OCRI's Contribution to Canada's Digital Economy Strategy

Summary

This submission provides an overview of several critical areas identified in the "Consultation Paper on a Digital Economy Strategy for Canada" from OCRI's perspective concerning Canada's digital economy and related strategies to create a sustainable advantage.

The focus of this submission is on three of the five key areas discussed in the consultation paper:

1. Growing the Information and Communications Technology Industry

• Recognition that ICT is a major pillar of the economy
• Improved financial support for startups and SME's
• Positive immigration strategy for skilled workers
• Governments as first adopters of technology

2. Creating Canada's Digital Content Advantage

• Support for content development infrastructure like Games Inc. and other clusters/incubators
• Increase the competitiveness of wireless industry, lower wireless fees
• Encourage government digital content
• Encourage Communications Enabled Applications (CEA)

3. Building Digital Skills for Tomorrow.

• Closer collaboration between industry, colleges and universities
• Programs to encourage Science, Technology, Engineering and Mathematics (STEM) at early stages
• Emphasis on jobs of tomorrow
• Encourage school–to–work transition for first jobs

Canada's rise to the number four position in overall IT industry competitiveness and its number one ranking in 2009 as the top R&D environment has garnered international attention. We have created an ecosystem that fosters innovation and builds critical mass around skilled talent. Coupled with the fact that Canada has the most stable economy in the world, we are poised to be a formidable force. Despite our privileged position, Canada needs to continue to foster and improve our competitive advantage in the global digital economy to remain among the best in the world. Competition from countries that have high quality and quantity of IT talent, innovation and an ability to commercialize and scale quickly are rapidly eroding Canada's IT landscape. Moreover, as other countries improve their R&D environment, our historic leadership in high–end development is being jeopardized.

Canada's digital economy is now an important driver of our economy. Through talent, R&D, innovation and entrepreneurship, Canada has the ability to grow and prosper. Canada has an excellent reputation for innovation but falls short when it comes to commercialization and reaching global markets in order to establish and maintain its competitive advantage. In order for Canada to thrive in the next decade however, it must be understood that the new digital economy is driven by knowledge, innovation, and an innate ability to commercialize and scale globally based on creativity and not manufacturing. Sustainable companies will be smaller, nimbler, more responsive to the market, and leverage their technologies with partners across the economy including academia, government and others in industry.

What we need is a deep commitment and collaboration at a strategic level by government, business, and academia working with other groups in the community, to sustain a high standard of living through improved productivity.

Submission

For the purposes of this paper, OCRI will use the Ottawa region as a basis for providing input to improving Canada's digital economy and enhancing its competitive advantage. Having worked with our counterparts in larger cities across Canada, we realize that we all share similar challenges.

Ottawa has emerged as one of North America's most dynamic economies. With nearly 79,000 employees across Ottawa's knowledge–based industries and 1,850 companies in a variety of technology sectors, Ottawa remains one of Canada's most stable economic centres. In fact, Richard Florida, renowned author and researcher who rates Canada well on its ability to compete in the creative economy, ranks Ottawa with the highest percentage of its workforce in the creative class in Canada and amongst the highest in the world, ahead of New York, London and San Francisco. Ottawa also dominates Florida's listing of the best place to live by life–stage.

In order to address a regional need to collaborate across government, industry and academia to strengthen Ottawa's economy, OCRI established the Ottawa Technology Roundtable (OTR) in late 2009. The OTR is comprised of Federal and Provincial Cabinet Ministers, University and College Presidents, and Industry CEOs and Presidents. The main objective is to define an innovation architecture for the Ottawa region with measurable results. Five themes have been addressed during the past two round tables: emerging sectors and innovation; marketing of the region's capabilities; talent development, funding for companies and collaborative partnerships. Several of the recommendations that have emerged from the OTR address common issues facing Canada's digital economy strategy.

