Microeconomics of Competitiveness · central actor in the economy • Resource revenues allow . unproductive policies and practices to persist . and fuel. corruption. Created Prosperity

20160203—MOC 2016—Session 3—FINAL Copyright 2016 © Professor Michael E. Porter1

Microeconomics of Competitiveness

Session 3: Core Concepts

Professor Michael E. PorterHarvard Business School

February 3th, 2016


Prosperity PerformanceOECD and BRIC Countries

Note: Luxembourg omitted from OECD average.Source: EIU (2015), authors calculations

Australia

Austria

Belgium

Brazil

Canada

Chile

China(+9.4%, $11,241)

Czech Republic

Denmark

Estonia

Finland France

Germany

Greece(-2.0%, $20,377)

Hungary

Iceland

Ireland

Israel

Italy

Japan

Mexico

Netherlands

New Zealand

Norway

Poland

Portugal

Russia

SlovakiaSlovenia

South Korea

Spain

Sweden

Switzerland

Turkey

UK

United States

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

$50,000

-2% -1% 0% 1% 2% 3% 4%

PPP-Adjusted Real GDP per Capita, 2014

($USD at 2005 prices)

Growth in Real GDP per Capita (PPP $US at 2005 prices), CAGR, 2004-2014

OECD Average Prosperity Growth: +1.1%

OECD Average Real GDP per Capita: $30,365


Prosperity PerformanceLow and Lower Middle Income Countries

Source: EIU (2015), authors calculations.Note: Low and Lower Middle Countries according to World Bank Income Groups based on GNI per capita.

Armenia

Bangladesh

Benin

Bhutan

Bolivia

Burkina Faso

Burundi

CambodiaCameroonCentral African Republic(-3.8%, $505)

Chad

Comoros

Congo (Brazzaville)

Congo (D.R.)

Côte d'Ivoire

Djibouti

Egypt

El Salvador

Eritrea

EthiopiaGambia

Georgia

Ghana

Guatemala

Guinea

Guinea-Bissau

Guyana

Haiti

Honduras

India

Indonesia

KenyaKyrgyz Republic

Laos

Lesotho

LiberiaMadagascar Malawi

Mali Mauritania

Moldova

Morocco

Mozambique

Nepal

Nicaragua

Niger

Nigeria

Pakistan

Papua New Guinea

Philippines

Rwanda

Samoa

São Tomé and Príncipe

Senegal

Sierra Leone

Solomon Islands

Sri Lanka

Sudan

Swaziland

TajikistanTanzania

Togo

Uganda

Ukraine

Uzbekistan

Vanuatu

Vietnam

Yemen

Zambia

Zimbabwe$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

$10,000

-2% 0% 2% 4% 6% 8%

PPP-Adjusted Real GDP per Capita, 2014

($USD at 2005 prices)

Growth in Real GDP per Capita (PPP $US at 2005 prices), CAGR, 2004-2014

Average Real GDP per Capita: $3,394

Average Prosperity Growth: +2.7%


• What is Prosperity?

• Defining Competitiveness

• Indicators and Enablers of Competitiveness

• Determinants of Competitiveness: The Core Framework

– Macroeconomic Competitiveness

– Upgrading the Business Environment

– Cluster Development

– Improving Company Operations and Strategy

• Geographic Influences on Competitiveness

• Integrating Economic and Social Development

Core Concepts


Decomposing Economic Prosperity

• Local prices– Efficiency of local

industries– Level of local

market competition• Consumption taxes

• Standard of living

• Average Income• Income inequality

Per Capita IncomeDomestic

PurchasingPower

Labor Utilization

• Workforce participation– Population age profile

• Working hours

Economic Prosperity

Shared Prosperity


Australia

Austria

Belgium

Brazil

Canada

Chile

China

Czech RepublicDenmark

EstoniaFinland

France

Germany

Greece

Hungary

Iceland

India

Ireland

Israel

Italy

Japan

Mexico

Netherlands

New ZealandNorway

Poland

Portugal

Russia

Slovakia

Slovenia

South Korea

Spain

Sweden

Switzerland

Turkey

UnitedKingdom

United States

50%

55%

60%

65%

70%

75%

80%

85%

90%

95%

100%

-5% -4% -3% -2% -1% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

Labor Force Participation (2013)

