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April 17, 2013

Is Canada’s telecom market stifling SME growth?

Anthony and I are working on a paper on SME growth in Canada, and in particular, what inhibits the evolution of low-growth companies into high-growth, high-employment companies. At the heart of our argument is the relationship between investment in technology and research and high-growth (high-employment) firms. And when it comes to investments in technology, the literature on the relationship between technology adoption and increased growth is quite robust.

Unfortunately, Canadian firms lag behind their American and international counterparts in most measures of spending on technology. Canadian SMEs spend just 60-70% of what the equivalent US firms spend on technology, and in particular ICT.

Given the strength of the Canadian dollar over the past decade, we would expect investment to equilibrate. Why hasn’t this happened? In part this is because of the high cost of telecommunications in Canada. A 2010 Harvard Berkman Centre for Internet and Society study on global bandwidth prices found that Canada ranked 20th out of 30 OECD countries for high-speed internet. On next generation speeds, Canada ranked 18th out 19 applicable countries. The report noted, my emphasis, that “Canada has the highest monthly charge for access to an unbundled local loop of any OECD country.

Subsequent figures that show that just 8% of Canadian SMEs have mobile-enabled websites, out of the two-thirds of firms that have sites, are thus unsurprising. Yet given the explosion of mobile usage, and the growing popularity of location-based applications, this stands out as an area of under-utilization. Would higher adoption affect growth? In the UK, the sales of “high” Web businesses grew by 4.1% annually from 2007-2010 – about seven times faster than the sales of low-and-no-Web businesses.

To be sure, there are a variety of issues at play that explain Canadian firm reluctance to invest – a low degree of within-industry competition and risk aversion being chief amongst them. However what is clear is that more competition in the telecommunications industry is necessary to lower the cost of access in Canada. Gradual openings of spectrum space (as the Government has committed to) for new players can only improve the situation, however this should be accompanied by the liberalization of foreign investment regulation in the sector and regulation of how spectrum is used by market incumbents.

A digital economy – and by this we mean companies across all sectors that use technology to run processes and reach customers – can’t be promoted in an environment that stifles competition and innovation.


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