Introduction

The Minister of Industry has invited over one hundred and fifty CEO-level leaders from business, academic and consumer organizations to a Forum on the Digital Economy in Ottawa on June 22, 2009. The goal of the Forum is to help develop a broad Agenda for the Digital Economy that would include the following themes:

• Promoting business innovation using information and communication technologies (ICTs)
• Building a digital infrastructure for the future
• Ensuring a safer, stronger online marketplace

At an October 2007 National Roundtable on the Future of the Internet Economy, participants expressed great concern about Canada's declining performance in these three areas. They urged the federal government to re-establish Canada's position as a global leader¹.

In developing a forward-looking agenda, it is important to recognize that the digital economy game has changed significantly in the year and a half since the National Roundtable.

• Technology has continued to evolve rapidly, particularly in the areas of Web 2.0 services, user generated content, and mobile Internet access.
• 'Green ICT' has emerged as a major business challenge and opportunity.
• Under the leadership of the OECD, a comprehensive international plan for transitioning to the digital economy has been established.
• There is a new realization of the changing nature of ICT-enabled innovation and its role in competitiveness and economic growth.
• The global financial crisis and economic downturn have prompted other countries to raise the economic stakes in the digital economy of the future.

In response to these events – and against the background of ongoing global security and environmental threats – the world's leading economies have adopted strategies to stimulate short-term recovery and restore long-term growth. Actions to strengthen their digital economies are at the centre of many national strategies. To regain digital leadership, Canada needs a similar strategic focus and commitment to action.

Since the Roundtable, the government has introduced measures to promote the application of ICTs in business, extend broadband access to unserved communities, advance the roll-out of electronic medical and health care records, and protect electronic commerce. While these are important steps, more is needed to keep pace with other countries and fully restore Canadian leadership in the digital economy.

The purpose of this paper is to provide background information about Canada's place in the digital economy and the three themes on the Forum program. It will also pose questions about how Canada can move forward in developing and implementing a National Agenda for the Digital Economy.

Canada and the Digital Economy

Over the past half century, the adoption and application of ICTs have transformed the global economy by creating new sources of wealth and employment, increasing productivity, enabling innovation, enhancing competition, and changing the structure and location of economic activity. ICTs have become a pervasive, general purpose technology that is an enabler across the entire economy. As part of this process new industries have been born, old sectors have declined, skill requirements have changed, and economic power has been redistributed among demographic groups, regions and countries.

The smart devices, high speed networks, services, and applications that make up ICTs have together created a massive online economy typified by companies such as eBay, which is a primary or secondary source of income for more than 1 million people worldwide; Google, which is transforming online business models and the overall structure of the digital economy; and Facebook, which has more than 200 million active users, including more than 7 million in Canada.

The importance of managing these changes in a way that facilitates transition to a more fully digital economy has been recognized for some time in Canada and other advanced economies. In June 2008, the OECD Ministerial Meeting on the Future of the Internet Economy agreed on a comprehensive plan for addressing the major policy and regulatory challenges involved in this transition.²

The worldwide economic downturn triggered by the global financial crisis that erupted in the second half of 2008 has added to the urgency of moving the digital economy agenda forward – in the short term with 'shovel ready' projects – and in the longer term with initiatives to create 'smart' energy, transportation and building infrastructures, and to use ICTs to improve productivity, competitiveness and environmental sustainability throughout the economy.³

Canada's current standing

Different measures that have been developed to compare the digital economy performance of countries present a similar picture of where Canada stands – not at the front of the pack, but not too far behind to overtake the leaders.

• The World Economic Forum 2008-09 Networked Readiness Index ranks Canada 10^th out of 134 economies, up from 13th in 2007-08. Canada's rank has remained in this range since the NRI was first published in 2001-02. The NRI uses 68 indicators grouped in 9 'pillars' of the digital economy to measure a country's ICT environment, readiness and usage.⁴
• The Economist 2007 e-Readiness Index ranks Canada 13^th out of 69 economies, down from 6th in 2006. The eRI uses a weighted collection of around 100 indicators to measure a country's ICT infrastructure, its citizens' ability to use technology, the transparency of its business and legal systems, and the extent to which its government encourages the use of technology.⁵

Many of the countries that rank ahead of Canada or at around the same level have comprehensive digital economy strategies in place that they regularly update as circumstances change.

