An Opportunity for Growth: Canada’s Internet Economy Lags Our G-20 Counterparts

A recent report by the Internet Association, which “represents America’s leading Internet companies and their global community of users,” found that although Canadians themselves have enthusiastically embraced the Internet, Canada’s economy has been losing out “because businesses are under-utilizing digital technologies and missing out on the contributions they can make to employment, GDP growth, and economic competitiveness.”

Taken by itself, the report suggests a glass-half-empty attitude to Canada’s tech economy. But one could just as easily see the situation as glass-half-full, with plenty of room for growth and opportunity. Canada’s tech sector, in stark contrast to the rest of its economy, has almost nowhere to go but up.

The Internet Association’s report paints a hyper-connected picture of Canada’s citizenry, with 41.3 hours per week spent online (second only to the U.S.) and 69% making use of social media.

Surprisingly, though, only 45.5% of Canadian businesses even have a website. Even more surprisingly, that number drops to 41.1% for small-to-medium size enterprises, which is surprising given that SMEs are often assumed to be more “agile” than the legacy players of Canada’s famously conservative business community.

As bad as those overall figures are, the numbers are even worse for retail, which may surprise, given that Canada has produced some of the most high-profile and innovative e-commerce platforms in the world, including Shopify, LightSpeed Retail and actual on-line shops like Frank & Oak, whose efforts have contributed to the growth of e-commerce in Canada, up 10% through 2012, to $22.3 billion.

But only 3% of Canada’s retail economy is online, compared with fully 23% of the U.K.’s and 7% of U.S. retailers. This massive untapped resource represents the tip of a huge iceberg lurking under Canada’s retail waters, and a huge opportunity for anyone willing to work it.

Even more alarming, perhaps, than the Canadian business sector’s lack of tech savvy is how little our Internet economy contributes to Canada’s GDP, a measly 3% ($49 billion or $44 billion U.S.), compared with 8.3% for the U.K. and 7.3% for South Korea.

These numbers are slated to worsen by 2016. When compared with the growth of other nations, Canada’s Internet economy will be overtaken by Mexico’s, which is forecast to contribute 4.5% of its GDP while Canada lurches forward to 3.6%.

The Internet Association singles out three areas for improvement that have been hampering Canada’s online technological growth: 1) underinvestment in R&D by government and corporations 2) lack of capital to get tech companies off the ground and 3) policy makers who “have been slow to embrace the Internet economy as a source of dynamism, innovation, and productivity.”

“The Government of Canada can grow the Internet economy with supportive policies like tax credits that encourage small and medium sized businesses to adopt digital technologies,” said Michael Beckerman, President and CEO of The Internet Association. “Promoting Internet access nationwide and increasing STEM education will ensure Canada’s workforce has the skill set needed for a 21st Century economy and help Canada close the competitiveness gap that exists with other G20 nations.”

Only 45.5% of Canadian businesses even have a website. Even more surprisingly, that number drops to 41.1% for small-to-medium size enterprises.

A 2012 report by Boston Consulting Group found that SMEs with a good web presence and solid engagement outperformed by 22% in terms of revenue SMEs with little or no web presence. In the U.K. such firms outperformed their web-less counterparts by a multiple of six.

The BCG report shows that the most powerful leverage a business has with respect to improving its revenue is customer engagement, which Canadian firms such as Vision Critical have been banging on about for years now.

For people who’ve been paying attention to Canada’s tech sector, the gap between how far behind we are and the possibilities for future growth are either disappointing or the opening of a great opportunity.

Given that there will be 3 billion Internet users globally by 2016 and that 4 out of 5 internet connections will be through a mobile device, the wasted potential for Canada’s businesses community is staggering.

Between simply getting Canada’s businesses online, and furthermore facilitating the adoption of customer engagement, the multiplying effect on Canada’s retail sector alone stands to be huge.

With financial services and the resource sectors, the heavy hitters of the Canadian economy, taking the bulk of the losses as the TSX overall lost 10% of its value since September, one would think that investors would seek to diversify a little.

Even so, we seem to be intent on doubling down on our perceived strengths. Given the short-term losses of last month, Canadians might think about paying a little more attention to the possibilities for growth offered by Canada’s tech sector.

Given the state of people’s attitude towards the Internet in a post-Snowden world, with its iCloud photo and Snapchat leaks, it’s tempting for the business community to blame the lack of potential for growth on people’s unwillingness to surrender their privacy for perceived commercial gains.

But lecturing the public on the need to exchange privacy for the good of the economy is a false bargain.

Only 3% of Canada’s retail economy is online, compared with fully 23% of the U.K.’s and 7% of U.S. retailers.

One particularly wrong-headed aspect of the Internet Association’s report is its self-serving swipe at Canada’s Personal Information Protection and Electronic Documents Act (PIPEDA), which it says “will have a negative impact on the growth of electronic commerce in Canada that outweighs the benefits.”

The lackadaisical approach to privacy concerns is not surprising coming from a group that represents the business interests of Facebook and Google, but what the report ignores is that people’s mistrust of corporate handling of their personal data is healthy. The trust of consumers must be won through transparency and fair dealing, not by encouraging the idea that people exist as data sets to be bought and sold by Google.

Not everyone in the business community has got privacy wrong, though. People’s desire for privacy represents another opportunity, not necessarily an obstacle.

Intel, for example, recently convened a group of “thought leaders” on the subject of Internet privacy, including Waterloo’s Privacy Analytics. In his keynote address, vice president and chief security and privacy officer for Intel Malcolm Harkins called on industry to take more responsibility with respect to consumer privacy.

“Innovation will be hindered due to an underlying mistrust among people about what businesses know about them and how they’re using that information,” said Harkins. “If we want to spur innovation and realize the true potential of big data to solve the world’s greatest challenges, technology leaders and organizations have to assume responsibility for establishing transparent business practices, designing privacy-enhancing technologies, and encouraging legislation that helps instill trust.”

What Harkins realizes is that people’s quite reasonable expectation to feel secure online should not be seen as an obstacle to economic development, but as an opportunity to innovate. There is no good reason that people can’t expect privacy while also going about their business online, as long as they feel the arrangement is mutually beneficial.

After a grim meeting yesterday with a group of private sector economists, Finance Minister Joe Oliver will likely try to put an optimistic spin on an otherwise sluggish economic forecast, the upshot being, “Hey, we’re not doing so bad. Look at Greece,” or words to that effect.

While relying on that sort of negative affirmation may come across as cute in a quintessentially self-effacing and Canadian way, it does no good to our economic future to keep treating the tech sector as a junior partner in waiting.

The Internet economy contributes 4.2% on average to the G-20’s GDP. It’s beyond time that Canada rose at least to that benchmark, if not beyond, to fulfill the promise of its tech sector.