Change in Labor Force Participation Rate, 2003-2013Note: Luxembourg omitted from OECD average.Source: EIU (2014), World Bank, authors calculations

Workforce ParticipationOECD and BRIC Countries

Workforce Participation Rate

Labor Force Size

Working Age Population (15-64 years)=

OECD Average: +2.8%

OECD Average: 74.0%


• Competitiveness depends on the long-run productivity of a location as a place to do business

- Supporting existing firms and workers- Enabling high participation of citizens in the workforce

• Competitiveness is not:- Low wages- A weak currency- Jobs per se

• Successful economic development depends on improving competitiveness

A nation or region is competitive to the extent that firms operating there are able to compete successfully in the national and global economy while maintaining or improving wages and living standards for the average citizen

What is Competitiveness?


Productivity Level and Growth

Country Competitive Environment

Domestic investment Imports

Outboundforeign direct

investment

Domesticinnovation

(Including assimilation of foreign technology)

Inboundforeign direct

investmentExports

Competitiveness Indicators and Enablers

20160203—MOC 2016—Session 3—FINAL Copyright 2016 © Professor Michael E. Porter9Source: USPTO (2015), EIU (2015)

Innovation OutputSelected Countries

3,000 patents =CAGR of US-registered patents, 2004-2014

Average U.S. patents per 1 million population, 2012-2014

United StatesJapan

Germany

South Korea

Taiwan

France

UK

Canada

Italy

SwitzerlandSweden

Netherlands

China(+32.8%, 4.4)

Israel

Australia

Finland

Belgium

India

Austria

DenmarkSingapore

Spain

Hong Kong

Norway

Russia

Ireland

New Zealand

BrazilSouth AfricaMalaysia

Mexico Hungary

Saudi Arabia(+31.0%, 8.0)

Czech Republic

Argentina0

50

100

150

200

250

300

350

400

450

500

0.0% 5.0% 10.0% 15.0% 20.0% 25.0%


Productivity Level and Growth

Country Competitive Environment

Domestic investment Imports

Outboundforeign direct

investment

Domesticinnovation

(Including assimilation of foreign technology)

Inboundforeign direct

investmentExports

Competitiveness Indicators and Enablers


AustraliaAustria

Belgium(+45.5, 122.4%)

Brazil

Canada

Chile

China

Czech Republic

Denmark

Estonia

Finland

France

GermanyGreece

Hungary

Iceland

India

Ireland(+42.6, 111.7%)

Israel

Italy

Japan

South Korea

Mexico

Netherlands

New Zealand

Norway Poland

Portugal

Russia

Slovakia

Slovenia

Spain

Sweden

Switzerland

Turkey

UK

USA

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

0% 5% 10% 15% 20% 25% 30% 35% 40%

Inward FDI Stocks as % of GDP, Average

2003-2013

FDI Inflows as % of Gross Fixed Capital Formation, Average 2003-2013

Inbound Foreign Investment PerformanceStocks and Flows, OECD and BRIC Countries

Note: Luxembourg omitted from OECD average.Source: UNCTAD, World Investment Report (2015)

OECD Average: +14.4%

OECD Average: 43.8%


Endowments

What Determines Competitiveness?

• Endowments, including natural resources, geographical location, population, and land area, create a foundation for prosperity, but true prosperity arises from productivity in the use of endowments


Endowments

Macroeconomic Competitiveness

Human Development and Effective

Public Institutions

Sound Monetary and Fiscal Policies


• Macroeconomic competitiveness sets the economy-wide context for productivity to emerge, but is not sufficient to ensure productivity




Sound Monetaryand Fiscal Policies

Endowments

Human Developmentand Effective

Public Institutions• Fiscal Policy:

Public spending aligned with revenues over time

• Monetary Policy: Low levels of inflation

• Economic Stabilization: Avoiding structural imbalances and cyclical overheating




• Human Development: Basic education, health care, equal opportunity

• Rule of Law: Property rights, personal security, and due process

• Government Institutions: Stable and effective political and governmental organizations and processes


