Written by: Shawn McCarthy
Globe and Mail

On a mid-May evening, Prime Minister Stephen Harper joined Industry Minister Tony Clement and 15 chief executives from Canada's largest technology companies for dinner in a private room of the 6th-floor restaurant in Parliament Hill's Centre Block.

The guests included Nortel Networks Ltd.'s boss, Mike Zafirovski, and Research In Motion Ltd.'s co-chief executive Mike Lazaridis – though there was no talk at the supper table of Nortel's court-supervised bankruptcy.

Nor was there any mention of RIM's desire to purchase key Nortel wireless assets, an objective that sparked a nationalist backlash this week after U.S. and Ontario courts approved the sale to Sweden's Telefon AB LM Ericsson of Nortel's wireless division for $1.1-billion.

Instead, the CEOs discussed with Mr. Harper and his Industry Minister how Canada's information and communication technology (ICT) sector can help propel the country's emergence from the recession, and sustain its prosperity in an increasingly competitive global economy. And Mr. Clement had a bold commitment for his dinner guests: He would produce an overarching plan by the end of the year to reverse a long slide in Canada's technology industry and make it the world's leading digital economy.

Few stories have underscored those declining fortunes more starkly than the dismantling of Nortel. But Canada has not only lost its leading high-tech multinational; it has also failed in recent years to keep up with major competitors in embracing technology as a force for economic growth. With the exception of RIM, no new major Canadian tech champions have developed. Canada is lagging the leading countries in promoting business innovation through adoption of technology. And we are falling behind in deploying digital infrastructure, such as state-of-the-art high-speed Internet and e-commerce systems that buttress an innovative society.

Those failures undermine the productive strength of the economy – making companies less competitive in the long run. They keep Canada trapped as a producer of commodities and branch-plant manufactured goods. As a result, there are fewer high-paying jobs in value-added sectors of traditional industries, and in the service sectors that support them.

Canada's best and brightest migrate elsewhere for opportunity, while workers see their incomes undermined by more competitive producers in other countries. In the end, the country is poorer.

“Our competitiveness depends on, in part, early adoption of ICT, and in today's day and age, it depends on having a competitive and thriving digital economy,” Mr. Clement said in an interview this week.

Homegrown champions

Mr. Clement said the government recognizes that Canada needs successful, homegrown companies that can bring innovative technologies to the global marketplace and add some high-tech heft to the broader Canadian economy.

“When you look at successful economies that have moved up the value chain, ICT is part of what they have.”

Past governments have made similar promises and, while there has been progress in specific areas, none managed to instill the required dynamism and innovative spirit into the country's corporate culture.

Ottawa has signalled some components of the plan. It is examining how to use its powerful procurement budget to stimulate business innovation – an “all government” approach. It has increased financing for a little-known but highly regarded program to boost technology adoption among small businesses. And it is studying federal R&D tax credits to determine how best to deliver tax benefits to research-oriented firms.

The government's critics say its public embrace of the high-tech sector is mere posturing from Conservative politicians who have slammed past government financing for the high-tech sector, cut funding for some high-profile research projects and failed to muster a rescue plan for Nortel.

For many critics, the auction of Nortel's assets suggests the Harper government simply doesn't believe it should intervene to promote high-tech champions. Those multinational not only create knowledge-based jobs directly, but they also act as anchors for technology clusters, providing a market for smaller Canadian suppliers and spinoffs as former employees launch their own startups.

RIM's Mr. Lazaridis and his co-CEO Jim Balsillie argued that Ottawa should back national players when they called on the government to block the sale of key Nortel assets to foreign companies. In the aftermath of RIM's public denunciation, former Nortel president Robert Ferchat said the high-tech sector “seems to confuse” the government.

Liberal industry critic Marc Garneau said he expects the government will make noises about support for the sector, but do very little.

“The Conservative government looks at everything through a political lens,” said Mr. Garneau, a former astronaut and president of the Canadian Space Agency who is working on the Liberal Party's innovation platform ahead of an election that could come as early as the fall.

“There is a important role for government [in building an innovative economy], but this Harper government has no plan for the high-tech sector,” Mr. Garneau said. “Everything is focused on letting market forces take their course.”

Searching for a strategy

The executives who gathered in the parliamentary dining room were unsure of the government's commitment to their industry, especially given the attention it paid to the failing auto sector, and its relative silence regarding Nortel.

In mid-May, Ottawa was finalizing its massive intervention in the auto sector, along with the Ontario and U.S. governments. Canada's $3.8-billion bailout of Chrysler LLC had been announced two weeks earlier, and Mr. Clement was in the final stages of negotiating a $11-billion rescue plan for General Motors of Canada Ltd.

But high-tech executives say they were pleased with the interest shown by the government, including the unexpected presence of Mr. Harper at the dinner, and Mr. Clement's determination to pursue concrete action.

“As our governments raise their heads above water after the difficulties with the auto sector, we're quite hopeful we're now going to have a coherent national strategy,” said Bernard Courtois, president of the Information and Technology Association of Canada, who attended the dinner.

Clearly, Canada has slipped in the race to harness the digital revolution to build world-beating companies and improve living standards. And after 31/2 years of Conservative minority rule, Mr. Clement concedes as much.

To get an up-to-date picture of Canada's standing, Ottawa commissioned a number of reports, including major studies from the Council of Canadian Academies, an independent think tank, and from the Science, Technology and Innovation Council, a government appointed advisory body.

