The strong loonie has placed Canadian technology companies in a battle for survival with their U.S. and overseas counterparts, say industry insiders.

For most of the past two decades, Canadian tech companies have enjoyed the luxury of paying their expenses in Canadian dollars and receiving revenues in U.S. currency after selling their products and services to U.S. customers.

But the Canuck buck's proximity in value to the U.S. dollar means companies north of the 49th parallel have lost an automatic advantage over U.S firms.

"Canadian technology companies, most of which have had all of their costs here and most of their revenue in U.S. dollars, are getting hit very hard right now," says Basil Peters, manager of the Vancouver-based Fundamental Technologies II fund that provides seed capital primarily to B.C. tech firms.

The loonie's return to par with the greenback for the first time in three decades ignited debates about its ramifications throughout Canada's economy.

Like many resource sectors, the Canadian tech industry relies on the U.S. to provide the bulk of its business - on both the software and hardware sides.

Peters says Canadian tech companies, thanks to a strong post-secondary education system, can compete with U.S. firms, especially in web-based applications. But Canuck companies have never had to go head-to-head with their U.S. rivals.

"Lots of Canadian companies have done spectacularly well just because they were based in Canada," says Peters.

He says Canadian firms have lost the automatic 25- to 35-per-cent advantage that they previously enjoyed. "If (Canadian tech firms) were very profitable, they'll be breaking even now," he says. "If they were modestly profitable, they'll be losing money now. The challenge is for them to survive operating as leanly as they can until the currency does come back to a more normal level."

Peters believes the loonie's strength has more to do with the decline of the greenback than anything else. He predicts the Canadian dollar will revert to the US$0.80 range within two years, but tech companies will struggle until then.

The loonie's rise also means that U.S. investors will be even less likely to finance Canadian tech startups. Meanwhile, Canadian angels will give potential new investments more scrutiny in light of the loonie's leap.

"For angel investors, it means that you've gotta have a business that's that much better," says Peters. "It's that much more competitive. It's that much more able to compete with the Americans on an equal footing."

But Bernard Courtois, president and CEO of the Ottawa-based Information Technology Association of Canada (ITAC), says the high loonie will benefit the tech sector over the long term. He says hardware and software companies will see reduced revenue and have more difficulty being "price-competitive.”

But the higher dollar also puts pressure on companies to use more technology to boost productivity.

A higher loonie will help close the historical productivity gap between Canada and the U.S. which, he contends, is caused by the Canadian economy's under-use of information and communications technology.

"When our dollar has been high, we've usually closed the productivity gap with the U.S. - and productivity is what makes prosperity," he says.

Courtois says he has to be sympathetic to ITAC members who are feeling stress because of the loonie, but if he has his way, he would keep its value "in the zone where it is."

"I know these are tough times," he says, "and part of it is (because of) the rate of change - not just the (currency) level. Fundamentally, you do not build a strong economy on a weak currency."

The loonie's rise, he contends, opens up the debate about the global nature of competition. It also "makes it more urgent" for governments at all levels in Canada to develop policies that help the country become a global technology leader.

He says the federal government is already doing a number of things right, but Canada needs a national "talent strategy" to ensure that its tech sector employs the most skilled employees. Governments must provide a tax environment that keeps the Canadian industry competitive and boosts the country's scientific and intellectual capacity through more funding of universities and research.

Ottawa must also re-examine its scientific research and experimental development tax credit, which exempts up to 35 per cent of the first $2 million of qualified expenditures on studies conducted in Canada, he says. In some cases, he adds, the feds provide the money but that does not affect companies' investment decisions.

Prime Minister Stephen Harper's government is moving in the right direction, he says, but must continue to remove barriers that deny growing companies access to domestic and foreign venture capital.

While U.S. companies that operate here do very well when it comes to funding Canadian research projects, the higher loonie makes it more difficult for them to base a project in Canada versus countries like Brazil, Russia, India or China.

"Whether it's a foreign-based company or a domestic-based company, they now all look at those choices and they move those things around," says Courtois. "So it makes it all the more important to be more intense in looking at our advantages."

Microsoft's recent decision to open a development lab in Vancouver shows Canada has an advantage when it comes to attracting the world's best and brightest technology developers, and that advantage must be intensified, he adds.

Although consumers may not see big discounts on products and services, he believes the high loonie will keep inflation low. He does not feel the nature of Canada-U.S. competition will change much, because the tech sector has been globally competitive for a long time.

But he does agree that the strong loonie will force Canadian companies to change the way they do business.

Iain Klugman, president and CEO of Communitech, which promotes and develops tech projects in Ontario's Waterloo region, sums up the challenge succinctly.

"It's innovate or die at this point in time," he says.

He predicts the impact will be greater on hardware companies, that have lower profit margins than on software firms. Smaller tech firms will suffer more than larger ones, and new players will have to provide the exponential growth that they promise.

"It forces everyone who sells into the U.S., regardless of the industry, to be more competitive," he says. "The companies that come at this aggressively and innovate and say how do we increase productivity, they're the ones that are going to be successful. The manufacturing companies that are here because of the Canadian dollar, we're seeing them leave, because this was a cheap place to manufacture and it's not a cheap place when the dollar's on par.

"The ones that are headquartered here that are part of a (U.S.) branch plant, they've got to figure out how to replace that competitive advantage with a new competitive advantage. The ones that are going to survive are the ones who are going to figure out how to innovate and reduce costs in every fashion possible."

He says Waterloo-area hardware companies responded well and quickly to the shift in the loonie.

"The term, built-in competitive advantage, has ceased to exist for companies that were (exporting) out of the country and multinationals who had operations here," says Klugman. "Those days are over."

(Monte Stewart can be reached at monte@businessedge.ca)