Archived — A Future Friendly Digital Economy Strategy: Submission to the Government of Canada's Digital Economy Consultation — Appendix 4

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Submission (continued)

III. Investment in Broadband Telecommunications Infrastructure is Crucial to Canada's Economic Advancement

Since the mid-1990s, economic growth in developed economies has been propelled by a revolution in high-technology products and services. This revolution began with semiconductors and computers, but it has been extended and enhanced by modern highspeed telecommunications networks which allow these computers to be interconnected. As a result, investment in information and communications technologies (ICT) is now driving economic growth in the developed world.

a. Investment drives economic growth

Investment and innovation are the engines that fuel a country's economic growth and productivity performance. As explained by economists Rudiger Dornbusch and Stanley Fischer in their widely cited text Macroeconomics,

[I]nvestment spending determines the rate at which the economy adds to its stock of physical capital, and thus helps determine the economy's long-run growth and productivity performance. Fastergrowing countries…generally invest a higher share of their GDP than slower-growing countries.Footnote 11

The impact of investment in information technology on economic growth, however, is even more pronounced. Research indicates that investment in information technology (IT) infrastructure is increasingly important for advancing economic growth. As noted by economist Dale Jorgenson:

The vaulting contribution of capital input since 1995 has boosted growth by close to a percentage point [in the U.S.]. The contribution of investment in IT accounts for more than half of this increase. Computers have been the predominant impetus to faster growth, but communications equipment and software have made important contributions as well.Footnote 12

Investment in connectivity and networking generates substantial economic value not just because of the direct benefits of connectivity to users, but because of the additional services and opportunities that the infrastructure creates, and the investments and innovations that are made in response to this improved infrastructure. As more advanced infrastructure is available, it becomes economic to make investments in developing new innovations and services that can use the new infrastructure. These new innovations and services benefit consumers and generate, in turn, more opportunities to build further on those innovations.

For example, greater availability of high-speed broadband networks makes electronic commerce more attractive to consumers and also more attractive to merchants. Offering products and services electronically (i.e., over the Internet) permits a company to expand its geographic reach significantly, but requires investment in operational support systems (such as billing), advertising, logistics, and inventory management systems. These investments are not likely to be prudent if high-speed broadband networks are not widely available for customers to access the company's products. The greater the availability of broadband, the more such complementary investments will be made. In turn, the greater the demand for support systems and services to implement electronic commerce, the greater is the incentive to invest in improvements in such systems and in the expansion of such services. In addition, the greater the reach of sellers, the more choices become available to consumers and the more vigorous therefore is competition for the sellers' products, driving down prices and expanding the ability of consumers—even those in remote areas—to enjoy the benefits of vigorous competition. All of these effects expand the overall welfare of the citizenry and the GDP of the country.

b. Investment in information technology benefits the broader economy

The effect of information technology on the economy as a whole, even beyond the direct effect on the information technology producing sector, has been studied in a variety of countries, and recent research has shown the importance of ICT to continuing and even accelerating productivity growth. For example, a number of econometric studies, particularly those by Professor Dale Jorgenson of Harvard University and his colleagues, have discovered that total factor productivity growth in the United States accelerated after 1995.Footnote 13 At first, this acceleration was led by the growth of the ICT-producing industries, such as computers, semiconductors, and telecommunications equipment suppliers. However, in the late 1990s and early years of this century, productivity accelerated in the ICT-using sectors of the economy. For example, economists Barry Bosworth and Jack Triplett have found that 73 percent of U.S. productivity growth has occurred in the service industries, largely because of the effects of using modern ICT technology.Footnote 14

A number of other recent analyses have reached similar conclusions. For example, the OECD found a dramatic effect of information technology on productivity, concluding that the production and use of information technology was responsible for 109 percent of the growth in labor productivity from 1996 to 2002 in the U.S. and most of the growth in labor productivity in several OECD countries.Footnote 15

Not all countries shared equally in this surge in productivity growth and, therefore, economic growth in general. Professors Melvyn Fuss and Leonard Waverman have shown that the EU 14, Canada, and Australia have lagged behind the United States because of lower investment and diffusion rates for ICT.Footnote 16 An earlier study by Fuss and Waverman, prepared for the Telecommunications Policy Review panel, showed similar results for Canada and the United States. As shown in Table 1, Canada lags behind the United States in productivity growth in both the ICT-producing sectors and the ICT-using sectors. Canada's economy produces relatively less ICT output and uses less ICT capital in the most technology-intensive sectors.