• In the European Union, Union-wide 'Information Society' policies are often complemented by national strategies. This is the case in the Nordic countries, which consistently rank above Canada on digital economy indexes. It is also the case, for example, in the UK, which unveiled a 'Digital Britain' strategy earlier this year and ranks either slightly ahead of Canada or slightly behind, depending on the index.⁶
• The advanced economies of Asia have long had national ICT strategies geared to their economic strengths. More recently, China and India have made the digital economy a centerpiece of their forward planning, aiming to capitalize on their emerging strengths in ICT manufacturing, software and services.
• In addition to its recently announced high speed broadband expansion, Australia has established a federal government Department of Broadband, Communications and the Digital Economy.⁷

In the US, the Obama administration's response to the economic downturn shows that the transition to a digital economy is seen by at least some American policy makers as one of the strategic keys to restoring long-term, environmentally sustainable growth. The responses of leaders in other G8 and OECD countries have sent similar signals regarding the importance of ICTs for 'Green Growth'.⁸

Regaining leadership in the digital economy

In the 1990s, Canada was one of the first countries to develop a national strategy for the information economy. However, major components of the strategy now require replacement or reinforcement in the face of technological and market change, and mounting pressures on the competitiveness of the Canadian economy. Accordingly, both the 2006 report of the Telecommunications Policy Review Panel and the 2007 National Roundtable recommended that Canada refresh its policies and programs and develop a new national strategy for the digital economy.⁹

Canada faces two major challenges in regaining leadership in the digital economy.

• The 5% Challenge – One challenge is to re-establish and reinforce the leadership position Canada has long held in the ICT sector of the economy – i.e. the sector that produces ICT goods and services. The ICT sector is one of Canada's technological strengths, performs 40% of Canada's private R&D, employs more than half a million Canadians, and generates 5% of GDP.¹⁰ Over the past decade, the performance of Canada's ICT sector has slipped in the face of rising global competition and as a result of management problems in some companies. OECD data suggest that Canada's ICT sector is currently punching at, or below, the weight of our economy. However, as the OECD has noted, the ICT sector in Canada and other countries has weathered the current economic downturn much better than most other sectors.¹¹
• The 95% Challenge – Another challenge is to use ICTs produced in Canada and elsewhere to increase innovation, improve productivity, enhance competitiveness, create jobs, and generate wealth in firms of every size, in every economic sector, in every region of the country. This challenge is larger and more complex than the challenge of reinforcing Canada's ICT sector, and it is also more urgent. OECD data indicate that our performance in applying and using ICTs throughout the economy is weak in comparison to countries that are digital economy leaders. Turning around Canada's performance in the application and use of ICTs is the challenge the Forum has been designed to address.

With the worst of the financial crisis and recession at least temporarily behind us, there appears to be consensus that advanced economies have reached a tipping point, and that the way forward is to embrace the full potential of the digital economy. To reinforce our existing strengths in ICTs and other economic sectors, be they resources, manufacturing or services, Canada cannot afford to continue to fall behind as a digital economy. We must become leaders again.

The purpose of the Forum is to advise the Minister of Industry on what should be done in his areas of direct responsibility to help Canada achieve leadership in the digital economy. These actions will form the first items on the national Agenda for the Digital Economy. To move the agenda forward, other federal and provincial departments and agencies will need to be engaged and contribute in their areas of responsibility, as will other stakeholders from the private sector, the academic and research community, and civil society. The Forum will also lay the foundations for engaging these other stakeholders in a broader policy dialogue by focusing on its three basic themes and recommending practical actions for moving forward.

