Download Deloitte Canada Submission

Digital Economy Consultation:
submission from Deloitte Canada
July 8, 2010
SUMMARY
Improving a nation’s digital economy is a complex task. But although it is possible to come up
with hundreds of possible actions that might work, a few broad principles should be applied, that
will sound familiar to any scientist running an experiment, an entrepreneur improving their
business, or even a coach trying to improve their hockey team. Do only what you can afford.
Don’t try to change too many things at once. Identify the key barriers to success, and fix them.
Things that aren’t problems should be left alone. Take a look at other scientists, entrepreneurs
and coaches around you – what worked for them will probably work for you, and what didn’t work
probably won’t.
Applying those principals to Canada’s innovation economy, Deloitte has proposed three problem
areas that need fixing, and three areas that aren’t currently limiting our success, and therefore
should be lower priorities.
Unlike most digitally successful countries, Canada is not creating enough new digital economy
companies, nor creating an environment where the companies of the future can prosper.
1. Our domestic angel and venture capital funding sources are shrinking and in danger of
falling below critical mass. Through a combination of tax credits, pension changes and
perhaps even government co-investment we can get Canada’s digital start-ups growing
again.
2. Our current tax credits for research and development are excellent...but can be improved.
Simplifying the rules could double the early stage innovation being done in Canada – at
minimal cost to Canadians.
3. The Digital Economy of 2020 and beyond will run largely on a wireless highway. Our
highway has too few lanes for the traffic of the future. The government can more
aggressively release spectrum for mobile data, which will spur innovation, once again at
minimal cost.
On the other hand, it is not necessary for the Canadian government to spend tens of billions on
digital economy megaprojects, nor do we need a national high-speed broadband stimulus project,
nor is our current digital economy educational system failing to produce the talent we need.
For Canada to be a success as a nation ten or twenty years from now we need to have a
successful digital economy strategy. This should be our top priority, and all sectors of the
Canadian economy (not just ICT) will have digital aspects and benefit from the strategy. The best
role for government is not to throw cash at the problem or pick winners, but to remove barriers
and create the best environment for innovation and allow the digital economy to thrive.
SUBMISSION
As a long-time advocate of the Canadian innovation economy, Deloitte agrees with the
Government of Canada that a coherent digital economy strategy is vital to the continued
prosperity of our country and the well-being of our citizens. We congratulate the Minister of
Industry, the Minister of Human Resources and Skills Development, and the Minister of Canadian
Heritage and Official Languages for publishing this consultation paper on the issue and we
welcome the opportunity to contribute to the discussion.
Our submission will consist of three sections. First, a discussion of why innovation matters, which
industries are affected, and the role of government. Second, a list of three policies which we
believe will lead to Canada becoming more innovative and improve Canada’s digital advantage.
1. fostering innovation through repairing and revivifying our domestic venture capital
community;
2. fostering innovation through simplifying and broadening our incentive program for
research and development;
3. fostering innovation through more aggressive release of spectrum for wireless data
communication.
Third, a list of three policies which are often mentioned as potential drivers of innovation, but
which are unlikely to help remove key barriers to Canada’s digital success:
1. multi-billion dollar megaprojects or tax holidays;
2. a national broadband policy that requires ubiquity and “future-proof” speeds;
3. major changes to our current educational system.
For each item we include specific recommendations for cost-effective actions we believe will
make a measurable difference, to the benefit of all Canadians.
Deloitte will continue to monitor Canada’s progress on these issues, reporting to its stakeholders
and advocating for continued improvement.
We will be pleased to provide any additional comment or clarification to this submission as
necessary. Our contact information is listed in Appendix 1.
Who we are:
Deloitte, one of Canada’s leading professional services firms, provides audit, tax, consulting and
financial advisory services, through more than 7,700 people in 58 locations across the country, to
a wide range of Canadian and international clients. Deloitte is the Canadian member firm of
Deloitte Touche Tohmatsu , which is a network of member firms, each of which is a legally
separate and independent entity. In Quebec, Deloitte operates as Samson Bélair/Deloitte &
Touche.
As such we are ideally positioned to contribute to a discussion on the future of our country’s
digital economy.
Our approach to this consultation process has been to engage our senior and experienced
business and technology professionals in Canada, representing a broad selection of industries
and viewpoints. Rather than advocate a single interest or outcome, our goal with this submission
is to provide a Deloitte opinion on issues that affect all stakeholders in Canadian business and
society.
What do we mean by innovation and growing the digital economy?
1. Innovation is important. It drives competitiveness and GDP growth and quality of life. And
Canada is lagging, finishing near the bottom, both on average and on many individual
metrics, in recent OECD studies.
