Explaining Industry Differences in IT Investment Per Worker Between Canada and the United States, 2002-2013

In 2013, Canadian firms invested only about one half as much per worker in information and communications technologies (ICT) compared to their US counterparts. Many studies have shown that lower ICT investment per worker in Canada compared to the United States is responsible for weaker productivity growth in Canada. In the past, attention has been focused on the aggregate gap, but 49.8 per cent of lower business sector IT investment in Canada relative to the United States in 2013 was explained by two industries: information and cultural industries and professional, scientific and technical services, which accounted for only 13.0 per cent of employment (IT investment is composed of computers and software investment, while ICT investment is composed of computers, communications, and software investment). The main objective of this report is to shed light on the possible reasons for the gap in these sectors even though other industries contributing to the gap are also analyzed. A number of explanations will be examined, including data measurement and comparability issues stemming from methodological differences between statistical agencies in Canada and the United States, and differences in potential explanatory variables of IT investment, such as human capital, taxation, profits, firm creation rates, industrial structure, and regulation, among others. This report finds that software investment in information and cultural industries and professional, scientific and technical services is responsible for 45.9 per cent of the total IT investment per worker gap between Canada and the United States. The report also finds that measurement issues likely account for a significant share of the software investment gap in professional, scientific and technical services, and subsequently, account for a large share of the total IT investment per worker gap. Other explanations, such as human capital, regulation, firm size, managerial education, and labour compensation likely play a smaller role in this industry. In contrast, measurement issues likely account for much less of the information and cultural industries software gap between Canada and the United States, meaning that explanations such as human capital, managerial education, labour compensation and firm size, are more likely to play a larger role in this industry.