Industry Committee on May 28th, 2013

[The Chair, Conservative, David Sweet]

Ladies and gentlemen, bonjour à tous.

Welcome to the 72nd meeting of the Standing Committee on Industry, Science and Technology. I know that some of our members aren't here yet, but I want to get moving because we have a limited amount of time.

I think you all have your agenda in front of you. I don't want to offend the witnesses, but rather than introduce you, I'll just leave that to our members. I'm going to follow this agenda for the opening remarks.

I would ask all of our witnesses to be as brief as possible. I understand that you already have prepared remarks, but if you could carve them down a bit, that way we'll try to get in as many questions as possible afterwards.

We'll begin right now with Mr. Geist, the Canada research chair in Internet and e-commerce law at the University of Ottawa.

Please begin, Mr. Geist.

[Dr. Michael Geist, Canada Research Chair, Internet and E-commerce Law, University of Ottawa, As an Individual]

Thank you, Mr. Chair.

Good afternoon. As you heard, my name is Michael Geist. I'm a law professor at the University of Ottawa, where I hold the Canada research chair in Internet and e-commerce law, but I appear before this committee today in a personal capacity, representing only my own views.

I appreciate the invitation. I'm certainly supportive of the committee's study on the issue of SME adoption of digital technologies.

As the committee has already heard, Canada fares relatively poorly in some areas when compared with peer countries. For example, you heard from Shopify's Harley Finkelstein on the lower e-commerce adoption rates by Canadian firms as compared to those in the U.S. There are many other studies that point to the same concerns. A 2011 CEFRIO study on Canadian SME ICT adoption found that mobile device usage was relatively low; moreover, many of the online collaborative tools—application sharing, web sharing, video conferencing—are only used by a small minority of Canadian SMEs.

The Canadian Chamber of Commerce's 2010 study on SME use of e-business solutions arrived at similar conclusions. Moreover, it pointed to Canada's declining rank, whether in the World Economic Forum's global competitiveness index, the OECD's broadband ranking, or The Economist's e-readiness ranking.

Of course, I suggest that the committee is well aware of these shortcomings, as your May 2012 report, “E-commerce in Canada”, cited similar statistics and studies and took note of the performance of Canadian SMEs.

So we have a problem, and while I'm pleased that the committee is looking at this, you'll forgive me if there is a sense of déjà vu about this discussion. This committee is currently also studying broadband and Internet access across Canada, has completed a study on the IP regime in Canada and, as I've just noted, also completed a study on e-commerce. As you know, you're not alone. The Canadian Heritage committee has completed a study on the entertainment software industry in Canada. The Access to Information, Privacy and Ethics committee completed a study on privacy and social media. The Justice and Human Rights committee has studied cyber-bullying. The Senate committee on Transport and Communications last year released a study on the wireless sector.

My point is that our problems with the digital economy, including SME digital technology adoption, are not the result of a lack of study. Many of these issues have been studied intensively for years. At least part of the problem lies in Canada's lack of a cohesive, forward-looking digital economy strategy. That failure is plainly hurting all aspects of our digital economy. It creates business uncertainty, it undermines consumer adoption of e-commerce, harms innovation, and sends an unmistakable signal that this is simply not a policy priority.

For an SME, the effects of Canada's digital economy strategy failure—something I've often termed as Canada's “Penske file”—can be found everywhere. Let me give three quick examples.

The failure to craft a cohesive strategy to ensure a competitive broadband and wireless market means higher costs and less choice for business and consumers alike. High data rates have often meant that the adoption of mobile solutions have been costlier in Canada than elsewhere, which hurts the business case for ICT investment. Further, when Canadian businesses travel to other countries to explore new opportunities, they face some of the highest roaming fees in the world.

Second, on the regulatory front, the digital economy strategy failure has meant that important legislation has stalled, creating legal uncertainty. For example, an SME considering an electronic marketing campaign will want to know what is permitted under Canadian law. I think that this government rightly passed anti-spam legislation in 2010, but the regulation-making process has dragged on for years, meaning that the law has still not taken effect. As a result, there is uncertainty about what is permitted, uncertainty about what will be permitted, and tailoring an e-marketing strategy is difficult.

