longer closely related to job creation. The new economy has characteristics of these elements including the constant of change. It is based on technology, a global market place, and a new mindset as developed by the recession. The high technology industry in Canada is showing signs of trouble, even though it accounts for 25 % of Canada's gross domestic product and employs approximately 3 million Canadians.(3) Many companies find there is a lack of qualified candidates for certain job positions. This is the case for the software industry, where there are 10 000 companies of this kind in Canada, employing 150 000 software developers.(4) Many so called "blue collar" programming jobs are moving out of Canada and into countries such as India and the United States.(5) Bell Northern Research signed a $ 3 million contract to have software written in India because of lower costs and the lack of qualified candidates in Canada.(6) A potential risk is the fact that most software companies are highly mobile and would be able to relocate in another country very quickly and easily. This is possible because not much physical capital needs to be transferred. The federal government's investment tax credit program is helpful to the industry by refunding 35 % of a software company's initial research.(7) Though this reduces the startup capital of a software company, it does very little to encourage a company to remain in the country. Small, specialized high technology companies are important to Canada because hundreds of them are hiring many skilled workers, contrasting the thousands of lay offs experienced by large companies. High technology industries in Canada are experiencing difficulty because of the unsuitable environment. This environment must be improved to encourage high technology growth. A serious problem is the lack of venture capital. In Canada, the cost of capital is high and it is difficult to raise when compared to other countries. High technology companies do not have many physical assets to justify investment. Their assets are ideas and innovations, not land and machinery. Compared to foreign competitors, expansion is difficult as well because of these higher capital-investment costs. Capital in Canada is twice as expensive as in Europe and the United States, and three times that of Japan.8 "If I moved this company across the border to Seattle, I would immediately save $250,000 a year."(9) This problem of funding is crucial to Canada's future prosperity because it means that potentially successful new companies must look to the United States for a location. Financial institutions can be partly blamed for this situation because most Canadian financial institutions are very cautious and lack the technological understanding to appreciate the potential success of a technological innovation. However, there is a segment in the investment market that specializes in venture capital funding. Capital is pooled from various sources such as pension funds and private investors. These funds are invested in small companies, and the investors usually take equity interest and ownership stake. This market is still small in Canada. The total domestic venture capital invested in 1993 was $ 700 million.(10) 30 % of this capital was invested in the high technology industries, compared to the United States' 60 %.(11) The U.S. has recognized the importance of these industries while Canada has not. Many Canadian high technology companies are undervalued at the beginning, and investors don't view Canada as a good place for high-tech investment. Countries such as Japan and Germany have the benefit of having banks playing a large role in developing industries, whereas in Canada, the United States, and Britain it is prohibited by law. Not only is there a problem with startup capital of new companies, the investment in existing high technology industries is poor, as shown by the expenditure on research and development. There is a lack of research and development in Canada. Compared to other industrialized countries, Canada spends the lowest proportion of its gross domestic product on R & D. Canada spends approximately 1.3 % of its GDP on R & D, while the United States and Japan each spend 2.9 %.(12) Private sector R & D in Canada accounts for 54 % of the total R & D, while in the United States it accounts for 70 %, in Germany and Sweden it accounts for 73 %.(13) This shows Canada's lack of recognition that technological advancement comes from R & D investment. On a more positive note, Bell Northern Research Ltd., a 22 year-old company, invests $ 1 billion a year on R & D, more than any other Canadian organization.(14) Alberta is one province that is adapting to the new economy. The Alberta government spends more money per capita on R & D than any other province. Research and development at the University of Alberta has led to at least 140 projects of potential commercial interest.(15) As shown by the successes at the University of Alberta, education can be an investment in the future. Education is another key area to consider when dealing with the information-based economy. Canada spends $ 43 billion a year on education.(16) Second to healthcare, education expenditure is the greatest. This is more than other industrialized countries in the world, other than Japan.(17) The amount of spending is not the main issue but the resulting quality of education is. More than 25 % of Canadians between the ages of 16 and 24 are functionally illiterate.(18) The dropout rate from secondary school is at 35 %.