Theme 1 – Promoting Business Innovation Using ICTs

The Issue

ICT enables innovation in the products, services and processes of all industries and economic sectors; the organization, location and nature of work; the structure and operation of markets for goods, services and intangibles; the management of energy, transportation, and building infrastructures; the conduct of scientific inquiry, research and development; and in the general process of commercializing innovation.

Taken together, the many different forms of innovation enabled by ICTs are profoundly transforming the global economy in ways that only a few other general purpose technologies, such as steam power and electricity, have done throughout history – but with a combination of speed, complexity, and global reach not previously seen.

Recent research suggests that to manage this complexity so as to fully benefit from the potential of the digital economy, countries, companies, governments and public institutions need to develop strategies that address the different dimensions of ICT-enabled innovation. Technology, skills, financing, business R&D, and an environment that encourages innovation and rewards entrepreneurship should all be part of the mix.

ICT adoption and use is the foundation of business innovation in the digital economy. Compared to other advanced economies, Canadian businesses – particularly SMEs – have been slow to adopt ICTs and use them to innovate. For example, the OECD 2007 Science, Technology and Industry Scoreboard ranked Canada 2^nd in terms of broadband penetration in businesses with 10 or more employees, but only 11^th in terms of use of the Internet and web sites by these businesses.¹²

Where Canada stands

Canada's position on international indexes of innovation, productivity and competitiveness is similar to our position on the digital economy indexes cited in the previous section – not at the front of the pack, but not too far behind the leaders to catch up.¹³

In an April 2009 preliminary report on Innovation and Business Strategy: Why Canada Falls Short, the Council of Canadian Academies Expert Panel on Business Innovation made a number of observations that are relevant to the Forum's agenda.¹⁴

• Innovation is an economic process rather than a primarily science and engineering activity.
• Canada has a serious productivity growth problem, due mainly to weak growth of multifactor productivity (MFP). The problem is not caused by shortcomings in Canada's workforce or inadequate capital investment – with the exception of significantly lagging investment in ICT, where average investment per worker in Canada is only about 60% of the US level.
• Canada's weak MFP growth indicates that the country's lagging productivity growth is largely due to weak business innovation. In the Panel's framework, business innovation includes better organization of work, improved business models, the efficient incorporation of new technology, the payoff from R&D, and the insights of entrepreneurs.
• Overarching the sector-specific factors that influence business innovation are a number of cross-cutting issues that suggest the need for proactive public policies. One of these issues is incentives to encourage investment in advanced machinery and equipment (M&E) in general and ICTs in particular. The Panel suggests these incentives should be designed only in light of a more thorough understanding of the reasons for the relatively slow adoption of ICTs in Canada to date.

Current challenges

In light of the foregoing, Forum participants may wish to consider the following questions.

• What is the role of ICTs for the recovery and re-tooling of the economy as a whole, as well as within specific sectors such as resources, manufacturing, retail and health care?

                    - Companies can jumpstart their innovation, realize productivity gains and increase customer satisfaction by tapping the intelligence of customers and employees. Crowdsourcing is no longer cutting edge; it's established, mainstream business practice. Canadian IT companies need to model that kind of innovation for other sectors; until Canadian IT companies integrate transparent online collaboration and customer engagement into their business practices, we can't expect other sectors to embrace this kind of innovation. We need a homegrown example like Dell's IdeaStorm -- a runaway success story to show Canadian companies how it's done. (AS)

• How does Canada address its current skill shortages and spur the development of new skills, business models, innovation in global supply chains and other entrepreneurial activities based on the further integration of ICTs, including emerging areas such as Web 2.0?
• How does Canada use ICTs to respond to global challenges such as climate change and the greening of the economy, health, and the general well being of Canadians?

Theme 2 – Building a Digital Infrastructure for the Future

The issue

To become a digital economy leader again, Canada needs a world class digital infrastructure. To prosper in a globalized economy in the emerging era of ICT-enabled open innovation and user generated content, this infrastructure must be accessible, affordable, and usable by all Canadian businesses and residents. If it is not, we will be unable to maximize ICT-enabled innovation and reap its benefits in terms of productivity, competitiveness, jobs and wealth creation.

