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Capitalization of Software in the National Accounts

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3.0 Trends of software investment in Canada

Charts 1-13 on the following pages show some summary results. Software investment reached $15 billion in Canada in 2000. Pre-packaged software made up 44% of the total, with own-account and custom-design software making up just under 30% each. The share going to pre-packaged software has more than doubled since 1981 (the first year for which the software estimate is made), while the share going to own-account is less than half what it was in 1981.

The business sector is accounting for a growing share of overall software investment, with 74% of the total in 1981 and 81% in 2000. Its share varies markedly by type of software, with businesses accounting for 94% of investment in customized software in 2000, 84% of pre-packaged software, and only 67% of software developed on own-account. Substitution towards pre-packaged software is taking place in businesses and governments, although own-account is still predominant for government, while pre-packaged has become the predominant type for business.

The shift towards pre-packaged software reflects not only its growing popularity and more widespread applicability, but also declines in its price relative to specialized software contracted out or developed in house. The quality-adjusted price of pre-packaged software has fallen over 80% since 1981, with most of the decline taking place during the eighties and early nineties. The cost of own-account software development on the other hand nearly doubled over 1981-2000, while the price of custom-design software remained relatively flat. In contrast to the price measure for pre-packaged software, the one for own-account software is not quality-adjusted, and the one for custom-design is only partially adjusted.

Software investment is making up a growing share of GDP, going from 0.3% of GDP in 1981 to 1.4% in 2000. It accounted for 7% of all investment in fixed capital in 2000, and now makes up the single largest component (at the detailed level) of investment in machinery and equipment. Investment in software generally outpaced investment in computer hardware throughout 1981-1993, surpassing it in 1990. Since the mid-nineties, the reverse has been the case, although software investment was still 20% greater than investment in hardware in 2000.

Software investment has grown much more rapidly than GDP over the last two decades. It grew an average 5% (Fisher volume) per quarter over the 1980’s, seven times faster than GDP. With the impact of the recession of the early nineties, the growth of investment in software over 1990-1995 slowed to 3% per quarter, still much higher than the 0.4% quarterly growth of GDP. With the high-tech boom of the late nineties and hardware/software upgrades and replacements in preparation for Y2K, software investment regained momentum, growing an average 4% per quarter over 1996-2000, versus 1% for GDP. Despite its small share of GDP, and because of its rapid growth, software investment makes a significant contribution to overall GDP growth, an average 0.05 percentage points per quarter over 1996-2000.

In a relatively recent development, Canada has become a net exporter of software. The trade deficit in software peaked in 1990 and has declined ever since, turning into surplus in 1998. In 2000, Canada exported over $2.2 billion in software, about $0.3 billion more than it imported. This was the first year in which trade in software fell in nominal terms over the previous year. This turnaround stemmed from a drop in both imports and exports of pre-packaged software which outweighed the smaller increases in imports and exports of customized software.

Close to 45% of software investment took place in Ontario in 2000, followed by Quebec (23%), Alberta (14%) and British Columbia (10%). Alberta has gained ground (at the expense of Ontario and Quebec) since 1981, when it held just over 9% of the total. Compared to provincial and territorial GDP, software investment varies across the provinces and territories within a fairly narrow range. Ontario leads, with software investment making up 1.6% of the province’s GDP in 2000. Quebec and Alberta are close behind, with all three provinces above the national average (1.4% of GDP).

Chart 1 Software investment
Chart 2 Software investment, distribution by type
Chart 3 Business share of software investment, by type
Chart 4 Business software investment, distribution by type
Chart 5 Government share of software investment, by type
Chart 6 Government software investment, distribution by type
Chart 7 Software prices
Chart 8 Software investment as % of GDP and Gross Fixed Capital Formation (GFCF)
Chart 9 Average quarterly growth of GDP and of software investment (Fisher Volume)
Chart 10 Average quarterly growth of GDP and contribution of software investment (Fisher Volume)
Chart 11 Trade in software
Chart 12 Distribution of software investment by province/territory, 2000
Chart 13 Software investment as % of GDP, 2000


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