FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, May 18, 2000

• 0913

[English]

The Acting Chair (Mr. Roy Cullen (Etobicoke North, Lib.)): Ladies and gentlemen, I'd like to start the sixty-sixth meeting of the Standing Committee on Finance. Today's topic is the new economy.

I'd like to welcome, from Industry Canada, Ross MacLeod, director of policy integration, Frank Lee, acting associate director, innovation analysis unit/MEPA, Jeanne Inch, director of marketplace innovation, Martin Green, director, economic policy framework, and Peter Ferguson, manager, policy research and coordination. I also welcome, from Digital Harbour Venture Management, Mr. Michael Mailman.

We're going to start with Industry Canada.

You each have about five to ten minutes to make your presentations.

Following Industry Canada, we'll go to Mr. Mailman.

Mr. MacLeod, will you start? Thank you.

Mr. Ross MacLeod (Director, Policy Integration, Department of Industry): I'd like to begin by thanking you for the invitation to come and speak to the committee about the knowledge-based economy. It's something we've been working on for several years now, both in terms of basic economic research and in terms of trying to find the appropriate policy responses that government should implement in this new economy.

• 0915

I'll give you a couple of contextual comments first. Then I think it would be useful to frame out a bit what this means for government policy—without actually prescribing policy, as I'm only an official here and the discussion of policy is really a ministerial prerogative.

Broadly speaking, the knowledge-based economy is one in which value and production are really based on knowledge that resides in people's minds—mostly—and is implemented through products and services sold on the marketplace. It is fundamentally different from what people have called the “old economy” or the goods-based economy, which is one that is based more on commodity, on production of physical objects. Often, the product in the knowledge-based economy is an idea implemented through something like software; it is a way of doing things, a way of creating something or of putting together other pieces that encompass or embody different knowledge in order to make a final product.

There are a few key pieces of this knowledge-based economy, and I'm sure you've heard of these before. One is globalization. We're in a world market now, where there are fewer barriers and products are sold and purchased everywhere. There are KBE workers in virtually every sector of the economy. When I say “KBE”, that's just an acronym for the knowledge-based economy. Knowledge workers work everywhere, even in what people have termed the old economy—and one point I'm going to come back to in a little while is what is the new economy and what is the old economy, because there's a bit of confusion about that.

The third point I'll make is that the information highway is really reshaping business and markets. It's a new way of doing business—even really pervasively throughout the economy.

The fourth point is that standards of living are really driven by productivity. In the final analysis, when you look at what provides people with a good standard of living, good jobs, and high wages, it really is productivity—what every person produces in the economy.

Finally, innovation is the key source of growth in this economy. I'll touch on the implication of that. Going back to the actual text of the Speech from the Throne, there are some interesting comments there about it, and I'll just touch on a couple of those.

One, working on the innovation theme, is that the advantage in this new economy really goes to countries that are innovative, that can produce the new products, take the ideas, develop them, and bring them to market.

The higher income levels will go to those countries that have high productivity levels. Productivity depends on a lot of things, one of which is innovation, but it also depends on having high-quality people and on having an economy that adjusts into new areas and out of old ones and is based on solid, long-term, and continuing investment in new capital.

The KBEs that will succeed will also be the ones that invest heavily in skills. In an economy based on ideas, human beings are really the most important resource. If you look at barriers to economic success, one of the worst barriers will be people who don't have the knowledge that it takes to succeed in this economy. If there's a constraint to growth in this economy, I think that's probably the most important one: if people aren't equipped to participate, they will be less able to enjoy the benefits of the well-paid jobs, and also, the place where they live won't enjoy the benefits of higher growth.

It's an economy that continually seeks out opportunities. The lingo used now is that speed matters. If you're not there, if you're not always looking for the new opportunity, the new market, and the new way to do something, you won't be as competitive as the other people or the other countries that are doing that.

Our analysis has led us to the conclusion that Canada is very well placed to thrive in this new economy. There will be regional variations based on regional strengths in terms of knowledge, innovativeness, basic capacity, and so on. This is a phenomenon that tends to happen in urban areas, but not exclusively. There will be differences across the country in how the KBE rolls out for Canadians, but overall as a country we're quite well placed. There are, I think, opportunities in all regions and all areas of the country. The trick is to find out exactly what they are and to build on local strengths and bring them to the market.

These trends certainly affect—and in some ways constrain—government policy. If we're looking at a global environment, for example, competition will be from everywhere and for everywhere. Canadians are selling all over the world and countries all over the world are selling to us. Of course we have an important relationship with the United States but, more and more, this knowledge economy allows products to be made in places where they haven't traditionally been made, and they can be shipped over the wire to somewhere else or assembled somewhere else or sold somewhere else.

• 0920

In addition to that huge opportunity, there are also a number of constraints on government policy, which are really formulated through trade agreements. Under agreements such as the GATT agreements, the NAFTA, and so on, we have a lot of obligations to observe. They frame the context, I guess, for what governments can do in this new economy.

We have to align our policies to take advantage of new opportunities. New opportunities come up quickly and go away quickly. If firms can't adapt quickly and can't get to the market and take advantage of those opportunities, they'll miss them, and then those opportunities are gone. Then they have to go chase another one.

Touching on HR issues again, the real comparative advantage in this economy is people. They have to be market ready. They have to be capable of surviving and of using the tools of the new economy, and they have to be capable of changing what they do, because this economy is evolving very rapidly. Skills will change over time. You can imagine that over someone's lifetime their skill sets will have to change so that they can take advantage of the opportunities that are there.

Finally, I think we need to recognize the role of the information highway in virtually all forms of economic activity. It's everywhere. It's being used by firms of all types and it's bringing firms to consumers, through electronic commerce, for example. But it's also bringing firms closer together and changing the way they interact, in the intermediate goods market, for example, in ordering inventory and in supply chain management and all of that.

It's changing the way we do business in firms, really, and, I think, in governments, although we're going to have to understand exactly how it works so that we can take advantage of the new opportunities. We don't fully understand it yet, and it's evolving as we go, but it's very important to learn about it and to understand how it works.

I'd like to just comment a bit on productivity as well. Ultimately in this new economy—as to some extent in the old—people's incomes, wages, and job opportunities will depend on how productive they are. You've heard this from Industry Canada representatives before, but it's a key economic challenge for Canada, and for all countries, really: finding ways to increase our levels of productivity to ensure that we can have the high incomes to which we've become accustomed and which, I think, we ultimately deserve. But there's a pretty rigorous market test for that, and if we're not out there and continually raising our levels of productivity, ultimately we can't expect incomes to rise.

Finally, on the distinction between the new and old economies, it's become a bit fashionable to talk about a new economy, which is often characterized as high tech, knowledge intensive and so on, and an old economy. I think that's a false dichotomy. The new economy is really everywhere, in a sense. Even in areas that we tend to think of as old economy areas, there are new technologies being applied all the time, there are knowledge workers there, the information highway is being used, and they're playing in a global market. So it's a bit of a false distinction, really. It's important to remember that there are these new economy opportunities throughout the country but also in most industries; there are even opportunities in what we would describe as quite traditional industries.

With that, I'll close.

The Acting Chair (Mr. Roy Cullen): Thank you, Mr. MacLeod.

Mr. Lee.

Mr. Frank C. Lee (Acting Associate Director, Innovation Analysis Unit, Micro Economic Policy Analysis Branch, Department of Industry): I'd also like to thank you for the invitation.

Today I'd like to share my views on what constitutes a new economy. I will divide my brief remarks into three sections. First I will define what we mean by a new economy. I will then give a historical context, and I will conclude with its implications.

In front of you, you have a deck entitled, “Are ICTs a Fad or are they General Purpose Technologies?” My speech today will be based on the deck, but I will not necessarily follow the order of the deck.

First, the term “new economy” can mean different things to different people. Broadly speaking, there are at least three different—although related—new economy views.

First, a long-run growth version refers to sustained economic growth without inflationary pressures. The sustained growth comes from higher productivity growth resulting from greater use of ICT, information communication technology.

The second view refers to the absence of trade-off between inflation and unemployment, that is, the new economy allows low unemployment and low inflation to coexist. This implies that the economy can expand without inflationary pressures, thanks to ICTs and globalization.

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The last version refers to the notion that the information technology is a new source of economic growth, affecting the way we carry out our business. There are economic spillovers from ICTs, thereby improving productivity.

All of these three views have a shared or common thread that makes them part of the new economy framework. The defining characteristics for a new economy are a focus on increasing globalization and an expanding information technology as the underlying causes of an evolving economy. In all three versions, globalization and computerization are not viewed as symptoms of other factors but as the driving forces that are fundamentally changing the economy. The real questions, however, are whether these changes are new in a meaningful sense and whether they are powerful enough to truly change how the economy works.

It appears that this is not the first time we are going through this fundamental change in the economy. We have experienced the first industrial revolution and the second industrial revolution, which fundamentally changed our economy. Each of these paradigm shifts witnessed the emergence of what are known as general purpose technologies, such as the steam engine and electricity. These general purpose technologies have a number of attributes. First, there is much scope for improvement initially. Second, they can be applied across large parts of the economy. Lastly, they enable other technologies to work more effectively.

Another characteristic is that it takes time to reap benefits from the introduction of general purpose technologies. Just to give you an example, in the U.S., in the middle of the 1800s, productivity improvements began to show up 40 years after the introduction of electrical power stations. This is because learning a new technology and making it useful may take time.

Information communication technology is no exception. If we examine it closely, it meets all the requirements for being general purpose technology. It is changing product design, production, marketing, finance, and the organization of firms. It is creating a wide range of new products. It is causing major reorganizations in the management of firms. Labour productivity is rapidly increasing in many of the affected industries.

Since Intel's commercialization of microprocessors in 1971, we are finally starting to see productivity benefits at the aggregate level, at least in the U.S. economy. A recent study by two economists at the Federal Reserve shows that about two-thirds of the recent surge in productivity in the U.S. can be attributed to ICT. Since 1995, the U.S. has had a labour productivity growth of roughly 2.4% per year, whereas Canada experienced roughly 1.2% growth per year—this would have huge implications for our living standard as compared to that of the U.S.

But this is not the only evidence. Another study, by renowned Harvard economist Dale Jorgenson, with Federal Reserve economist Kevin Stiroh, also found that the acceleration of productivity growth in the U.S. is driven by information technology. In fact, before this study, their view was that “...ICTs are not ushering in a period of faster growth of output and total factor productivity.” However, with this new study, they now claim that “the productivity statistics, beginning in 1995, have begun to reveal a clear impact of information technology”.

However, at the economy-wide level, the impact appears to be much smaller in Canada compared to the U.S. There may be a number of reasons. First, we spend less on ICT as a proportion of GDP compared to the U.S. We invest less on ICT as a proportion of real GDP compared to the U.S. The share of this ICT sector is much larger in the U.S. compared to Canada. At the same time, labour productivity in the ICT sector has been much faster in the U.S. compared to the ICT sector in Canada.

However, this does not mean that ICT does not have an effect in Canada. Our industry-by-industry analysis indicates that ICT investments are a important source of productivity growth across Canadian industries as well.

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My conclusion is yes, there is a new economy that is driven by information technology and by globalization, and they have a positive impact on productivity and the overall standard of living.

Thank you.

The Acting Chair (Mr. Roy Cullen): Thanks, Mr. Lee.

We'll go now to Jeanne Inch.

Ms. Jeanne E. Inch (Director, Marketplace Innovation, Department of Industry): Thank you very much. I'm very pleased to be here this morning.

I'm going to take a slightly different slant on innovation and the knowledge-based economy. I'm going to speak primarily from the perspective of the firm and firm-level innovation.

Innovation is a big word, and what I'd like to do is to define it precisely for people so that they will understand what I mean by innovation. It's a process whereby knowledge, new ideas, and new technologies are developed into new or improved products, processes, or services and commercialized in the marketplace. It is, simply stated, putting knowledge to work.

