Canada's information technology sector

Fred Wong
Statistics Canada

Information technology is a dynamic, multifaceted sector of the Canadian economy. It is at the leading edge of technology, exhibiting rapid and at times radical change. The sector is composed of large numbers of small, rapidly growing companies as well as some very large, long-established ones. Information technology covers a broad spectrum. It is not easily defined, but includes three essential elements: hardware, software, and infrastructure. In this Industry Profile, hardware is defined to include the hardware manufacturing industries; software includes software and service companies; and infrastructure consists of telecommunications carriers.

1. Canada a World Leader in Telecommunications Technologies

By international standards, Canada is a small but specialized producer of information technologies. Canada accounted for only 1 per cent of world exports in information technology products in 1992, but has earned a reputation as a world leader in telecommunications. Canadian communications equipment companies such as Northern Telecom, Bell-Northern Research, MITEL and Newbridge Networks have established a substantial presence in highly specialized market segments. They have benefited from a close working relationship with companies such as Bell Canada and Rogers Cable Systems, which have created networks for telephone, satellite, cable and cellular systems spanning the continent, and are now at the forefront of the "information highway".

In recent years, Canada has also emerged as a major producer of software and computer services through firms such as SHL Systemhouse, Cognos, DMR and Corel, the latter recently gaining prominence through the acquisition of the world-renowned WordPerfect software systems. As a manufacturer of information technology hardware, moreover, Canada benefits from the presence of multinationals such as IBM, Digital and Hewlett Packard.

2. A Significant Part of the Canadian Economy

Information technology is a significant part of the Canadian economy. In 1995, it accounted for 7.6 per cent of Canada’s Gross Domestic Product (GDP) at factor cost, up from 5.5 per cent in 1990. Although comprising a wide variety of activities, some of them are particularly prominent. Among hardware manufacturing industries, communications equipment and computer technologies are substantial, supporting a workforce of 71,000 employees. In the software category, software and computer services has been a growth industry, with employment from 64,000 in 1990 to 77,000 in 1995, a 21 per cent rise during this period. And in the infrastructure category, telephone companies are the dominant group, followed by the emerging but much smaller cable and cellular telecommunications carriers.

The information technology sector supported a workforce of 308,000 in 1995, almost 3 per cent of total employment in Canada. The recession and corporate downsizing were reflected in declining employment from 1990 to 1994, before the industry recouped most of its job losses in 1995. The net reduction of the workforce resulted mainly from structural re-engineering by telecommunications carriers, where the combined effects of the 1990-91 recession and increasing use of automated systems saw a loss of over 25,000 jobs - some 21 per cent of the industry total - from 1990 to 1995. A further 8,500 jobs disappeared among producers of computers and office equipment, scientific and professional equipment and the small consumer electronics category. These declines contrasted with the situation in the communications equipment and software and service industries, where employment rose by 26,000.

3. Product Specialization and High Levels of Trade

International trade and the specialization of production are integral characteristics of the information technology sector, and are reflected in high volumes of two-way trade. Canadian manufacturers are highly export-oriented, with exports as high as 73 per cent of factory shipments. At the same time, imports of information technology products are actually greater than domestic production. Canada’s trade deficit in information technology products amounted to $19.6 billion in 1995 after growing by about 14.4 per cent a year since 1990. Data on trade in services are incomplete, but suggest that exports of software and computer services are increasingly important. Although small relative to trade in hardware, they almost tripled from $515 million in 1990 to $1.5 billion in 1995.

The importance of trade reflects the high degree of specialization within the industry. For example, Canadian firms have established particular expertise in communications equipment, whereas the mass market for consumer electronics is largely sourced from the United States and offshore. A further inducement to trade has been the implementation of the North American Free Trade Agreement (NAFTA) and its precursor, the Canada-U.S. Trade Agreement. Although tariffs have not represented a particular barrier to trade in the information technology sector, the introduction of the NAFTA may be expected to result in increased specialization of production, including more extensive use of global product mandates for Canadian plants of multinational enterprises, and even higher levels of North American and international trade.

4. Increased Use of Information Technologies in Manufacturing

The high proportion of imports into Canada reflects not only the openness of the Canadian economy to trade, but also investment in cutting edge technologies by Canadian corporations to maintain their competitiveness in international markets. The use of information technologies, such as CAD/CAE (computer aided design/computer aided engineering), numerically controlled equipment and pick-and-place robots, is increasingly common among Canadian industries. In 1993, investment in computerized industrial, office and business machinery and equipment amounted to an estimated $11.9 billion, or slightly more than one-quarter of total outlays on all types of machinery and equipment in Canada. Moreover, 35 per cent of Canadian manufacturing establishments, accounting for 81 per cent of total factory shipments, used at least one type of advanced technology in their operations. Plants using more than five different advanced technologies were responsible for 59 per cent of all factory shipments, a proportion expected to rise to more than 70 per cent within two years.

To remain at the forefront in highly competitive markets, the information technology sector is heavily involved in research and development (R&D). Each year the information technology sector spends about $2.3 billion and employs some 23,400 people in R&D. The sector is responsible for slightly more than one-half of R&D by all Canadian manufacturing industries, and one-third of total industrial R&D in Canada. These outlays contrasted with a net decline in capital expenditures by the information technology sector over the past five years, although the output/capital ratio - an indicator of the efficiency with which capital was employed - increased substantially during this period.

5. High Value-added, Profit Potential

Information technology is a high value added sector. Its value added is equivalent to about 65 per cent of gross output, compared to 30 per cent for the manufacturing sector as a whole. Labour productivity (as measured by value added per worker) is also very high and rising, reflecting gains in output and a declining workforce. Labour productivity rose by 51 per cent over the 1990-95 period, compared to 23 per cent for the manufacturing sector as a whole and 9 per cent for all industries. Further evidence of productivity improvement is provided by a significant increase in the output/capital stock ratio, indicating more efficient use of fixed assets by hardware manufacturers.

Buoyant demand for information technology products boosted operating revenues of electronic equipment and computer services companies by 60 per cent between 1990 and 1995. The industry posted substantial profits in 1990, followed by a large decline in 1991 with the onset of the recession. Profits fluctuated in 1992 and 1993, but in 1994 the combination of a resurgent economy and strong demand for information technology products pushed net profits to record levels before easing somewhat in 1995. For telecommunications carriers, the financial results were relatively stable throughout the period.