Much like our counterparts across Canada, the Ottawa region continues to welcome new companies to the economic landscape and is fuelled by a strong entrepreneurial spirit that is innovative, resilient and able to identify opportunities in the global market. Ottawa has undergone a transformation from a knowledge–based industry dominated by a few large players accounting for the bulk of employment to a more balanced mix of multinational companies (now smaller, but with more skilled workforce) and hundreds of small– and medium–sized enterprises (SMEs). Ottawa has crossed the threshold to a new economy in which innovation is the driving force of wealth creation. The City has already made the transition from an economy that was heavily reliant on government, to a more diversified economy in which government, tourism and technology all contribute to balanced employment growth and the creation of new wealth.

Knowledge–based technology companies are critical to Canada's competitiveness; key to growth and innovation both as an economic sector, and as an enabler throughout the economy. As a sector – production of technology includes software, hardware, application services and telecom sector. Ottawa is home to several emerging technology sectors, which include digital media, cleantech and medical technologies. Our competitive edge in many areas of clean technology and life sciences is driven by our critical mass in the digital economy. These areas are the future growth engines of the Canadian economy. As an enabler — the use of technology across all sectors drives innovation, efficiency and the ability to connect with global markets.

Of recent concern is Canada's disappointing performance in terms of research and development investments as well as capital investments in new technologies and companies. In addition, according to the recent report "State of the Nation 2008 — Canada's Science, Technology and Innovation System" published by the Science, Technology and Innovation Council (hereafter referred to as the STIC report) Canada ranks very low in the areas of open innovation and collaboration. If Canada is to remain a global competitor in terms of R&D and innovation, we need to think much more seriously about how we successfully participate, in a collaborative manner, in the new global economy. Our future jobs and prosperity depend on this.

What we need is a deep commitment and collaboration at a strategic level by government, business, and academia working with other groups in the community, to sustain a high standard of living through improved productivity.

1. Growing the Information and Communications Technology Industry

The cluster–based approach to economic development continues to deliver significant results for the Ottawa region and the individual companies within the clusters. It enables the City, our companies and associations to focus development efforts in specific areas of strength to leverage global opportunities for optimum success. The region's key innovation sectors include photonics, enterprise software/eBusiness, wireless/mobile applications, life sciences including medtech and biomedical, security and defense. Emerging sectors such as communications enabled applications, cleantech, digital media and virtual education continue to gain traction and attention here in Ottawa and abroad for our home–grown base of companies, technologies and innovators. But, immediate action must be taken to re–energize the more mature clusters and leverage our technical capabilities.

A globally competitive knowledge–based community needs the skilled talent that provides its foundation. The recognized potential shortfall in this area requires immediate action in the areas of talent attraction and retention of skilled talent, adult education and retraining, new skills development and increasing enrollment in relevant knowledge–based programs. In order to increase the talent pool, Canada must consider foreign credential accreditation, foreign student retention issues and attracting talent from outside the country. Efforts must also be designed to encourage and develop young entrepreneurs. As far as talent goes, Canadian universities do not produce enough graduates to meet the ICT sector demand in terms of number, diversity and skills. Talent issues start with marketplace signals impacting the student pipeline for ICT disciplines.

The key concerns for technology startups and SMEs are financing and successful commercialization. For some, venture capital, even if it was available, is not the right answer. Many advocate new tax incentives for angels and strategic investors who leverage partnership synergies in order to grow startups. However, there is a consensus amongst business leaders that government support is too focused on R&D, not enough on commercialization and building strong businesses.

There was much praise for IRAP and SR&ED tax credits for SMEs, but they are not set up to address commercialization and costs to access markets, which are just as important as R&D. In addition, many local SMEs are unable to sell to the Canadian governments (federal, provincial), yet they are able to win contracts with governments and military organizations in other countries. SMEs that are unable to sell to the Canadian telecom operators and cable companies (Rogers, Bell, Telus) can sell to their counterparts in the United States.

The Ottawa cluster's large ICT companies and multinationals are concerned with the availability of skilled talent and view the local market as largely shaped by the government agenda for digital infrastructure in Canada. We cannot compete on labour costs with China and India. Nonetheless, the cost per employee is a key metric and companies are sensitive to variability in costs for R&D performance across provinces, particularly in the Ottawa–Gatineau region. It was easier to get federal government support for a proactive technology agenda some 10 years ago. Given a choice, large companies seek to locate where there is a thriving market, in countries where governments are committed to delivering a strong digital infrastructure agenda.

