Working with what we have got: Why economic clusters are a useful frame for thinking about Alberta’s energy transition

How can Alberta’s economy continue to attract investment in a net-zero future? Over the last year, great minds in finance, policy, advocacy, and systems change have come together through the Energy Futures Policy Collaborative to answer this question, and Smart Prosperity Institute has been both a participant and an advisor on the process.

One key finding has been that decades of extracting oil and gas has given Alberta the tools to excel in other sectors, if the right policies are put in place. Alberta’s hydrocarbon industry has developed a host of companies specialized in supporting all aspects of oil and gas extraction, processing, transportation and refining whose skill sets and assets combine to form an economic cluster. Clusters are made up of groups of companies and institutions located in a given region, and they are often drivers of innovation and prosperity. History tells us that clusters can take on a life of their own and even renew themselves after the original industry declines.

This blog explains what clusters are and what this lens can tell us about Alberta’s economic prospects in a net-zero future, summarizing a recent brief on economic clusters by Smart Prosperity Institute that was authored by Aline Coutinho, Una Jefferson and Mike Moffatt.

What is an economic cluster?

Clusters are groupings of companies, institutions and infrastructure that emerge in a given region around a particular economic opportunity. What separates a cluster from an industry is that the players in the space are located close to one another, and are deeply interlinked; they depend on each other for different aspects of their businesses, and often operate at different stages of the same value-chain. This proximity and interconnectedness means that rates of information sharing, idea combination and knowledge transfer are higher within the cluster than outside of it, which is part of the appeal of clusters: Companies within a cluster have easier, or low-cost, access to other companies and information that improve their business, making the cluster a more attractive place for companies in that industry to operate.

The region in which a given cluster occurs can vary in size, but it is always defined by a place. Silicon Valley in California, the Pearl River Delta Economic Zone in Southeastern China, North Italy’s shoe manufacturing hub, Hamilton, Ontario’s health technology research centre, and Taiwan’s semiconductor/ITC sector are all examples of successful clusters, which have also been referred to as “business hubs”.

Alberta’s hydrocarbon sector can be thought of as a cluster because it meets this definition nicely: Within the province, there are a host of companies, institutions and organizations that support oil and gas extraction, refining and processing directly and indirectly whose success depends on both themselves and others. These include a range of manufacturers and engineering, legal, financial, project management, and environmental services, many of whom have specialized knowledge, and who play a critical role in the overall oil and gas industry.

What does thinking about Alberta’s energy sector as a cluster offer?

Policy should have an aim of supporting both companies creating jobs today, and the growth and emergence of companies who will create jobs for tomorrow’s workforce. Thinking about Alberta’s hydrocarbon sector as a cluster can help with these objectives in three ways: One, using a cluster lens shows that there is a clear role for policy to support the building blocks firms need to develop and thrive, including capital, a skilled workforce, a supportive regulatory environment, IP protections and access to new markets, to name a few — necessary for firms to develop and thrive. Two, the cluster lens illustrates that there is a need for more than a handful of companies to drive forward the future of Alberta’s energy sector. The presence of companies engaged in specialized niches in a given value chain makes it more attractive for newcomers to set up shop in the region, and can create a sector that attracts new companies because of its inherent advantages. Three, a clusters lens can offer useful lessons to policymakers about how success has been achieved elsewhere, especially in regions or environments where large industries have faced uncertain economic futures.

Clusters are more than capable of reinvention, but their success in pivoting towards future opportunities is never guaranteed. The revitalization of a cluster, which can occur either before or after a decline starts, can occur in three different ways:

  • A cluster can adopt frameworks and approaches from elsewhere slowly, and integrate them over time (“Adaptation”);
  • A cluster can suddenly adopt new technologies that open up new markets immediately (“Renewal”);
  • A cluster can take its existing internal skill sets and products and develop its own innovations to drive future growth (“Transformation”).

The ultimate path a cluster takes to support revitalization will depend due to a number of factors, many of them internal to a particular cluster, which include:

  • The ability of companies, institutions and groups within the cluster to absorb, adopt, adapt and use external knowledge;
  • The ability of companies to move around within the cluster, either geographically or within the value-chain;
  • The similarity between new and old technologies adopted; and,
  • The dynamics and relationships between the companies and institutions within the cluster itself.

There are other factors as well, detailed in the policy brief, that influence whether a given cluster can revitalize itself using any of the three methods outlined above.

What lessons learned from other clusters help identify policies suited to help Alberta’s hydrocarbon cluster moving forward?

Clusters around the world offer a number of lessons that could be useful in helping the province navigate this period of economic change. While the policy brief details a number of lessons, here are three points worth sharing now: two points about best practices, and one important caveat.

  1. Governments have a role to play in promoting change when clusters start to enter decline: One of the most famous clusters is California’s Silicon Valley, where a risk-tolerant culture was paired with major investment in the building blocks that companies and their workers need to engage in the kinds of entrepreneurial activities that create jobs. To promote the growth of new companies, governments need to support reskilling and retraining, investment in affordable housing and transportation solutions, and ensure that the data needed to run modern businesses can be accessed. These policies and supports can help to create an environment where taking risks does not lead to bankruptcy for innovators.
  2. Companies working close to each other need to learn from one another: The Norwegian Centre for Excellence, a program aimed at supporting clusters in Norway, developed a program to try and help its companies learn from international examples by linking them into global value chains. Overall, the success of the program was modest and short-term, since it was not aligned with the sources of competitive advantage that clusters rely on to survive: interconnection and collaboration among the companies who are in geographic proximity within the cluster itself. Without these connections, local innovation does not thrive as readily, and it is difficult for clusters to remain competitive over time.
  3. Supporting technologies alone is not enough to create regional economic success stories: Northern Sweden’s forestry cluster was once supported by a government program to grow its biorefinery and biogas sectors. The program offered support for companies to use new technologies and enter new value chains, in an effort to support renewal and adaptation in a high-employment cluster. However, even though governments supported technologies, other factors inhibited their uptake, including low levels of tolerance for disruption, lock-in to old production methods where capital had been invested, and markets that were not yet large enough to prove attractive. For policies that support clusters to succeed, they need to offer support that address the actual challenges companies face and the concerns they have, beyond simply offering support for the specific technologies governments would like to see adopted.

Building something from something

Thinking about Alberta’s hydrocarbon sector as a cluster highlights the wealth of assets that have grown up around oil and gas extraction, including infrastructure, skills, intellectual property, supply chains, and social capital. Policymakers should learn from past instances of cluster renewal to ensure that these assets are leveraged towards a prosperous net-zero future in Alberta in a way that leverages the province’s strengths, and allows it to set the course for its own future.

John McNally is a Senior Research Associate and the Manager of the Clean Growth team at the Smart Prosperity Institute. He is a member of the working group for the Energy Futures Policy Collaborative.