(19) The quality of the education is not as high as those in other countries as evident by international test scores. "Canada's education costs are among the highest among the industrialized world's, but the output, at least as measured in international test scores, is among the industrial world's lowest."(20) The educational system is not adequate in preparing graduates for the workforce. A possible answer to the lack of venture capital would be the creation of registered community investment funds. These would be similar to registered retirement savings plans but would only be used for investments in high technology companies. Another source would be RRSPs and pension funds because $ 190 billion are trusted in pension funds in Canada.(21) Possibly, a tax penalty could be applied against pension funds that do not invest a minimum percentage of its assets in a high-tech company. This percentage would be fairly low because the safety of future pensions must be considered. A matching investment fund could set up by the government to attract aggressive high-tech companies that are searching for capital. More straight-forward tax credit programs for investments in research and development should be developed because many companies find the current package of tax credits on R & D to be more complicated than the previous scientific research credit program. Increasing the available venture capital will allow new high technology companies, who normally would not be able to obtain funds, to be created. This will encourage growth in the high technology industries. Canada must increase it's expenditure on research and development. It must recognize the value of R & D, like many other countries that have done so already. The government, businesses, and educational institutes must all increase their expenditure in this area. In total, the GDP proportion spent on research and development should at least be equal to that of the other industrialized countries. Joint research and development by the government, educational institutions, and private industries could decrease the expenses. Tax incentives, similar to those provided for venture capital investments, the offering of government subsidies, and the provision of research and development facilities, would provide more incentive for businesses to increase expenditure in research and development. But first, Canada must decide on which type of R & D to promote. There is the basic (theoretical), and applied (practical). Though these are artificial divisions, an emphasis of one kind over the other dramatically alters where the concentration of research ends up. The applied research would have a more direct and immediate effect upon the economy. Theoretical research would most likely be conducted by an educational institute or the government. The case for applied research is supported by the fact that it does not matter who discovers or invents something, what matters is how quickly the new technology is implemented. "There is increasing evidence that it does not matter as much as it once did who originally discovers or invents something. Nowadays it is more a question of who adopts and diffuses the new invention or technology most rapidly."(22) In some cases it may actually the costs may be greater to create knowledge than to purchase it from another source. No matter which type of research and development Canada decides to emphasize, funding must be encouraged. The long-term goal of Canada should be improvements to the educational system. In the new economy that is based on information, graduates must be highly-educated and highly-skilled to compete in the global economy. High technology companies are in need of such people and if they cannot be found in Canada, they will be found in another country. An overhaul of the school curriculum should be undertaken to reflect current society. Students must learn to gain access to information and become more adaptable and flexible in the new economy. Existing co-operative programs must be expanded, as well as apprenticeship for practical work experience. At the same time, companies must do their part to maintain and motivate a high-quality labour force. This involves initial education, and constant retraining. The government must do its part by creating high technology-oriented jobs and moving away from the traditional 1930s style job creation programs of public works, which only provide temporary employment. In this way, the government is encouraging education as a requirement for employment. Education is a strong foundation for an information-based economy. The graduates and youth of Canada must be educated in a way that reflects current society. After all, education is an investment in the future. The economic effects of encouraging the growth of the high technology industry can be seen in New Brunswick. This province has taken actions to improve its economic situation. Premier Frank McKenna broadened the province's economic base from the existing lumber industry and smaller off shoots that were once monopolized by the Irving family, attracting many new high technology companies to the area. His plans which were oriented towards technology created 3121 jobs from 1991 to 1993.(23) Fifty new companies moved into the area, such as Unisys Canada Inc., Comdev Ltd. (a manufacturer of satellite subsystems), and Unitel Communications Ltd.