An innovation can be a breakthrough, like the computer, or an incremental innovation, like the development of the Pentium. It may be restricted to one industry sector and have limited impact on economic growth, or it may be an enabling technology—for example, communications information technologies, biotechnology, advanced materials—that has an impact and wide application across all industry sectors, generating tremendous benefits to the economy at large.

We speak about the four interrelated elements of innovation. Ross mentioned them in his opening remarks.

The first is the knowledge infrastructure. This is the pipeline of ideas, research, and science generated in universities, in federal research centres, and by the private sector.

The second is the commercialization of this knowledge, the transfer of this research into new products, processes, and services in the marketplace. Many Canadian firms are working at commercializing research from universities and from federal research centres and government labs. Many small firms are working in partnership with these organizations and institutions, and of course we have large firms working in partnership as well.

Recent OECD statistics indicate that there's an availability of venture capital in Canada comparing favourably with the United States, so there is an infrastructure there on the financial side for the commercialization of research.

We also need to ensure that there is a receptor capacity for research in Canada. The formation of university spinoff firms, for example, has been growing rapidly in the last 20 years, from 5 per year in the 1970s to 20 to 30 per year in the 1980s and then to 60 to 70 per year in the late 1990s. There are now over 700 such firms in Canada, and in 1997 they contributed over $1.4 billion in annual sales and generated 11,000 jobs.

The third element is a highly skilled workforce. In this knowledge-based economy, as you've heard, Canada's strengths no longer lie in our natural resources, in products, but in the knowledge of our workers—in our human capital and brainpower.

There is a lot of discussion, as I'm sure you're aware, of brain drain and brain gain in Canada. Certainly there are some firms in key sectors, including ICT firms, that are having difficulty recruiting and retaining technically skilled workers in key areas. We hear from many firms in this sector about the relentless competition from the United States for skilled talent.

Certainly over the next decade we're facing some challenges. A shortage of opportunities could lead to skilled workers seeking employment elsewhere. There is essentially a lack of skills for functioning effectively in a knowledge-based, highly competitive business environment—like, for example, communications, problem-solving, teamwork, and management skills.

The fourth element is the business environment—one that supports open and competitive markets—the standards and regulations and marketplace rules that enable firms to compete.

The new technological developments are rapidly bringing new challenges, such as how to deal with the protection of higher life forms, the privacy and security issues surrounding electronic commerce, and the regulation of biotechnology. These challenges impact on the infrastructure and can slow down a well-functioning economy. Intellectual property laws, for example, must ensure that innovators receive an adequate return on their investment while they at the same time encourage the rapid diffusion of innovations.

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From an innovation perspective, the new economy is a rapidly changing one. There is a recognition that innovation is not confined just to technology and research and development but that non-technological innovations are critical to the commercialization of knowledge.

At the firm level, organizational innovations are key to stimulating creative thinking and facilitating the development of new ideas, the risk-taking, the entrepreneurial spirit. Sales and marketing and customer services are being rapidly transformed through innovations in the use of the Internet for electronic commerce transactions and through 24-hour call centres.

For small businesses, developments in the Internet and e-commerce provide new opportunities to combine their strength, which is the flexibility to take advantage of new opportunities, with economies of scale, a traditional weakness of small firms. Certainly the need for highly specialized expertise and the access to leading-edge technologies are driving the trend towards forming strategic alliances, joint ventures, and other forms of partnership among small firms, but also among small firms, suppliers, and manufacturers at large corporations. There is a growing recognition that a firm cannot do it all alone, especially in a global economy where speed to market with new and improved products is critical to success.

That's some of the background of the context that we're working in from the “firm perspective” on innovation. I'd like to turn now to some work that we're doing to try to dig into this situation and develop some answers and solutions for firms.

The innovation policy branch at Industry Canada, in partnership with Statistics Canada, undertook a survey last fall of 6,000 manufacturing firms and 800 selected natural resource firms. This was to collect data on innovation activity in Canada. The survey was completed by CEOs at the enterprise level, and there was a 90% response rate. We have a huge database of information to work with.

Preliminary findings indicate that there's a very high incidence of the introduction of innovations, new or significantly improved products or processes, with 81% of manufacturing firms having introduced innovations in that survey period of 1997 to 1999. Manufacturing industries appear to have a higher incidence of innovation than natural resource firms, which reported 40%. Not surprisingly, the incidence of innovation appears to be more concentrated in the information and communications technology industries.

Firms report that their primary objective for innovation is to improve product quality. Their second and third objectives are to increase production capacity and to extend product range. Firms undertake a variety of activities linked to innovation. The top one is the acquisition of machinery and equipment, followed by training and R and D activities—this is not just in-house research but outsourcing and partnerships with the universities and government research institutions.

Of the firms that introduced innovations, 34% were involved in cooperative arrangements with other firms to develop innovations. The top reasons cited for collaboration are accessing critical expertise, accessing research and development, and prototype development.

More than 85% of firms faced problems and obstacles to innovation. The major obstacle is the inability of firms to devote staff on an ongoing basis to projects to develop new or improved products and processes. Now we certainly need to do a great deal of analysis on this, but my sense is that this is driven by the fact that firms need to get their products into the marketplace fast and get returns quickly, so there's a tendency to work on the production side as opposed to the longer-term research and development of new products and processes.

Other obstacles are high costs, lack of skilled personnel, and lack of financing. However, firms did not see an inability to qualify for government assistance or access to expertise in university and government laboratories as obstacles to innovation.

We have the data and we have a plan for analysis. One of the important pieces of work we'll be doing is linking the results of this survey, the innovation survey, with the annual survey of manufacturing, thereby enabling the link between firms reporting innovation and their production output, financial performance, and employment.

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We'll be able to compare the innovation activities of Canadian firms with those in the European Union because these surveys are comparable. Unfortunately, we cannot do this with the Americans as they have not launched an innovation survey, but Statistics Canada and Industry Canada plan to meet with them this fall to discuss how we can share data and do some comparisons.

We've commissioned the Conference Board of Canada to examine the collaboration and cooperation context of innovation. This study will provide a profile of industrial cooperation among firms, between firms and universities, and between firms and government research centres. The collaboration will be examined at the regional level, within 100 kilometres, and within a province, and internationally—the United States, Europe and Asia. We would be pleased, once we have some answers, to report back to you on the findings of this survey.

Thank you very much.

The Acting Chair (Mr. Roy Cullen): Thank you, Ms. Inch.

Now we'll go to Martin Green.

Mr. Martin Green (Director, Economic Policy Framework, Department of Industry): Thank you.

I, too, thank the committee for this opportunity.

In the discussion on globalization and the new economy, an important sidebar is the formidable pressure we place upon the environment and our ecosystems. In that regard, I'd like to speak to you a little today about eco-efficiency and its relationship to productivity and innovation.

Eco-efficiency is an important business practice and management tool that provides business with the means to increase productivity and competitiveness while making measurable progress towards improved environmental performance.

Let me begin with the issue of productivity.

Productivity is the most important determinant of our standard of living. Sustainable long-term growth can occur only through increased productivity. However, over the past two decades Canada has not kept pace with most of its important competitors in terms of productivity growth. We have the lowest rate of growth in the G-7 group of nations.

Innovation is particularly important to improving our productivity performance, and OECD studies confirm that innovation and productivity go hand in hand. We see strong links between eco-efficiency and increasing innovation and productivity. Simply put, eco-efficiency is about finding innovative ways of using resources more efficiently—reducing material requirements, and energy intensity, toxic dispersion and so forth. This strengthens competitiveness and also benefits the environment.

Eco-efficiency is now recognized by multinational and other leading companies as a key area for developing competitive advantage. Their eco-efficient strategies typically involve innovations in technology, production processes, production design, and business organization and practices that can lead to productivity gains, reduced costs, and lower environment-related liability. Indeed, eco-efficiency has been linked to the bottom-line performance of many companies.

An example is Millar Western, a large Canadian-based forest products company that has applied eco-efficiency at the most fundamental stage—plant design. Through design improvements, their pulp mill in Saskatchewan produces a high-quality pulp product without using chlorine and with zero liquid-effluent discharge. In addition, through finding new uses for waste by-products from the production process, the company has achieved the lowest-cost product in the market.

As well, there appears to be a growing conviction amongst financial institutions that companies using strong eco-efficiency management tools tend to be better managed than most. Some financial advisers and investors now use environmental performance as an indicator for investment potential.

A recent article by Stephen Peck and Robert Gibson, entitled “Pushing the Revolution”, which appeared in the Alternatives Journal, says, and I quote:

...all good managers can recognize essential but simple rules for economic gain through better environmental performance: if you make products with less material, energy and waste, you cut costs; if you anticipate rising energy, material or pollution costs and make efficiency improvements to avoid them, you will win competitive advantage over less innovative competitors who react only when the crisis is upon them; if you reduce environmental risks and potential liabilities, you can lower your borrowing and insurance costs;

and finally,

if you can demonstrate better environmental performance in response to the environmental concerns of your customers, you can win a larger market share.

In terms of moving forward, we believe there are opportunities in Canada to move forward on a number of fronts with respect to eco-efficiency. I will highlight a few suggestions and would of course welcome your questions, comments, and suggestions during the discussion.

Canadian firms have been leaders in environmental management and practices, but we continue to face a number of challenges. A recent study undertaken by Industry Canada on the status of eco-efficiency in Canadian industry indicates that while many large companies have adopted a number of eco-efficiency practices, few Canadian firms are in the forefront of eco-efficiency innovations. In particular, there is a lack of understanding of the concept of eco-efficiency as a management tool and of its benefits, particularly by small and medium-sized firms.

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To achieve further progress in the use of eco-efficiency practices will require demonstrating measurable economic and environmental benefits to industry and other institutions. More exposure to successful examples in their sector or from other sectors, plus technical assistance in identifying opportunities, is needed to engage industry more. This view was confirmed with companies from several different sectors in an eco-efficiency consultation workshop we held in January of this year. Since then, we have begun building an eco-efficiency website to create better aware of best practices, case studies, and tools.

Additional awareness measures such as demonstration projects, with supporting tools and information products, could also be undertaken in key industrial sectors. These could involve a partnership of leading business practitioners of eco-efficiency, industry associations, and the federal government.

One such pilot demonstration project is currently being explored in the automotive parts manufacturing sector by Natural Resources Canada, Industry Canada, and other departments. Another example is the National Research Council's pilot eco-efficiency audit program with the Ontario Centre for Environmental Technology Advancement. It is designed to assist small and medium-sized enterprises to improve their energy and materials efficiency and to make them more competitive. This initiative is currently being tested with a small group of companies and, if successful, could possibly be expanded to a much larger audience.

There are also indications that the role of Canadian universities could be strengthened with respect to innovative research and teaching. For example, one of the gaps in Canada's innovation system is the shortage of design engineers, particularly those familiar with environmental design.

To begin addressing this issue, the Natural Sciences and Engineering Research Council recently funded two chairs in environmental design engineering, one at the University of Calgary in life-cycle engineering, and another at École Polytechnique in process integration in the pulp and paper industry. But we need to establish additional chairs related to eco-efficiency practices and environmental design at other educational institutions.

Industry has an important role in identifying opportunities for research and, along with the government, in providing funding. Encouraging the development and diffusion of eco-efficient technologies and products is also essential if Canada is to make the transition to a more sustainable economy. Strengthening research networks and links among academic institutions, federal and provincial agencies, and the private sector is a necessary part of the process. Voluntary measures such as renewal of the accelerated reduction/elimination of toxics program and new memoranda of understanding with key industry sectors are additional areas of opportunity.

These are just a sample of some of the things that are being and could be done.