Other studies corroborate these conclusions. A 2003 study by Francesco Daveri found that Canada allocated only 19 percent of its non-residential fixed capital spending to IT in 1995-2000 while the U.S. devoted 28 percent.Footnote 17 A more recent study by Fuss and Waverman, from which Figure 2 is drawn, shows that both Canada and the EU lag far behind the U.S. in total ICT capital per worker hour.Footnote 18 Fuss and Waverman find that this deficit is responsible for one-half of the difference in labor productivity between the U.S. and Canada.Footnote 19 The demonstrated impact of ICT investment on labor productivity indicates that the same amount of worker hours can produce more economic output when workers and firms can incorporate information technology into their job activities. Thus, if Canada's economy is to grow as rapidly as that of its southern neighbor, it must pursue policies that are congenial to investment in high technology. Telecommunications is clearly a major focus of such investment in an increasingly sophisticated, interconnected world.

Table 1: Labor Productivity Growth in Canada, the EU, and the United States, 1995-2000 (Contribution to Overall Growth in Brackets)
* EU includes Austria, Denmark, Finland, France, Germany, Ireland, Italy, Netherlands, Spain, Sweden and the United Kingdom. (back to table 1, footnote reference *)

Source: Melvyn Fuss and Leonard Waverman, "Canada's Productivity Dilemma: The Role of Computers and Telecom," Bell Canada's Submission to the Telecommunications Review Panel, Appendix E-1, 2005, Table 1.1; Bart van Ark, Robert Inklaar and Robert McGuckin, "‘Changing Gear' – Productivity, ICT and Services Industries: Europe and the United States," Research Memorandum GD-60, Groningen Growth and Development Centre, December 2002.

  Canada EU* United States
Overall Growth 1.8% (100%) 1.4% (100%) 2.5% (100%)
ICT-Producing Sectors 7.1% (24%) 8.7% (33%) 10.1% (30%)
ICT-Consuming Sectors 3.2% (47%) 1.6% (29%) 4.7% (56%)
Non-ICT Sectors 0.8% (30%) 0.7% (34%) 0.5% (14%)
Figure 2: Canada Lags the U.S. in High-Tech Capital per Hour Worked
Figure 2: Canada Lags the U.S. in High-Tech Capital per Hour Worked

Source: Melvyn Fuss and Leonard Waverman, "Why Is There No New Economy in Old Europe or The Networked Computer," London School of Economics, Digital Transformations Power Point Presentation, 2006, slide 11.

[Description of figure 2]

The beneficial effects of IT investment can also be seen at the local level.Footnote 20 For example, some studies of the effect of broadband deployment have focused on specific U.S. states. The Sacramento Regional Research Institute (SSRI) quantified the effects of broadband in the state of California, and found that increased broadband use contributed nearly 80 percent of the net new jobs created in California between 2002 and 2005 and about $11.6 billion of the $85 billion in net new payroll.Footnote 21 Similarly, a 2007 report by David Shideler and other researchers evaluated the effects of Kentucky's plan for broadband deployment and adoption. The report concluded that broadband deployment had a "positive and significant impact" on total employment in Kentucky.Footnote 22

In Canada, a study commissioned in 2003 by the United Kingdom's Department of Trade and Industry of the economic impacts of a fiber network built in South Dundas, Ontario between 2000 and 2001 concluded that the direct and indirect effects of this investment of CAD$1.3 million amounted to CAD$21 million in increased GDP, 270 person years of employment, and CAD$8 million in increased tax revenues.Footnote 23

Taken together, these studies of economy-wide labor productivity, as well as local economic stimulation, demonstrate that the beneficial effects of investment in information technology are not just theoretical. Investment in IT has been found to have material positive effects on economic advancement at the local level and economy-wide.

c. Investment also leads to social welfare benefits by fueling platform competition

In countries such as Canada, in which there are (at least) two broadband networks (cable and DSL), investment in broadband infrastructure leads not only to more availability of broadband services, but to more competition among the platform providers. This is turn induces the providers to work harder to provide innovative, ever-higherquality services at attractive prices on their platforms. Facilities-based providers have far more flexibility to provide innovative and differentiated services than do competitors using unbundled elements or resold services. It is not surprising, then, that multiple academic studies have found that intermodal (infrastructure) competition is associated with greater broadband penetration, while intramodal competition (competition based on unbundling) is not.

