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Canadian businesses spend far less on software than in U.S.

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One of the enduring mysteries of the North American economic landscape is that Canadian businesses chronically spend less on information and communications technology than their American counterparts.

Economists have long speculated about the reasons why, including data collection anomalies, differences in industry structure, the preponderance of smaller companies in Canada and greater U.S. wealth.

A study released Wednesday by the Centre for the Study of Living Standards for Industry Canada confirms that apples-and-oranges data comparisons account for a significant piece of the puzzle.

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But it's not an entirely satisfying answer. Measurement problems only account for about a tenth of the shortfall, leaving the issue a largely unsolved mystery, acknowledged Andrew Sharpe, the centre's director and the report's lead author.

"We thought it might be larger," he said.

Canadian businesses spent an average of 57.8 per cent per worker of what U.S. companies spent on so-called ICT, $2,273 versus $3,931 in the U.S., calculated in constant U.S. dollars.

The report characterizes the overall tech spending gap as "troubling" because ICT investment is closely linked to an economy's potential to grow.

Statistical measurement discrepancies between Statistics Canada and the U.S. Bureau of Economic Analysis make up about 10 per cent of the gap, according to the 137-page study.

"The Canada-U.S. ICT investment gap is no a statistical artifact," the report pointed out.

The lion's share of the ICT spending gap is due to much higher relative U.S. spending on computer software, leaving Mr. Sharpe speculating about possible explanations. He suggested that two factors explain why software spending is so much higher in the U.S. – the large and tech-dependent U.S. financial services and information sectors, coupled with the significantly higher pay of U.S. software workers.

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"There are many factors at play," Mr. Sharpe said.

Investment per worker on software in Canada was 39.8 per cent of U.S. levels in 2011. A clutch of industries accounted for nearly 40 per cent of the difference in software spending – culture, media and telecommunications. All these are heavily regulated and sheltered from the full force of foreign competition.

Among the more perplexing findings is that Canadian businesses spend more on computer hardware than Americans, but so much less on software. And the gap has grown wider since the mid-1980s.

The finding suggests Canadian workers may be using computers loaded with significantly less software.

"A better understanding of this software deficit, and the reasons for its concentration in only a few industries, is the key to explaining the Canada-U.S. ICT investment gap," according to the report.

The report suggests a few possibilities, including smaller average company size in Canada, companies being less aware of the benefits of ICT and potential differences in business culture and attitudes.

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But Mr. Sharpe said he is already beginning work on a second report for Industry Canada to nail down the answer.

Interestingly, the report found no difference in how much governments spend on ICT in the two countries.

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About the Author
National Business Correspondent

Barrie McKenna is correspondent and columnist in The Globe and Mail's Ottawa bureau. From 1997 until 2010, he covered Washington from The Globe's bureau in the U.S. capital. During his U.S. posting, he traveled widely, filing stories from more than 30 states. Mr. McKenna has also been a frequent visitor to Japan and South Korea on reporting assignments. More


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