Public InstitutionsMacroeconomic Competitiveness

Endowments



Human Developmentand Effective

Public Institutions



Microeconomic Competitiveness

Sophisticationof Company

Operations andStrategy

Quality of the Business

Environment

State of Cluster Development

Endowments


Public Institutions



• Productivity ultimately depends on improving the microeconomic capability of the economy and the sophistication of local competition revealed at the level of firms, clusters, and regions

• Macroeconomic competitiveness sets the economy-wide context for productivity to emerge, but is not sufficient to ensure productivity



Inherited vs. Created Prosperity

Inherited Prosperity

• Prosperity derived from inherited natural resources / endowments– Prosperity is limited by the

endowments themselves

• Dividing the pie• Government usually becomes the

central actor in the economy• Resource revenues allow

unproductive policies and practices to persist and fuelcorruption

Created Prosperity

• Prosperity arising from productivityin producing goods and services– Prosperity is unlimited

• Expanding the pie• Companies are the central actors in

the economy• Government’s role is to create the

enabling conditions for productivity and foster private sector development


The internal skills, capabilities, and

management practices that enable companies to attain

the highest level of productivity and innovation

possible





Quality of the NationalBusiness

Environment


Endowments


Public Institutions




Foundations of Company Competitive Advantage

Differentiation(Premium Price)

Lower Cost

CompetitiveAdvantage

• Operating Cost

• Utilization of Capital


• The value chain is the set of activities involved in delivering value to customers

• Strategy is reflected in the choices about how activities are configured and linked together

Competitive Advantage and the Value Chain

SupportActivities

Marketing& Sales

(e.g., Sales Force,

Promotion, Advertising,

Proposal Writing, Website)

InboundLogistics

(e.g., Customer Access, Data

Collection, Incoming Material Storage, Service)

Operations

(e.g., Branch Operations, Assembly,

Component Fabrication)

OutboundLogistics

(e.g., Order Processing,

Warehousing, Report

Preparation)

After-Sales Service

(e.g., Installation, Customer Support,

Complaint Resolution,

Repair)

Ma

rg

i

n

Primary Activities

Firm Infrastructure(e.g., Financing, Planning, Investor Relations)

Procurement(e.g., Services, Machines, Advertising, Data)

Technology Development(e.g., Product Design, Process Design, Market Research)

Human Resource Management(e.g., Recruiting, Training, Compensation System)

Value

What buyers are willing to pay


• Creating a unique competitive position

• Assimilating and extending best practices

OperationalEffectiveness

Operational Effectiveness Versus Strategic Positioning

Doing the same things better Doing things differently

StrategicPositioning


Company Transformation and Economic Development The Company Agenda in Emerging Economies

1. Large share of the local, protected market

2. Opportunistic to capitalize on opportunities created by instability and government policies

3. “Me-too” strategies imitating foreign companies based on low prices and low input costs

4. Low quality and inefficiency are tolerated

5. Short time horizon and low investment in people, brands and technology

6. Limited participation in the value chain with concentration on production activities

• Pursue a distinctive position in regional and international markets

• A long-term strategy for competing in each industry

• Create distinctive value propositions

• Move to international best practices

• Sustained investment in human resources and technological capabilities

• Master the entire value chain, including technology, IT, and marketing

Legacy Aspiration


7. Wide product line focused on the local market

8. Exports of commodities or labor-intensive goods to advanced economies

9. Heavy reliance on partners through OEM agreements, foreign distributors, and joint ventures

10. Conglomerate business groups operating in many disparate fields

11. Top down economic policy by government

• Focus on distinctive products to serve local and regional markets

• Export more differentiated, branded products and services to neighbors and niche markets in advanced countries

• Gain direct control of distribution, customer relationships, and technology needed to serve international markets

• Related diversification that creates synergies

• Companies take a leadership role in upgrading their cluster and improving the business environment

Legacy Aspiration

Company Transformation and Economic Development The Company Agenda in Emerging Economies


The quality of the external business

environment conditions supporting company

productivity, innovation, and growth







Environment


Endowments


Public Institutions



Assessing the Quality of the Business EnvironmentThe Diamond Model

Context for Firm Strategy and Rivalry

Related and Supporting Industries

Factor(Input)

ConditionsDemand

Conditions

• Sophisticated and demanding local needs– e.g., Strict quality, safety, and

environmental standards– Sophisticated demand in the private

sector or government

• Many things in the business environment matter for competitiveness• Successful economic development is a process of successive upgrading, in which the

business environment improves to enable increasingly sophisticated ways of competing