For example, a study co-authored by one of us examined the effect of intermodal (cable modem v. DSL) competition on broadband penetration in the U.S. The study found that intermodal competition between cable and DSL significantly increased broadband penetration after controlling for demand and cost influences. The price of the unbundled local loop, however, had no statistically significant effect on broadband penetration, implying that mandatory unbundling was not an important determinant of broadband penetration.Footnote 24

More recently, in a 2006 paper, Distaso et al. examined the causes of broadband adoption in the European Union and similarly concluded that "while inter-platform competition [between DSL and cable modem service providers] drives broadband adoption, [intramodal] competition in the market for DSL services does not play a significant role."Footnote 25 A 2001 OECD study also reached a similar conclusion, finding that "[c]ountries where cable and DSL compete (rather than being jointly owned by the same entity) generally have a stronger broadband market."Footnote 26 The OECD study concluded that "[t]he most fundamental policy available to OECD governments to boost broadband access is infrastructure competition."Footnote 27

Hence, while proponents of unbundling regulations argue that unbundling will enhance competition, in fact, the research shows the opposite. It is facilities-based competition that drives consumer benefits. The evidence is that unbundling harms competition and consumers because not only does intra-modal (unbundling-based) competition fail to stimulate broadband penetration, but it harms investment in platform competition, as we will discuss shortly. Policy that dampens investment in broadband infrastructure in Canada harms competition and consumers.

d. The Benefits of Broadband Investment Include Increased Availability of Healthcare, Educational, Governmental, Business, and Other Services

Information technology of course includes more than telecommunications infrastructure. However, the economic gains associated with investment in information technology have been attributed specifically to the communications component—the assets and infrastructure than enable large numbers of people and computers to connect, interact, and communicate with each other. According to Alan Greenspan, the former Chairman of the U.S. Federal Reserve:

[U]ntil the mid-1990s, the billions of dollars that businesses had poured into information technology seemed to leave little imprint on the overall economy. The investment in the new technology arguably had not yet cumulated to a sizable part of the U.S. capital stock, and computers were still being used largely on a stand-alone basis. The full value of computing power could be realized only after ways had been devised to link computers into large-scale networks.Footnote 28

This is what broadband networks do—they link computers, and people, into largescale networks. Dr. Greenspan is observing that the power of computing technology is unleashed, for the benefit society as a whole, by networking them together and enabling them to communicate.

For example, at the beginning of the decade it may have been difficult for residents in rural areas to receive timely news and information, book travel, bank, or pay their bills quickly and efficiently, or even locate spare parts for their appliances, buy and sell household items, locate reference material and books on obscure topics, research health issues, or pursue a variety of hobbies and interests. Today, however, anyone with a broadband Internet connection can easily and much more efficiently do any and all of these things on Amazon.ca, Theglobeandmail.com, Expedia.ca, Royalbank.com, and a host of other websites. The deployment of ultra-high-speed broadband at speeds of 100 Mbps and higher—already available in some countries, as mentioned earlier—enables the use of applications that provide further benefits to consumers. These applications include the delivery of high-definition movies over the Internet, and an assortment of other highbandwidth applications to aid distance learning, telemedicine, and telecommuting.Footnote 29

The Quello Center for Telecommunication Management and Law at Michigan State University has summarized how broadband adoption benefits communities and society generally by increasing the availability of and access to information and other services, such as healthcare, education, and government services, and by contributing to economic activity and growth.Footnote 30 A 2001 report by the Canadian National Broadband Task Force identified similar benefits. In fact, the report argues that "the impact of broadband communications on Canadian life will be at least as great as the impact of railways, highways, airlines, traditional telecommunications and broadcasting."Footnote 31 The CRTC has, likewise, acknowledged that there are "considerable benefits" to Canadian citizens from increased availability of broadband services, which also include "expanding Canadians' capacity to access, create, communicate, and share knowledge and entertainment … [and] improve[ing] access to health care, education, and electronic services."Footnote 32

