SME Perspective on Advancing Canada's Digital Economy

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Submitted by Canadian Federation of Independent Business (CFIB) 2010–07–13 12:40:22 EDT
Theme(s): Building Digital Skills, Canada's Digital Content, Digital Infrastructure, Growing the ICT Industry, Innovation Using Digital Technologies

Summary

Small and medium–sized enterprises (SMEs) play a vital role in Canada's economy representing 98% of all businesses, employing 55% of Canadians and producing 45% of Canada's GDP. As such, they are a critical part of the technological innovation "food chain", and are often the incubators for tomorrow's "Blackberries", creating and innovating in ways that larger companies often cannot. As SMEs are such an important component of Canada's economy and society, it is imperative that government policies consider the impacts on this group. Fostering entrepreneurship and creating an environment that supports SME growth will do more to drive Canada's digital advantage than narrowly–focused measures that target only a specific industry or business. With a focus on tax and regulatory measures, as well as procurement and broadband internet strategies, the submission looks at broad–based approaches that are fundamental to tomorrow's digital economy, and will have a lasting impact on Canada's ability to compete globally.


Submission

July 9, 2010

The Honorable Tony Clement Minister of Industry
C.D. Howe Building
235 Queen Street
Ottawa, ON, K1A 0H5

Dear Minister Clement:

I am writing on behalf of the 107,000 small– and medium–sized business owners who are members of the Canadian Federation of Independent Business (CFIB), in regards to the consultations on Canada's digital economy and the future of technological innovation in this country. As you know, Canada's small– and medium–sized enterprises (SMEs) are a critical part of the technological innovation "food chain", and are often the incubators for tomorrow's Blackberries, creating and innovating in ways that larger companies frequently cannot. As SMEs are such an important component of Canada's economy and society, it is imperative that government policies consider the impacts on this group.

Canada's Capacity to Innovate

One of the best ways that government can foster technological innovation is to free up the time and resources of entrepreneurs, so that they can concentrate on building their business and bringing products and services to market. Rather than "picking winners" through grants or targeted programs, CFIB advocates a comprehensive program of paper burden reduction across the Canadian economy as a whole, as a means of stimulating entrepreneurship and innovation.

As CFIB noted in our 2010 report, Prosperity Restricted By Red Tape, Canadian business of all sizes spend $30.5 billion complying with regulations from all levels of government (visit: Prosperity Restricted by Red Tape for a copy of the full report). Many of these regulations are redundant, unnecessary, or could be simplified. Addressing the need for regulatory reform in Canada would go a long way to stimulating innovation and technology growth in the SME sector. In fact, a 10 to 25% reduction in the total regulatory burden in Canada would be equivalent to a stimulus package of $3 to $7.5 billion every year. Furthermore, there would be little or no direct cost to the government, and it would provide benefits to every business, especially smaller and newer businesses that tend to bear the highest regulatory costs.

Other highly effective measures to stimulate technological innovation and investment are to reduce the overall tax burden, as well as develop tax measures that entice firms to innovate or invest in new technologies. There has been good progress in reducing the tax burden on business with decreases in the general corporate tax rate over the last several years, as well as reductions in the small business rate and increases in the small business threshold. However, we are growing concerned with the erosion of the differential between the small and large corporate tax rates, which was established in recognition of the greater impact taxes and regulations have on smaller firms. In order to encourage new entrepreneurs and innovators, we encourage the government to recognize this growing inequity and work towards lowering the small business rate so it sits at around 50% of the general rate.

We would also encourage using tax measures to encourage innovation and technology investment among firms. In fact, we have seen some success with an already established temporary tax measure — the 100% capital cost allowance (CCA) for technological expenditures. CFIB's Business Barometer, which tracks Canadian SME business confidence on a monthly basis, reveals that since this measure was announced, there has been a steady but noticeable increase in the number of firms planning to invest in new technology (visit: Business Barometer for a copy of the full report). With the accelerated technology CCA measure set to expire in early 2011, CFIB would like to see this measure extended, perhaps in some permanent way, in order to continue to encourage small businesses to invest in new technologies. The government should also consider including training costs as part of any CCA related to technology as firms often must invest almost as heavily in training its people on new technologies as in the technology itself. This would not only encourage new technology investment but help develop new technology skills that will only become more important as we move towards a more digital economy.

