Canada: The great tech north?

Last year's rumor that Microsoft might move to Canada to avoid potential Department of Justice penalties may have been only the beginning of chatter about migrating tech companies. Canada has launched a branding campaign to bring technology companies north. The message: Canada is tech friendly.

"There's a revolution in Canada," Tobin said, speaking at The Digital Economy and North American Growth, a roundtable discussion hosted by the Committee for Economic Development in New York. "The country has become entrepreneurial."

Tobin was in New York this week with a panel of venture capitalists and other Canadian notables to pitch "Silicon Valley North." Canada has strong tax incentives, cheaper labor and a stronger broadband infrastructure than the United States--tools that will be employed to lure tech companies north.

Canada is trying to emulate the success of other countries such as Ireland that have convinced U.S.-based companies to set up shop abroad. When they relocate to another country, they often provide its economy with jobs and a jump start.

If the plan gets going, it could gain momentum because tech companies tend to cluster together. Indeed, Canada is already a fiber-optic powerhouse with Nortel Networks and JDS Uniphase calling the country home. Other Canadian companies include 360Networks and Corel. Meanwhile, U.S. giants IBM and Cisco Systems have announced the opening of new global business centers in Canada, and overseas companies Nokia, Ericsson and Alcatel also have plans to open offices there.

Canadian research and development helped hatch the popular BlackBerry pager developed by Research In Motion of Waterloo, Ontario.

"Canada is grounded by strong economic fundamentals: budget surpluses, low inflation and low unemployment, meaningful tax cuts and forward-looking policies," Tobin said.

Officials argued that Canada's tech sector is also in better standing because the country missed the dot-com boom. "We avoided the carnage of the U.S. (stock markets) because money wasn't poured into dot-coms; it went into software, infrastructure" and other areas that haven't been hit as hard, said John Eckert, managing director of McLean Eatson Capital and president of the Canadian Venture Capital Association.

The country also has a campaign to ensure that all Canadian communities have access to high-speed broadband Internet service by 2004.

Canada is ahead of the United States already with 5 percent of its population having broadband access, as compared with 2 percent in the United States, according to Tobin. The percentage of its population online is one of the highest in the world, and it connected all its schools and libraries to the Internet over two years ago.

Luring business
Before Canada could make its pitch to tech companies, it had to get its financial house in order. For years, Canada has not been known as a free-market country.

"We recognize we have a branding problem," Tobin said.

The Canadian government used to own the country's largest airline, a major oil company and a major railway, but those have all since been privatized as the country has become business friendly. Chief among the new policies have been changes to tax laws.

"Ten years ago, we had double-digit inflation and double-digit unemployment, and the economy was lackluster; from a financial perspective, we had no cachet whatsoever," Eckert said.

"We're no longer a high-tax environment but a competitive tax environment." In early 2001, the country implemented its biggest tax cut in history, a package worth $65 billion (in U.S. dollars), Tobin said. This is a big sum for an economy one-tenth the size of the United States', he noted.

Canada is also cutting taxes to attract businesses. By 2005, the average corporate tax rate in Canada will fall to roughly 5 percentage points below the U.S. rate. The government has also lowered its capital gains tax to 23 percent for assets held less than a year. In the United States, capital gains can top 40 percent for assets held less than a year.

Aside from incentives to lure established businesses north, Canada also has initiatives designed to entice start-ups. A World Bank/Harvard University study concluded that entrepreneurs starting new businesses in Canada face less red tape than entrepreneurs in any other country the study looked at. The United States ranked fourth by comparison, he noted.

The venture capital market is also flourishing in Canada. In 2000, the amount of capital disbursement grew to $6.3 billion, a 133 percent increase over the $2.7 billion in 1999.

The brain basin
Donald Peterson, president and CEO of Avaya, the former enterprise networking arm of Lucent Technologies, said U.S. companies are also looking for intellectual talent.

"It's also about creating a nucleus of capability," Peterson said. Avaya runs a sales and services subsidiary out of Toronto, which it opened to take advantage of the wealth of cheap, skilled labor north of the border.

The 2000 Global Competitiveness Report ranked Canada No. 1 out of 59 countries in the world for per capita availability of knowledge workers.

Canada has long bemoaned its "brain drain"--the mass exodus of its most talented minds for higher-paying jobs in the United States. Indeed, Silicon Valley is host to 350,000 to 400,000 Canadians, according to Paula Stern, President of the Stern Group, an international trade advisory firm in Washington, D.C.

To help its cause, Canada is touting its engineering schools. Such clout worked for Silicon Valley, which took off in part because of its proximity to Stanford. Microsoft recruits more graduates from the University of Waterloo in Ontario than any other campus, and according to Gourman, which ranks universities, 18 of the top 40 electrical engineering programs on the continent are offered at Canadian universities.

Canada now allows more highly skilled immigrants a chance to stay in the country. "Immigration policy is economic policy in 2001," Stern said. "Canada's immigration policy has been a big factor" in its ability to create a technology-savvy work force, she added.

When DoubleClick bought Canadian company FloNetwork in February, it had to decide where to locate, Canada, or Atlanta. "It was quickly evident that Toronto was the only choice. It was 50 percent of the cost (of) Atlanta, and that's not just about the lower dollar--it's more employee loyalty," Eckert said.

Tobin agreed: "Canada has changed. We're not complacent, we're ambitious. We're at your heels. We're nipping. Before long, we're going to invite you to follow."