Our economic and demographic characteristics make widespread affordable access to world class digital infrastructure particularly important in Canada.

• Although a number of Canadian companies are global players in the resource, manufacturing and service sectors, our economy is mainly made up of small and medium sized enterprises serving local and regional markets. SMEs often lack the resources needed to participate in traditional, R&D-driven innovation processes. The new kinds of innovation opportunities offered by the digital economy, in contrast, are much more open to SMEs.
• Canada's population density is lower and our communities are more dispersed, often over challenging terrain, than in some leading digital economies. These demographic patterns add to the cost of infrastructure deployment and access for communities in rural and remote areas. In recent decades, many of these communities have existed on the margins of the Canadian economy. This is likely to change in the future in at least some areas – for example, the North – as the result of significant emerging economic opportunities.

For the past decade, the public Internet and broadband access networks based on cable and digital subscriber line (DSL) technologies have been the main infrastructure underlying the digital economy for SMEs, households and individual consumers. In the decade ahead, there will be major changes in the digital infrastructure.

• Fibre optic technologies, which have long been used in core networks in conjunction with local access technologies such as cable and DSL, are now increasingly deployed as close as possible to homes and SME business locations in order to overcome the limitations of traditional telephone networks and improve the performance of cable systems.
• New wireless technologies, such as third generation cellular and Wi-Max, which can provide high-speed access to mobile users are also beginning to be deployed, and even faster technologies such as LTE are being developed to provide higher transmission speeds and greater capacity.
• The telecommunications industry is developing Next Generation Networks (NGN), which combine the interactive, multi-media capabilities of the Internet with the quality of service and security of traditional telecommunication networks. NGNs are currently deployed in many countries, although the scale and pace of deployment varies.
• Initiatives, such as the US GENI and the EU Future Internet projects, are underway to re-design the Internet with the aim of improving its utility, quality of service and security, while maintaining traditional principles of Internet architecture.¹⁵

These new technologies and network architectures will give a significant boost to the digital economy. Deploying them and ensuring that they are accessible and affordable to businesses and residents in all communities will require major investments. These investments will be a major cost of transition to the digital economy. However, as in the case of all investments in infrastructure, the direct and indirect benefits of these investments are likely to far exceed their cost, if they are properly managed.

Where Canada stands

Although there are many different ways to compare countries in terms of their digital infrastructure, high speed broadband and mobile access are essential to participating in the digital economy. Both time series data and one-off analyses tend to paint similar pictures of where Canada currently stands.

• As a result of the early introduction of cable and DSL Internet access services, Canada ranked at the top of the leader board when the OECD began compiling statistics on residential broadband penetration a decade ago. Since then there has been a steady slippage. As of December 2008, we ranked 10^th among OECD countries in terms of broadband subscribers per 100 inhabitants.¹⁶
• According to a 2008 study by MBA students at the University of Oxford Said Business School, Canada ranked 27^th out of 42 countries studied in the quality of its broadband services, as measured by actual tests of download throughput, upload throughput, latency, and other factors. When our broadband penetration rate was combined with our quality score, Canada moved up, but only to 20^th position in the study's overall broadband leadership rankings.¹⁷
• As the Internet goes mobile, the relatively low penetration of mobile services in Canada raises additional questions about the quality of our digital infrastructure going forward. In the OECD 2007 Communications Outlook, Canada ranked 29^th out of the 30 OECD member countries in terms of cellular mobile subscribers per 100 inhabitants.¹⁸

Current challenges

In light of the foregoing, Forum participants may wish to consider the following questions pertaining to the evolution of Next Generation Networks and the Internet of the future.