I believe there are two key messages with regard to eco-efficiency. The first is, we do have a productivity gap in Canada, and the second is, we believe eco-efficiency can play a role in addressing this gap and improving our environmental performance. A more systematic approach to adoption of eco-efficient practices and technologies by Canadian industry could yield significant benefits in terms of improved competitiveness and reduced environmental risk. We believe eco-efficient practices are a natural fit for our productivity agenda and could become a key component of the federal government's sustainable development agenda.

The Acting Chair (Mr. Roy Cullen): Thank you, Mr. Green.

Peter Ferguson.

Mr. Peter Ferguson (Manager, Policy Research and Coordination, Department of Industry): Thank you, Mr. Chairman, for the opportunity to be with you today.

I'd like to talk about electronic commerce and the Internet and the future growth situation for Canada.

The Internet and e-commerce get incredible press coverage and interest today. If I go back almost five years to the first report of the Information Highway Advisory Council in 1995, that report was produced in advance of the first indications that the Internet was going to become a profound economic platform for the global economy. It was at that point that Mr. Manley called the council back.

In its second report, two years later in September 1997, more than half of the recommendations that the advisory council made pointed to the significance of the Internet and electronic commerce as the new direction for growth and development. It has the potential to transform everything: business, education, government, health, and entertainment. It's not just a phenomenon of the high-tech sector itself. It will affect all sectors of the economy, including government service delivery and citizen access to information, products, and services.

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It's interesting to note that in just five years the Internet has reached a critical mass in terms of penetration in developed economies. I think that five-year phenomenon is worth noting, as is the road ahead. Both Mr. Greenspan and Lou Gerstner, the head of IBM, have indicated that we're really just five years into what is probably a 30-year significant technological and economic transformation—so we're at the beginning.

The huge growth forecasts for e-com are apparent in the media, in the business press, and in academic literature—we tend to rely on IDC and Forrester Research. The lows that are forecast for 2003 indicate activity related to the Internet and electronic commerce at about $1.8 trillion as a global figure. The high end that both research firms project could have growth of almost $4 trillion for that same period of time.

Anecdotally, it's interesting to note that in the Canadian context, Christmas 2003 tends to be seen as the watershed period at which point Canadians are expected to embrace the use of Internet and e-com retail purchasing, the point when that critical mass will have been achieved.

Business-to-business dominates e-commerce, accounting for about 80% to 90% of the total. Business-to-consumer e-com is clearly important as well, with significant impacts on distribution channels, particularly in the retail area, as I have noted.

Government-to-business and government-to-consumer is another area of great interest in terms of on-line delivery of government information, forms, services, programs, and procurement. It is, however, a separate initiative within our department and within the Government of Canada.

I think what's behind all of this, beginning with the information highway exercise in 1993—and my colleagues have mentioned this—is the sense of urgency and the need for speed if companies, citizens, and countries, this country in particular, are going to capitalize, grow, and prosper. The target that Industry Canada has established is approximately 5% of the world market for e-commerce by 2003. It's interesting to note that one of those two major research firms very recently indicated that we might in fact get 6% of world e-com.

I'd like to touch on some highlights of changes in the economy. Again, my colleagues have touched on some of them.

The first one is, of course, enabling new business models. Traditional supply chains were linear because they were restricted by scope, geography, distribution channels, local market conditions, and relatively limited information and communications channels. With new technologies, the conventional supply chain is no longer appropriate. In fact, we've gone from a linear environment to really, truly, a web environment. Producers can deal directly with customers or retailers and bypass wholesalers; wholesalers, in turn, can deal directly with customers and bypass retailers.

What this means is more empowerment of customers. There is, again anecdotally, some suggestion coming out of this past Christmas holiday time that the “click phenomenon” is already at work: those retailers that don't provide adequate service are literally gone from the customer's mind in the same way one would change a television channel—and gone for good, is the suggestion. We'll be watching that kind of data over the next two and three years.

Customers can find anything, anytime, anywhere, so they have increased choice, convenience, speed, and, of course, the ability to compare prices. What we're watching, then, is really a shift of power away from the supply side of the economy to the demand side.

This also means more integrated business relationships along that supply chain. Large firms such as automotive ones can direct their suppliers to be on-line and meet the manufacturer's standards if they wish to continue to do business. On-line bidding, which we've seen by suppliers for huge contracts, is now a phenomenon done on a global basis, not on a national market basis.

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Another phenomenon is time to market and first-mover advantage, and it's key. This reinforces that need for speed in this new environment. I hate to give you the dreaded example of Amazon.com, but it is a classic: $23 billion in market capitalization, which is twice that of Sears and eleven times bigger than Barnes and Noble, and yet its future profitability is unclear. So there's a tremendous, tremendous advantage in first to market.

Another highlight is mergers, alliances, and restructuring. Traditional sectors are transforming by partnering, acquiring, and restructuring to compete in the Internet arena. New innovative companies are emerging and setting industry directions and threatening traditional companies. You can see the changes in the marketplace, with transportation companies—the FedExs and the UPSs of the world—no longer only hauling goods and services but in fact getting hugely into the business of inventory management.

ICT companies are merging with non-ICT companies to exploit strengths. Of course the AOL-Time Warner example is a classic. We anticipate there may be some in Canada over the next year.

The emphasis is focused on the increased importance of intangibles—again, my colleagues have alluded to this—like ideas, talent, brands, and innovation, but also customer base. A highly skilled workforce is a key factor in attracting investment for major ITC companies. In the local economy, Nortel is a classic example of this. This year we expect that the private sector workforce in the national capital region will, for the first time, exceed that of the Government of Canada.

The third and final highlight I'd like to point out is the significant benefits from electronic commerce. These include reduced time to market, improved inventory management, better out-sourcing coordination, improved manufacturer-distributor coordination, and the potential for improved customer satisfaction, support and feedback. There are the reduced uncertainties by improvements in the quantity, reliability, and timeliness of information. Boston Consulting Group has projected that the key sectors being affected by e-commerce are financial services, telecommunications, retail, transportation and storage, utilities, and, of course, motor vehicles.

Goldman Sachs, in a report in January of this year, a proprietary study, estimated savings of business-to-business e-commerce by various sectors over a one-year period as compared to traditional business models employing telephone, fax, and courier. It has estimated some very significant savings: 11% to 20% in the computing business; 15% to 20% in freight and transport—and we're familiar with some of that in the popular business press; 10% in chemicals; 11% in aerospace; and, as one of my colleagues has just mentioned, a very significant 15% to 25% in one of our traditional industries, forest products. We don't have Canadian data. We are looking for it.

The strategic direction for Canada is obviously to position Canada as a world leader in technologies that harness the potential of the Internet and to encourage the use of ITC and e-commerce throughout all sectors of the economy, working in partnership with the private sector, citizens, and provincial counterparts to have in place a policy framework conducive to the development and diffusion of e-commerce.

We really have four component parts to our framework. First is building trust in the digital marketplace dealing with privacy, which the federal government has done, with cryptography, where we have a policy in place since October 1998, and consumer protection, where we have consumer protection guidelines paralleling those produced by the OECD.

Second is clarifying marketplace rules dealing with the legal framework. Again, we have just passed legislation enabling the use of digital signatures by federal departments and agencies. We are working on trade rules; the WTO process is once more underway. IP policies are being reviewed and refined.

The third component part is strengthening information infrastructures, an evergreen process in Canada, which means building network access and availability and, of course, working on standards. If I could be prescient, standards is going to be one of the international issues over the next three to five years as we look for common ways of ensuring transactions across jurisdictions internationally.

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Finally, there is realizing the benefits/market development, which would be the adoption and use in the private sector and government of electronic commerce and ICT.

The challenges, though, do remain. In 1999, a survey of Canadian business leaders indicated that we were in fact lagging in terms of planning for the uptake of electronic commerce and information technology. Directly as a result of that, really, the Canadian e-business opportunities round table was created. John Roth, CEO of Nortel, and the Boston Consulting Group organized and engaged Industry Canada in the planning and running of the round-table exercise. They produced a report in January of this year. That round-table organization is continuing its work in six subcommittees and is holding regional round tables across the country; the first one was held in Halifax a week ago.

Our future agenda really has three component parts.

First, we want to continue to ensure that Canada has a world-leading policy environment. We're working in the OECD with the European Union, within APEC, and within the FTAA to ensure that such is the case and also to influence policy development internationally to the degree that we can.

The second element of our forward agenda is to accelerate the rapid adoption and use of information technology and electronic commerce. My colleagues have given you examples of that kind of activity.

Third is to strengthen expertise and innovation in Canada. One of the challenges for us in Canada is to develop a research agenda in electronic commerce, with industry and academia. We have been working with a number of universities, but principally Dalhousie, to try to get that kind of activity off the ground. We expect some feedback from a combination of academics and private sector leaders working to develop such a research agenda.

I'd like to stop there and would welcome your questions.

Thank you very much.

The Acting Chair (Mr. Roy Cullen): Thank you, Mr. Ferguson.

Thanks to all the Industry Canada officials.

Now we'll go to Mr. Michael Mailman, from Digital Harbour Venture Management.

Mr. Michael Mailman (Individual Presentation): Like everyone else, I'd like to thank you for your time. I appreciate the invitation. I really do hope that what I say provides some value and that you guys get value out of it as well or it will have been a waste of everyone's time.

I'll just solidify a couple of things I heard from the Industry Canada people that I thought were extremely valuable.

One was that Mr. MacLeod said he doesn't think that we should really try to differentiate between the new economy and the old economy. I think that's completely valid. Just let happen what happens, as it has happened everywhere else, and we'll just enable it, hence what I call this presentation, “Enabling The New Economy”.

I heard pretty much everyone here talk about how speed matters. We call it something in our little boutique firm: “closer, faster, better”. You get closer to the market, faster to the market, and better to the market, and that's what this really boils down to.

I'm going to talk about five quick things: Canada versus the U.S.; Canada versus ourselves; building a cluster; early stage capital; and then what I think we really must do to be successful overall as a country.

What I talk about here is really going to be a synopsis of what everyone else has said, so that makes me feel that my presentation is at least on track, but at the same time I might put in some different little snapshots for you.

As I said, I was asked here to do a presentation on this question: is there a new economy? To be quite frank, I get a little concerned that we're asking that question. There is a new economy and it's growing all over the world.

I spend a lot of my time involved with companies that look to do business in the U.S., whether it's through partnerships, acquisitions, or financing. It really allows me to understand why, once again, the Americans have led an industry and a boom. As what I consider to be a fairly patriotic guy, it irks me and drives me crazy, and I think we have tons of opportunities to lead it as well.

So I think it's important that we are having this discussion—for sure.

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In terms of real economic growth, Canada versus the U.S., I'd like to highlight a recent study by the Organisation for Economic Co-operation and Development, which illustrates that industries producing information technology accounted for 35% of the real economic growth in the United States from 1995 to 1998, as you can see by my graph. Canada, on the other hand, produced 19.3% between 1996 and 1997. As I mentioned just a couple of seconds ago, clearly the new economy not only exists but is playing an increasing role in the world economy as a whole.

Mr. Lee spoke about my next graph. I think what he said was great. This illustration might help emphasize what he stressed as well. While the world moves towards a new economy as electronic commerce is linking individuals and businesses and, of course, business-to-business networks are tying each other closer together, Canada unfortunately is not a producer of information and communication technologies and services. For example, information and communication industries were just 2.9% of Canada's gross domestic product in 1997, the same as it was in 1980, if you can imagine that—17 years later we have no increase in GDP for ICT. In the United States, this industry accounts for 4.4% of GDP.

My next slide is, I think, a good illustration in that I'd like to highlight that if Canada had the same ratio of information and communication industry production—basically ICT to GDP—as the United States does, or what I like to call “a share of the new economy”, the country would have a $37-billion industry as opposed to a $25-billion industry. I think that's a huge significant factor.

