Innovation vacuum imperils Alberta’s economic juggernaut

History is rife with stories of how the mighty can fall – and fall spectacularly. Achilles had his heel problems. Nixon was done in with audio tapes. Even the mighty Goliath was felled by a boy and a slingshot. The common element in all such stories is that they didn’t even see it coming.

Alberta’s economy is a powerhouse, but it’s also vulnerable. The resource sector alone cannot be counted on as a wealth generator forever. Concerned about the province’s long-term economic viability, a group of thinkers in Alberta are grappling with a serious question: Is Alberta competitive? The Alberta Economic Development Authority (AEDA) commissioned a multiyear study on the province’s competitiveness with an initial report in 2010. The updated snapshot of how the province stacks up will be released soon.

The report identifies 70 benchmarking measures such as employment indicators, transportation infrastructure, human capital, education, regulatory and tax burden, and new business startups. It compares Alberta to 14 peer jurisdictions – five other Canadian provinces, six U.S. states, Norway, Finland and Queensland, Australia.

Predictably, Alberta is a star in almost every category. It places first or second in gross domestic product per capita, unemployment rate, new business startups, high-school academic performance, government investment infrastructure and its marginal effective tax rate on capital investment.

But rather than gloat about Alberta’s excellence, the AEDA is more concerned with points of relative weakness. The province ranked second to the bottom in research and development spending, employment in high-tech and knowledge-intensive services, and investment in machinery and equipment. It ranked dead last in labour productivity growth in construction. In fact, most of Alberta’s serious shortfalls point to two broad areas of concern: innovation and productivity.

Innovation is the “it” word these days in economic circles, but to be honest, it’s a bit slippery to define. The AEDA uses the Conference Board of Canada’s definition of the former: “The extraction of economic and social value from knowledge.” And productivity is simply the ability to produce more with fewer resources. Economists agree that without these, you’re doomed.

Some of Alberta’s shortcomings in innovation have explanations. Lower-than-average R&D spending reflects the uniqueness of oil and gas extraction. The petroleum industry doesn’t operate like other sectors such as pharmaceuticals, information and communications technology, or consumer-driven manufacturing where research is done in a laboratory and spending is easy to track. Oil and gas “research” is much more likely to take place at the drill site or in the actual physical exploration. It’s done through trial and error – tweaks to methods and practices are constantly improving efficiency and reducing costs. It never gets counted as “spending on R&D” but it doesn’t mean research isn’t happening.

Alberta’s last place ranking in labour productivity growth in construction corroborates a Statistics Canada report on business innovation, released in February. Apparently, only 12.5 per cent of Alberta construction companies are actively investing in new technologies, compared to about 33 per cent in Ontario and 30 per cent nationally. The problem is that Alberta construction companies have been so busy, they’ve lagged in the uptake of advanced technology. When you’re running staff on perpetual overtime just to keep up with demand, it’s difficult to find time to examine new process innovations, analyze the expected return on investment, and train staff to use them.

These explanations provide some context, but they don’t let Alberta off the hook. Its competitive position could be greatly improved by some purposeful attention to innovation and productivity. This will doubtless be of interest to the province’s new premier – whoever he or she is when the governing Progressive Conservative party elects a new leader this fall.

Still, there are practical limits to what a premier alone can do. The report recognizes this: “While government can work actively to develop a more attractive and competitive business environment as the foundation for competitiveness, once the foundation has been laid, industry has the lead role in generating jobs, innovation, productivity and prosperity.”

Alberta’s got some work to do and the government has an important role. But without industry doing most of the heavy lifting on innovation and productivity, the province’s years of being Canada’s economic juggernaut could be numbered.

This column originally appeared in The Globe and Mail on May 23, 2014.