By HEATHER SCOFFIELD

Monday, November 28, 2005 Posted at 8:43 AM EST

ECONOMICS REPORTER

George Foss’s company was overwhelmed.

3L Filters Ltd., a small manufacturer based in Cambridge, Ont., makes highly engineered filtration systems for gases, liquids and CANDU nuclear reactors. But the company’s sales staff couldn’t keep up with inquiries from potential customers.

3L was suffering from Canada’s quintessential productivity conundrum, according to some top-notch researchers. Its work force just couldn’t produce enough to meet rising demand, and so the company stagnated.

Each customized quote required endless hours of research and help from company engineers. The sales staff was falling behind — and company revenue right along with them.

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So Mr. Foss set to work automating the quotation system. He sunk about a quarter of a million dollars — a big chunk of change for a $10-million company — in software that would let sales reps put together complex, customized quotes without the help of an engineer.

After retraining the staff, turnaround time was cut by two-thirds. Staff confidence levels soared, as did the number of quotes they were able to send out.

The company’s investment in information and communications technology (ICT) was the secret to a boost in productivity. But it’s a secret that, in Canada, is too well kept, some researchers say.

Much of Canada’s lag in productivity compared with the United States can be traced to a lack of ICT in Canadian companies, they say. Canada, in other words, has a serious computer problem.

“Canada has had this puzzling gap in ICT,” said Bernard Courtois, president of the Information Technology Association of Canada. “The topic is quite ripe right now in Canada. Everyone senses there is a complacency that is quite dangerous. It’s an attitudinal thing.”

While that kind of statement will surely irk many business people in Canada, there is data behind it.

A recent study by two top economists, Melvyn Fuss from the University of Toronto and Leonard Waverman, chair of economics at the London Business School, concluded that ICT can account for about 60 per cent of the huge and widening labour productivity gap between Canada and the United States.

Their study measured simple investment in ICT, but it went a step further than most studies by quantifying the spillover effects of ICT on productivity in companies. In essence, they attempted to measure the effects of networks, and not just quantities of hardware and software.

Specifically, the researchers look at the number of personal computers in use in the United States compared with Canada, as a proxy for diffusion of ICT. They find that households in Canada actually have more computers per capita than in the United States. Canadian small businesses have fewer computers per capita, but just marginally.

Medium-sized and large businesses, on the other hand, as well as education and government in Canada are far, far behind.

“There is significantly lower accumulation of ICT by medium and large firms, education and government in Canada,” the study notes.

“The major difference in the stock of PCs in Canada used by medium and large corporations compared to U.S. firms may signal reluctance in Canada by managers to embrace completely the new economy and the significant changes it requires.”

Part of the reason Canada looks so bad compared with the United States is that the United States excels at ICT adoption. The authors recognize that compared with Europe, Canada stands up quite well on the ICT scale.

“U.S. firms are quite unique in their adoption of the deep changes — [the] organizational transformation that accompanies ICT,” Mr. Waverman said in an e-mail interview.

In Canada, he does not detect an outright resistance to ICT. Rather, he sees a stronger conviction in the United States that ICT can transform the way a company functions.

“Maybe Canadian firms are too comfortable to be challenged to change,” he said.

The Fuss and Waverman paper was presented last month in Gatineau, Que., as part of the federal government’s review of telecommunications policy. The review is to be concluded by the end of the year.

Andrew Sharpe, one of Canada’s top experts on productivity, agrees with the two professors that ICT is at the root of much of the productivity gap with the United States. His own research shows that large corporations in Canada lag the United States in terms of investing in ICT.

Still, he is doubtful about drawing the conclusion that more than half the productivity gap can be explained away by the ICT factor. Given that PCs are quite cheap these days, any large company that needed one would already have one, he reasons.

“Intuitively it doesn’t make sense,” he said of the Fuss and Waverman conclusions.

Plus, the professors’ paper focuses on the big gap between Canada and the United States, and does not shed much light on why, the United States aside, there has been essentially no productivity growth in Canada whatsoever for the past two years.

Mr. Sharpe, who is the executive-director of the Centre for the Study of Living Standards based in Ottawa, believes the most recent productivity stagnation is mainly because of Canada’s natural resources.

Because commodity prices have been high, he argues, resource firms have had incentive to extract commodities that would be marginal with lower prices. While the extraction is still profitable, it drives down the national productivity numbers. (Productivity is usually defined as output per amount worked).

Still, Mr. Sharpe said he is generally sympathetic to the Fuss and Waverman argument that ICT is a main reason for Canada’s poor productivity performance.

“Even if ICT is not the major cause, it may be part of the solution,” he said.

But in the federal Liberals’ recent key strategy document, produced as part of their pre-election mini-budget, little was done to encourage more adoption of ICT to boost Canada’s productivity. Most of the announcements targeted taxes, while the document acknowledged that ICT drove productivity in the 1990s and concluded that it would continue to do so in this decade.

And the Fuss and Waverman paper hits a big brick wall when it comes to the country’s statistics authority. John Baldwin, director of micro-economic analysis at Statistics Canada, says he thinks the study distorts the ICT problem in Canada.

“There are so many things that determine how productive a company is. I’d be surprised if there were a holy grail,” he said. “The best firms are implementing ICT into their operations faster than other firms. But the best firms are doing a lot of things better than other firms.”

Mr. Baldwin also has issues with the methodology used in the Fuss and Waverman paper, and he thinks they handicapped Canada by not considering that high-technology is embedded into many different types of equipment these days, not just computers.

Canada, he also points out, has a much different economy than the United States. Because Canada is a resource-based economy, much corporate profit is invested in infrastructure — pipelines, dams, engineering structures — rather than the machinery and equipment that U.S. profits favour.

Plus, Mr. Baldwin adds, since Canada has experienced a huge growth in its labour market over the past two years, the country’s wealth per person has remained unchanged when compared with the United States, at about 80 per cent.

Mr. Waverman dismisses Mr. Baldwin’s critique as plain wrong.

“All studies show that ICT is the driver of U.S. productivity growth. Canada lags, and the lag is in increasing in ICT adoption,” he said. “What these lags mean about production and organizational change are vitally important.”

All the researchers agree, however, simply spending more money on technology won’t do anything for a company’s productivity unless it is accompanied by thorough and effective training, plus strategic use of the technology itself.

For Mr. Fuss at 3L in Cambridge, the money he spent on automation would have been wasted had he not made sure that the software was easy to use, and that his staff was well trained.

Says Mr. Waverman: “Raising productivity is not about shedding jobs, but enabling labour to have the modern tools and the organizational structure to compete at world levels.”

Booting up

The United States uses more PCs per capita than Canada in every category except residential. The following chart shows, on a per capita basis, that for every single computer in Canada, the United States owns:

2003 2004 2005
Home 0.88 0.91 0.93
Small business (1 to 99 employees) 1.21 1.23 1.30
Medium/large business (100+) 1.64 1.67 1.72
Government 1.66 1.71 1.75
Education 1.56 1.57 1.59
Total 1.14 1.16 1.19

SOURCE: IDC CORPORATION THE GLOBE AND MAIL