Third, and somewhat similarly, Canadians want all businesses, including SMEs, to take security and privacy seriously. Making investment in these areas means factoring these issues into account. Yet with Bill C-12, the privacy reform bill languishing in the House of Commons, and, with all respect, inaccurate criticisms of a private member's bill on security breach disclosure requirements, the message, quite frankly, to SMEs is that the Privacy Commissioner may be concerned with the state of privacy law, but it is not a priority.

Now we could talk about, and I hope we do have the chance to talk about, what a digital economy strategy incorporating SME digital technology adoption might look like, including some of the legislative reforms, educational initiatives, skills training, as well as commitments to increase competition and ensure access for all. But my starting point is simply to say that without a broad-based digital economy strategy that weaves together these various issues, we should not be surprised by the lagging performance by Canadian SMEs. Indeed, we've practically scripted it.

I look forward to your questions.

[The Chair, Conservative, David Sweet]

Thank you, Mr. Geist.

Now we go to the Business Development Bank of Canada and John Connell, vice-president of strategic relations and planning, and Mary Anita Bezeau, assistant vice-president of ICT solutions.

I take it that one of you will give opening remarks.

Mr. Connell, please go ahead.

[John Connell, Vice-President, Strategic Relations and Planning, Business Development Bank of Canada]

Thank you, Mr. Chairman.

Thank you for inviting us here today.

First, I'd like to congratulate the standing committee for having chosen to study the adoption of digital technologies by Canadian SMEs.

The BDC appeared before the committee during your study of e-commerce last year, and I'd like to summarize three key points from our testimony.

First, reversing Canada's stubborn productivity gap can be achieved through efforts to increase business innovation; second, business practices rooted in applications of digital technologies will help foster innovation; and third, while Canadian SMEs are applying digital technologies in the workplace today, opportunities abound to do more.

BDC is the only bank in Canada exclusively dedicated to entrepreneurs. Our legislative mandate directs us to provide financial and management services that fill out or complete services available from commercial financial institutions, giving particular consideration to the needs of SMEs.

An important statistic to keep in mind is that 87% of all companies in Canada have fewer than 20 employees. Chances are that very few of them, if any, will have IT departments. That's why I believe this committee recommended last year that BDC make ICTs a strategic focus.

We heard you loud and clear. Anita and I are here today to tell you what we've done and what we're seeing in the marketplace, plus share some insights from our experience thus far.

BDC uses a variety of ways to help entrepreneurs identify their needs and determine how to help them. It starts with awareness. We have, on bdc.ca, a special section called Smart Tech. Smart Tech contains two free e-books: one on how using technology can help the bottom line, and the other on how to use social media. Smart Tech also contains information on technology financing and a free website assessment tool, so entrepreneurs can start improving their website.

BDC can arrange for an Internet specialist to ensure that a firm's website is performing the way it should or for a consultant to develop an Internet strategy customized to a company's unique needs. Of course, we also offer financing, with flexible and easy-to-access loans for investments in hardware, software, and business methods such as social media and Internet marketing.

Interest in and use of these offerings have been stronger than expected. Since we launched Smart Tech 18 months ago, we have had almost 220,000 visitors. The two e-books have been downloaded over 10,000 times. We've done over 35,000 online web assessments, around 900 ICT assessments, and over 300 consulting mandates.

Lending has been brisk. We've been averaging about 130 ICT loans per month, and we've given close to 1,800 loans since launching the program in fall 2011.

What are entrepreneurs buying? The top three sellers are hardware, software, and services, and the top three sectors are business services, retail, and manufacturing.

It's important to keep in mind the scale of BDC's efforts. We're reaching only a small percentage of Canada's population of entrepreneurs, but have nonetheless gained a broad perspective on client needs and behaviours.

First, we see a great appetite for ICT solutions, but an insufficient or disparate supply. Most sellers pursue large companies, and it's easier to make a few big sales than a few small ones. We see very few vendor-neutral sellers and advisers. By this I mean that most sellers and advisers are selling a particular product or service. Their pressing commercial interest is to have the entrepreneur buy their product or service, so they analyze and advise in that direction, and entrepreneurs can become skeptical of the value of their advice.

