Bust didn’t stop start-ups: StatsCan

Firms in Canada’s information and communications technology (ICT) sector continue to see new market opportunities despite significant losses in output and employment since 2000, according to Statistics Canada.

In its study released

last week on the ICT sector from 1997 to 2003, StatsCan looked at rates of entry of new business establishments built by new and incumbent ICT firms in addition to more traditional benchmarks like economic growth and employment rates.

“We’re trying to characterize the bust looking beyond simply levels of employment or output as measured by GDP,” said Mark Brown, senior research economist at StatsCan. “We were simply asking, ‘Were we continuing to see large numbers of new entrants entering into the sector during the so-called bad years?’”

Between 1998 and 2000 entry rates or the proportion of employment in establishments that were new from the year before in the ICT sector were between 25 and 44 percentage points above the rest of the business sector. Despite weak gross domestic product (GDP) growth since 2000 and similar employment patterns, entry rates in 2001 were 16 points above the rest of the business sector and 14 points higher in 2002.

These numbers came as a bit of a surprise to Brown who co-authored the report, titled “An Anatomy of Growth and Decline: High-tech Industries through the Boom and Bust Years, 1997 to 2003.”

“With the decline in employment in the ICT sector after 2000 I wasn’t expecting entry rates to be higher than the rest of the business sector,” said Brown. “It was something of a surprise to see there are lots of new entries emerging even during a period when the sector was retrenching.”

To track entry rates, StatsCan obtained data from its Business Register (BR), a list of all firms with employees in Canada. While most of the units are updated on a monthly basis as per info from administrative sources, larger and more complex businesses are updated less frequently. To ensure an accurate measurement of employment in the ICT sector, StatsCan also uses payroll deduction records that the federal government receives.

Industry experts, however, agree with the study’s results but say they are nothing new.

Canadian Advanced Technology Alliance (CATA) vice-president Barry Gander said he’s not surprised that the number of new companies would continue to rise with the ongoing increase of new ideas for new productivity tools.

“Certainly there has been a slowdown in the development of productivity tools,” said Gander. “In today’s world that investment curve has started to climb up again. The people who are fueling the inventiveness growth have been counting on that pickup all along and that that pickup is now occurring.”

Driving this new investment in new establishments is the fact that many firms continue to see opportunities to develop new types of products in ICT, said Brown.

“From a theoretical perspective what people argue is that products go through several different phases like product cycle,” said Brown. “The high tech sector during the 1990s was comprised of a lot of businesses with a lot of products in the initial stages.

“We saw really strong growth because of that. We’re going to find a lot of new firms entering and a lot exiting too because of experimenting taking place.”

Information Technology Association of Canada (ITAC) vice-president of communications and research Lynda Leonard said ITAC is seeing it as “tapering growth.”

“This is the Internet cycle of the growth of our industry. That’s fully consistent with what many of us have experienced two or three times before,” she said.

Like Gander, Leonard also said the ITC sector, like any other industrial market, is subject to boom and bust cycles.

“It’s basically what we’ve been saying all along which is the sky is not falling,” said Leonard. “It’s nice to have this corroboration but those of us in the industry have been saying this is a business cycle. Every knowledge-based industry that you’re going to develop and foster in the Canadian industry is going to encounter business cycles.”

Denis Vance, group vice-president and chief research officer at research firm IDC Canada, agreed the ICT sector from 1997 to 2003, excluding 2001, saw lots of start-ups.

“That is the history of the ICT business,” said Vance. “It attracts innovative people, it attracts entrepreneurial people, it attracts capital and that’s why it has become such a growth engine for our economy.”

While Vance agreed that people have continued regard information technology as a good investment, he disputed the report’s findings in terms of growth, adding that results can differ depending on how data is measured.

StatsCan found while between 1997 and 1999, GDP growth in the sector averaged 19 per cent a year, it declined 2.6 per cent in 2000 and grew only one per cent in 2002. The report went on to say that output in ICT returned to its 2000 levels in 2003.

IDC Canada’s numbers, however, show that the market continued to shrink in 2002 and 2003 and, as it predicted, turned around in 2004.

“In 2000 the market was $36.1 billion (external spend),” said Vance. “The following year, we dropped down to $35.5 billion. We got back to 2000 levels in 2004.

“IDC predicted in Jan. 2004 that 2004 would be the turnaround year and indeed it was. We ended the year back to where we were in terms of dollars spent in 2000. This year we’re saying it is going to be a $37.75 billion spend. You’re seeing real growth over and above 2000 levels.”

Similar to GDP, while employment growth averaged 13 per cent a year between 1997 and 1998, it declined after 2001, particularly in manufacturing compared to service.

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