• Local rules and incentives that encourage investment and productivity– e.g. incentives for capital investments,

IP protection• Sound corporate governance• Open and vigorous local competition

− Openness to competition− Strict competition laws• Improving access to high quality

business inputs– Qualified human resources– Capital availability– Physical infrastructure– Scientific and technological

infrastructure– Administrative and regulatory

infrastructure • Availability and quality of suppliers and supporting industries


Assessing the National Business EnvironmentPeru, 2012

Context for Firm Strategy and Rivalry


Factor(Input)

ConditionsDemand

Conditions

+ Abundant resources: mineral, agricultural, fishing, and cultural

+ Advantageous location+ Improving administrative infrastructure + Simplified customs procedures± Sound banking system, but high interest

spreads± Improving financial markets, but limited

venture capital availability– Poor physical infrastructure– Low skill levels in the labor force,

mismatch with demand– Weak university-industry research

collaboration– Few high-quality research and scientific

institutions

+ Improving consumer protection regulation

± Improving sophistication of local buyers− Weak environmental standards

enforcement

– Limited local suppliers and supporting industries

– Shallow clusters

+ Openness to foreign investment, trade, capital flows

+ Improvements in investor protections± Efforts to strengthen competition policy

– Rigidity of employment – Difficulty in business formation– Low intensity of local competition– High Informality of the economy


0

10

20

30

40

50

60

70

80

90

100

110

120

130

140

150

160

Business Environment Indicators Ease of Doing Business Rankings, Israel

Ranking, 2015 (vs. 189 countries)

Source: World Bank Report, Doing Business (2015).

Favorable Unfavorable

Israel’s GNI per capita rank: 25


Geographic concentrations of firms, suppliers, and related institutions in particular fields (e.g.

tourism, automotive) that enable productivity and

innovation







Environment


Endowments


Public Institutions


20160203—MOC 2016—Session 3—FINAL Copyright 2016 © Professor Michael E. Porter29Sources: HBS student team research (2003) - Peter Tynan, Chai McConnell, Alexandra West, Jean Hayden

Restaurants

Attractions andActivities

e.g., theme parks, casinos, sports

Airlines, Cruise Ships

Travel Agents Tour Operators

Hotels

PropertyServices

MaintenanceServices

Government Agenciese.g. Australian Tourism

Commission, Great Barrier Reef Authority

Educational Institutionse.g. James Cook University,

Cairns College of TAFE

Industry Groupse.g. Queensland Tourism

Industry Council

FoodSuppliers

Public Relations & Market Research

Services

Local Retail, Health Care, andOther Services

Souvenirs, Duty Free

Banks,Foreign

Exchange

Local Transportation

What is a Cluster?Tourism Cluster in Cairns, Australia


Institutions for Collaboration (IFCs)The Australian Wine Cluster

Wine Industry National Education and Training Council

Established 1995

Focus: Coordination, integration, and standard maintenance for vocational training and education

Funding: Government; cluster organizations

Cooperative Centre for Viticulture

Established 1991

Focus: Coordination of research and education policy in viticulture

Funding: Cluster organizations

Australian Wine Export Council

Established 1992

Focus: Wine export promotion through international offices in London and San Francisco

Funding: Government; cluster organizations

Winemakers’ Federation of Australia

Established 1990

Focus: Public policy representation of companies in the wine cluster

Funding: Member companies

Grape and Wine R&D Corporation

Established 1991 as statutory body

Focus: Funding of research and development activities

Funding: Government; statutory levy

Wine Industry Information Service

Established 1998

Focus: Information collection, organization, and dissemination

Funding: Cluster organizations

Source: Porter/Solvell, The Australian Wine Cluster – Supplement, HBS 2002


Why Clusters Matter?