(24) The attractions of New Brunswick were its low property taxes, its bilingual workforce, and its newly installed telecommunications infrastructure of fibre optic lines. McKenna also recognized the value of education and retraining and has increased spending on these new programs. The result is a lean, mean, province that is run like a successful business. This is an example of what may be in store for the economy if Canada orients its economic policy towards the new economy. Canada will thrive in the high technology industry if the government and industries encourage this through capital venture funding, research and development funding, and improvements in the educational system. Venture capital will expand the high technology industry, increasing potential economic growth. Research and development will allow the development and implementation of new technologies, furthering economic growth. Improvements to the quality of the educational system will ensure that graduates and youth are prepared for an information-based society. Success in the new global economy will be achieved if Canada recognizes these needs and initiates action immediately. As shown by New Brunswick, success will come. The new global economy holds many new promises if proper action is taken. ============================================================================== End Notes ========= 1 Statistics Canada declared recession in April, 1990. 2 McMurdy, Deirdre. "Where the jobs are". Maclean's, March 15, 1993. p.28. --------- 3 McMurdy, p.28. 4 Cohen, Dian and Guy Stanley. No Small Change Success in Canada's New --------------------------------------- Economy. Toronto: Dian Cohen Productions, 1993. p198. ------- 5 Blue-collar programming jobs are the relatively low-skilled, very common, initial programming positions in a company. 6 Dalglish, Brenda. "Software Boom Help Wanted for Some Jobs". Maclean's, March 15, 1993. p.34-35. --------- 7 Marotte, Bertrand. "High-tech financing weak: Canadian entrepreneurs are starved for capital". The Calgary Herald, Sunday, October 27, 1991. E2. ------------------ 8 Marotte, E2. 9 "Software Boom". Maclean's, March 15, 1993. p.35. --------- 10 Wickens, Barbara. "Venturing capital funding technology is a challenge". Maclean's, March 15, 1993. p.36. --------- 11 Wickens, p.36. 12 Marotte, Bertrand. "Nation's competitors do more research and development", The Calgary Herald. Sunday, October 27, 1991. E2. ------------------ 13 Marotte, E2. 14 Dalglish, p.35. 15 Geddes. Ashley. "Government banking of R&D effort bears fruit". The Financial Post, Friday, October 7, 1994. p19. ------------------ 16 Cohen, Dian and Guy Stanley. No Small Change Success in Canada's New --------------------------------------- Economy. Toronto: Dian Cohen Productions, 1993. p.75. ------- 17 Cohen, p.113. 18 Cohen, p.112. 19 Cohen, p.35. 20 Cohen, p.122. 21 Marotte, Bertrand. "High-tech financing weak: Canadian entrepreneurs are starved for capital". The Calgary Herald, Sunday, October 27, 1991. E2. ------------------ 22 Crispo, John. Making Canada Work: Competing in the Global Economy. --------------------------------------------------- Toronto: Random House of Canada Ltd., 1992. p.124. 23 DeMont, John. "Chairman Frank New Brunswick is run like a business". Maclean's, March 15, 1993. p.32. --------- 24 DeMont, p.33. ============================================================================== Bibliography ============ Cohen, Dian and Guy Stanley. Class Action: making the future work - now!. ------------------------------------------- Toronto: Robert Davies Publishing, 1993. Cohen, Dian and Guy Stanley. No Small Change Success in Canada's New Economy. ----------------------------------------------- Toronto: Dian Cohen Productions, 1993. Crane, David. "Ottawa urged to back technology intensive ventures". The Toronto Star, Monday, June 3, 1991. C1-C2. ---------------- Crispo, John. Making Canada Work: Competing in the Global Economy. --------------------------------------------------- Toronto: Random House of Canada Ltd., 1992. Dalglish, Brenda. "Software Boom Help Wanted". Maclean's, March 15, 1993. p.34-35. --------- Daly, John. "There are lots of jobs". Maclean's, March 15, 1993. p.30-31. --------- DeMont, John. "Chairman Frank New Brunswick is run like a business". Maclean's, March 15, 1993. p.32-33. --------- Friedman, Thomas L. "Accent is on education as global jobs talks end". The New York Times, Wednesday, March 16, 1994. D2. ------------------ "Government backing R&D efforts bears fruit". The Financial Post, Friday, October 7, 1994. p19. ------------------ Leitech, Carolyn. "Canada urged to exploit technology. Developing countries catching up in education, expertise, competitiveness, conference told". The Globe and Mail, Wednesday, April 22, 1992. ------------------ Litchfield, Randall. "Trillion dollar tune-up". Canadian, Business. Vol. 65, December 1992. p33-6. ------------------ Marotte, Bertrand. "High-tech financing weak: Canadian entrepreneurs are starved for capital". The Calgary Herald, Sunday, October 27, 1991. E2. ------------------ Marotte, Bertrand. "Nation's competitors do more research and development". The Calgary Herald, Sunday, October 27, 1991. E2. ------------------ McMurdy, Deirdre. "Where the jobs are". Maclean's, March 15, 1993. p28-29. --------- Mohnen, Pierre. The Relationship Between R&D and Productivity Growth in Canada -------------------------------------------------------------- and Other Major Industrialized Countries. Ministry of Supply and Services of ---------------------------------------- Canada, 1992. Wickens, Barbara. "Venturing capital funding technology is a challenge". Maclean's, March 15, 1993. p.36. ---------