The Business Council of British Columbia (BCBC) recently released a report examining capital investment trends in BC. While the entire report is worth a read, one excerpt stood out to us:
When considering Canada’s investment performance, Alberta truly is in a different league…Canada’s business investment performance may be poor compared to other countries, but it would be far bleaker without Alberta (pg. 7).
In this Quick Read, we take a closer look at what this means; we examine capital investment trends in Alberta and how they compare to the rest of the country to understand what it means to be a province in a different league.
Why capital investment matters
As explained by the BCBC report, the OECD predicts that Canada will be the worst-performing advanced economy—as measured by per capita GDP growth—for the next 40 years. Not among the worst. The worst. For most peoples’ entire working lives.
This expected poor growth in per capita GDP is primarily due to our inability to make meaningful gains in labour productivity. Productivity growth, as measured by increased output per hour worked, is important because it drives improvement in living standards (for a primer on productivity, see our productivity series here). Without it, Canadians can expect a declining quality of life relative to other countries that have more productive economies.
And that brings us to capital investment. Capital investment is important because people can be more productive when they have access to modern facilities, tools, technology, and intellectual property. In other words, capital investment equips workers to raise their output, creating more value per hour worked. This increases the value of work, raising incomes and living standards.
Types of capital investment
Capital investment is divided into two categories—residential investment and non-residential investment.
Residential investment is spending on new and renovation residential construction and the expenses associated with transferring real estate ownership. While it has been an important driver of economic growth in recent years, it does not make a significant contribution to productivity.
Non-residential capital investment, on the other hand, is much more important to productivity. It includes non-residential buildings, machinery and equipment (M&E), and intellectual property products (IPP). As mentioned previously, investments in engineering structures, modern tools, software, and research and development are the kinds of investments that enable workers to do more, build more, and create more.
Alberta versus Canada
Alberta consistently leads the country in total investment (residential and non-residential) per available worker (measured by the number of people in the labour force).
As you can see from the graph below, Alberta’s non-residential investment, per available worker, has ebbed and flowed dramatically over the past 40 years, from a low of $11,200 per worker in 1986 to a high of $41,900 per worker in 2014. What has remained consistent, however, is Alberta’s ability to attract much higher investment, per available worker, than any other province in Canada. Even at its lowest levels.
Investment in non-residential structures, M&E, and IPP is significantly higher in Alberta because of the large role the oil and gas industry plays in our economy. This industry is very capital intensive as projects often require billions of dollars in initial investment to extract and transport resources.
In 2014, oil and gas accounted for nearly two-thirds of total non-residential investment. Even after the oil price crash in 2014/2015, oil and gas investment continues to play a prominent role in Alberta’s economy, accounting for one-third of total non-residential investment in 2020.
Despite the downward trend of capital investment per available worker over the last several years, Alberta still leads the country with $17,800 per available worker in non-residential investment. The national average is well below that at $10,300. This means that Alberta invests around $7,500 more per worker per year than the Canadian average.
Alberta versus the OECD
So, by Canadian standards, Alberta is doing pretty well. Well, really well. So, how does the province compare to other advanced economies?
Last year, the C.D. Howe institute released a report comparing business investment levels in Canada to other OECD countries. They found that Canadian businesses invest around $7,000 less per available worker than the OECD average. And when looking at the US, Canadian businesses invest about $12,000 less per available worker.
And Alberta? Well, Alberta does invest more per available worker than the OECD average—but only barely. And for every dollar spent on capital investment in the US, businesses in Alberta invest less, about 87 cents.
While investment levels may place Alberta in ‘a league of its own’ within Canada, Canada’s investment track record is poor, making it a weak benchmark against which to compare Alberta. International comparisons show that investment levels in Alberta are basically on-par with the OECD average and remain lower than investment levels in the US.
So, is Alberta really in a different league? Or are we just in the fast lane on a slow road?
Emma Dizon, Policy Analyst