The Digital Economy in Canada - The Rise of the e-Economy (3)

The Rise of the e-Economy

Background Document
The Challenge of Change: Building the 21^st Century Economy
e-Commerce to e-Economy: Strategies for the 21^st Century
Industry Canada
September 27-28, 2004
Ottawa, Ontario

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During the latter half of the 1990s, the North American economy grew at a rapid rate. Recent studies demonstrate that productivity gains resulting from the production and use of ICTs were the principal source of economic growth during this period. ³

These findings confirm that the most effective strategy for increasing Canada's national wealth in the global economy of the 21st century will be to enhance productivity and competitiveness throughout our economy – primarily by developing and applying ICTs.

Building national wealth through ICT-enabled productivity gains will benefit all Canadians. As the federal government recognized in the February 2004 Speech from the Throne, it is vital that Canada's economy continue to grow so that we will have the resources needed to strengthen our social foundations, particularly in areas such as health care and education.

A. From e-commerce to the e-economy

In 1998, the federal government published a strategy that set out a vision for Canada's future in electronic commerce and how it could be achieved. The goal of this strategy was ambitious – to become a world leader in the development and use of electronic commerce by using the Internet in business-to-consumer (B2C) and business-to-business (B2B) transactions.

The Canadian Electronic Commerce Strategy established four priorities:

• Building trust in the digital economy, by increasing consumer and business confidence in e-commerce by addressing security, privacy and consumer protection concerns;
• Clarifying marketplace rules in order to remove barriers to the use of electronic commerce by updating laws and regulations governing the marketplace, financial issues and taxation and intellectual property protection;
• Strengthening the information infrastructure, by ensuring that networks support the growth of electronic commerce and allow interoperability; and
• Realizing the opportunities, by maximizing the job and growth potential of e-commerce through skills development, awareness raising and showing government leadership as model users.

This strategy was based on the principle of private and public sector partnerships. It recognized that the private sector has the lead role in developing and using electronic commerce in Canada, that government must provide support through policy and operational responsibilities and that consumers and public interest groups should also be involved.

Six years have passed since the adoption of the Canadian Electronic Commerce Strategy. Now, the partnership principle of this Strategy must be extended to other elements of Canada's emerging e economy. Specifically, the time has come to look at how productivity, competitiveness and consumer welfare can be increased in all sectors of the e-economy through strategies that maximize the role of ICTs in organizational transformation, as well as in product and process innovation.

B. What is the e-economy?

The e-economy – the use of information and communications technologies for product and process innovation across all sectors of the economy – has emerged as the primary engine of productivity and growth for the global economy. Successful economic strategies will enhance our capacity to adopt and exploit technology, information and knowledge in order to create sustainable competitive advantage.

There are five main factors that will shape the maturation of the e-economy:

• Technology drivers, including the digitization of all forms of information and communication, expanding capacity, speed and intelligent systems (Figure 1)
• Increased network connectivity between buyers and sellers, particularly via the Internet (Figure 2)
• Increased competition in the global marketplace
• Organizational transformation in all sectors of the economy
• Social adaptation to the e-economy

The e-economy encompasses more than economic and technical change. The ICT-powered revolution of the 21st century will transform all aspects of economic, social, cultural and political life on a global basis. Its impact will be at least as profound as the revolutions triggered by the application of steam power, electrical power and fossil fuel power in the 19th and 20th centuries.

C. Productivity: the essential building block

The e-economy is based on the hypothesis that productivity will increase throughout the economy if ICTs are applied in ways that fundamentally transform organizations and support product and process innovation. In this vision, ICTs can also be applied to help build an e-society by helping, for example, to transform government and improve the efficiency and effectiveness of education, health care and other public services, as well as by fostering new forms of communication and collaboration among members of civil society.

For a number of years, the validity of this hypothesis was in doubt due to the lack of evidence that there was any relationship between investment in ICTs and productivity growth and the lack of evidence that it was possible to increase productivity in the service sector through investment in ICTs or by any other means.

There are a number of different sources of productivity growth – the quantity and quality of labour, the quantity and quality of capital, and the way in which labour and capital are organized and applied in production processes.

As Figure 3 illustrates, research has demonstrated that over the past five years, investments in ICTs have been the most important contributor to increased productivity in all economic sectors and to overall economic growth.

Building the e-economy is not only a matter of investing in ICTs. Investments are also required in software and skills development and business process transformation. The effects of ICT-enabled changes in the organization of labour and capital inputs to production processes are important contributors to productivity improvements in the ICT sector and in the economy as a whole.

Organisation for Economic Co-operation and Development (OECD) studies have shown that for every $1 invested in ICTs, matching investments of $9 are needed in these other areas. ⁴ Over time, this ratio will most likely decline as social and organizational adaptation to ICTs take place and as younger people who have grown up with the technology enter the workforce.

D. Canada's productivity challenge

In spite of the recent general economic slowdown – and the dip in ICT investment over the past two to three years – the productivity of Canada's economy has continued to increase. Canada experienced a marked improvement in labour productivity growth over the 1990s ⁵ and recently a doubling of its average annual growth in multifactor productivity. ⁶ This continuing growth in overall productivity results from several factors, including:

• Organizational adaptation – After two decades of experience, enterprises have learned how to organize business processes to make more effective use of ICTs, just as in previous economic revolutions it took several decades to learn how to make productive use of steam engines and electricity.
• The network effect – The Internet has made it practical for businesses to link suppliers, production units, customers, and ICT⁷ resources through electronic networks, thereby increasing efficiency, supporting innovation and adding value through personalized products and services. This is an instance of Metcalfe's Law, which states that the value of a network increases geometrically according to the number of users it connects. 

In seeking to grow our productivity, we face a special challenge. Even though Canada has consistently ranked among the G7 leaders in terms of economic growth, we have generally lagged behind the United States. Differences in productivity between the two economies have been identified as the main reason for this gap. Narrowing this gap is a strategic priority for Canada.

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³ Industry Canada Research Monograph: Economic Growth in Canada and the United States in the Information Age, Edited by Dale Jorgensen, May 2004 (pp. 1–5).

⁴ ICT and Economic Growth: Evidence from OECD Countries, Industries and Firms, OECD, 2003 (p. 90).

⁵ The Daily, Statistics Canada, July 14, 2004.

⁶ The Economic Impact of ICT: Measurement, Evidence and Implications, OECD, 2004.

⁷ The mathematical expression of Metcalfe's Law is V = n (n-1) where V equals the value of the network and n equals the number of users and/or terminal devices connected to the network.