How Canada can strengthen its cloud services industry
Applying Porter’s National Comparative Advantage framework to Canada with regards to cloud services industry
Cloud-based infrastructure and platform services industry, or in short cloud services industry, is a rapidly growing industry which is also a critical enabling infrastructure for all kinds of internet services. Canada is well positioned to capitalize on this growth as it enjoys several comparative advantages.
In this article, I analyze Canada’s comparative advantages in the cloud services industry. First, I briefly trace the internet services value chain and focus on the cloud services industry. I apply Porter’s ‘National Comparative Advantage’ framework to analyze the current comparative advantages and disadvantages of Canada with regards to cloud services industry. I end with recommendations for Canada to improve its comparative advantages in the cloud industry.
Internet Services Value Chain and Cloud Services Industry
More than 4.6 billion people use the internet. Although the internet has become an important part of our daily lives across the world, some even arguing that reliable internet access should be considered as a basic human right, it continues to grow at a rapid pace in terms of users and traffic. Despite the drastic increase in users, there is still a lot of room to grow even further, as 41% of the world’s population still do not have regular access to the internet.
Value chain is defined by Porter (2008, pg. 19) as a system of independent activities, which are connected by linkages, such that if one activity is performed, it affects the cost or effectiveness of other activities in the chain. During the early days of the internet, it was just seen as an interconnected network that facilitated faster and easier communication. Gradually with the rise of browsers, websites and search engines, the internet became a useful tool for general people. Then came another revolution with cheaper internet data whereby people also sought entertainment and a wide array of uses of the internet. At its current form, Internet services value chain is complex and large with many parts connected by linkages.
Given this complexity, I want to focus on one specific part of the value chain for my analysis: Cloud-based infrastructure and platform services, or the cloud services industry. This is arguably one of the most important components of the value chain given it is the ‘infrastructure’ of the internet, powering most other services and platforms.
Cloud Services Industry and Value Chain
Cloud services allow users to access applications, computing power, and data over the Internet without having to install or maintain them on their own computers. This means that businesses can save money on hardware and software costs, people can stream media and employees can work from anywhere. There are different types of clouds, such as Public (on-demand computing services and infrastructure are managed by a third-party provider; example- AWS, Microsoft Azure); Private (only for few people, who manage it themselves); Dedicated (companies having servers in their HQ); and Managed (physical servers and customer service is not in the HQ, situated somewhere else). Cloud has its own value chain with several parts:
· Onsite/off-site data storage and manipulation functions
· IaaS (Infrastructure as a Service). When companies don’t want to build their own data centers, they pay cloud providers for this ‘infrastructure’ service and the associated benefits such as added computing power and functionality.
· PaaS (Platform as a Service). Generally, developers use the cloud infrastructure to develop software and other applications.
· SaaS (Software as a Service). Software or data (including streaming) hosted in cloud.
Over time, there will be increasing blurring of these categories, as these will become inter-mingled, the same provider playing multiple roles. The cloud service chain can be shown as:
The global market for cloud services is dominated by the following companies (market share as of 2022): AWS (34%), Microsoft Azure (21%), Google Cloud (11%), Alibaba Cloud (5%) and Tencent Cloud (3%).
Porter’s Diamond Analysis of Canada in Cloud Services Industry
Porter (2011) created a framework to analyze the comparative advantages and disadvantages of a country in an industry.
The framework contains four broad attributes of a country, that individually and as a system constitute the diamond of national advantage. Below, I apply the framework to understand Canada’s advantages and disadvantages in the cloud industry.
1. Factor Conditions. This includes country’s position in factors of production, such as skilled labor or infrastructure, necessary to compete in a given industry. Canada has several factor conditions that are favorable to the cloud services industry. These include:
· A highly skilled and educated workforce. Canada has a great public education system producing highly skilled and educated workers, including engineers and IT experts. Moreover, Canada has a welcoming immigration system that allows hundreds of highly skilled workers to relocate to Canada, many of whom are engineers from developing countries.
· Canada has well-developed infrastructure, including a reliable telecommunications network and transportation system.
· Data centers require large amounts of reliable energy and Canada has energy abundance given it is a net exporter of oil and energy.
· Canada is a liberal democracy that has a stable political and economic environment, which is attractive to businesses. Canada’s central bank is highly reputable and independent, who has been more successful than many other developed countries in avoiding big financial crises.
· Canada has strong Intellectual Property Rights (IPR) and legal infrastructure that can safeguard business investments.
· Proximity to the US can be a double-edged sword for Canada. While Canada benefits via increased trade and partnerships across the border, there is also a ‘brain drain’ from Canada to the US. Especially given Canada’s climate is much colder than most parts of the US, many highly skilled workers move from Canada to US once they have the opportunity.
2. Demand Conditions. This includes the nature of home-market demand for the industry’s product or service, and how sophisticated the consumers in the domestic market are. Canada’s demand conditions related to the cloud services industry include:
· Canada’s domestic market is not as large as US or China. Hence, Canada might not be as attractive or important a market for large cloud providers. However, Canada has a highly educated and sophisticated consumer population, especially concentrated in highly dynamic and multinational cities like Toronto and Vancouver. These customers would demand the latest technology for their personal or business use.
· Canadian and Canada based businesses are sophisticated and demanding customers, many of which are small and medium start-ups in the technology sector (such as Slack and Hootsuite). Their demand for cloud services can drive innovation and quality in the cloud services industry.