General Recommendations:

• Improve and expand SR&ED program.
• Increase access to capital.
• Make better use of Industrial Regional Benefits (IRBs) offsets to support local industry.
• Nurture skilled talent.
• Set a clear Canadian agenda for the rollout of next–generation broadband networks making broadband a universal service across all regions of Canada.
• All levels of government, academia and the private sector need to collaborate to make the local market for innovation a true springboard for domestic businesses to commercialize globally.

Improvements to the SR&ED Tax Credit Program

The Scientific Research and Experimental Development program (SR&ED) is the single largest federal program supporting business R&D in Canada, providing over $3 billion in tax assistance to Canadian businesses in 2006.

The SR&ED program, when combined with provincial R&D incentives, competes effectively against the offerings of other countries but that competitive advantage has eroded in recent years.

OCRI's vision is to have a comprehensive review of the SR&ED program and include an in–depth evaluation of its effectiveness in producing adequate levels of incremental high–quality R&D. As part of the process we would also like to see the business community engaged during all phases of the review to ensure that any changes to the program are effective for existing and new R&D performers.

The changes recommended below will bring the SR&ED program into the 21^st century. The majority of emerging technology companies would benefit immediately or in the near term. It would be a clear indication of the Government of Canada's support for emerging technology companies, directly enabling them to be more competitive globally and encouraging jobs and investment to remain in Canada.

More economically efficient conditions for enterprises would stimulate innovation and should be the top priority in the strategy. Beyond that, improvements to the SR&ED tax credit program should be considered as it provides the economic framework to ensure that our technology companies continue to invest in R&D to remain competitive. Recommendations include those to improve access to the SR&ED tax credit, new tax incentives to improve innovation, and recommendations aimed to improve program efficiency and effectiveness. SR&ED should be expanded to include the full commercialization cycle and market development expenses.

Recommendations:

• Broaden current refund provisions within SR&ED to provide direct refunds to all qualified applicants. This will give more value to the credit in periods when corporations are not paying tax, and when they have also exhausted the possibility to carry SR&ED tax credits back to prior years.
• Increase the annual R&D expenditure limit from $2M to $10M and adjust the taxable capital threshold from $10M to $50M.
• Include the costs to protect intellectual property (IP) as part of the eligible expenses. For example, the costs associated with patenting should be eligible under the program.
• Extend SR&ED tax credit to equipment that is used primarily for R&D to qualify for full credit.
• Restructure SR&ED tax credits to address needs of mid–stage and small public companies.
• Expand SR&ED to cover the entire commercialization life cycle as well as market development expenses.

Review and expansion of IRAP

NRC's Industrial Research Assistance Program is critical to the vitality of Canada's small and medium–sized enterprises. By providing technical and business advisory services and financial assistance it is by far one of the best spend of federal funds. This program assists in the growth of innovation and technology fueling the economic engine of Canada. Since IRAP is already a national program, it is well suited to continue to assist in the growth of our companies.

Recommendations:

• Increase the level of funding available to IRAP in support of Canadian knowledge–based industries and with increased funding to early– stage, high– growth enterprise.
• Increase the amount of funding available to IRAP to support commercialization associations and networks across Canada to accelerate high growth companies to global markets at early stages.

Increase Access to Capital

Canada has a global reputation as a leader in the innovation of technologies across knowledge–based industries. In order to foster the conversion of those innovations to high impact, globally competitive commercial successes, Canada needs to build and enhance a national ecosystem which fosters the commercialization of those innovations, and the flow of capital to support rapid scalability and growth to the global marketplace. These two concepts must be done in parallel and the Canadian government must set up the conditions to make investing in Canadian companies a success for all parties.

Although the federal government took significant steps in the 2009 budget to help remove barriers to foreign investment through the elimination of Section 116, there is still much work to be done to both attract foreign investment and to cultivate and support angel investors across the country and rebuild the venture capital and private equity asset class to help Canadians continue to invest in Canada and Canadian enterprise.