The Canadian Task Force Report specifically discussed the potential benefits in several of these areas. For example, the report observes that broadband adoption can facilitate the growth of e-business, which in turn brings economic benefits, including greater market efficiency, reduced distribution and procurement costs, and increased productivity;Footnote 33 it can create new opportunities for educational institutions and libraries for the diffusion of knowledge and information by facilitating and enhancing the online learning experience;Footnote 34 and it can improve access to and reduce the costs of healthcare services and information.Footnote 35 Broadband access expansion can also foster new growth opportunities for the online entertainment industry and for the development of information technology applications.Footnote 36 All these benefits brought about by broadband deployment can be instrumental in bridging the quality of life gap that, according to the Task Force, exists between urban and rural communities in Canada.Footnote 37

The information posted online by the Government of Canada about its programs for the diffusion of broadband in rural areas exemplifies the achievement of these benefits in a number of rural communities.Footnote 38 For example, a report written by Canadian researchers Julie Zilber, Phillip Djwa, and David Schneider documents the economic impact of broadband access in the regions of Peace River and South Similkameen. Some of their findings include the following:

  • "Over 80% of all business respondents reported that absence of broadband would affect their businesses negatively;"
  • "Over 18% of all business respondents stated they could not operate their businesses without broadband;"
  • "62% of [pre-existing] businesses indicated that their productivity has gone up as a result of broadband, with a majority indicating an increase in productivity of more than 10%;"
  • "Many businesses reported increases in pre-tax income and/or decreases in operating costs due to broadband connectivity;"
  • "15% of [residential broadband subscribers] reported that their household income has increased and 39% report that their household expenses have decreased due to residential broadband connectivity."Footnote 39

Another case study posted by the Government of Canada describes the benefits experienced by the municipal government of the town of Tillsonburg, Ontario, which implemented a Strategic Technology Plan that relied greatly on the deployment of a broadband network.Footnote 40 It is reported that after the first year of implementing this plan, the town was able to contain property tax increases relative to its neighboring municipalities;Footnote 41 increase available customer service hours substantially;Footnote 42 and generate $100,000 in new revenues,Footnote 43 among other benefits. As a result, 89 percent of residents and 80 percent of businesses said that they are satisfied with the municipal services of this small town.Footnote 44

Clearly, the evidence demonstrates the scope and variety of benefits brought by broadband investment to Canadian welfare and economic prosperity, and illustrates the kinds of benefits that would be expanded and enhanced by investment in next generation networks. Providing access to the abundance of information and services available on the Internet requires investment in the broadband backbone, but more specifically, it requires investment in broadband access.

The traditional wireline telecommunication networks are no longer the technology of the future. While not obsolete for all uses, these networks cannot provide most new, high-speed services efficiently and cannot deliver the most sophisticated high-speed services at all. As a result, telecommunications carriers must invest billions of dollars simply to be able to deliver state-of-the-art services. Equally important, national governments must be aware of the imperative of such investments for future economic growth. It is this investment that is specifically vulnerable to adverse regulatory rules that impose unbundling obligations, because those obligations affect access facilities most directly.

It is clear from this wealth of research into the effects of broadband deployment that, whether looked at qualitatively or quantitatively; locally, regionally, or nationally; prospectively or historically, broadband investment enhances broadband adoption and standard economic measures of well-being, economic prosperity, and opportunity. It creates opportunities for residents of rural or remote areas to access services and products to which they would otherwise not have access; it creates opportunities to improve and expand health, educational, and social services; it creates opportunities to increase governmental and business efficiency; and it provides entertainment. The Commission should be mindful that policy decisions that would artificially depress incentives to invest in the broadband infrastructure that would permit more people to have access to high quality broadband services would therefore harm social welfare. This includes the infrastructure that supports ADSL services, existing and new, as well as next generation networks. Regulatory decisions that allow the market to create efficient incentives to invest in broadband infrastructure and equipment advance social welfare in very material and concrete ways.