Next is Canada versus ourselves. Really, we can sit around and talk about us versus the U.S., us versus the European Union, and I think it's good to do—we need to have some benchmarks—but I also think we have to look at our core focus, at what it is, at what we, as a country, can be good at.

In the rollout production of information and communication technology products such as personal computers, wireless phones, telecom equipment, VCRs—all the stuff you use in your home—Canada ranks 15th overall in GDP, yet this is one of the fastest-growing segments of the world, trade accounting for 6.4% of trading goods in the world in 1990 and then increasing dramatically to 10.4% in 1998. As you can see in my trade figures, Canada has a trade deficit of $20 billion in that sector.

However, Canada did generate a small trade surplus in communication, computer, and information services, reflecting the export skills of many of our small to medium-sized companies. That surplus is $900 million. Even though it's not large, it's nice to see green instead of red in our figures.

I'll talk quickly here about how success breeds success. I'm going to highlight what Mr. Ferguson talked about in the e-business round table.

How do we take these small and mid-sized software and system companies and use their great skills, translating that into more successful companies overall and a more competitive advantage for Canada? In that recent report published by Boston Consulting for the e-business opportunities round table, they know that rapid new economy formation and growth has traditionally been concentrated in clusters of activity around specific regions such as San Francisco—we all know the Valley—New York—we all know Silicon Alley—and Boston.

Being from Halifax, it's such a natural evolution for us to look at both the Boston marketplace and the New York marketplace, and we just don't do it enough.

So while Canada does have some nascent clusters—Ottawa is becoming one and it's great being here to feel the excitement and all that kind of stuff—there's still a shortage of early stage venture capital to invest in new economy companies.

Linkages: I heard someone talk about linkages among universities, businesses, and the financial communities. We do have them, but they are much weaker and less frequent than in the U.S. It's kind of embarrassing to say, but Dalhousie—or the Atlantic Canada region itself—was one of the largest recipients of R and D tax credits in the country last year and was also the lowest contributor to commercialization. That is just scandalous. I think $21,000 is the number that they commercialized last year—in total. The MIT lab of Boston spins out $5 billion worth of commercialized products a year.

I'll also talk a little about some anchor companies. While we do have some anchor companies, there's not enough critical mass to spin off satellite companies in turn, to try to expand the talent pool. Newbridge created a great thing in their affiliate program. Newbridge is now gone. It's now sold to a European company. They will probably downsize or minimize basically the whole affiliate program, and once again we'll have no more spinoffs.

As I say, why do we struggle so much to devise a rapidly deployable plan? Models already exists; it has already been done. We don't have to reinvent the wheel. Let's just do it.

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My thoughts are.... And actually, they're not just mine; they're talked about in the Boston Consulting Group report, and in my boutique firm we have a very seasoned board of directors that feels the same way. The most significant factor concerning growth in the new economy is the lack of Canadian-based, participative, early-stage capital prepared to invest in the new economy space. Canada needs to provide its entrepreneurs with more than capital—with something we call “knowledge capital”. Knowledge capital is management expertise, strategic resources, access to partnerships, and much, much more.

We're going to quickly look at my next slide now. This graph, as you can all see, is absolutely scandalous. In general, there is an extreme shortage of venture capital in this marketplace in Canada as a whole, venture capital that is not at arm's length from the government.

Government-backed funds are very passive, don't accept much risk, and don't look for risk, and therefore provide really no incentive for the entrepreneur. We also find that government-backed funding provides little knowledge capital. It provides cash. It doesn't provide access to NASDAQ-based companies for listings. It doesn't provide research or strategic alliances with companies in Europe. It's just simply an influx of money.

In the U.S., less than 1% is government-backed venture capital. In Canada, as we can see, it's 64%. I think that really speaks for itself.

What we must do is correct tax and securities regulations to increase participation in early-stage capital. We have to incent individuals and institutions to invest as opposed to government applying direct investments or investments through one of their organizations. There has to be an incentive. Unfortunately, I'm not a tax expert. I'm not going to say what I think the best ones are. I can tell you what I think a couple of them are, but they're something that really has to be developed quickly and be employed or we're not going to be successful.

We need foreign investment. Basically, we need to change capital gains to allow venture capital funds to attract foreign investment. We need foreign investment for both the experience and the relationship this capital brings. I think we need to implement a long-term/short-term scenario, as in the U.S., for capital gains. Long-term capital gains in the U.S. that qualify for more than one year pay 28% and short-term pay 39%. We all know what capital gains are here in Canada. You have done a few things by increasing the existing rollover treatment for reinvestment after six months, which is a great thing, but it's still not enough.

We actually have been doing these kinds of presentations for a while. I did this one prior to the February budget: adjust the tax treatment of stock options to allow a deferral of taxation until the time of sale of the stock. You did that. It's a great thing. It's a step in the right direction. I still think the number could be lower, but how we get there is for you guys to decide.

Finally, I think that if we don't do all these things, if we don't tear down the walls and enable what really could be the greatest opportunity the country has, then it will just simply be something that's passed us by as a country—again.

That's it.

The Chair (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): Thank you, Mr. Mailman.

Mr. Michael Mailman: Actually, I should just tell you that if you guys want to write down that web address, that presentation is right there.

The Chair: Thank you.

We will now proceed to the question-and-answer session.

Mr. Lunn.

Mr. Gary Lunn (Saanich—Gulf Islands, Canadian Alliance): Thank you.

First I want to apologize for the fact that while so many of you came here, that you put all that work into the presentations, the committee was extremely thin, as you saw. I apologize that there were not more people here to listen.

Having said that, I want to share with you a phone call that I got.

You're all from Industry Canada, with the exception of Mr. Mailman. Is that correct?

Voices: Yes.

Mr. Gary Lunn: I listened to you talking about this new technology, the new economy. Yesterday I got a call from a man who lives in my riding. I'm from Victoria, British Columbia. He's the owner and CEO of Northwest Marine Holdings, a software producer that makes products for the hotel industry. He has a payroll of $28 million and 400 employees annually. I've never met this man before. This guy is not involved in politics at all. He phoned me yesterday and he was absolutely furious with, I'm going to say, the government, with what the federal government had stopped him from doing.

He was on his way down to Seattle to buy property in order to move his whole company down there, and I said, listen, can we get together for lunch so I can get a little more information? He said that if I wanted to have lunch with him I was going to have to go to Seattle. This guy was frustrated beyond your wildest imagination.

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Now, we hear these stories all the time. I've never had one this close to me; he lives three blocks from my house, and he provides so much to the community I live in. Victoria, of course, has about a quarter of a million people, and I live in Sidney, a town of 5,000. His company is right at the airport, which is in Sidney.

He sees no hope for this country and this new economy—none—whether it's taxation or some of the things that Mr. Mailman just identified. It was kind of ironic that some of the things we must do.... You all identified some of the challenges facing us, and I appreciate all of the hard work you put into your presentations about what you do, but I don't know if I heard enough about solutions.

Ironically, there were five of you from Industry Canada, but nobody came up with a slide, with “here's what we need to do if we're going to be leaders in this”. I think we all want to do that. We all want to be seen.... I think one of you referred to it like we can't be first. I think it might have been Mr. Mailman who expressed the sentiment that we have to be closer, faster, and better, that it really irks him that the U.S. leads, that there's no reason Canada cannot. That was his same sentiment: that there's absolutely no reason we can't be number one. But obviously we're not, it's very clear we're not, and we need to change if we are going to be number one.

So I want to ask you specifically, for Mr. Kelly who lives in Sidney, what can we do to tell him he doesn't need to leave, that there is hope for his company here? You've all identified many of the challenges that we face as this thing is changing faster than we can. Some of you have talked about studies that you've done and studies that are ongoing, that you want to share with us in the future. More importantly, what can you tell this guy about the reason he should stay here, about what we can do as a government—I take it that Industry Canada is probably an integral part of that—if we're going to succeed?

It's ironic that the five from Industry Canada spent a lot of time identifying the challenges—and I agree with many of them that you talked about—but the one person from the private sector actually came up with the solutions, hard-core solutions, in saying “here are some suggestions”, like changing the capital gains to allow VC funds to attract foreign investment. I know that one of the reasons Ireland has been so successful and is now emerging as one of the global leaders in this industry is the stock options—they can attract the very best and the very brightest.

But I'm very worried. The reason I got into politics in 1997 was that we're losing the very best and the very brightest of our country to our neighbours to the south of us and we don't need to do that, so I would like to hear, from any of you, solutions on how we can be number one—not trying to be half as good as the United States—solutions for what we specifically need to do, not the government's agenda, but what you think needs to happen. Then we have to start pushing for that.

Thank you, Mr. Chairman. That's for anybody who wants to take a stab at it.

The Chair: Go ahead.

Mr. Ross MacLeod: As I mentioned at the beginning of my presentation, it's a little difficult for an official before a committee to speculate on what government policy should be, but I think I can outline where the areas of interest are.

I think tax treatment is clearly one. We saw measures in the last budget, I think, to start addressing those issues.

Human resources is one, obviously: making sure we have the right people to do the right things and making sure we have an environment that supports innovation—intellectual property law, marketplace frameworks, and so on.

The dimensions of the new economy are such that if you're not at the leading edge in any of those areas or if you're not competitive in any of those areas, you're not there. And—

Mr. Gary Lunn: Can I just round-table this?

Mr. Ross MacLeod: Sure.

Mr. Gary Lunn: We talk about things like IP and these laws and new regulations and following this and making sure we're at the leading edge. That's all very important, and I couldn't agree more. This is changing so fast. But we seem to be focused more on regulation as opposed to.... I don't know if that's going to cut it. Is that going to help these people stay here or do we really need to get down to the nuts and bolts? How will that keep the best and the brightest people here in Canada? Because that's the fundamental resource you're going to need if you're going to succeed. How will that—at all—keep some of the very best people here?

Mr. Ross MacLeod: Peter, would you like to take that?

Mr. Peter Ferguson: I'd like to respond in a number of different ways.

One of the list of characteristics of the new environment—I'm going back to 1994 when this whole thing was beginning to percolate—was the concept that economies of scale didn't matter any more and that the new environment was going to liberate individuals and businesses to be successful regardless of their geographic location. It took about two years before that concept became one of the ten dreaded myths of the information highway era.

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In the case of the United States, economies of scale do matter, and they matter profoundly. I don't think it matters whether you're in Canada or in Sweden, another very successful economy, or in Ireland; the power and the dynamism of the U.S. economy is there and it's attractive.

And we can be successful in Canada, but we will never, probably, be number one. Like it or not, no matter what tax policies we have in place, what transformations we make, it is not possible, based on economies of scale, to dominate the U.S. economy. That's a factor.

We had meetings yesterday with Singapore. They were here. We were comparing—

Mr. Gary Lunn: I'm going to stop you there for a second.

First of all, we'll have to agree to disagree. If your goal is second place, then you know what? That's the best you'll ever do.

Ireland is sky-rocketing, absolutely exploding, being become known globally as a leader in this technology, in this new economy. And they're not on the same page as the United States. I mean, if you're talking about the big, big economies of scale, they're not there, but they are attracting companies globally, from around the world, including from Canada. They're going to Ireland.

So that argument, you know.... I think you just have to say, no, we can be number one, or how the hell—

Mr. Peter Ferguson: I think our policy is dedicated to our being as successful as we possibly can be. I think that's the approach we're taking. I really don't think, however, that saying that somehow we're going to outstrip the United States at this point in time, or reasonably in the next two to five years, is a realistic goal.

Other successful economies? There are many besides Ireland, many, and Singapore is one of them, as I just alluded to.

Mr. Gary Lunn: Exactly.

Mr. Peter Ferguson: There's also Hong Kong, and others that we're working with.

Mr. Gary Lunn: Exactly.

Mr. Peter Ferguson: So depending on what it is you're actually looking at and measuring, including attracting businesses, Canada ranks extremely well.