Foreign capital, from angel investor to tier 1 venture capital, is increasingly attracted to Canadian private enterprise. With the lack of available venture capital in Canada there is even a trend to the creation of U.S.–based venture funds seeking only to invest in Canadian companies. Unfortunately, although this capital flows into these companies, and by extension, into the Canadian economy through job creation, there are still barriers to entry due to income tax provisions and withholding tax on capital gains to keep these Canadian companies in Canada for long. Removing the ITA provisions that trigger taxation from cross–border mergers of private companies, and removing the ITA provisions that trigger withholding tax on capital gains made by foreigners in Canadian private investments from the federal budget would go a long way in helping to keep these companies growing and prospering in Canada.

New and high paying jobs are created in industries that attract capital for growth. Canada must create programs and incentives that foster entrepreneurship and investment at early stages of company development and growth to be globally competitive and to be seen as a beneficial place to do business. The solution lies in the stimulation of more angel and venture capital investment at the early stage of company development in order to ensure the creation of more successful, knowledge–based, globally competitive companies in Canada.

Angel investors require special consideration. Together, these early stage investors share deal flow and make investments at critical early stages of company development. They also provide valuable expertise to their investments to accelerate their growth, open global networks and create the conditions for success. By providing tax credit incentives or flow through share structures to angel investors, there will be incentive to invest more over the life of an investment.

The Canadian economy needs to focus on growing sustainable, successful, and globally competitive companies. Ontario recently implemented the Emerging Technology Fund (ETF)–$250 million over five years– to co–invest alongside early stage venture funds and angel investors in knowledge–based enterprises. However, substantial work remains to be done on the federal side to ensure that new technologies and companies have access to the funding and support they need in order to succeed.

Recommendations:

• Eliminating the barriers for foreign investment, by implementing announced changes to the Income Tax Act as it relates to triggering income and withholding tax on foreign investors.
• Allow individual angel investors to claim up to a 30 per cent tax credit on investments in eligible companies.
• Develop a national strategy to improve the supply of risk capital, which coordinates federal and provincial programs and leverages our Canadian institutions to invest their equity in the "private equity" asset class.
• Increase the mandate and amount of seed funding to BDC and EDC enabling them to invest as a coinvestor alongside angels or early stage funds.
• Simplify and establish consistency of federal and provincial funding programs for both domestic and foreign investors.
• Enhance investment attraction strategies and marketing of Canada as the home for innovation to attract top global talent and companies.

Talent:

Canada's workforce is among the best educated in the world and presents a competitive advantage on which we can build. A critical concern, due to the declining birth rate and aging population, is maintaining and cultivating an adequate number of skilled or highly educated people in the workforce. A globally competitive knowledge–based community needs the skilled talent that provides its foundation. The recognized potential shortfall in this area requires immediate action in the areas of talent attraction, adult education and retraining, new skills development and increasing enrollment in relevant knowledge–based programs. In order to increase the talent pool, Ottawa and other knowledge–based communities, must consider foreign credential accreditation, foreign student retention issues and attracting talent from outside Canada.

As stated in the STIC report, workers whose skills are upgraded, new graduates and immigrants who bring international expertise and skills with them will all contribute to our pool of talent. Canada must develop a nationwide methodology that encourages and rewards workplace training to enable those in the workplace to adapt to new innovations, and re–skilling opportunities that can provide new and relevant career options for our citizens.

University enrolment in Ottawa for science and technology related programs has either decreased or increased only marginally over each of the past five years. This very slow rate of change cannot support the anticipated need for skilled talent in the near future. Steps must be taken to promote and encourage education and career opportunities in our innovative technology sectors.