• What strategies are required to accelerate private sector investment in broadband network infrastructure in order to expand capacity and produce Next Generation Access capabilities – for example, with respect to issues such as foreign direct investment (FDI) and alternative models of infrastructure ownership and competition?
• What do the private sector and governments need to do to promote ICT deployment and use, especially higher speed applications, which will generate innovation, new markets, and business opportunities?
• What is the best way to apply these ICT infrastructures so as to complement and support investment in the development of 'smart' infrastructures and services in other sectors of the economy, such as energy and transportation, in order to enable 'Green Growth'?

Theme 3 – Ensuring a safer, stronger online marketplace

The issue

The online marketplace for goods and services is one of the central features of the digital economy. It is based on a combination of the public Internet, which is accessible to consumers and SMEs, and the private networks or 'intranets' of companies that supply the online marketplace, either directly or through global value chains; the banks, credit organizations and other financial organizations involved in online transactions; and public institutions that participate in the digital economy by offering online services.

The Internet developed outside government regulatory oversight, initially as a research network, used primarily for email and document transfer. Following the development of the World Wide Web and browsers in the early- to mid-1990s, the Internet began to grow exponentially on a worldwide basis as a public, multi-media communication system with significant commercial potential.

When this happened, advanced economies including Canada took the view that the rapid growth of the Internet, the innovation it unleashed, and the benefits it brought would not have happened if it had been regulated in a way similar to traditional telecommunications or broadcasting media. Instead, Internet-related regulation focused on enabling e-commerce and creating an online marketplace that consumers could trust.

Work following the 1998 OECD Ministerial Conference on E-Commerce in Ottawa put many of these ground rules into place. In the past decade, however, an accumulating series of Internet-related issues have combined to suggest that it may be time to refresh the legal and policy framework for the Internet, the online marketplace, and Next Generation Networks as we move forward into the digital economy.

• Safety and security – Although providers of Internet services are subject to generally applicable laws and regulations concerning criminal activities, competition and consumer protection, gaps in existing laws and the borderless nature of the Internet have made it difficult for Internet service providers and national governments to successfully address issues such as child pornography, spam, online fraud, identity theft, malware, and distributed denial of service attacks.
• Network stability and reliability – Governments have come to recognize that in the digital economy, the Internet is a Critical National Infrastructure on which economic activity, public services, social well-being and national security increasingly depend. However, the Internet was not designed to play this role and has vulnerabilities in terms of security and quality of service. Cybersecurity is now a major item on the international communications policy agenda.
• Access and competition – In the past couple of years, there has been ongoing debate in Canada and other advanced economies about the relationships between, on the one hand, vertically integrated Internet service providers (i.e. ISPs that own facilities, provide wholesale and retail Internet access, and may also offer Internet content, applications and services), and, on the other hand, their 'upstream' competitors in content, application and service market segments; their wholesale customers; and their 'downstream' retail subscribers.
• Role of regulation – Much of traditional telecommunications and broadcasting regulation spills over to the Internet, not only because of issues such as traffic management and investment, but also because of the evolution of new media. This is raising fundamental questions about the role of regulation. For example, should we move traditional broadcasting regulation towards the more open Internet model? Or should we try to apply more traditional broadcasting regulatory approaches to the Internet? And how should we adapt our intellectual property legislation to the Internet?

In the absence of direct government oversight, the Internet traditionally was self-regulated by its stakeholders. Over the past decade, the growth of e-commerce and the emergence of the issues enumerated above have generated novel forms of industry self-regulation and public oversight. Multi-stakeholder cooperation and private-public partnerships have emerged to address issues such as spam, cybercrime and cybersecurity, both within countries and across borders. Going forward, however, it is an open question how the innovative approaches developed over the past decade can be adapted to manage these issues on a truly global basis.¹⁹

More generally, it is also not clear how to reconcile innovative governance models with more traditional approaches to regulating markets, carriage, content, privacy and intellectual property rights (IPRs), in order to respond effectively to issues raised by media convergence and Next Generation Networks, as well as to online identity and privacy concerns emerging from the complex social networks enabled by Web 2.0 technologies.