• Clusters increase productivity and operational efficiency

• Clusters stimulate and enable innovations

• Clusters facilitate commercialization and new business formation

• Clusters reflect the fundamental importance to productivity and innovation of linkages and spill-overs across firms and associated institutions that occur within geographic areas


Source: “Clusters and the Great Recession” by Mercedes Delgado, Michael E. Porter, and Scott Stern (2014), “Clusters, Convergence, and Economic Performance” by Mercedes Delgado, Michael E. Porter, and Scott Stern (2012), “Cluster and Entrepreneurship” by Mercedes Delgado, Michael E. Porter, and Scott Stern (2010); “The Economic Performance of Regions” by Michael E. Porter (2003)

• Presence of strong clusters

• Breadth of industries within a cluster

• Strength in related clusters

• Presence of a region‘s clusters in neighboring regions

• Job growth

• Higher wages

• Higher patenting rates

• Greater new business formation, growth and survival

• Resilience in downturns

• Build on the region’s existing and emerging clusters rather than chase hot fields

• Economic diversification occurs within clusters and across related clusters

Empirical Evidence on ClustersStrong Clusters Drive Regional Economic Performance


Information Technology

(+3.4%, 14.7%)

Metal Miningand Manufacturing

Analytical Instruments(+1.7%, 6.1%)

BusinessServices

Plastics

CommunicationsEquipment

ProductionTechnology

Chemical Products

Oil and Gas Products

Hospitality and Tourism

Transportation and Logistics

Textiles

Automotive

Sporting, Recreational and Children's Goods

Lighting and Electrical Equipment

Medical Devices

Motor Driven Products

Apparel

Forest Products

BuildingFixtures and Equipment

Fishing and Fishing Products

FurnitureHeavy

Machinery

Power and PowerGeneration Equipment

Financial Services

AgriculturalProducts

Biopharmaceuticals0%

1%

2%

3%

4%

5%

6%

7%

-3% -2% -1% 0% 1% 2%

Taiwan’s National Cluster Export Portfolio2002-2012Share of World

Exports, 2012

Change in Share of World Exports, 2002-2012

Jewelry, Precious Metals and Collectibles

= $6 billion

Taiwan’s AverageWorld Export Share: 1.96%

Average Change in Taiwan’s Overall World Export Share: -.47%

Entertainment and Reproduction Equipment


Cluster Emergence and DevelopmentThe Australian Wine Cluster

1955

Australian Wine Research Institute founded

1970

Winemaking school at Charles Sturt University founded

1980

Australian Wine and Brandy Corporation established

1965

Australian Wine Bureau established

1930

First oenology course at Roseworthy Agricultural College

1950s

Import of European winery technology

1960s

Recruiting of experienced foreign investors, e.g. Wolf Bass

1990s and 2000s

Surge in exports and international acquisitions

1980s

Creation of large number of new wineries

1970s

Continued inflow of foreign capital and management

1990

Winemaker’s Federation of Australia established

1991 to 1998

New organizations created for education, research, market information, and export promotions

Source: Michael E. Porter and Örjan Sölvell, The Australian Wine Cluster – Supplement, Harvard Business School Case Study, 2002


Marine Equipment

Related Clusters and Economic Diversification

FurnitureBuilding Fixtures,

Equipment & Services

Fishing & Fishing Products

Hospitality & TourismAgricultural

Products

Transportation & Logistics

PlasticsOil & Gas Products

Chemical Products

Biopharma-ceuticals

Power Generation &Transmission

Aerospace Vehicles &

Defense

Lighting & ElectricalEquipment

Financial Services

Publishing & Printing

Entertainment& Reproduction

Equipment


Aerospace Engines

Business Services

DistributionServices

Forest Products

Heavy Construction

Services

ConstructionMaterials

Prefabricated Enclosures

Heavy Machinery

Automotive

Sporting,Recreational &

Children’sGoods

Production Technology


Metal Manufacturing

Jewelry & Precious Metals

Textiles

Footwear

Processed Food

Tobacco

Medical Devices

Analytical InstrumentsEducation &

Knowledge Creation

Apparel

Leather & Related Products

Note: Clusters with overlapping borders or identical shading have at least 20% overlap (by number of industries) in both directions.

