Industry Committee on May 6th, 2010

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

—particularly the class of 1995.

Is that correct?

[Prof. Randall Morck]

Yes, that, or very close to it.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Thank you.

If I could, I just want to touch on the issue of the prosperity gap and venture capital, something that both of you brought up.

Could you maybe speak a little bit to the correlation, the cause and effect, between the two? I know it's not specifically related to what we're talking about, but I did find it an interesting part of the discussion.

[Prof. Randall Morck]

Well, this is actually a really good example of government policy gone incredibly bad in Canada. We had a nascent venture capital industry, and then the government got the idea that they should subside venture capital by setting up labour union-sponsored venture capital funds with huge tax breaks. By setting those up, they drove the existing real venture capital funds out of business. So we ended up virtually with only the labour-sponsored venture capital funds.

Now what does a venture capital fund do? Well, venture capital funds are very good at talking to people with PhDs in things like electrical engineering and molecular biology. In fact, they have their own staffs of PhDs in those areas, and they tend to be quite specialized. So a venture fund in Silicon Valley might specialize in a particular type of electrical engineering. It might have a staff of its own PhDs, or PhDs on call in that area, to evaluate proposals. That lets the venture fund offer fairly generous financing to people with good ideas and to screen out bad ideas.

Now what happens if you put a labour union in that position and ask them to do that job? Well, it's probably going to be very hard for them to screen out the bad ideas and to offer generous terms to the people with good ideas. In fact, they're probably going to have great difficulty telling one from the other. What happens is you're going to get the Canadian firms offering the same terms to everybody. The U.S. firms will offer generous terms to people with good ideas and will turn away people with bad ideas. The Canadian firms will offer roughly the same terms to everybody.

What's going to happen next? All the guys with good ideas go to the U.S., and the Canadian venture capital funds end up with the guys the U.S. ones wouldn't fund. So we end up with huge failure rates and, generally, a devastated industry.

There's a very nice work by Josh Lerner and Paul Gompers at Harvard comparing venture capital around the world, and they discuss the Canadian experience at length.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Professor Hejazi.

[Prof. Walid Hejazi]

I don't have much to add. I agree with everything Professor Morck has said.

It's well known that these labour-sponsored venture capital funds in Canada do exactly that: they don't do a very good job at screening. So what ends up happening is that the good projects are subsidizing the bad projects, and you get bad outcomes.

I think this feeds into the general consensus that the ability to identify good projects, to make the business case for them, and to take them to market is another area that needs to be worked on in the Canadian context.

Thank you.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

In thinking about this prosperity gap, and more specifically the particular discussion we're having right now on telecommunications, is it fair to say that the latter is a smaller piece of the overall prosperity gap, and that if we were to take a look at other sectors they would just add to that?

Then, to maybe take it even further, I think you were saying that the telecom sector actually has a compounding effect because it impacts on the gaps we might see in other areas.

Is that fair to say? Maybe you want to elaborate on that a little.

[Prof. Randall Morck]

Well, as I said, my research shows that developments in the telecom industry, and information technology more generally, have ripple effects on the stock prices of firms in just about every other industry in the economy. The development economists call these “general purpose technologies”. They're things that are used by everybody, from forestry companies to meat packing companies. So there are some industries that have these general purpose roles in the economy and are different from other industries. They're the ones that provide these interconnections. So an inefficient telecom industry has this impact, not only on itself but also on every other industry that depends on it.

That, I think, is the key thing to come away with. So things that screw up the telecom industry are very, very expensive—much more expensive than a similar measure, say, for foreign ownership in meat packing, which would matter to meat packing but not much else. Foreign ownership restrictions in telecom, or other policies that limit the efficiency of the telecom industry, affect everybody.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Professor Hejazi.

[Prof. Walid Hejazi]

Yes, I completely agree.

I would add that there are three sectors that I call critical infrastructure sectors. These are telecommunications, finance, and transportation.

I'm just going to give a quick example of transportation. I know it's off topic, but if you think of the recent debate in Alberta, there are a lot of people from Alberta going to Dubai or to Abu Dhabi, because there is a lot of investment going on between these two locations. So the Emirates want to do a direct flight from Edmonton, or Calgary, to Dubai or Abu Dhabi. The flight would be by Etihad, but Air Canada is preventing that. Air Canada is saying, “No, we want people to go from Alberta to Toronto, and then Toronto to the U.A.E.”

The question I ask is, why doesn't Air Canada provide this flight itself? Why would it want to prevent another carrier from flying it? As a result, everybody in Alberta who wants to do business in the gulf area, where we have a lot of synergies, has this huge cost of having to stop in Toronto. Toronto is a great city, but they only see the airport, and they sit there for four or five hours before they make their transfer to another flight over to the U.A.E.

So there are three sectors that are critically important, and when you raise the cost for business of using those three sectors, you have a ripple effect that impacts the entire economy. I would argue that those three sectors contribute to a large part of the prosperity gap. Restrictions on entry to those sectors explain a large part of the prosperity gap that Canada sees and a hit to our competitiveness.

Thank you.

[The Chair, Conservative, Michael Chong]

Thank you.

I think Mr. Lake would want to know what those three sectors are, Professor Hejazi.

[Prof. Walid Hejazi]

They're telecommunications, finance, and transportation.

[The Chair, Conservative, Michael Chong]

Okay, thank you.