Although many public policy issues deserve attention, Canada’s falling and failing
performance in innovation and the digital economy means that this is probably the
most important initiative confronting the government of Canada at this time.
2. A nation’s technology sector is often thought of a proxy for innovation. But although the
tech sector is one of the key drivers of innovation, other sectors of the economy are as
important or sometimes even more important. While the Canadian technology, media and
telecom industry employs half a million knowledge workers, the rest of the economy
employs tens of millions of Canadians, and more than a million knowledge workers.
a. In our resource industry, technology is the competitive differentiator. Our pulp
and paper industry competes with the US and with Scandinavia not on the quality
of our trees, but on the advanced robots in the factories.
b. Our energy industry is driven, among other technologies, by advanced software
for seismic data analysis.
c.
Our world leading financial industry is about technology as much as it is about
balance sheets: each of the five major banks employs more software
programmers than all but a handful of our largest tech and telecom players.
d. Our advanced manufacturing companies have either become global leaders
through continued investment in innovation (Bombardier is one of the largest
spenders of R&D in Canada over the last 5 years) or, like our automotive
industry, need to invest in innovation to be competitive going forward.
In other words, the digital economy is the whole economy, not just the ICT sectors.
3. Past government attempts around the world to stimulate a digital economy have
demonstrated various best practices:
a. Government has a poor track record of picking winning sectors.
b. Significant (multi-billion dollar) government expenditure or tax holidays seldom
accomplish anything in the long term.
c.
Initiatives that are designed primarily to create employment do not tend to
stimulate innovation as much as they do jobs.
d. On the other hand, when government reduces barriers to innovation and creates
or allows the conditions for innovation to flourish the results have been much
better.
The best role for government is not to throw cash at the problem, but to remove
barriers and create the best environment for innovation and allowing the digital
economy to thrive.
Recommendations for Actions:
1. Fostering innovation through better venture capital
There is an urgent need to repair and revivify our domestic Canadian VC and angel sectors.
Getting more foreign VC money in has helped make up some of the decline in home grown VC
investment (recent changes to Section 116 are likely to help further) but no country has ever
become a leader in creating a digital economy without a healthy domestic VC industry. They
create the ICT companies that can become global leaders and champions, and they effectively
train the workforce of the future in the skills necessary. Not all VC-funded firms become the “next
Google” but the employees from even the failed or less-successful firms go on to found and work
at other ICT companies and other innovative companies in the broader economy.
Domestic VCs and angel investors occupy crucial links in the innovation life cycle – without them,
fewer companies succeed and even the successes are not as big as they would have been given
greater access to capital.
There are four principal measures that would help the Canadian VC and angel industries reverse
their current decline.
1. Restart retail venture capital. The former Labour Sponsored Investment Fund (LSIF)
program had its flaws, and was justifiably regarded as a mixed success at best. But a
reworked program that combines federal and provincial tax credits in ALL provinces
would create billions of dollars of VC funding that would come from Canadians and go to
Canadians. These funds are the ‘missing link’ in the current Canadian innovation life
cycle – we have many good start-ups, and more mature companies can usually raise
money globally. But the $1-2 million series A financing round has almost vanished.
2. Angel/Commercialization Tax Credit – at both federal and provincial levels.
3. Changes to encourage/require more domestic VC/digital economy investment from
Canadian pension plans and therefore more Canadian GPs backed by Canadian LPs.
This could be accomplished by anything from moral suasion to explicit investment
requirements. Although Canadian pension plans do have some domestic VC
investments, many of those are historical commitments: recent investment levels have
been much lower.
4. Government direct investment in angel or VC funds. This is obviously more contentious
(and expensive for the government) but has successfully been done in other countries as
a spark to innovation.
2. Fostering innovation through changes in R&D tax credits
The current Scientific Research and Experimental Development (SRED) program is excellent and
well-regarded as an innovation-stimulating program globally. But the current structure makes
distinctions between Canadian Controlled Private Company status and all other candidates.
CCPC companies get a higher 35% credit rate and in cash, all other get lower 25% rates and
non-cash benefit. Eliminating or simplifying this criterion would have two positive effects:
1. It would massively simplify the application process, reduce complexity both in
administering the program and for those who apply and receive the SRED credits. It
would also reduce the various elaborate contortions that CCPC companies sometimes
indulge in to maintain their status.
2. By allowing the more advantageous SRED rate to apply to any company doing R&D in
Canada, much more innovation will inevitably occur. Some of it might be transferred to
other countries, but most will not. And even that IP that is transferred will leave behind all
the workers and know how that was involved on the project. They can then apply their
skills and knowledge to more Canadian projects and innovations.