Footnotes

  1. 11 Rudiger Dornbusch and Stanley Fischer, Macroeconomics, Sixth Edition, McGraw-Hill, Inc., 1994, p. 331. (back to footnote reference 11)
  2. 12 Dale Jorgenson, "Accounting for Growth in the Information Age," in Philippe Aghion and Steven Durlauf, eds., Handbook of Economic Growth, Vol. 1A, Amsterdam, North-Holland, 2005 (hereafter, Jorgenson 2005). Accessed from www.economics.harvard.edu/faculty/jorgenson/files/acounting_for_growth_050121.pdf. (back to footnote reference 12)
  3. 13 Jorgenson 2005; Dale Jorgenson, Mun S. Ho, Jon D. Samuels, and Kevin J. Stiroh, "Industry Origins of the American Productivity Resurgence," Interdisciplinary Information Sciences, Vol. 14, No. 1, pp. 43-59, 2008. (back to footnote reference 13)
  4. 14 Jack E.Triplett and Barry P. Bosworth, Productivity Growth in the U.S. Services Sector: New Sources of Economic Growth, The Brookings Institution, 2004, p. 2. (back to footnote reference 14)
  5. 15 Organization for Economic Co-operation and Development (OECD), "The Economic Impact of ICT: Measurement, Evidence, and Implications," Paris: Organization for Economic Co-operation and Development, 2004 See, also, Jason Dedrick, Vijay Gurbaxani, and Kenneth L. Kraemer, "Information Technology and Economic Performance: A Critical Review of the Empirical Evidence," ACM Computing Surveys, Vol. 35, No. 1, March 2003, pp. 1–28, which reviews 50 academic studies published between 1985 and 2002 and concludes that all the studies from the mid-1990s find positive and significant returns on information technology investments. (back to footnote reference 15)
  6. 16 Waverman and Fuss 2006, slide 15. (back to footnote reference 16)
  7. 17 Francesco Daveri, "Information Technology and Productivity Growth Across Countries and Sectors," IGIER Working Paper No. 227, January 2003, Table 3. (back to footnote reference 17)
  8. 18 Waverman and Fuss 2006, slides 12 and 13. (back to footnote reference 18)
  9. 19 Waverman and Fuss 2006, slide 13. (back to footnote reference 19)
  10. 20 We caution the reader that the magnitude of the effects of IT investment on a local community cannot necessarily be extrapolated to the economy as a whole. For example, if IT investment in a community leads to a substantial increase in employment in that area, some or all of the newly employed workers and new jobs may have been diverted from another area. (back to footnote reference 20)
  11. 21 "Economic Effects of Increased Broadband Use in California," Sacramento Regional Research Institute, prepared for AT&T, pp. 24-25. (back to footnote reference 21)
  12. 22 David Shideler, Narine Badasyan, and Laura Taylor, "The Economic Impact of Broadband Deployment in Kentucky," for presentation at the Telecommunication Policy Research Conference, Washington, D.C. September 2007, p. 11 and Table 2. (back to footnote reference 22)
  13. 23 Strategic Networks Group, "Economic Impact Study of the South Dundas Township Fibre Network," Prepared for the Department of Trade and Industry, United Kingdom, June 27, 2003, p. 29. (back to footnote reference 23)
  14. 24 Debra J. Aron, and David E. Burnstein, "Broadband Adoption in the United States: An Empirical Analysis," in Allan L. Shampine (ed.) Down to the Wire: Studies in the Diffusion and Regulation of Telecommunications Technology, Nova Publishers, March 2003. Another empirical paper of broadband adoption in the US is Mario Denni and Harold Gruber, "The Diffusion of Broadband Telecommunications: The Role of Competition," Working Paper, October 2005. Available at SSRN: ssrn.com/abstract=829504. Denni and Gruber similarly concluded that intermodal competition significantly increases broadband penetration, but that intramodal competition has only an initial, temporary effect on penetration that is soon dissipated. (back to footnote reference 24)
