An enormous increase in IT capabilities and an even more substantial drop in price has driven businesses to sink more money into information and communications technology than almost any other type of asset over the last two decades, according to a recent Statistics Canada report.
However, at least one analyst said there is no way that kind of growth rate can sustain itself.
From 1981 to 2000, business investment in information and communication technology (ICT), including computer hardware, software and telecommunications grew at an annual average rate of 16.2 per cent, which far outpaced investment in other types of assets. Business investment in ICT grew an average 27.6 per cent per year, five times faster than business sector output from 1995 to 2000. That, according to the report, made it “a major factor in the acceleration of growth in the business sector’s economic output.”
And, said Tarek Harchaoui, chief of the multifactor productivity program in the microeconomic analysis division at Statistics Canada in Ottawa, while need for technology has been the consistent driver for the last 20 years, cost has been the major factor since around 1995.
“The main determinant to this huge growth of ICT component is the drop in the prices of ICT,” Harchaoui said from his Ottawa office. “It functions because over the years, prices of ICT components dropped and therefore was incentive for firms to replace their equipment because it was getting cheaper to own and lease it.”
Larry Karnis, president of Brampton, Ont.-based Application Enhancements Inc. and member of the Canadian Information Processing Society (CIPS), said the numbers from Statistics Canada don’t surprise him, but he warns that such growth can’t last.
“A number of factors in the middle to late 90s all conspired to drive IT,” he said, explaining that those factors include the falling price of PCs and the rising concern about Y2K.
“The other thing that happened — there is a general trend in IT from specialized equipment to commodity equipment. The PC on your desktop is a commodity device and you pay commodity prices for everything you buy for it, as opposed to a big company that buys specialized equipment.”
He also includes Microsoft’s introduction of Windows NT – what Karnis calls the first “real operating system” – which allowed companies to use PC servers for more than file and print sharing, as another ICT driver.
But Statistics Canada also reveals that ICT equipment still accounts for a small share of the business sector’s aggregate capital. In 2000, the sector’s ICT assets totalled $60 billion in current prices, representing only 6.4 per cent of fixed reproducible capital, which includes other machinery, equipment and structures, but not land or inventories. Even so, that is more than five times the total of $11 billion in 1981, when ICT accounted for an even smaller 3.9 per cent share of the business sector’s fixed reproducible capital stock.
The rapid adoption of ICT reflected both the steep decline in the price of computing power, at the rate of 9.3 per cent a year since 1981, and the explosion in ICT applications and capabilities. It also suggests that businesses made a sustained effort to improve both their performance and profitability. Karnis suggests, however, that if technology is cheap enough, companies find excuses to use it.
“You have a five-fold increase in power and a six-fold decrease in price, then you start looking to technology to do things you wouldn’t have previously thought of deploying technology for,” he said. “You start finding excuses to roll it out.”
Business investment in ICT more than doubled from 1995 to 2000 compared with the 1988-to-1995 period, as firms replaced and upgraded their high-tech equipment and software.
“There’s the Y2K thing, the transition of technology from specialized to commodity, there is the entry of Microsoft with a server operating system, there is a general maturity of commodity products, so all of these things helped drive spending in IT,” Karnis said.
“It’s completely unsustainable,” he said, explaining that no matter how much the price of PCs drop, consumers are not likely to buy enough of them to keep up this massive growth.
Of the 4.9 per cent average annual growth rate of output from 1995 to 2000, ICT capital services contributed 14 per cent, other machinery and equipment and structures 20 per cent, labour inputs 45 per cent, and multifactor productivity the remaining 21 per cent. Harchaoui also identifies the economy recovery in the mid-90s as a factor for ICT growth.
“1995 to 2000 was a period of expansion too, because the economy just came out of the recession,” he said. “There is a cyclical component there.”
Statistics Canada in Ottawa is at http://www.statisticscanada.com/
Application Enhancement in Brampton, Ont., is at http://www.aei.on.ca