Many businesses want ICT problems to be solved for them. Most people, understandably, like simplicity, and they don't have a great understanding of technology. Some entrepreneurs are more risk-averse than others, and no one has much time. So three barriers to greater ICT take-up are complexity, risk aversion, and shortage of time.

We've also noticed that most entrepreneurs have to learn that they need internal resources to properly manage their ICT needs. It takes time and skilled employees to manage a website and IT systems. When the consultant leaves, the work begins for the entrepreneur.

Finally, we see that BDC employees have been, in a way, creating demand. In many cases, the first conversation the entrepreneur has about the benefits of investing in ICT is the one he or she has with us. The good news, from our experience, is that these conversations generate an interest and concrete actions on the part of the entrepreneur.

I trust you'll find that description helpful. Anita and I would be pleased to answer any questions you have in the Q and A session.

Thank you.

[The Chair, Conservative, David Sweet]

Thank you very much, Mr. Connell.

Now we move by video conference to the group from the Toronto Association of Business Improvement: John Kiru, president, and Lionel Miskin, vice-president. With them is Dafna Strauss, a consultant with Connect Consulting Solutions.

One person is going to do the opening remarks. Is that correct?

[John Kiru, President, Toronto Association of Business Improvement Areas]

That is correct.

Thank you, Mr. Chairman, for the opportunity.

I am just wondering whether you received the package that we can follow or whether that has not reached your table as yet.

[The Chair, Conservative, David Sweet]

Yes, we have the package. It has been distributed, Mr. Kiru.

[John Kiru]

Thank you. So I'll dispense with most of the background on TABIA, but it's noteworthy that we are an umbrella organization representing 74 business improvement areas in the city of Toronto, with a membership of 35,000 businesses and property owners.

As was rightly noted by the speaker before me, 87% of the jobs created in this country are in fact among companies with 20 employees or less. That is what most of our membership represents. Mom and pop neighbourhood retail, commercial retail, whatever you want to call it, those are our members from across the city.

Retail, as we all know, is extremely reactive. If you really want to know how the economy is doing, look to retail. That's where people curb their spending first. I think it's very important to note also that the traditional main street retail has to be distinguished from some of the commerce that takes place out there. Effectively 67 cents out of every dollar spent in the locally owned store stays in the community. That 67 cents gets the economic spin-off that continues to support community initiatives, while only 47 cents of dollars spent in national chains and the large retail actually stays in the country, let alone in the community. So almost half actually leaves the country.

That's where part of the disconnect is, because as the economy is moving to where it is, it's becoming very obvious that e-commerce and new technologies are becoming significantly more important to what's happening out there. The one thing that we need to say on behalf of small neighbourhood business is that every time an auto plant closes and 400 jobs are lost on the line, all three levels of government—with due respect—throw money, technology, and policy at that issue to try to keep those jobs in place.

I can tell you from our experience and the experience of our brethren across the country that we lose hundreds of jobs a week on the main streets and neighbourhoods and downtowns across this country, and yet we seem to be that forgotten sector. So not only are there challenges from multinationals on traditional main streets, but we are also facing challenges of not really being recognized as the key components that we are of the economy.

A recent survey by Prosper Mobile Insights found that consumers are using smart phone technologies to their advantage, sometimes right there in the shopping stores. Forty to sixty percent of them price products while they're in the store with their iPhone technology, and 60% of them have actually left to purchase it elsewhere. So this technology is prominent. We are big users of it. We in Canada are highly engaged online. The average hours per visitor spent in Canada is 43 hours per week versus 23.1 hours worldwide. So we are actively engaged.

The other comment to make is that e-commerce spending has gone up. There was a 10% increase from 2011 to 2012 in the total expenditures using e-commerce. The number of transactions has actually gone up 17% in one year. That's more than a trend: it is a reality.