I draw your attention to one article in the Globe and Mail's business section yesterday. It was comparing views of Canada in the media, looking into the foreign press, including The Economist and other reasonably ranked periodicals, to see how Canada was rated, how Canada was doing. We do very well in terms of the perception of how Canada is succeeding in this new environment.

Mr. Gary Lunn: I'll let somebody else have a turn, Mr. Chairman.

The Chair: Perhaps we can keep our preambles short so that we can get more answers from the actual witnesses.

Mr. Brison.

Mr. Scott Brison (Kings—Hants, PC): Thank you, Mr. Chairman.

Thank you to all of you for taking some time today to help us understand better the issues of the new economy as we craft public policy around this.

I have a couple of quick questions. First, to the Industry Canada people, to what extent is government being used to help generate more of this new economy activity? For instance, is there a strategy through procurement? We're all familiar with companies like fleamarket.com and these various companies that are utilizing the latest technology.

One of the things I found when I got to Ottawa, for instance, was that even the House of Commons information services.... It seems the government itself is not really using the best of technologies. It strikes me that part of the puzzle is with government itself, if it were to fully embrace the new economy.

The second part of that would be, for instance, as we talk about health care reform, whether we are incorporating the biotech. Are we creating a more conducive environment for biotechnology as part of health care reform?

So my first question, then, is related to the role of government, not in terms of direct funding but in terms of being part of this wicked and cool new economy.

Ms. Jeanne Inch: I certainly can't speak about health care reform, since that's Health Canada. As well, my colleagues from the biotech industry sector at Industry Canada are not here. But we could certainly forward information to you.

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I also cannot speak directly about government on-line and using electronic commerce for the procurement process, but I do work with Public Works and Government Services Canada and with Treasury Board on a procurement-related reform measure, and I'm aware that there is an overall effort on the part of the government to streamline procurement to make it easier for contractors.

Mr. Scott Brison: Is it considered...for instance, the notion of outsourcing the procurement arm through a private sector e-procurement agency in trying to, again, reduce the cost of delivery and increase the efficiency through that?

I know there is a movement to outsourcing, but it increasingly strikes me as being a very important part of it that could be achieved. It could also help spawn some of the new economy activities.

Ms. Jeanne Inch: Certainly outsourcing is a form of procurement. You're procuring services.

Mr. Scott Brison: I'm talking about outsourcing procurement.

Ms. Jeanne Inch: Oh, excuse me.

Mr. Scott Brison: Yes, outsourcing outsourcing.

Mr. Peter Ferguson: Again, I'm not an expert in procurement, but we do understand there are electronic processes in place developed in combination with the private sector. This isn't, in other words, the government doing its own thing.

There are also internally within the government now totally electronic catalogue systems for use by line departments. The concept of outsourcing it I know has been discussed. Whether it's under active consideration or not, I'm not sure.

Mr. Scott Brison: Okay.

Mr. Peter Ferguson: That concept, by the way, comes up in international discussions as well, looking for standardization and access from international markets to the processes. So there's a trade policy issue there as well.

Mr. Scott Brison: Very good.

My second question is relative to Atlantic Canada. It's good to have Michael here as an active participant in the new economy in Atlantic Canada. There are some very exciting things happening.

Mr. Ferguson mentioned Dalhousie University, my alma mater, as playing a role in that. Mount “A ” is a nice local school as well, with a great national reputation.

One of the advantages we have in Atlantic Canada—coming from Nova Scotia, the cradle of higher education in Canada—is an excellent post-secondary education infrastructure. Given the degree to which in the U.S. the universities are one of the principal incubation zones for technology, what can we do to improve the tech transfer side of our universities? Because that is, as Michael identified, a critical part.

Now, part of our problem with universities in Atlantic Canada or anywhere is that there is such a parochial attitude. Is it possible that we could see as part of a regional development strategy, or as part of a national e-commerce or technology development strategy, a more cohesive approach to tech transfer?

In the U.S. there are great tech transfer experts from various universities who would be looking for the quality-of-life advantages of living in Canada. Why aren't we seeking out those people and bringing them to Canada, trying to develop a better strategy on this?

The Chair: Mr. Ferguson.

Mr. Peter Ferguson: I think Michael identified one of the characteristics of what we refer to as “clusters”, which is that very necessary combination of the university, the academic capacity, as well as the skilled workforce and the high-tech companies. Geographically, Boston is the most obvious, and from a Dalhousie perspective—I guess envious perspective—it's very close. We would see the same potential in centres in Toronto, obviously, Montreal, probably in Calgary, and probably on the west coast.

I think it's very difficult to conceive of taking a standardized approach to it. First, the skills embedded in the institutions vary, and second, the nature of the high-tech industry located in these centres tends to vary.

Mr. Scott Brison: But there could be a regional approach. For instance, there could be work between Acadia and Dalhousie, or between Dalhousie and UCCB, which is doing interesting work on that type of thing.

Mr. Peter Ferguson: That's what's going on, as I understand it, with the Dalhousie concept.

Mr. Scott Brison: Sure.

Mr. Michael Mailman: At the same time, Scott, I would jump right in and say that I think to have government involved in that process, to be quite honest with you, would slow down the process and defer it.

Mr. Scott Brison: Good point.

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Mr. Michael Mailman: I don't mean to be the cowboy guy here by any means, but the fact that we had to wait to get quorum for probably one of the most revolutionary things that's happening in the country right now scares me. It frightens me. If we want to then take that approach and go to privatize something that could save someone from cancer....

Why would we do that? Incent private industry, the guy who is going to leave and go to Seattle. Give him some kind of incentive to do it himself. You know why? He's going to work hard every day, because he needs to put food on the table for himself and his kids. That's what's going to make it successful.

Mr. Scott Brison: I've heard of urban cowboys but never eastern cowboys.

Mr. Michael Mailman: No, but I mean—

Mr. Scott Brison: No, I agree. One of the things we should be looking at...and Gary mentioned the Ireland comparisons. Now, comparing Canada with Ireland is kind of a bad comparison, because you have to take into account the EU's relationship with Ireland. But if you compare, for instance, Atlantic Canada with Ireland and the relationship Atlantic Canada has with the rest of the country in the context of Ireland's relationship with the EU and the transfers, I think we can see some parallels there that are quite exciting.

When I talk to people in the technology sector, when they talk about ACOA or BDC the five words I hear the most are, “They just don't get it.” On the technology side there's a strong feeling that ACOA, BDC—the government agencies that fund or lend to the technology sector—just don't get it. This is what I'm hearing from people.

I would posit as a strategy or potential strategy a tax treatment in Atlantic Canada, or a tax zone, for instance, based on corporate taxation, which is probably, in terms of growth areas, if you want bang for the buck in terms of tax reduction, although less politically palatable, the best from a growth perspective.

Secondly, I have some real concerns relative to the fact that we're about two years behind the U.S., I understand, in terms of e-commerce. I think it's about two years behind.

The problem with being two years behind right now is that we're seeing the turbulence that's occurring now in the capital markets. There's a good possibility that the IPO market is going to close off for a period of time. The U.S. is two years ahead. We could see now, as Canadian e-commerce starts to hit a potential critical mass, a closing of the opportunities to access capital.

I would suggest that one of the things that should be considered now is something in Canada to provide an advantage, a Canadian advantage, to the venture capitalists and early-stage investors in Canada. I would suggest we have to be ahead of the U.S. The idea of eliminating personal capital gains taxes in Canada and actually for once being ahead as opposed to always behind might be a good start. There would be a $900 million hit per year in terms of federal tax revenue, but the benefits in terms of the fluidity of capital and actually giving a Canadian advantage at a very critical time I think would be very important.

So I'd appreciate your feedback on both of those areas, the Ireland-Atlantic Canada comparison and the idea of driving a stake through some of these regional development agencies that aren't working in terms of the new economy, and trying a tax-driven strategy; and secondly, the idea of a capital gains tax advantage in Canada to help make up for this disadvantage we're going to be at now due to the closing of the capital markets for a period of time. We don't know how long that will last, but the IPO market right now really sucks.

Thanks.

The Chair: Mr. MacLeod.

Mr. Ross MacLeod: I think I'll take that one.

To back up to the Ireland example, it's one we've studied a bit. We recently had a meeting with Professor Brendan Walsh, a professor at one of the Irish universities. He's a bit of an expert on this Irish renaissance issue. He identified several areas, and it's a bit similar to what I discussed earlier in terms of how the government needs to play on the issues of growth in the KBE.

He said that Ireland's economic success has depended on a number of things. One is the quite vast education reform they conducted in the seventies and eighties. The second one is their tax policy. The third one is very aggressive investment promotion by the Irish Development Agency and being a member of the EU, which was, of course, a conscious policy decision. That had several benefits for them, one of which was subsidies from the EU. The other was being an English-language bridgehead in the ECU zone.

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As you know, the United Kingdom didn't join the common currency market in the European Union. Ireland did. From a very early stage that was fairly well known, and that helped them a lot. American companies in particular, because of the language issue and some cultural connection with Ireland, found that to be a very attractive investment location.

They also had relatively low wages for highly skilled people at the time, because up until the 1980s, the Irish economy was fairly depressed and they had a young, well-trained population that was able to go to work.

Mr. Scott Brison: I don't mean to interrupt, but just as a conversation, you've described a country and I'm describing a region in Canada. You're describing a dependency on transfers—there's a similarity there—and a highly educated workforce. The smartest city in Canada now is Halifax in terms of post-secondary education achievements, so you have a strong, educated workforce. You're describing also from a quality of life...and not that I would want to promote this as an advantage, but reality it is. From a cost-of-living perspective and the commensurate relationship with wages and pay, there are some huge advantages. With the death of distance as a determinant in the cost of telecommunications, I just see Atlantic Canada as being hugely comparable in terms of Ireland of some time ago. It just strikes me as being something that bears greater levels of exploration.

I mean, I don't think the regional development agencies are really helping spawn the new economy activities to the extent they should be, and for all kinds of reasons. The road to hell is paved with good intentions, and I'm sure it was a well-intended strategy. As an Atlantic Canadian, I just think we should try something new.

The Chair: Is that a question?

Mr. Scott Brison: No, it's just part of the discussion.

Mr. Ross MacLeod: Perhaps I can just close on that.

Mr. Scott Brison: I'm just getting going, Mr. Chairman.

The Chair: Yes. It takes awhile.

Go ahead.

Mr. Ross MacLeod: In an economic sense, Ireland is probably more appropriately viewed as a region of Europe than as an independent country. They've joined a common currency. They've submerged some of their foreign policy in the European Union foreign policy and so on. They've joined a common market. It's probably an appropriate example.

I think what's interesting there in terms of government policy is making sure the right actors do the right things. There are some things the government can't do that really have to be done by the private sector. We're just not equipped to do it.

Obviously, we effect the incentives—IP rules, tax rates, and so on—that people have to grow a business and to prosper and bring innovations to market.

The Chair: Mr. Brison, any further questions?

Mr. Scott Brison: I would like to hear some feedback on the notion of what we can do at this time, when the capital markets are potentially closing down for a period at a very critical stage of our e-commerce development in Canada, to try to ameliorate those impacts, and the potential of, again, a capital gains tax advantage.

We currently have, even after the budget, a 13% disadvantage in Canada. This would provide an effective 20% advantage in one critical area of taxation in terms of the new economy. If you look at the degree to which stock options are used as compensatory assets, it's a major part of it.

That's just an idea of one thing we can do to catalyze activities now, when things are slowing down.

Mr. Peter Ferguson: I think generally this is a question that's going to have to be directed at the Department of Finance, dealing with tax policy and other types of financial policy.

Mr. Scott Brison: Sure, but you can tell me how Industry Canada would view a policy that would emanate from the Department of Finance, clearly.

Mr. Peter Ferguson: I can't tell you that—

Mr. Scott Brison: Okay. I may have to depend on Michael for that.