The results were not encouraging. While many of the problems have been identified for more two decades – and efforts have been made to address shortcomings – Canada has witnessed a widening innovation gap with global leaders, especially the United States.

While Canada's work force is as skilled as the American labour force, labour productivity in the Canadian business sector has fallen to 76 per cent of U.S. levels in 2007 from 90 per cent in 1984, says a report from the Council of Canadian Academies, which represents the scientific and engineering communities.

Corporate investment on information and communications technology – a key driver of productivity growth – is about 60 per cent of U.S. levels as a percentag
e of company revenues, while business spending on in-house R&D has consistently fallen below average of industrialized countries.

One key reason for that R&D weakness is the dearth of homegrown multinationals like Nortel and Research In Motion. Those companies are the most likely to engage in product innovation and research and development.

Structural problems

Council president Peter Nicholson said much of the country's productivity problem arises from structural factors that inhibit investment – the reliance on resource industries, the small domestic market that lacks competition in key sectors and the branch plant structure that dominates Canada's economic landscape.

But those structures are shifting as Canadian commodity producers face global competition and environmental pressures, as global competition from emerging markets increases, and as revolutionary advances in ITC, life sciences and advanced materials create new opportunities.

Governments around the world are realizing they have an important role to play in encouraging innovation in their economies, but business leaders are ultimately responsible, said Mr. Nicholson, who advised former Liberal finance minister and prime minister Paul Martin.

“Some of the attitudes and habits of the past are going to have less sway in the future, and both the challenges and opportunities of the new economy are all conspiring to make Canadian business much more concerned about innovation,” he said.

“Government has got a really important role in waxing the surf board, but you need to have the wave,” he said.

So how can governments encourage the growth of high-tech companies and the diffusion of innovation across the economy? Especially when Ottawa is forecasting a $50-billion deficit this year.

When the recovery picks up steam, the federal government will be looking to roll back much of the stimulus spending the Conservatives announced in their last budget, which was supported by the Liberals. That budget included $225-million to accelerate deployment of high-speed Internet to rural areas, $500-million for electronic health records, $200-million for a program that advises and helps finance small business to adopt new technology, and money for research infrastructure at universities as well as financing for the Business Development Corp. to provide early stage finance for small businesses, including tech firms.

But much of that spending expires in three years.

High-tech executives and advisory panels say the government needs to take a government-wide approach to innovation that would include its own procurement policies. They urge long-term commitments to digital infrastructure, efforts to boost venture capital funding, a revamped and refundable science research and experimental development (SR&ED) tax credit, and an emphasis on higher education and loosened immigration rules for knowledge workers.

This week, Mr. Harper travelled to the rural Beauce region on Quebec's south shore to announce the rollout of the rural broadband strategy, saying high-speed Internet access has become an essential ingredient in a modern economy. The industry association argues that the rural strategy should be just a start – that Canada needs to take a leadership position in the deployment of a next-generation, higher-capacity system.

Digital economy

Mr. Clement followed up his Parliament Hill dinner with a one-day forum on the digital economy last month. The keynote speaker, Ottawa-based consultant Wayne Gudbranson, urged both government and industry to aggressively pursue another key building block in the country's digital infrastructure: e-health (the use of technology to improve productivity in the health sector through electronic records) and digital communications.

Mr. Gudbranson is chief executive office at Ottawa-based Branham Group, which tracks the performance of Canada's domestic and foreign-owned ITC companies. Despite recessionary setbacks, he suggests the sector is thriving and estimated its overall revenue growth at 18 per cent last year. He added that it is poised to take off with an economic rebound, particularly if Canada seizes the enormous opportunities that confront it.

The e-health sector provides a clear example of the virtuous circle that happens when governments commit to digital infrastructure.

Canada already boasts some leading e-health providers, companies such Telus Corp.'s Telus Health; xwave, a division of Halifax-based Bell Aliant; and Nightingale Informatix Corp. of Markham. Ont. An aggressive strategy of building out the e-health system would provide them with a solid domestic base from which to launch a global marketing effort.

“We have a perfect opportunity to combine our ICT knowledge and our state-of-the-art health care system, and take a leadership role in that area,” Mr. Gudbranson said. “And that could be very much a part of a digital economy strategy.”

Shortage of talent

One key constraint on Canada's pursuit of the digital revolution is the lack of talent – the shortage of skilled ICT professionals that persists even in recessionary times.

Xerox Canada CEO Kevin Warren attended the ITAC dinner and spoke at Mr. Clement's one-day “digital economy” forum. His top priority: The sector needs a diverse, highly skilled work force to be able to grow.

Xerox Corp., which consistently spends 5 per cent of revenue on R&D, maintains one of the largest corporate R&D efforts in Canada at its Mississauga research centre. The Xerox research centre employs 120 scientists and engineers from 39 different countries.

Mr. Warren has spoken with Mr. Clement several times about the need to both nurture homegrown professionals and also attract the best and brightest from around the world. “Diverse talent and key talent really does drive innovation,” Mr. Warren said. “We've found that when you bring together people from around the world [who have] different cultures, different ways of thinking, there's a synergy that is far greater than when you don't have that sort of diversity.”

Canada's corporate culture, meanwhile, has been widely criticized for its uninspired leadership. The Council of Academies and the Conference Board of Canada have argued that business strategy must change, or government efforts will fall short.

The demise of Canada's long-reigning national high-tech champion is a stark reminder that success in the global marketplace can never be taken for granted. And the industry is looking to Ottawa for leadership.