According to Statistics Canada, more than 80% of the Canadian population is online. It is no longer a young man's game; everybody out there has got the ability and the potential. As such, 20% of entrepreneurs admit that keeping up to date with technology is their number one challenge. So one in five people out there trying to make a living in the small business sector is finding that to be their challenge.

Merchant online and social media strategy can result in market growth and greater profitability. So we absolutely need to look at assisting this sector in meeting those needs. Only 39% of the entrepreneurs surveyed say that they use social media to promote their business. Only four out of ten—out of those 98% of people who employ jobs out there—are actually using that.

The technology keeps on moving forward. I only need to show the example of Amazon. We all know who Amazon is. Currently they capture one-third of online shopping, amounting to some $48 billion of revenue last year. The indications are that in the next decade—by the end of this coming decade—Amazon will in fact surpass Walmart as the world's largest retailer at $600 billion annually.

What's important, and what I don't think we can dismiss, is jobs. Jobs are a direct link. Just as an example of the importance of supporting our traditional main streets and small business in this country: for $1 million in sales, for Amazon or any of the e-commerce-based shopping networks out there, it takes one person to be employed to generate $1 million in sales. In the big box stores, which you may recognize as Walmart or Target or any of the big box retailers out there, it takes five people to generate $5 million in sales. As for the independents, the small neighbourhood retailers that are out there in many of the towns you guys come from—you know the people I'm talking about—it takes eight people to generate $1 million in sales. A direct link to employment is very, very important.

Just as a quick follow-up, according a recent Royal Bank of Canada report, only 46% of Canadian small businesses have dedicated websites. Less than half of those, about 22% of Canadian small businesses, sell their products and services through their website. So one in five people out there is actually at the stage where they can sell this. The most important thing is that 38% of those who sell via website generate over 25% of their revenue through online sales, with two in 10, some 22%, generating more than 50% of their annual revenue nowadays through their websites. It's becoming a very important component in retailing and the survival of many small businesses out there. The businesses that are the generators of a significant number of jobs, whether for young Canadians or new Canadians who come here to invest their life savings in opening a businesses here, these are the people who need the assistance that we're hoping this committee, in some of its directions, will generate.

Mr. Chairman, I will leave it at that for now and look forward to receiving any questions.

[The Chair, Conservative, David Sweet]

Thank very much, Mr. Kiru.

We'll now move to our other teleconference witness, Leonard Waverman, who is the dean of DeGroote School of Business. It happens to be within the riding I represent.

Please go ahead with your opening remarks.

[Dr. Leonard Waverman, Dean, DeGroote School of Business, McMaster University, As an Individual]

I hope that's not the reason I was invited here, Sir.

[Voices]

Oh, oh!

[Dr. Leonard Waverman]

Thank you.

On April 30, Scott Smith of the Canadian Chamber of Commerce, in appearing before this committee, referred to my research that ranks countries in terms of useful connectivity. Briefly, my research emphasizes that the services, skills, and applications required to turn pipes and conduits into useful connectivity are what produce jobs and productivity. I'm going to talk briefly about that, then talk about the new databases now available at StatsCan that will allow us to look more deeply into the productivity dilemma. Lastly, I'll just throw out an idea about an untapped resource, the business schools across this country.

In our study, connectivity is usually understood to be the copper fibre, wires, network computers, mobile phones, and base stations. It is much more than that. That kind of physical infrastructure has to be expanded to include the complementary assets that economists talk about—the software skills, the applications embodied in people that are required to turn those assets into productivity enhancement.

Basically, Canada's gaps are not in infrastructure. There is a problem with SMEs in rural areas, but otherwise all major OECD economies have very high access to and penetration of fixed and mobile broadband. The studies that we rely upon, such as the OECD, remind me of the story about the drunk who's scrambling under a lightpost looking for his keys when a passerby says, “Can I help you? Where did you lose your keys?” And the drunk says, “Well, about a mile from here”. The passerby says “Why are you looking here?” and the drunk says, “Because there's light”. So, with a lot of these rankings, including my own, we're basically scrambling for data and measuring the obvious.