Mr. Peter Ferguson: —although my minister might want to.

What I would tell you, though, by way of example, in sharing our discussions held yesterday with Singapore, is that one of the challenges—and they recognized the same problem—is the likelihood that at least the availability of capital is going to slow down. One of the things they're looking at is the concept of taking the loan and converting the concept of the loan into investment, subject to different tax treatment, aimed particularly at small and medium enterprises.

• 1040

I don't know whether that kind of thing is applicable to the Canadian economy, and I wouldn't know how it would fit under the Bank Act, but conceptually it's something that Singapore is certainly investigating. We understand that Malaysia and some other Asian economies are also looking at it.

The Chair: Further comments, Michael?

Mr. Michael Mailman: I'll give a bit of an example on that, Scott. I think it's a big issue.

As we are out actively trying to market a venture capital fund and raise $25 million, we think a large chunk of it should come from the U.S. marketplace. As we mentioned, we think it's smart money, no question.

One of the managing directors on our fund is a former senior partner at Kider Peabody, which invested in a small firm called Summit Capital Partners at one time. It's now the largest venture capital firm in the United States, with over $200 billion in assets. In the VC world, money's invested in people and not so much in the idea, because it's the people who find the ideas.

We called the founding partner of Summit to say, you know, we're doing this now, would you like to invest? Maybe throw a couple of million bucks at it. Come play in the Canadian marketplace.

He laughed so long and so hard and so profusely on the tax, tax, tax rate that would be applied from capital gains.... He said to Peter, listen, you lent me the money to start my business and made me a multi-multi-millionaire, but I'm not a stupid guy. I'm not going to put money into that country.

End of discussion. He just did not want to be taxed and taxed and taxed.

I am not a tax specialist. I sat in front of our tax specialist yesterday to get feedback on it, to see if it made sense, and he gave me feedback that it was the right thing to do from a tax perspective.

Unfortunately, then, I can't say this is how we change it, but at the same time, I think it's very important. I mean, it's the most critical factor, that we try to change foreign investment policies to come into Canada. I don't think we do it in the way of the traditional Immigrant Investor Program. I think that's not the way we do it. I think we do it such that smart institutional money that's provided....

Maybe it's just a simple short-term capital gain, long-term capital gain issue, just the same way they do in the United States. It's a 16% saving if you keep your money in for more than a year.

The U.S. guys like that. Maybe that's just a small, quick, one-two-tier approach to do that here.

The Chair: As a business person, Mr. Mailman, what do you find attractive about Canada?

Mr. Michael Mailman: Honestly? Quality of life, plain and simple. I'm a Maritime boy. I took a company public on the stock exchange at 23 and moved to Toronto, but the rat race was way too much. I moved back to Halifax, which is the biggest centre there, to try to create a standard of life and a quality of life that I would like to grow up in and have my family be part of and all that kind of stuff.

Quite frankly, that's why I'm there. But because of Canada's environment, I struggle, bang my head, to become successful and to become as wealthy as my partners in the firm and I would like to be.

Does that mean I'm going to pick up and leave? No, but I think it's a problem that generally everyone does. A lot of my friends have said, hey, I'm going to go to the U.S. because I don't get taxed. They go down there and make $250,000 U.S. and pay almost.... You know, that's finally when they hit the higher tax bracket, not at $62,500.

But I'm not going to do that. I'm want to try to make some changes. That's why, when I got invited here, I decided to take time out of a day. I think just before you got here I said I really hope what I say provides value, because it's taking time away from me making money. I hope some changes definitely come from what we talk about.

The Chair: As you probably know, this committee consults Canadians extensively. I understand, and I sense, a bit of the frustration, but I can guarantee you that corporate taxes are coming down. I'll tell you that now.

Mr. Michael Mailman: Okay.

The Chair: And I'll tell you that income taxes will be reduced even further.

Mr. Michael Mailman: Honestly, as Scott said—and I'll just interject this as part of the discussion, although I don't know if this is the way you guys like to facilitate this process—corporate tax is the key. Before personal tax, I think, corporate tax is the key.

Your example of the guy in Sidney...and we talked about Canada being number one as opposed to.... I think we have to find specific companies that can be the number one, and from there it will spin off.

I mean, we do have number ones. We have a Research In Motion. We have a Nortel.

The Chair: But I do want to point out to you that, as you probably know, back in 1993 we were dealing with a $42 billion deficit. We had to get rid of that, balance the books. What I'm saying is that while I understand the concerns....

I'm actually one of the individuals, alongside this committee, who has been pushing for faster tax cuts, both corporate and personal.

• 1045

I also do want to say that there is a sense of optimism in the country—

Mr. Michael Mailman: I agree completely.

The Chair: —in terms of economic growth and consumer confidence and business confidence. I mean, some people may have discovered tax issues now, but we've been talking about it for a number of years.

Going back to what Mr. Ferguson said, there has to be a realistic framework placed around the national debate of economic growth, productivity gains, and many, many other issues.

Mr. Michael Mailman: I don't want to sit here and sound like a guy who harps on taxes, because to be quite honest with you, I'm not harping on taxes. We have to pay taxes. I like the fact that I can go to the hospital and get health care. I don't want that to change. I like the fact that I drive on what I consider to be reasonably safe highways. I don't want that to change. But what I think we do have to change is the way that government is involved with mandates and participates in the distribution of the capital. That will then spur new opportunities and more wealth.

I personally think success breeds success. You know, in Silicon Valley when you drive down the road there's a billboard that tallies the number of millionaires who've been created. It literally tallies the number of millionaires who've been created in Silicon Valley. I drove by there five days in a row, and that billboard changed five days in a row.

That's because it's spun out by opportunity after opportunity, and that's what we have to do. We have to back government away from the distribution of the capital, let the free market basically distribute it itself, and then you guys can tax us and make all the money you need in order to do this kind of stuff.

So I personally don't have a problem with the tax system.

The Chair: You're saying that government does have a role, though.

Mr. Michael Mailman: The government has a role, yes. I personally am not sure what it is.

I don't know if you saw the slide—you came in late—that said 66% of venture capital funds in Canada are government-backed. I don't think that's a role. Less than 1% in the U.S. are government-backed.

Mr. Scott Brison: Just to add to that, is there a crowding-out effect of government money that effectively marginalizes private sector money sometimes? For instance, if your fund is competing with government-backed funds—

Mr. Michael Mailman: No question.

Mr. Scott Brison: —the tendency may be for people to go with the lower-cost provider of money.

Mr. Michael Mailman: Well, why would an entrepreneur in Atlantic Canada—and this is just one example—come and give up 20% of his company for a $1 million investment that's going to come with some really seasoned management around it and open doors or get a non-interest-bearing loan for $1 million if they have 10 years to pay it back and don't have to give up any equity?

Mr. Scott Brison: That seasoned management may come with a track record and a relationship with the investment banks as well—

Mr. Michael Mailman: No question.

Mr. Scott Brison: —that can facilitate—

Mr. Michael Mailman: The next round or the next round....

Mr. Scott Brison: I would expect that the Goldman Sachs or the Yorkton Securities or the Dominion Securities would rather see early-stage capital provided by a private sector firm, probably, than by ACOA in terms of a track record and that type of thing.

Mr. Michael Mailman: A lot of the firms and the banks we deal with won't deal with any business that has government money.

Mr. Scott Brison: I understand there to be a significant difference between the investment banking style of U.S. investment banks and Canadian investment banks; that the Goldman Sachs model or the Bear Stearns model of being actively involved, early stage, is not as prevalent in Canada; and that in fact the investment banking community in Canada has been extremely conservative relative to the new economy.

Industry Canada may have an idea, and Michael may as well. I'd appreciate your feedback as to what extent this ultra-conservative investment banking climate and structure in Canada impacts the new economy in Canada from a competitiveness perspective.

Mr. Ross MacLeod: Maybe I can comment on that.

We met with Professor Bradford DeLong from Berkeley a little while ago. He's an expert on the development of Silicon Valley. One of the things he had said was that venture capitalists in that area expect an applicant to come with a trail of four or five failed companies behind them. They view it as a learning experience rather than as something people should be punished for.

It was really an interesting observation. They see it as, look, these companies didn't make it, but this guy has some good ideas and a lot of energy, and we'll back him.

Anecdotally, I hear that's not exactly the way it's done here.

The Chair: Mr. Green.

Mr. Martin Green: I was in Boston in the fall at a conference of largely high-tech entrepreneurs. Now, this is not empirical data, but I think I was the only public servant in the room; when you told people that, you got this sort of quizzical look.

• 1050

The unbridled joy of entrepreneurship in the United States is quite different from what it is here. These guys got up, one after another, talking about their failures—you know, I lost this company last year but I bounced back, and I did this or that. It was absolutely astonishing.

I see a number of the venture capital people who were there as being formidable in terms of their aggressiveness. If there's a start-up company in Minnesota or what not, their team will fly in there the next day. They'll do an analysis of the executive of that company, and they're ready to move, within 48 hours, to make an investment.

It's striking. I guess that is partly the economies of scale and all, but it is a striking difference.

Mr. Michael Mailman: Just quickly, again, I don't think we have to compare ourselves with the U.S. in terms of economies of scale. I think it's a mentality.

We have developed in our fund, in the marketing of our fund, an investment methodology that says we have a term sheet in front of entrepreneur in 10 days. Traditionally, Canadian, especially government-backed, venture capital funds go two to three months before they make a term sheet that says, okay, we'll make an investment in this company for this amount.

A prime example is Fast Lane Technologies, a Newbridge affiliate. It has raised well over $55 million in venture capital money, only $2 million from Atlantic Canada; it took too long to get any more put in. And now that they've put that $2 million in they've capped out, because the government, which owns 51% of that fund, regulates that no more be put in.

So what I think is probably going to be one of the greatest success stories of the country, with a $500 million to $600 million market cap when they go public, Canada didn't participate in very much at all.

Again, I tell stories probably more than I give...but I think they're good stories, and they're important to understand. This is out there. It exists. It has a lot to do with the mentality as opposed to the economies of scale.

The Chair: Mr. Ferguson.

Mr. Peter Ferguson: I just want to make a shared observation. Many of the examples we're hearing from Michael do relate to the high-tech industry or around it. Some of the major consultancies operating in North America who are in the business of putting e-business in place have indicated to us that in the small business arena, generally outside of the high-tech area, retail, etc., Canada and the United States have the same problems, and the United States is not ahead of Canada. Small business in the U.S. is struggling in this new environment. We all have to somehow push, probe, raise awareness.

Particularly there's the challenge of bringing new business models to this community, which generally lacks, at the entrepreneurial level, the capacity to seek out and understand both the business models that are appropriate and the technology that goes with it. There's a challenge there on both sides of the border.

So, terrific examples in the information technology arena, small enterprises in the United States, but we do still, in the small enterprise area, share common problems.

The Chair: Mr. Forseth.

Mr. Paul Forseth (New Westminster—Coquitlam—Burnaby, Canadian Alliance): Thank you very much.

You know, the picture that is emerging is certainly that government is the problem, that it's in the way rather than part of the solution.

Certainly we've heard at this committee, over and over again for several years, about productivity, about how we're falling behind. We hear it over and over again. Since there really are no technological secrets in the G-7 and in Canada—we have infrastructure, we have trained people, we have all the elements—you then have to say, well, what's left over? It certainly must be the tax and regulatory climate that government creates.

What we've heard today is that the problem is in our heads rather than in our hands, and that essentially government is the problem. That's from my perspective, from what I've heard.

So then we have to look to you folks today. We pay a high price for your advice, but we need good, strong, clear advice, what you know rather than what you figure is nice to say. You have to outline in strong terms a prescription for solutions. It's part of what we talked about in terms of the mentality here today.