3. Fostering innovation through more aggressive spectrum release and allocation
Over the next decade, data consumption is expected to grow enormously, both in Canada and
globally. Market forces will be able to provide solutions for much of this demand, especially for
wired connections. However, limitations of both technology and the laws of physics suggest that
the digital economy needs for wireless data spectrum will far outstrip both current spectrum
allocation and even the likely release of an additional 500 MHz in the next few years. Spectrum
re-allocation is a long, complicated and expensive process, and needs to be done in coordination
with the US and the FCC. The US government is already looking at 1000 MHz over the next
decade, and many are suggesting that 1500 MHz may be even more prudent.
Recommendations against Actions:
1. Megaprojects
Given the current fiscal realities, both in Canada and globally, it is understood that any digital
economy strategy that required federal spending of tens of billions of dollars would be difficult to
afford. Luckily, past experience has shown that although megaprojects of this nature may create
jobs and can create infrastructure...they seldom result in a sustainable digital advantage. For
instance, attempts to create a semiconductor manufacturing centre to rival Silicon Valley
consumed billions of pounds in Scotland in the 1990s and have created almost no permanent
industry cluster.
Not only can governments in 2010 not afford innovation megaprojects, they shouldn’t
even try.
2. Universal Broadband
One of the questions asked in the Consultation Paper deals with the need for ubiquitous or
universal broadband to all Canadians. Similar programs discussed in other countries are framed
as “100 megabits to 100% of the populace.”
Although there is no question that universal broadband creates some jobs during construction,
and accomplishes significant social goods, the correlation with innovation or a digital advantage is
less clear.
Whether PCs, cell phones or broadband connections, more is often seen as better, especially by
governments. There is some evidence for this: countries with 80% penetration tend to be more
innovative and have higher GDP than countries with 8% penetration. Where it gets less clear is
how much difference "the last 20%" makes: countries with 80% penetration don't seem to have
consistently lower levels of innovation or GDP than countries with 88% (or even 98%)
penetration. Please see chart below.
This makes quite a bit of sense -- getting a device or service to the last 20% of a population has
some great public policy advantages (telemedicine or egovernment or distance learning, etc) but
it doesn't tend to have much of an economic effect. Further, even the social benefits are unclear:
in recent studies getting either PCs or broadband into lower income households has caused high
school reading and math scores to fall, not increase.
By and large, that last 20% don't have a PC, cell phone or broadband because they don't
want it enough, won't pay for it, and won't use it even if you give it to them for free.
3. Educational Restructuring
The Consultation Paper devotes an entire section to questioning what changes Canada needs to
make to its educational and training systems to give us a digital advantage. Although a better
education system is always likely to be a good thing, it is less clear that our current system is
failing in significant ways. Wholesale changes may well do more harm than good.
1. Focusing on specific skills or training (as is often advocated) is potentially dangerous. If,
in 1998, the Canadian education system had been able to instantly address the pressing
ICT industry talent shortage of the time, it would have created 100,000 Canadians with
telecom and fibre optic hardware design skills. Not only would almost all of them have
lost their jobs by 2001 when the tech bubble burst, but most of them would still be unable
to find jobs in that sector even a decade later. Can we be sure that training 100,000
social media or solar power employees will be any more useful or prescient today?
2. Deloitte has an excellent source of primary data through our Technology Fast50 program,
now in its 13th year. This list of the 50 companies with the highest 5-year revenue growth
is composed of all types of technology companies: hardware, software, telecom and
emerging technologies. And the sectoral composition of Canada’s Fast50 more-or-less
matches the composition of other Fast50 and Fast500 lists around the globe that Deloitte
produces. Based on the evidence, while there may be regional or temporary skills
shortages, these do not appear to be a barrier to the growth of successful companies
across all niches within technology.
3. Further, as part of our Fast50 program, Deloitte surveys the CEOs of all winning
companies. Each year questions regarding talent availability are asked, and the results
are consistent: although talent is always mentioned as one issue among many, it is
seldom a top five topic. Even within those who mention talent and training as concerns,
the perceived Canadian shortages are never of engineers or technicians; they are of
senior, experienced sales staff – not a shortage that our universities, colleges or technical
schools can remedy.
Education and training can always be done better, but based on the data from the ICT
industry this does not need to be a focus area when formulating Canada’s digital economy
strategy.
Conclusion
Once again, Deloitte thanks the government for proposing this consultation, and we look forward
to continuing to play an active role in this process in the years ahead.
Appendix 1: Deloitte contact information
Duncan Stewart
Director of Research, Technology, Media & Telecommunications
Deloitte Canada
John Ruffolo
Managing Partner, Technology, Media & Telecommunications
Deloitte Canada