Canada's Digital Infrastructure

In regards to Canada's broadband internet infrastructure, CFIB is concerned with the decision by the Canadian Radio–Television and Telecommunications Commission (CRTC) to deregulate certain aspects of the broadband sector. We are particularly concerned about the so–called "essential services" decision 2008–118, which eliminated the need for incumbent telecom companies such as Bell and Telus to provide competitors access to their Ethernet networks at a fair cost–plus wholesale price.

This concern stems from the fact that the majority of SMEs are consumers of broadband internet services, and they rely on affordable broadband internet access to compete in the modern economy. This is also an essential element in fostering growth and innovation in a digital economy, and difficult to do if you cannot access competitively priced Ethernet services. According to CFIB's 2007 report, Answering the Call, 91% of SMEs use broadband internet services regularly in their business dealings (visit: Answering the Call for a copy of the full report). More importantly, only 49% felt that there was sufficient competition for these services in the marketplace, and in more remote and rural areas of Canada, the feeling was that there were even fewer competitive choices available. CRTC's decision will likely have an adverse impact on market competitiveness, especially in rural areas, given that incumbent ISPs such as Bell and Telus hold 88% of the market share (based on submissions made to the CRTC). The fact that nearly half of the SMEs surveyed were already dissatisfied with the state of competitiveness within the telecommunications sector speaks to the need to continue fostering competition in this area.

In addition, a number of smaller independent internet service providers (ISPs) that are trying to provide competitive options to consumers risk losing their businesses if the incumbent providers are able to deny them access to the national broadband infrastructure at a fair cost–plus wholesale price. It is our understanding that the incumbent telecom providers have been the recipients of many years of government subsidies (or Crown Corporation status), tax breaks, and favourable deals that have allowed them to establish a national infrastructure from which they can build a sufficient network to supply broadband anywhere. We therefore strongly disagree that there are no barriers for competing carriers installing their own fibre networks.

Beyond these issues, however, rests the real problem of how to foster competition in a vital sector of the economy. The fair cost–plus wholesale price model is a fair compromise that allows incumbents to cover their expenses, while still giving new entrants a chance to compete in areas such as customer service and reliability. Given the nature of large, multi–billion dollar internet networks and the many years required to duplicate the infrastructure required to create a viable competitive alternative, this simple, cost–effective and fair model is by far the most logical choice for fostering competition and growth in the broadband telecom sector.

CFIB believes that the only workable solution to this problem of competitiveness and fair access is to overturn CRTC's decision, and restore the "conditional essential" status of internet networks. This would help new Canadian ISPs grow and innovate, and would provide SMEs with a competitive market for their growing broadband needs so that they can better contribute to improving Canada's digital advantage.

Growing the Information and Communications Technology Industry

Government procurement policies can play an important role in fostering Canada's technology sector. As one of the largest clients for high tech products, the Government of Canada has a significant impact on the direction the industry takes, and can use this buying power to promote innovation and resourcefulness in its partners.

One of the most important ways in which the government can improve its procurement strategy is to stop attempting to bundle contracts for services such as broadband, telecom, software, etc. These bundled contracts become so large and so cumbersome that they preclude any kind of innovation or new thinking, and shut out small companies who might provide innovative alternatives. The "sub–contracting" options these super–contracts provide, which are often cited as the way in which smaller companies can participate in government procurement, are dictated by the large incumbent telecom and IT companies, and therefore rely on those companies' business models and technologies. Not only do these bundled contracts shut out smaller companies and reduce innovation and entrepreneurship, they quite often fail to deliver savings for a variety of reasons (e.g. inability of the government to off–ramp its procurement strategy once it commits to a bundled contract, damage to the IT services ecosystem through eliminating competing companies who do not win the bid, deployment issues, etc.).