I'll just quote you something from the paper today about this issue of mentality. On page A17 it talks about the fact that while the e-complex is dubious, this week the Quebec government, just like the federal government, announced its latest megaproject, a $700 million electronic commerce complex in downtown Montreal. The plan is to offer $1.5 billion in tax incentives in the hope of attracting 20,000 jobs to the site. But it got a cool reception from the pundits. And why?

This is what the Montreal Gazette says in an editorial:

Quebec has long been the North American champion of corporate welfare, but it's outdoing itself now.

Government's role should not be to pick winners and losers, but to set fair, competitive conditions for everyone. Instead of spending billions on selective corporate welfare, Quebec should cut taxes for all.

And it goes on with this notion.

• 1055

Mr. Brison is quite right in outlining some of the history of Atlantic Canada, that if selective government action poured into Atlantic Canada over decades was ever going to create anything, then Atlantic Canada should be the richest place in the world. But it's not, largely because of government behaviour.

So you folks here today at the table know what the answers are, but it sounds to me like you don't want to say what they are. I think you folks could give us, from your perspective in Industry Canada, a very short, sharp, hot list that the government should do very quickly, perhaps even in a mini budget for the fall, to just simply change the rules, to change our heads, because it's all in our hands.

I would like to hear something strong from you. Step out of the box and give us some good, strong advice, a prescription of what you know.

The Chair: We also have to remind ourselves that there are certain roles officials play—

Mr. Paul Forseth: I understand, yes.

The Chair: —and I think you have to respect that as well.

Mr. Paul Forseth: Yes.

The Chair: Mr. Green.

Mr. Martin Green: I'd love to be Michael today in terms of the ability to speak in front of the committee, and hearing Mr. Brison's comments and others', we would love to respond. I'm sure the five of us have some very, very strong feelings on that. I don't mean to be fatuous or anything, but we are public servants, and we operate within a system where we do offer our advice internally and within the government context.

Certainly Industry Canada works on all these issues—tax reform, productivity, innovation, the skills debate. Regional agencies are part of Industry Canada, and we're looking at many new ways in which those might operate over the next few years. We offer up quite vociferous opinions, but we do that within the parliamentary cabinet system we have.

As I say, we do identify these. It's not non-answers you're getting today; it's basically us playing our roles as public servants.

Mr. Paul Forseth: I'd just like to add that this committee is independent. If we look at some of the past reports from this committee, I mean, a lot of great reports have come out of this committee. The recommendations have been pretty good, I think, pretty clear, and yet there seems to be a gap that once this committee gets together and writes its report, and then we see the budget, something doesn't come out at the other end. Maybe we get 25% of the measures rather than the whole load.

I think it's clear that when you're here, you have to give—

The Chair: [Inaudible—Editor]...privilege do a lot better than that.

Voices: Oh, oh!

Mr. Paul Forseth: Well, I just hope you can be a little bit more forthcoming in prescribing.... You know, there may be even the fundamental question of asking ourselves how large Industry Canada is. Maybe it's too large.

The Chair: Mr. Mailman.

Mr. Michael Mailman: I don't know whether, in the context of this environment, I'm entitled to ask a question of you guys yourselves.

Nah, I didn't think so.

Voices: Oh, oh!

Mr. Michael Mailman: Actually, when I got engaged in this process I thought a number of private sector people would be involved. That was the anticipation, I believe.

Mr. Paul Forseth: We do have them.

Mr. Scott Brison: A number were invited.

Mr. Michael Mailman: But I'm saying they didn't feel there was enough value to participate, obviously, and I'm not sure why that would be.

Mr. Scott Brison: Well, they're out making money.

The Chair: I don't know what their reasons are, but I'm glad you're here. You're giving your input, and that's what's important.

Go ahead.

Mr. Ross MacLeod: Perhaps I could respond a bit further to Mr. Forseth's question.

We're in a difficult position in terms of giving advice, or talking about policy, which is the minister's role, but we have outlined the structure of this new economy.

Without going too far into policy, there are a few key points we should make. One is incentives. If you don't have the incentives right in your economy, it's not going to happen, and the people are going to go elsewhere or they're going to do other things. I think that's pretty clear. You can read into incentives what you wish. There are a few issues there—taxes, the IP framework.

• 1100

In biotechnology, for example, intellectual property is a critical issue. If you can't get a reward for your investment in research in something, you're not going to make that investment. You're going to invest somewhere else.

You have to make the right investments in people. I see that as being a big role of government—for example, getting the right people at the right place at the right time with the right skills. We need financial markets that work and get capital to people with ideas, and companies with good products to get out there. I think there is a kind of slowness in Canadian capital markets to get to the people.

Secondly, you need people to invest in the right place at the right time, and you need more flexibility in industry itself to grab those new opportunities. It's quite striking how fast the U.S. has evolved into the ICT sector as compared with Canada.

And your charts, Mike, were really helpful there.

I mean, we're just not getting there. I'm not sure the government has a role to play in that, but we can play a role in kind of obvious ways, I think, in the other things I described.

The Chair: I think it's pretty clear that there are certain levers we have as a government, but there are some we still have to work on.

I want you to comment, if you can, on Michael Porter's assessment of the past ten years, particularly as it related also to the private sector. It wasn't just government that had to change. He spent quite a bit of time just speaking about the role of the private sector and how it should change.

Mr. Ross MacLeod: Actually, Professor Martin at the University of Toronto is doing a lot of work on the role of corporate leadership in economic growth. I think it's his view—and I think it's shared with Mr. Porter, since they're fairly close in terms of work—that you need that kind of leadership there. You need to make those leaps into the new technologies and take those risks. If you don't have a corporate culture of taking on new opportunities, you're going to miss them.

We said earlier that speed matters. It really does. If you're not there, it will go by you, and someone else will get it.

The Chair: When we refer to the Americans and to the American economy, we always address their successes, but there's something else they also accept a lot more of, and that's failure.

Mr. Gallaway, followed by Ms. Guarnieri.

Mr. Roger Gallaway (Sarnia—Lambton, Lib.): Thank you.

I've learned a lot this morning, but the most fascinating thing has been that Nova Scotia was part of the continental drift from Ireland.

In any event, I want to follow up on what Mr. Forseth has been talking about, because I think there's an underlying factor here. I was quite taken with what Mr. Mailman had to say. It seems to me that people at Industry Canada—and I've been dealing with some people there recently—certainly know what's going on on the ground, in specific regions. I'm from what I call the “deep south” of Ontario, so we're not subjected to ACOA or any of these other things. Industry swims on its own.

Having said that, I hear comments made here that, well, we can't comment on that, because that's a matter for the finance department, or health. It's within government.

I want to know, then, in terms of the formulation of policy, what sort of interdepartmental working groups—I think that's the term used—exist. It seems there are a lot of good ideas and very bright people who work in government, and they can generate policies and ideas, but if it conflicts with somebody else in another department that has overlapping jurisdiction, you have to try to bring them up to your level of knowledge.

I think the speed at which government moves drives most Canadians crazy.

Do you want to comment on that?

Mr. Peter Ferguson: You raise a valid point in terms of the machinery of government itself and how well it facilitates cooperation.

Perhaps I can go back to the information highway exercise, beginning in 1993, and the fact that the council made recommendations to the government and basically asked for a response. It required a very formal process. We engaged, in the end, seven departments, seven ministers, and a memorandum to cabinet with seven signatures.

It was useful in that it drove a response from the government and ongoing cooperation, one of which was targeted at electronic commerce and development of policy in that area. The structure to date with respect to interdepartmental cooperation has been less formal, more at the level of operating director and occasionally director general. What I'm saying is that it isn't as visible, I think, but it is ongoing.

• 1105

So if I go back to the period from November 1997 leading through the e-commerce OECD initiative hosted in Ottawa, all of the activity to generate Canada's positions on that was done at the interdepartmental level. And that work continues.

Mr. Roger Gallaway: Now, Mr. Green, in your presentation you talked about eco-efficiency from a business perspective. One could assume that it's from a somewhat micro perspective, that the more attuned a business to eco-efficiency, the more competitive they are. Yet I shake my head here every day in terms of environmental laws or policies being proposed that are at direct odds with those that are occurring in the United States. A company could be the very model of eco-efficiency competing in a North American market and the government can just remove whatever competitive advantage it might have had because of some regulation.

Now, I know that's beyond your control, but let me ask you this, then, because I'm assuming that within Industry Canada you're charged with some liaison with the environment department. You talk about voluntary compliance as being the way to go. I'll give you an example.

About a year and a half or two years ago, the refining industry in diesel fuel laid down a regime of meeting voluntary targets on sulphur reduction. They've met those, and it worked out for the industry. Yet, having said that, we have a regime of sulphur objectives for gasoline that.... You know, we can pass all the laws we want here, and cabinets can pass all the regulations, but the industry is not able to meet them. So we're going to be at this competitive disadvantage with respect to the cost of gasoline, 60% of which feeds into the cost of goods.

What say does Industry Canada have in terms of these laws that emanate, apparently—and they can be based on science—from the Department of the Environment? Do you have any input at all?

Mr. Martin Green: Oh, we play what's called the “advocacy” role, certainly, on all of those. I think you've probably seen some of the debates that have happened in years past, be it on the Canadian Environmental Assessment Act or be it on CEPA, which as you know was quite a contentious piece of legislation when it went through. The industry department played a very vociferous role on that, especially with regard to the competitiveness of industry.

As well, when you get into these things in terms of our environmental regulations, you get into what is perhaps the most polarized debate going in the public, with the environmentalists claiming it's hardly adequate, and providing sometimes quite a bit of evidence that we're not doing as well by our ecosystems as we could, and industry with their competitiveness arguments. Those debates get settled in probably true Canadian fashion in that we try to have compromise legislation and regulations in that regard.

Industry Canada's main thrust on eco-efficiency, though, is that we see that as the perfect opportunity to engage industry, because industry does have as its focal point the bottom line. With eco-efficiency, we can talk to industry and say, okay, if you've looked at this as a management tool, it directly translates to your bottom line.

It's a wonderful entree for businesses to start better understanding and perhaps having some positive environmental impacts. So our approach is to do the doable right now with industry.

In terms of the other things you're talking about, sulphur emissions and those, we play a very strong behind-the-scenes advocacy role on behalf of industry.

Mr. Roger Gallaway: One of the subjects raised here is intellectual property, which is the new economy, one could argue, and yet within government we have split jurisdiction with respect to things involving intellectual property, between the departments of industry and heritage. It's now been about five years or whatever since that occurred.

• 1110

I'm referring to certain aspects, such as broadcasting, that fall under Heritage Canada, whereas everything else falls under Industry Canada—trademarks and that type of thing.

I just wondered if you'd care to comment on how that's working.

Ms. Jeanne Inch: I can't comment on how it's working, but in my understanding of intellectual property—and I do work in that area, in particular related to the management of intellectual property generated and funded by the government through universities—the split is not a departmental one but by legislation under copyright, which would be literature—

Mr. Roger Gallaway: Yes, it is by legislation.

Ms. Jeanne Inch: There's certainly some discussion going on now that I'm aware of regarding the changes in the economy in terms of electronic commerce and Internet distribution, how you manage the intellectual property and protect the inventor and the creator through that. It's one of the impacts of the new economy.

Mr. Roger Gallaway: Thank you, Mr. Chairman.

The Chair: Ms. Guarnieri.

Ms. Albina Guarnieri (Mississauga East, Lib.): Let me add my apologies; some of us were physically challenged by the rain this morning.

I'd like to go back to an earlier question that alluded to the brain drain. How serious do you think the brain drain is for this country? Do we have a problem?

We hear anecdotes. All the pundits tell us there's a problem. A number of witnesses before this committee have alluded to problems. Michael Mailman mentioned some stories. Do we view it as a serious problem within government?

Mr. Ross MacLeod: We're doing research on the brain drain now. There is some indication that there are more people going to work in the United States on temporary visas, which we negotiated with the Americans in the NAFTA agreement, for example.