The question of which strategies are most appropriate for regulating different aspects of the online marketplace must be clarified and resolved in order to encourage business investment in digital infrastructure, facilitate innovation in digital products and services, and promote consumer confidence and trust in the digital economy.

Where Canada stands

The 2006 Report of the Telecommunications Policy Review Panel concluded that Canada's regulatory framework for the digital economy was out of date in comparison to other OECD countries, including members of the European Union, the US, Australia and New Zealand. The Panel recommended a comprehensive update that would include new policy objectives, new approaches to economic, technical and social regulation, development of national ICT policies and strategies, an innovative broadband program for unserved areas, new legislation, and sweeping institutional reforms.²⁰

Some individual TPRP recommendations have been acted on – for example, through the December 2006 Governor-in-Council Policy Direction to the CRTC on implementing telecommunications policy objectives, the broadband provisions of the January 2009 Budget, and the April 2009 Electronic Commerce Protection Act. However, there has not yet been a comprehensive response to the Panel's recommendations, and new issues have arisen since their report was issued.

Current challenges

In light of the foregoing, Forum participants may wish to consider the following questions.

• How should our laws and regulatory approaches evolve to promote leadership in the development, deployment and use of Internet and digital economy technologies?
• What are the legal and policy ground rules, as well as the priorities for action, necessary to ensure a safe, trustworthy, online marketplace in the face of rapidly changing technologies and globalization?
• How can Canada address emerging technologies that may be ill-suited to the conventional consent model for privacy protection – for example, the widespread use of radio frequency identification devices (RFID), nanotechnology, Web 2.0 applications, and 'cloud computing'?
• How can Canada help to develop identity management solutions that provide individuals with greater control over their personal information and online identities?

Conclusion

It is clear that Canada faces major challenges in regaining leadership in the digital economy. In setting a national agenda, it would be unrealistic to think that we could be world leaders in every area. An effective national strategy must distinguish between those areas where our challenge is to improve our performance so that we keep pace with the current world leaders, and those areas where it is vital for our overall economic performance that we match and surpass their performance.

In the concluding session of the forum, after having considered its three themes, participants may wish to consider the following questions:

• What should be Canada's priorities in setting a National Agenda for the Digital Economy?
• In which areas should we aim to be world leaders? What should be done to achieve this goal?
• In which areas do we need to improve our performance so as to keep pace with the leaders, and what should be done?

References

¹ See the Chair's report and other documentation pertaining to this event.

² See the Seoul Declaration and other documentation of this meeting.

³ Chair's summary of the findings and conclusions reached at the 57th Session of the OECD Information, Communications and Computer Policy Committee, "Fostering a Networked Recovery"

⁴ Report

⁵ 2007 eReadiness Ranking

⁶ Digital Britain

⁷ Austailian Department of Broadband, Communications and the Digital Economy

⁸ See an overview and analysis of OECD country stimulus packages.

⁹ See the ICT policy recommendations of the Telecommunications Policy Review Panel

¹⁰ Industry Canada

¹¹ See OECD Information Technology Outlook 2008, chapters 1 & 2, for information on the performance of Canada's ICT sector and business uptake of ICTs relative to other countries.

¹² SourceOECD

¹³ See for example the Economist Intelligence Unit 2009 Global Innovation Index and the World Economic Forum 2008-09 Global Competitiveness Index.

¹⁴ See Report. The Panel's full report will be issued in June 2009.

¹⁵ See Global Environment for Network Innovations and The Future Internet for Future Europe

¹⁶ The OECD definition of broadband is speeds at or above 256 Kbps

¹⁷ New High-Quality Broadband Study

¹⁸ OECD Communications Outlook 2007

¹⁹ The April 2009 ITU World Telecommunication Policy Forum adopted the Opinion that ITU members may wish to consider bringing a number of these issues into the treaty framework of the International Telecommunication Regulations at a World Conference on International Telecommunication scheduled to be held in 2012.

²⁰ Telecommunications Policy Review Panel