One way the government can alter its procurement strategy to enhance innovation is to alter the way it sets its contract terms. In a recent study of CFIB members who engage in government procurement, CFIB found that one of the biggest obstacles for small companies that sell to government is overly restrictive technical requirements that limit the ways companies can address the core "need" of the procuring department. Rather than being able to propose an innovative product or strategy that meets the core need of the contracting entity (and would often save them time and/or money), the procuring department's request for proposal (RFP) dictates the exact way in which the bidding companies must address the challenges of the contract, essentially guaranteeing that the technical solution will be the same type of product or service every time. While some companies thrive by becoming experts at repackaging off–the–shelf technical products for the consumption of these narrow RFPs, many smaller companies with innovative solutions that would meet or exceed the core requirements are excluded simply because their product does not meet some narrow requirements set by the procuring department.

In order to promote innovation in Canada's small business sector, the government should move to a more open, outcomes–based procurement strategy that promotes innovation and entrepreneurship, while simultaneously reducing procurement costs for the government. With the advent of cloud computing and the rise of open–source software solutions, government procurement can be adaptive and flexible without sacrificing dependability and inter–operability, thereby using procurement as a means of fostering innovation, rather than stifling it.

Digital Media and Copyright

CFIB supports in principle the federal government's move to strengthen Canada's copyright laws. Canada has long been seen internationally as a weak link in global copyright protection, and measures to reduce the theft of intellectual property are in general welcomed by small businesses.

However, the need to protect copyright in digital media must be balanced by the need for these protections to be fair and workable for all participants, including SMEs. CFIB has long been concerned that many of the organizations that enforce aspects of copyright law, such as SOCAN and Re–Sound, operate in a way that leaves many small businesses confused and alarmed. These designated authorities operate with little government supervision, and are therefore perceived as being able to enforce the law as they see fit.

Small business owners who may play recorded music in their businesses, such as fitness studios or retail stores, report that they can receive large bills from these designated authorities. These bills provide little indication as to how a fee was calculated, or from where the designated authority derives its power. This was particularly troublesome when the Neighbouring Rights Collective of Canada (NRCC) changed its name to Re–Sound as it led to frustration among small business owners attempting to figure out who Re–Sound was, and how they came to assess what seems to be an arbitrary fee on their business.

As part of the government's efforts to strengthen copyright law, CFIB would like to see better oversight and transparency of designated authorities, and some level of recourse for the small business owner that may disagree with their decisions. This would allow small business owners to feel that these agencies are operating in a more transparent manner and that they will be held accountable through appropriate government oversight.

Conclusion — Supporting SMEs Key to Improving Canada's Digital Advantage

Canada's vibrant SME sector is, and can continue to be, a source of innovation and exploration, driving the technologies of the future. It is important to remember that many of the greatest technological innovations of the last hundred years came from garages and small start–ups, and not from large companies that can lack agility and determination. It is equally important to remember that the environment that fosters this kind of innovation requires strategies that reflect the different needs of small companies in areas such as broadband internet and procurement strategies. By taking actions that support SMEs in Canada, you not only support the ongoing growth of Canada's primary job creators and employers, but also lay the groundwork for some revolutionary technological developments of tomorrow. While not as splashy as unveiling a new technical school or announcing increased research funding at universities, the policies proposed in this letter are just as fundamental to tomorrow's digital economy, and will have a lasting impact on Canada's ability to compete globally.

Should you or your staff have any questions or concerns, please feel free to contact me at any time at 613–235–2373.

Sincerely,

Corinne Pohlmann
Vice–President, National Affairs
c.c. Honorable Diane Finley, Minister of Human Resources and Skills Development
Honorable James Moore, Minister of Canadian Heritage and Official Languages

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