The research is incomplete. There is, of course, a lot of anecdotal evidence that this is happening.

In terms of economic growth, I think for us the real issue is, first, are we losing the kind of people who are going to bring new ideas to market, who are going to innovate, who are going to develop companies that are going to drive the economy in the next decades or whatever? I'm not sure we have a very good understanding of that yet.

I mean, there's a lot of anecdotal evidence there. There's some evidence that people are going on the temporary visas and so on. Whether it's of the dimension that some commentators have said it is, we haven't seen evidence of that yet. My worry is that if we're losing the bright entrepreneurs who are going to create economic growth in the future, then we'll have a problem. We don't have really systematic evidence of that, though.

Ms. Albina Guarnieri: What are the impediments to collecting that evidence? My own husband is in the satellite industry, and every day he comes and tells me that some of his best minds are looking south of the border for opportunities, are being lured to go down south.

What are the impediments to collecting evidence? Every day there's a story. Can you elaborate as to why we're having trouble collecting it?

Mr. Ross MacLeod: Sure. I think part of the difficulty is identifying who's where and what are the means of collecting the data. We have data, for example, on temporary visas. We have tax-filer data, for example. But to take that data and make the leap to, yes, we're losing these scientists, we're losing these computer programmers and stuff, we just don't collect that data. We don't have it on hand.

We use the data we have. Some tax-filer data may give you some indication of the type of people we're losing in terms of what kind of income groups they would fall into and so on, but that's kind of the limits of what we actually collect currently.

Ms. Albina Guarnieri: Mr. Ferguson, I'd say you're eager to jump in here.

Mr. Peter Ferguson: Well, yes. With the recent passage of Bill C-6, I think it does raise the matching of some of that very personal information with identification of who it is that's actually leaving the country. Yes, we might know of a certain number of people, but then, into the level of where they come from, and what university, and ultimately who they are, we don't collect it, regardless of what you see in the press.

Ms. Albina Guarnieri: Should we be collecting it?

Mr. Frank Lee: I just want to add that we get the number of temporary visas granted to Canadians who move to the U.S. from the U.S. government, actually. Currently UBC is carrying out a study on their graduate students as to whether their PhDs and people with master's degrees have gone to the U.S., and how they are performing in the U.S. market. That might enlighten us on the issues related to the brain drain.

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Ms. Albina Guarnieri: Do you view it as a problem that we can't get a handle on this?

Mr. Ross MacLeod: Yes, not knowing the dimension of a policy issue is difficult for us.

Ms. Albina Guarnieri: It sort of impedes us somewhat, doesn't it, from making a coherent policy...to a problem that they exist?

Mr. Ross MacLeod: In some ways, I think the deeper policy question, if there's an issue there, is what are the incentives for people to go or stay? We probably have a bit better evidence than that relative to the U.S. or other countries.

I think at a policy level that's more our concern: Why stay here? Do we have the incentives right in a number of ways and in the dimensions that government can actually influence to keep people like Michael here? For us, that's probably the bigger issue.

Of course, identifying and finding the source of the problem is certainly an issue, and we're just not there yet in terms of the research.

Mr. Michael Mailman: I will just quickly add that I think the true leaders, the people we want to stay here, are staying. I'm going to be quite frank and say that. We see 60 business plans a month come across our desk. The bulk of them are from people in this country. The leaders are here. We think the people who are providing almost hard-core labour in the technology sector are guys who are programming code, who are still key people to drive the new economy. Those are the people who are going, but I think the leaders are staying here, because they feel they'll be successful no matter where they are.

I don't think it's really going to be important whether it's—

The Chair: Of course, Mr. Mailman, you don't see the business plans of the people who leave.

Mr. Michael Mailman: We actually do see plans of the people who leave. We still get stuff from Boston, from people we've built relationships with in Canada and who've now moved to Boston. You know, money's based on relationships, and money's invested in relationships, so we still see that quite frequently. We have a strategic relationship with a company in Boston, and they see stuff coming through their desk from Canadians.

The Chair: So you do see people leaving, then?

Mr. Michael Mailman: We do see people leaving, but again, I don't necessarily think it's the true leaders, the people who are going to make the difference, who are going to invent the next Research In Motion or the next Open Text. I think they're staying.

Ms. Albina Guarnieri: So you don't see that there's a problem with this exodus we hear about. It's myth more than reality in terms of the kind of people we are losing.

Mr. Michael Mailman: Yes. Again, my region is probably different. I live in Atlantic Canada, where people stay because it's nice to stay. I'll be honest with you; I think that probably is a difference there.

Last night I was in Toronto and had supper with a London School of Economics and Harvard MBA grad who moved back to Canada to work. He's here for a reason. He's a 27-year-old guy who'll be a leader of something very big. He wants to stay in Canada.

Ms. Albina Guarnieri: What lured him back to the country? He had an opportunity he was offered?

Mr. Michael Mailman: Yes. Actually, he could have gone to work for a U.S. investment bank, but he decided to come back to work for a Canadian one. He might go to work for a U.S. investment bank but do it in Canada.

You know, I think it's in us as people to want to stay here. I really do. I can't give you an answer to that, unfortunately.

I think there is a drain happening on technical people, but the true leaders, I think, will stay. And they will attract the right technical people. People that we fund ideas for, they will go to Boston and get people and give them such a good sales pitch that they'll want to move back to Halifax and work there. And it happens. It's really the leaders who drive that.

Ms. Albina Guarnieri: It's refreshing to see your faith, but....

I see that Mr. Ferguson has something to add.

Mr. Peter Ferguson: I just want to bring up the historical perspective on this. Skimming through a biography of Frederick Banting by Michael Bliss at the University of Toronto, he's just done the big discovery, and in 1923 it's the same problem. It's a new area of research, and the offers are coming out of the United States. It was a concern for both the Ontario government and Ottawa as to how to keep this level of medical research in Canada.

It's a historical problem. It comes and goes, but the measurement of it, as Ross has indicated, is difficult.

Ms. Albina Guarnieri: Is it cause for concern or not? Are you concerned? If it's cyclical and it comes and goes, is there a problem there?

Mr. Peter Ferguson: I can't speak for the department.

Ms. Albina Guarnieri: Then as an individual.

An hon. member: Still can't.

Ms. Albina Guarnieri: I'm with Mr. Forseth; we want you to come out of your box and tell us what you really believe.

Mr. Peter Ferguson: Can I add one other slight twist on that?

Ms. Albina Guarnieri: We're searchers of the truth here.

Mr. Peter Ferguson: This is personally anecdotal. I work in APEC and in OECD. One of the things that the American private sector representatives who participate in this process—and these are major American corporations—envy about Canada is the intensely close level of cooperation and support between government and the private sector. They can't get it in the United States, in that more entrepreneurial environment, where government is mistrusted to a level that I don't think exists in Canada.

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So we have that kind of relationship that is envied not only by the United States but by a number of Asian economies as well. It's the kind of thing that keeps business here and attracts business to this environment. I've heard that a number of times.

Ms. Albina Guarnieri: Thank you very much.

Obviously Canada has many assets, and Michael, your faith in this country is refreshing.

The Chair: Thank you, Ms. Guarnieri.

I just want to go back to the Ireland example. If we're able to set to improve our conditions here and develop more of a culture of opportunity, success, or whatever you want to call it, the Irish example also tells you that emigration from the United States to Ireland has sky-rocketed. So we can reclaim many Canadians if we perhaps improve certain elements of our economy.

Would you agree with that?

Mr. Ross MacLeod: Yes, I think so. It's very interesting you cited the return of Irish people to Ireland. Professor Walsh, who I mentioned earlier, has documented that a lot. They had huge emigration from Ireland in the 1960s, 1970s, and 1980s, and the return flood of trained people, often with capital and business expertise, has helped the economy quite a bit on the return flood.

So, yes, I think we can attract people back, and we can attract people from the outside. I was recently asked to get in touch with the economic development commissioner for the San Francisco Bay area, who'd recently been in Ottawa and is coming back to lead a trade mission to talk of U.S. companies who want to talk to Canadian companies about opportunities here. What they're finding in the bay area and in the valley is that they are running out of people. The costs are high and the cost of property is high and so on. They're looking at Ottawa as a place where they can expand because of quality of life reasons. A lot of Canadians have the right skills, pay levels are somewhat different than in the valley, and so on. So there may be a reverse drain out there if you get the conditions right.

The Chair: Basically, then, what Canadians are doing is going down to United States to build up capital and then bring it back, right? Isn't that it?

Mr. Ross MacLeod: That would be great.

The Chair: Mr. Brison.

Mr. Scott Brison: I have just a couple of quick things to add, Mr. Chairman.

One of the things we have with our departure tax system is that we actually encourage, in a sense, the thinking that if you're going to make a lot of money, you'd better get out early. I understand that's one factor.

Michael is unique as...you know, maritimers have a very.... There's probably a greater draw back to the Maritimes than there is to almost any region of the country, for whatever set of reasons.

Tom Axworthy was speaking at the BCNI meeting in Toronto a few weeks ago. He spoke as a former professor at Harvard. He said that over a period of years he saw the percentage of his graduating students who were from Canada and who were returning to Canada dwindle from 100% to almost zero. The final class wasn't staying. I've heard that from other Harvard graduates, and this is of course troubling.

But there's one other thing. I know the culture of opportunity issue has been brought up a couple of times, as has the notion of the innate entrepreneurialism that is more pervasive in the U.S. than in Canada. That's been brought up as a factor. We can't change that specifically, but we can handle the other impediments.

This is a great story, which you people may be able to use at some point, about an old seafood restaurant in St. Stephen, New Brunswick. A guy went in there one day to have lobster dinner. When he told the waiter he'd like to have lobster dinner, the waiter asked him if he wanted American lobster or Canadian lobster. He said, “What's the difference?”

The waiter told him the American lobsters were over in a tank with a lid, and the Canadian lobsters were in a tank without a lid. The man asked why they had to put a lid on the American lobster and not on the Canadian lobster: “What's the difference?”

The waiter told him, well, with the American lobster, if we don't put the lid on, the lobster will crawl out, go out on the floor, disturb patrons, bite people, and it's really very embarrassing; we can't let that happen. But with the Canadian lobster, well, if one of them climbs up too high, the other ones will grab hold of him and pull him back.

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Voices: Oh, oh!

Mr. Scott Brison: I think our approach to success and failure in Canada may be a little different, but while we can't address necessarily those cultural differences we can address whether it's taxes or development strategy, etc.

Thank you all for your time.

The Chair: [Inaudible—Editor]

Mr. Scott Brison: We've now heard from our crabby chairman.

Voices: Oh, oh.

Mr. Scott Brison: Thank you, Mr. Chairman.

The Chair: That's it?

Mr. Scott Brison: That's it.

The Chair: That was your contribution?

Mr. Scott Brison: That's my last crustacean story for this morning.

The Chair: Mr. Gallaway.

Mr. Roger Gallaway: No, I'm finished.

The Chair: Ms. Guarnieri? Mr. Forseth?

Mr. Paul Forseth: We're done.

The Chair: Okay.

I'd like to thank you all very much. It was certainly interesting.

It's very difficult, I guess, to get some of the answers to some of the key problems. Having said that, I think some of the measures we have taken and some of the things we're looking at as a government are certainly creating a moderate tilt towards greater growth.

Even on the jobs issue—and I was talking to Ms. Guarnieri yesterday about this—what I'm finding is that in this country there's also a shift there. As unemployment drops, the issue of standard of living becomes more important, and disposable income becomes more important. Public policy has to in fact reflect that shift as well.

The challenges are many, and you clearly pointed those out. We will be seeking solutions not only during these round tables but also during budget consultation for our next report to the Minister of Finance. Again, thank you.

The meeting's adjourned.