More needs to be done to promote mathematics and keep K–12 students interested in learning math in order to increase feeder groups for post–secondary studies that will yield graduates for the ICT sector. Special efforts must also be made to attract youth, aboriginals and women into ICT careers, and to get more foreign students to study in Canada. It should be easier for universities to set up new hybrid programs and to collaborate with one another in response to market demands. More strategic partnerships are needed between local universities, federal labs and industry to provide all students with suitable internships. There is also a need for mature entrepreneurs to mentor startups. Increased immigration may be required to address the various talent shortfalls that limit growth in the ICT cluster.

Recommendations:

• Federal government to facilitate the expedient integration of skilled immigrants in all industries in order to assuage the impending lack of skilled workers and contribute towards filling Canada's talent pipeline.
• Strategies must be in place to increase participation in STEM (Science, Technology, Engineering and Mathematics) to meet the demands for skilled talent in the ICT sector.
• Federal and provincial governments to commit to establish incentives for companies and programs that provide re–training and re–skilling of talented workers to address the future needs of our growing businesses.

2. Digital Media: Creating Canada's Digital Content Advantage

The Ottawa ICT cluster has transitioned from being the world's hotbed for telecom infrastructure in the 1990s to exploiting new technology opportunities in knowledge–based industries post Nortel. The depth of the cluster's talent pool and its strong entrepreneurial culture are best represented in wireless, photonics, software, eBusiness, life sciences and security/defence. Emerging strengths include cleantech, communications enabled applications, digital media and virtual education. In 2010, Ottawa's innovation leaders face intense world competition for investments and talent. Emerging markets such as China challenge Ottawa/Canada to compete with creativity and agility in order to offset local R&D labour costs which might have been half of California's not too long ago, but are many times those of Asia.

Key themes that continually surface nationwide include innovation and technology cluster development, investments and financing, talent, procurement and government support, and the government's digital agenda.

As it is aptly stated in Improving Canada's Digital Advantage, Strategies for Sustainable Prosperity — "With the right framework, digital media entrepreneurs have the ability to create Canada's digital content advantage with vision and boldness to unleash the potential of content to capitalize on our investments in digital infrastructure and drive more innovation in the years ahead." As true as this statement is, we have to become better at providing the tools to support the infrastructure and innovation.

For example, in June 2009, the province of Ontario announced that Ubisoft — one of the world's largest digital games publishers — was to establish a development studio in Ontario; the digital games industry looked to be poised for rapid growth. Indeed, several studies related to the creative sector in Ontario have cited the lack of a major international games publishers as a key limitation of Ontario's digital games industry. However, Ubisoft is not a panacea for all challenges of the digital games industry, if Ubisoft is to have the greatest impact on the development community in Ontario, the industry as whole will need to have access to the appropriate business support structure if it is to grow to support Ubisoft's publishing demands. Furthermore, it is important that the entire province, rather than just Toronto be able to reap the benefits of this growing industry. Source: Ontario Digital Games Business Network: ECCPF Project Plan.

Most recently, two public/private initiatives have been put forth to assist with the aforementioned, the Ottawa Digital Convergence Centre (ODC) which is a new media convergence hub, designed to act as a catalyst to Ottawa and Canada's commercial role in the digital content revolution and Game Inc. which is Ontario's Digital Games Business Incubator Network. In Ottawa, the recently formed digital media cluster — GENERATOR — provides the region's digital media companies and innovators the ability to establish a greater presence in the national and global markets as well as leverage the influence of the entire sector. Regional, provincial and national clusters for robust sectors will enable the digital media industry to grow and become established as a global leader much more quickly than if individual companies or groups were to attempt it alone. Each by their own right have the capability of covering the whole digital media sector and most importantly be adopted nationwide to strengthen Canada's digital media position globally.

Recommendations:

• Adopt comprehensive digital media convergence centres in strategic locations across Canada to mobilize the innovation and talent within this cluster. This should be done through public/private partnership.
• High growth and high potential sectors must be identified and resources must be concentrated in key sectors to ensure sustainable advantage.
• Identify cross–sector opportunities to leverage digital media and ICT developments.
• The monies raised from sale of wireless spectrum should go back into building a strong KBI ecosystem.
• Promote regional clusters at key global events.