Communications Equipment

Coal & Briquettes


FurnitureBuilding Fixtures,

Equipment & Services

Fishing & Fishing Products Hospitality

& TourismAgricultural

ProductsTransportation

& Logistics

Opportunities for Economic DiversificationTaiwan’s Share of World Exports by Cluster, 2012

Plastics

Oil & Gas

Chemical Products

Biopharma-ceuticals

Power Generation

Aerospace Vehicles &

Defense

Lightning & ElectricalEquipment

Financial Services

Publishing & Printing


Communi-cations

Equipmemt

Business Services

DistributionServices

Forest Products

Heavy Construction

Services

ConstructionMaterials

Prefabricated Enclosures

Apparel

Leather & Related Products

Jewelry & Precious Metals

Textiles

Footwear

Processed Food

Tobacco

Medical Devices

Analytical InstrumentsEducation &

Knowledge Creation

Taiwan overall world market share in 2012: 1.96%Note: Clusters with overlapping borders have at least 20% overlap (by number of industries) in both directions.

Marine Equipment

Aerospace Engines

Heavy Machinery

Sporting & Recreation

Goods

Automotive

Production Technology


Mining & Metal Manufacturing

Entertainment& Reproduction

Equipment

> 1.5%

> 3.0%

> 6.0%

World Market Share

Coal & Briquettes


Benchmarking CompetitivenessISC Competitiveness Model for Korea, 2013

Korea’s GDP per capita rank is 26th

vs. 144 countries

Note: Rank versus 144 countries, *Color coding based on comparison relative to income.Source: Institute for Strategy and Competitiveness, Harvard University (2012), based in part on survey data from the World Economic Forum; analysis prepared based on research findings by Scott Stern, Mercedes Delgado, and Christian Ketels.


42

Public Institutions

87

Rule of Law57

MicroeconomicCompetitiveness

30

Macroeconomic Policy

1

National Business Environment

32

Company Operations and Strategy

26

Country Competitiveness33

Significant advantage

ModerateadvantageNeutral Moderate

weaknessSignificant weakness

Factor Conditions

26

Demand Conditions

23Related and Supporting Industries

27

Context for Strategy and

Rivalry 80

Human Development38


Neutral

Competitive Advantages Soundness of banks 25Paying Taxes, Payments number (WB) 31Ease of access to loans 31Regulation of securities exchanges 33Number of procedures required to start a business 34Brain drain 34Capacity to attract talent 35Capital market infrastructure 38Capacity to retain talent 40Getting Credit Legal rights index (WB ) 43Financing through local equity market 44Financial market sophistication 48

Venture capital availability 52Protection of minority shareholders’ interests 56Burden of customs procedures 60Tertiary enrollment 60Administrative infrastructure 63Quality of electricity supply 64Quality of management schools 71

Competitive DisadvantagesQuality of math and science education 133Quality of the educational system 127Quality of domestic transport network: business 122Quality of scientific research institutions 114Quality of railroad infrastructure 113Utility patents per million population 109Availability of scientists and engineers 105Burden of government regulation 102Innovation infrastructure 101Time required to start a business 100Domestic credit to private sector 99Quality of roads 94University-industry research collaboration 94Logistical infrastructure 90Mobile telephone subscribers per 100 population 90Internet access in schools 86Telephone lines per 100 population 85Quality of air transport infrastructure 84Communications infrastructure 84Quality of port infrastructure 83Internet users per 100 population 82Percentage of households with computer 81

Factor(Input)

ConditionsDiamond Strengths and Weaknesses

Peru, 2013

Note: Rank versus 144 countries; overall, Peru ranks 72nd in 2013 PPP adjusted GDP per capita and 74th in Global Competitiveness. Source: Delgado, Mercedes, Christian Ketels, Michael E. Porter, and Scott Stern. “The Determinants of National Competitiveness.” NBER Working Paper Series, No. 18249, July 2012.


Improving Microeconomic CompetitivenessThemes

• Many things matter for competitiveness

• Progress must be made simultaneously on multiple fronts

• The weakest links will constrain productivity and retard development

• Imbalance between company sophistication and business environment quality slows down progress in improving competitiveness

• As economies develop, they face transition points that require many dimensions of competition to be transformed


Stages of National Competitive DevelopmentShifting Policy Imperatives

Factor-Driven Economy

Investment-Driven Economy

Innovation- Driven Economy

Source: Porter, Michael E., The Competitive Advantage of Nations, Macmillan Press, 1990