The reasons there are gaps in take up are not the obvious. For example, what we do when looking at business infrastructure, beside the obvious on the uptake of mobile and broadband, is to include the use of new data protocols such as ethernet and IP virtual private networks. We look at fixed and mobile enterprise lines. We look at cloud computing services as a percentage of business turnover. We look at corporate data services spending. What we're trying to do in my research is basically expand beyond the obvious and look at those sources of applications and services that are necessary for the take up of these services.

Statistics Canada has unveiled a new, very large database thanks to the use now of tax data. It took years to be able to use tax data because of the identity issues involved. A lot of the kinds of assets we want to measure can be written off, so tax data give us firm data and much better measures of the assets and services that firms are actually using.

The studies that will be used in the next few years will allow us to examine the unfortunate productivity gap. There's a new paper that came out today from Stats Canada by John Baldwin, who tries to look at some of the missing data that we don't have a good handle on. His analysis in the data available today suggests that the productivity gap between us and the U.S. is even larger than we had thought.

I have an idea. Business schools are all across the country. I've been a dean at DeGroote for four months. I was dean at the Haskayne School of Business in Calgary for five years. We have a tremendous network of business schools across the country. It's an untapped resource to enable us to help all users, especially SMEs, with applications and services. It's really the applications that are missing. When we're looking at Canadian data—and Michael talked about this—our kids are with it, but the managers in Canada don't seem to be. SMEs, of course, have the great problems that were just discussed, which is that there are economies of scale to using these.

So without talking to any of my fellow deans, I would propose that we're everywhere in the country and that together we can provide a network, in combination with the Conference Board and the Canadian Federation of Independent Business and these other organizations, that would be a complete source. I think Michael would agree. If you look at some of the data on what people think of CEOs, do they trust them? No. Do they trust politicians? I'm sorry, they don't trust them either. They do trust professors, and I think with the advantages we have in universities, we can provide a willing arm to help.

I'm pleased to answer any questions as we move forward.

[The Chair, Conservative, David Sweet]

Thank you very much, Mr. Waverman.

I just want to assure you that the reason you were invited to committee was your credentials.

We'll move on to our first questioner now. We'll have time for one round, and we'll have to keep it very tight as well.

We have Mr. Braid for seven minutes.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

Thank you, Mr. Chair.

Thank you to our witnesses for being here this afternoon. Our apologies for starting a little late. Thank you for contributing to our study.

Professor Geist, I'll start with a question for you.

One of the areas that you said Canada was lagging—which I was surprised and want some clarification about—is mobile phone use. I thought I heard you say that. Could you speak to that, and does it include smart phones?

[Dr. Michael Geist]

The reference I made came from a CEFRIO study that looked at SME use of mobile devices. I agree with you that certainly we're seeing growing uptake on the consumer side, but their 2011 study found that SME usage was low.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

Okay. But the consumer side is going up?

[Dr. Michael Geist]

Well, it has been going up, although, as you know, there has been a great deal of concern about the state of the wireless marketplace in Canada—which we could get into—whether the level of competition, consumer pricing, and the like.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

Thank you for that clarification.

Mr. Connell, from the BDC, I'd just like some clarification.

You were speaking about a lending program and that lending has been brisk to SMEs. Is the lending program Smart Tech? Could you just clarify that?

[John Connell]

I'll ask my colleague to answer that.

[Mary Anita Bezeau, Assistant Vice-President, ICT Solutions, Business Development Bank of Canada]

Smart Tech is an awareness vehicle that we use with BDC. It's basically an element on our website that's related to awareness. The lending vehicle is something different; it's essentially specialized loans for the purchase of technology.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

Is that under a special BDC program?

[Mary Anita Bezeau]

Yes.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

Could you elaborate on that, please?

[Mary Anita Bezeau]

Yes, certainly.

At BDC, since we launched our ICT initiative at BDC, we have had a technology loan that has more favourable terms and conditions than our traditional loan, due to the unsecured nature of these kinds of loans. We've done 1,800 of these technology loans since the launch of the program, and we've found that more than a half of them have been for less than $150,000. So they're loans to small businesses to help them purchase technology—software, equipment, technology services—and help them become either more productive or to grow their business.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

When was the program launched?