  15. 25 Walter Distaso, Paolo Lupi, and Fabio Manenti, ‘‘Platform competition and broadband uptake: theory and empirical evidence from the European Union," Information Economics and Policy, Vol. 18 No. 1, 2006, p. 88. Another empirical study of broadband adoption in the EU is Robert Crandall and Allan Ingraham, "The Relevance of Recent United Kingdom Telecommunications Policy to the Policy Choices in Canada," Appendix D to Supplementary Material of TELUS Communications Company filed in Telecom Public Notice CRTC 2006-14, 5, July 5, 2007 (hereafter Crandall and Ingraham 2007). Crandall et al. (¶25) similarly concluded that local loop unbundling and bitstream access in the EU countries "do not contribute significantly to broadband penetration." (back to footnote reference 25)
  16. 26 Organization for Economic Cooperation and Development, The Development of Broadband Access in OECD Countries, October 29, 2001 (hereafter OECD Broadband 2001). (back to footnote reference 26)
  17. 27 OECD Broadband 2001, p. 4. Another empirical study of broadband adoption in the OECD countries is Scott Wallsten, "Broadband and Unbundling Regulations in OECD Countries," Joint Center AEIBrookings Joint Center for Regulatory Studies, Working Paper 06-16, June 2006. Wallsten concluded that (1) "local loop unbundling has no robustly significant impact on broadband penetration," (2) bitstream access, while having a positive effect on broadband penetration, is not statistically significant under certain specifications, and (3) subloop unbundling, i.e., access to a portion of the loop, has a negative and statistically significant impact on broadband penetration under all specifications. (back to footnote reference 27)
  18. 28 Alan Greenspan, "Technology Innovation and its Economic Impact," Remarks before the National Technology Forum, St. Louis, MO, April 7, 2000 (emphasis added). Accessed from www.federalreserve.gov/BOARDDOCS/SPEECHES/2000/20000407.htm. See, also, Dale Jorgenson, "U.S. Economic Growth in the Information Age," Issues in Science and Technology, Fall 2001, concluding that "Communications technology is crucial for the rapid development and diffusion of the Internet, perhaps the most striking manifestation of IT in the U.S. economy." Accessed from www.issues.org/18.1/jorgenson.html. (back to footnote reference 28)
  19. 29 Statement of Joseph Savage, President of Fiber-to-the-Home Council North America, before the Senate Committee on Commerce, Science and Transportation, Hearing on State Broadband in the United States, April 24, 2007. Accessed from www.ftthcouncil.org/UserFiles/File/Fiber-to-the-Home_Council_April_24_07_Testimony.pdf. (back to footnote reference 29)
  20. 30 Johannes M. Bauer, Ping Gai, Junghyun Kim, Thomas A. Muth and Steven S. Wildman, "Broadband: Benefits and Policy Challenges," Quello Center Report prepared for Merit Network, Inc., December 10, 2002, pp. 6-7. (back to footnote reference 30)
  21. 31 "The New National Dream: Networking the Nation for Broadband Access," Report of the National Broadband Task Force, Government of Canada (hereafter 2001 Broadband Report), p. 3. (back to footnote reference 31)
  22. 32 Telecom Decision CRTC 2006-9, ¶ 78. (back to footnote reference 32)
  23. 33 2001 Broadband Report, pp. 23-24. (back to footnote reference 33)
  24. 34 2001 Broadband Report, pp. 25-26. (back to footnote reference 34)
  25. 35 2001 Broadband Report, pp. 29-31. (back to footnote reference 35)
  26. 36 2001 Broadband Report, pp. 31-33. (back to footnote reference 36)
  27. 37 2001 Broadband Report, p. 3. (back to footnote reference 37)
  28. 38 See, http://broadband.gc.ca. This website reports on the progress of two initiatives, the Broadband for Rural and Northern Development pilot program and the National Satellite Initiative (NSI). (back to footnote reference 38)
  29. 39 Julie Zilber, David Schneider, and Phillip Djwa, "You Snooze, You Lose: The Economic Impact of Broadband in the Peace River and South Similkameen Regions," prepared by 7th Floor Media, Simon Fraser University for Industry Canada, September 5, 2005, pp. 1-2. (back to footnote reference 39)
  30. 40 Thomas S. Dawe and Michael Curri, "Town of Tillsonburg: Economic Impact Case Study," INS Consulting, January 2003 (hereafter 2003 INS Consulting), p. 8. (back to footnote reference 40)
  31. 41 2003 INS Consulting, p. 2. (back to footnote reference 41)
  32. 42 2003 INS Consulting. p. 19. (back to footnote reference 42)
  33. 43 2003 INS Consulting, p. 4. (back to footnote reference 43)
  34. 44 2003 INS Consulting, p. 42. (back to footnote reference 44)