· A strong government commitment to cloud computing. The Canadian government has made a strong commitment to adopt cloud services, including making it a policy for all government agencies to first consider public cloud services, which is driving demand for cloud services. See Government of Canada Cloud Adoption Strategy.
3. Related and Supporting Industries. This includes the presence or absence in the country of supplier industries and other related industries that are internationally competitive. Canada has a number of related industries that are supportive of the cloud services industry. These include:
· The telecommunications industry. The Canadian telecommunications industry is strong and well-developed, which provides a foundation for the cloud services industry. Although there are three large competitors in this industry (Bell, Rogers and Telus), it has been consolidating further. Canadian regulators are cautious about anti-trust concerns.
· The technology industry. The Canadian information technology industry is strong and well-developed, which provides a source of skilled workers and innovative technologies for the cloud services industry. More importantly, many of the large cloud services providers such as Amazon and Microsoft have set up their offices in Toronto and Vancouver, so they have pre-existing employees and connections with the regional governments in these places.
· The financial services industry. The Canadian financial services industry is competitive and well-developed, which provides a stable financial infrastructure to do business and also a source of demand for cloud services. There are five large banks who compete to provide services in Canada: RBC, Scotiabank, BMO, TD bank and CIBC.
4. Firm Strategy, Structure, and Rivalry. This includes the conditions in the country governing how companies are created, organized, and managed, as well as the nature of domestic rivalry.
· There is no large Canadian cloud services provider.
· Canadian government have several policies to encourage increased demand, competition and innovation in the technology sector, including in the cloud services industry. Canada’s principal strategy for the technology sector is the “Government of Canada Strategic Plan for Information Management and Information Technology 2017 to 2021”. Among the six principles identified in this document, the fifth principle is “Cloud first approach”.
· The Canadian cloud services industry is competitive with several US based major players in the market, including Amazon Web Services (AWS), Microsoft Azure, and Google Cloud. These companies are competing for market share, constantly innovating and investing in new technologies, which drives competition and innovation in the industry.
Recommendations to Strengthen Canada’s Comparative Advantage
The following are my recommendations to strengthen Canada’s Comparative Advantages in the cloud services industry:
· Canada has a strong comparative advantage of welcoming highly educated and talented people and engineers. This merit-based immigration system will be a great asset going forward and it needs to be further resourced (modernized and more staff) to make the system more efficient given recent complaints of inefficiency in the system. Given the nationalistic turn in many of the competing countries including the US, Canada can capitalize in attracting the best and the brightest from across the world.
· Canada needs to do a better job in keeping talent in Canada, not just attracting them. Many highly educated Canadians and immigrants, move to US given the salaries and opportunities tend to be comparatively higher in the US. The Canadian government can incentivize more investment from global companies like Amazon and Microsoft in Canada by providing specialized zones and temporary tax relief tied with employment in Canada. The government can also incentivize highly educated engineers to stay and work in Canada by providing them easier access to loans and other support for start-ups.
· Venture capital is critical in encouraging founders and start-ups to take risks. To make Canada’s venture capital industry more innovative and well-funded, the government should utilize the Vancouver-Seattle-Silicon Valley pacific corridor, and the Toronto-New York corridor, by fostering partnerships between firms across the border, and sponsoring knowledge sharing.
· One of the current challenges for many start-up founders and younger Canadians is the unaffordability of the two most dynamic Canadian cities- Toronto and Vancouver. Government should take steps to increase the affordability of living in Toronto and Vancouver by incentivizing local governments to embrace more open zoning laws and providing tax exemptions to developers to increase the housing supply in these cities.
· Canadian government should also not hyper-focus on only Toronto and Vancouver, rather promote other entrepreneurial and more affordable places like Calgary and Montreal as future technology hubs. Canada’s trade missions abroad can attract more investments in these cities by highlighting their comparative advantages. Montreal is considered one of the Artificial Intelligence (AI) capitals of the world because of a number of world-renowned universities, including McGill University, the University of Montreal, and École Polytechnique Montréal who have strong research programs in AI.
· Canadian government should increase funding to make Canada’s universities world class and to attract scholars from across the world. Currently, many scholars choose US over Canada because of the disparity in research funding available.
· Canadian government has plans to offer “publicly owned cloud services”. But this strategy is likely to fail for several reasons: the government will likely lack sufficiently capable people to operate large scale cloud services and to keep up with the rapid pace of innovation; large capital investments may not be sustained in the long run; and cybersecurity risks that need highly specialized talent to protect the cloud.
Finally, given rising tensions between the United States (US) and China, and the bifurcation of the technology manufacturing and services world, Canada will be forced to pick a sphere of influence to be part of. Given Canada’s longstanding friendly relationship with US and given the geographical proximity, Canada should be part of US’s sphere of influence and continue to cultivate a close tie with fellow democratic countries in US’s sphere of influence.
References:
Freyberg, Axel, and Colin Rand. The Internet Value Chain 2022. GMSA, 2022. Accessed at <https://www.gsma.com/publicpolicy/wp-content/uploads/2022/05/Internet-Value-Chain-2022-1.pdf>
Porter, Michael E. Competitive advantage of nations: creating and sustaining superior performance. Simon and Schuster, 2011.
Porter, Michael E. On competition. Harvard Business Press, 2008.
Smith, Noah. The End of the System of the World. Noahpinion. Substack, 2022. Accessed at: <https://noahpinion.substack.com/p/the-end-of-the-system-of-the-world>