3. Building a Digital Skills for Tomorrow

Canada is facing a shortage of skilled knowledge workers in the relatively near future. Currently, skilled technology workers are in high demand in Ottawa. The technology sector in the region has recovered from the telecom collapse in 2001 and is now re–emerging from the global economic recession. However, it has been observed that our youth — our future — remain skeptical about an industry that caused so much uncertainty and concern in our region. Registration for computer and technology related programs in post–secondary institutions remains low. In an effort to create a culture of entrepreneurism and establish interest in knowledge–based industry careers, a number of programs and initiatives have been created. TalentBridge, Junior Achievement, High School Technology Program and Summer Company are all in place in Ottawa to establish that careers in the region's diverse knowledge–based industries are desirable options. These programs require more resources to achieve the results required. If Canada is to maintain its position as an innovative technology leader, it is critical that we ensure that we have a sustainable talent pipeline.

Related to the issue of the recruitment of talent, we believe the issues need to be expanded to include a very strong retention of new recruits to the area, as well as existing, homegrown talent. The world is flat for all talent, not just those individuals looking to migrate from foreign countries. As an example, assisting high potential talent in their integration into the Ottawa ecosystem is a key element of OCRI's TalentBridge program. TalentBridge concentrates on providing linkages to job prospects, meaningful projects, like–minded peers and social and mentor networks. These factors are all key elements of a broader decision to "stay" or "leave" the City. These "success factors" also help in the individual's promotion of the City as a destination of choice. Rather than merely marketing Ottawa abroad, the City may be well served by creating the right conditions once a new Canadian is here, as it is likely that an existing immigrant well established in Ottawa will be far more influential for others considering Ottawa because of his or her own personal experience.

The future of Canada's economic success relies heavily on the quality and quantity of our skilled talent. The innovation and diversification of Canada's technology industry (i.e. the shift away from traditional ICT and telecom) requires a specific skill set in order to meet the demand for talent as our new businesses evolve and innovation opportunities arise. It is imperative that the federal government consider incentives for companies and programs that provide workplace training and re–skilling opportunities to address the needs of our growing businesses. Our nation's ability to innovate also depends on our ability to attract talented researchers and scientists. The expedient integration of skilled immigrants in all industries will make a valuable contribution toward filling Canada's skilled talent pipeline.

In an economy where eight of 10 jobs (according to Statistics Canada) are created by SMEs, we should be concentrating on the promotion of entrepreneurism and the teaching of business skills as a workforce asset since the majority of graduates will either start their own, or be asked to contribute to the success of a small or medium–sized enterprises. While the problem is not new, the elimination of grade 13 in Ontario resulted in the subsequent elimination of many business and entrepreneurship classes as a result of the condensed curriculum. This left a further sizable void in the promotion of entrepreneurism and the teaching of business skills as a workforce asset. Contrast this to the experience of many industrialized countries where innovation and entrepreneurship is taught throughout a student's academic career, and starts in the earliest grades, as a way to ensure sustained economic growth, and we can clearly see a gap in the earliest parts of the economic life cycle here in the Ottawa region. Our vision is that all students have a continuum of programs, services and initiatives that serve to promote entrepreneurism and teach business skills as a work force asset from the earliest grades through to post–secondary institutions.

Recommendations:

• While we have high quality, local talent with many students graduating every year from two major universities and two significant colleges, we need to increase STEM (Science, Technology, Engineering and Mathematics) participation to meet the demands.
• The education system needs to place more emphasis on encouraging students to become entrepreneurs with an innovation focus. Leadership and early entrepreneurship education must also become key focus areas.
• The educational process for sciences and math must start as early as daycare to encourage participation in later years.
• A strategy must be developed to attract, retain and leverage skilled talent.
• An immigration strategy needs to be developed to address skills shortages and talent gaps thereby increasing innovation and globalization response.
• Collaboration must be fostered between industry and post–secondary students.
• Review existing initiatives and assign additional resources and funding to provide additional capacity and support for expanded and enhanced programming.
  • Entrepreneurship awareness and promotion
  • Entrepreneurship education and training
  • Creative talent attraction and engagement
  • Applied research and development relationships