We will now go to Madame Lavallée.

[Carole Lavallée, Bloc, Saint-Bruno—Saint-Hubert, QC]

Normally, I do not sit on this committee, but on the Standing Committee on Canadian Heritage, since I am the Bloc Québécois critic for heritage matters, specifically for arts and culture.

The cultural community in Quebec is extremely concerned about opening telecommunications to foreign ownership. It is very clear to us in Quebec that telecommunications and broadcasting are increasingly the same thing. This is already the case with some telecommunications equipment, but, overall, it is increasingly the case and will be the case even more. He who controls the medium controls the message; that is very clear to us in Quebec. You know McLuhan better than I do, but that is what he said. It is still true, in my view, and it will become even more true in the future.

I am sure that you have a third-generation smart phone. I am sure that you also have free applications, including some cultural ones. Your wireless company, which essentially comes under the Telecommunications Act, has made some cultural choices for you: CBC television, for example, or CBC radio, or Maclean's magazine or even Disney videos—because Disney has free applications too. Bell provides applications of that kind when it provides its wireless equipment. In other words, telecommunications companies are making cultural choices for you in Canada. They are making different ones in Quebec, and they are not subject to the Broadcasting Act.

Even in France, wireless telephones will carry television programs. I would remind you that, even in the United States, you cannot acquire a telecommunications company any way you please. Their legislation says that you have to establish your credentials, for national security reasons among others.

So telecommunications and broadcasting are moving closer and closer together and getting harder and harder to tell apart. Mr. Hejazi, earlier, you said that the telecommunications sector is critical. Mr. Wilson, the author of the report that has prompted our present study, also says that it is very difficult to separate telecommunications from broadcasting. The CRTC president sat in the chair where you are now, Mr. Morck, and told us that, because telecommunications and broadcasting are so intertwined, we have to combine three acts: the Telecommunications Act, the Broadcasting Act, and the Radiocommunication Act.

But we must also protect and promote the cultures of both Canada and Quebec. This is so true that Canada was one of the first countries to sign the Convention on the Protection and Promotion of the Diversity of Cultural Expressions precisely in order to protect those cultures. We also know that the foundations of Canadian culture are shakier than Quebec culture on a number of levels.

Are we afraid of being bought up by foreign companies? Yes. The world of culture is afraid of being bought up by foreign companies, because we know what happens when it is. We also know what happens when there is no regulation. There is no regulation over cinema screens, for example, meaning that 98% of the screens in Canada are showing foreign films, in particular, American ones.

In Quebec, the situation is a lot less noticeable given the strength of our nation's culture, as you know. We have even managed to take on so-called American blockbusters. Last summer, for example, the Quebec film De père en flic took in more at the box office than all the American movies showing at the time, including Harry Potter, as an example.

You might say that lack of regulation is, in general, not an economic principle, but a political one. When there is no regulation, companies do nothing. They sit here, they beg us not to regulate, and they say that they will do it themselves. Of course, they do nothing and I could give you a number of examples.

So, there you go. Those are my comments. I just want to add one more thing, Mr. Morck. You said earlier that singers do not produce more songs when they have had one big hit and have made a lot of money. That is not true. That would mean that guys like Luc Plamondon, or singers like Céline Dion would not record songs anymore. Those are examples that you are familiar with, but I could also give you examples like Fred Pellerin, Karkwa or the Colocs.

What you are saying is not true. Singers and the world of economics are not motivated by the same principles. Those artists do not sing just to make money necessarily; they sing to express their emotions and their souls, if I may put it like that. They are in a different ballpark entirely.

I would like to hear your comments on that.

[The Chair, Conservative, Michael Chong]

I have to ask you to be brief, Mr. Morck.

[Prof. Randall Morck]

You need to have a look at what our copyright laws actually are for songs and written works. The international standards now allow the revenues from a song to persist from copyright well beyond the lifetime of the person who actually wrote it. So people who want to use that song and download it, etc., have to continue paying for copyright privileges, perhaps for a generation after the person dies. Is that really going to encourage more singing?

You may well be right that maybe these people will keep singing no matter what, in which case we don't need any copyrights on songs, do we? You have to find a median ground here that makes sense and rewards people who are innovative and creative, but that doesn't saddle the rest of us with paying for the privilege of using their innovation and creativity forever—and which doesn't let them rest on their laurels.

I'm willing to believe—

[The Chair, Conservative, Michael Chong]

Thank you, Professor Morck.

Briefly, Professor Hejazi, and then we're going to adjourn.

[Prof. Walid Hejazi]

I'll just make two quick points. First, there is a lot of evidence to show, even with charitable giving, that when taxes on charitable giving change, there is a big change in actual charitable giving. So I do agree with the general point that the financial incentive and how people respond differ between singers and artists and business people, but I think that just reinforces the point we are trying to make, that having one policy that makes all of us pay to protect Canadian content is the wrong way to go.

The right way to go is to create an environment that is productive and innovative to increase the amount of GDP and increase the tax base, so that we get more tax revenue that we can use to directly encourage Canadian content in the arts, and so on. I think that is the right way to go.

[The Chair, Conservative, Michael Chong]

Thank you, Professor Hejazi.

Thank you to both of our witnesses today for your testimony. It will help us in drafting our report.

I want to thank members of the committee.

This meeting is adjourned.