Growth and Wealth Creation in B.C.'s High Tech Sector by Michael C. Volker

Over the past few years, B.C.'s high tech industry has been the bright spot in the Province's economy. While GDP growth has been stagnant, the technology sector is enjoying near double-digit growth, generating new wealth for British Columbians.

While opinions vary on what constitutes high technology and how to measure its impact on the B.C. economy, one thing is for sure: new ventures and new jobs are being created at an unprecedented rate. In fact, more than 25,000 new jobs are expected to be created over the next three years, according to industry prognosticators.

Technology companies are those which rely heavily on research and development activities to bring innovative new products to market. On their income statements, these firms will typically show R&D spending at 10-20% of revenue.

When referring to high technology, many people think about information technology, i.e. computers, communications and electronics hardware and software. The "New Media" industry comprising multimedia, entertainment, and internet companies represented by NewMedia BC is an expanding area within information technology. However, biotechnology is a young and rapidly growing area. And just appearing on the radar screen is the nascent fuel cell industry which offers unlimited new opportunities.

It is difficult to determine the exact size of the technology industry due to different approaches in measuring the sector. Organizations like B.C. Statistics and the B.C. Technology Industry Association, as well as their counterparts in neighbouring states and provinces, take different approaches in sizing up the industry.

There are more than 5,000 technology enterprises in B.C. Industry revenues are in the $5 billion range with employment approaching 50,000 full-time jobs. With a provincial GDP of just under $110 billion, high tech's contribution is impressive indeed.

But what is more impressive is the contribution to wealth creation within the technology sector. A recent BIV column by Harry Jaako of Discovery Capital revealed that, of all industry sectors, technology ranked the highest in terms of market value.

There are presently more than 100 publicly traded technology firms with headquarters in B.C. The top 20 firms enjoy a current market capitalization of $12.5 billion, a value which has more than doubled in less than two years. Not included in this list are those (like Electronic Arts Canada, MacDonald Dettwiler & Associates and Seagate Software Inc.) which are subsidiaries of U.S. based public firms. If you included the local operations of these U.S. firms on a pro-rata basis (say by employee count) and if you added in all the local private companies (attributing valuations on a comparative basis), the value of high tech in B.C. easily surpasses the $25 billion mark.

More and more technology companies are going to the public markets to raise equity capital, be it on a senior stock exchange to raise capital for expansion or a junior exchange to raise early stage venture capital. Among the senior exchange IPOs this year are companies like AnorMED Inc., Sierra Wireless Inc., and CREO Products Inc. These companies will appear in the T-Net20 stock index, which tracks the market value of the top 20 B.C. technology firms.

The T-Net20 chart shows that the index closed at 1822 in May'99. This index, which is updated quarterly, shows that a $1000 investment In Jan'98 would have grown to $1822 (i.e. simply by maintaining an investment in the top 20 companies, weighted by their relative market capitalizations).

This growth in value is justified on the basis of corporate performance. Just a few years ago, there wasn't a single technology company in B.C. with sales in excess of $100 million. Now there are several. Leading the charge are companies like PMC-Sierra Inc. and CREO Products Inc., which will likely be our first companies to hit the $500 million sales mark. PMC-Sierra, a spin-off from MPR Research, is itself only a few years old.

The growth in high technology is not limited by markets and new opportunities. The only constraints are the supply of human talent and financial capital. These concerns are foremost on the minds of industry and business leaders who have long advocated a closer partnership with government to address these matters.

The level of personal taxation, especially for high income professionals, is the most often-cited reason why people leave B.C. or why it is difficult to attract new talent. This problem could be overcome to a certain extent by offering higher wages or stock incentives, but punitive taxation on capital gains and stock options inhibit capital formation. And it isn't as if the industry is asking for any kind of handout. What is being asked for is very simple: rewards, not punishment, for success and a climate that encourages innovation and entrepreneurship. Lowering marginal tax and capital gains tax rates will result in bigger slices for everyone.

Why B.C.? The province's universities can take much of the credit for the people component of the industry's growth. MacDonald-Dettwiler, followed by many others, had its origin at the University of British Columbia. UBC and Simon Fraser University have created over 100 spin-off companies some of which are now "anchor tenants" in the province which in turn spawn new ventures. Together with the University of Victoria, the University of Northern BC, and TechBC, these institutions are actively drumming up new initiatives (e.g. SFU's TIME Centre - for Technology, Innovation, Management, and Entrepreneurship) not to mention several joint projects (e.g. a UBC/SFU New Media Centre).

Agencies like the B.C. Advanced Systems Institute, the Science Council of B.C., and the Vancouver Enterprise Forum augment this intellectual capacity by assisting entrepreneurs in the development of their ventures.

The other component - capital - is available in B.C. through a growing network of business angels, seed investors, and venture capitalists. The new "Venture Equities Exchange" (still to be named) resulting from the merger of the Vancouver and Alberta Stock Exchanges will provide the link between the average investor and the junior technology firm.

With all these things going for the technology industry, in spite of adverse tax policies, the B.C. technology industry will figure prominently in the economic limelight and will provide new wealth and prosperity for all British Columbians.