Low Cost Inputs Productivity Unique Value

• Monetary and fiscal, political, and legal stability

• Market opening• Improving basic human capital• Efficient basic infrastructure• Lowering the regulatory costs

of doing business

• Efficient access to endowments

• Increasing local rivalry• Creating advanced

infrastructure• Setting incentives and rules

encouraging productivity• Cluster formation and

activation

• Building advanced skills• Creating world class

scientific and technological institutions

• Setting incentives and rules encouraging innovation

• Cluster upgrading


Impact of Macro and Micro Competitiveness by Stage of Development

0.30 0.23 0.16

0.49

0.42

0.36

0.21 0.35

0.48

Low Income Countries Middle Income Countries High Income Countries

Source: ISC Competitiveness Model Notes: - Weights in a linear model across all economies: Micro: 0.31, SIPI: 0.41, Macro Policy: 0.28

- Middle-stage weights are an average of Low- and High-stage weights.


Human Development and Effective Public Institutions

Fiscal and Monetary Policy


Geographic Influences on Competitiveness

Regions and Cities

Nation

• Regions are the most important economic unit for competitiveness in larger countries, especially countries beyond subsistence development


• Economic performance varies significantly across sub-national regions (e.g., provinces, states, metropolitan areas)

The Role of Regions in Economic Development


Alabama

Alaska

ArizonaArkansas

California

Colorado

Connecticut

Florida

Georgia

Hawaii

Idaho

Illinois

Indiana

Iowa

Kansas

Kentucky

Louisiana

Maine

Maryland

Massachusetts

Michigan

Minnesota

Mississippi

Missouri

Montana

Nebraska

Nevada(-1.9%, $42,539)

New Hampshire

New Jersey

New Mexico

New York

North Carolina

North Dakota(+4.9%, $65,225)

Ohio

Oklahoma

Oregon

PennsylvaniaRhode Island

South Carolina

South Dakota

Tennessee

Texas

UtahVermont

Virginia

Washington

West Virginia

Wisconsin

Wyoming

$30,000

$35,000

$40,000

$45,000

$50,000

$55,000

$60,000

$65,000

$70,000

-1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0%

High but declining prosperity versus U.S.

High and rising prosperity versus U.S.

Low and declining prosperity versus U.S.

Low but rising prosperity versus U.S.

Source: BEA. Notes: GDP in real 2009 dollars. Growth rate is calculated as compound annual growth rate.

Real Growth in Gross Domestic Product per Capita, 2004 to 2014

Prosperity Performance of U.S. States2004-2014

Real GDP per Capita, 2014

U.S. Average GDP Per Capita, 2014: $49,469



• Many essential levers of competitiveness reside at the regional level

• Regions specialize in different sets of clusters



The Composition of Regional Economies

``

• Serve almost exclusively the local market

• Little exposure to international or cross-regional competition for employment Local

Clusters

64% of U.S. Employment

Traded Clusters

36% of U.S. Employment

• Serve national and globalmarkets

• Exposed to competition from other regions and nations

− Much higher average wages with 51% of payroll

− Much higher rate of innovation with 91% of patents issued

Note: Cluster data includes all private, non-agricultural employment. Source: Michael E. Porter, Economic Performance of Regions, Regional Studies (2003); Updated via Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School (2008)

20160203—MOC 2016—Session 3—FINAL Copyright 2016 © Professor Michael E. Porter47Source: Census CBP; author’s calculations.

U.S. Employment in Local clusters2013

Employees, 2013

0 4,000,000 8,000,000 12,000,000 16,000,000

Local Industrial Products and Services

Local Utilities

Local Entertainment and Media

Local Education and Training

Local Household Goods and Services

Local Logistical Services

Local Personal Services (Non-Medical)

Local Financial Services

Local Food and Beverage Processing and Distribution

Local Motor Vehicle Products and Services

Local Community and Civic Organizations

Local Retailing of Clothing and General Merchandise

Local Real Estate, Construction, and Development

Local Commercial Services

Local Hospitality Establishments

Local Health Services

Employees 50,000 =

Traded Cluster Composition of the Massachusetts Economy

Note: Clusters with less than 1,000 employees not shown.Source: Prof. Michael E. Porter, Harvard Business School; U.S. Cluster Mapping 2014 Benchmark Definitions (Delgado-Porter-Stern 2013), Richard Bryden, Project Director.

Overall change in the Massachusetts Share of US

Traded Employment: -0.13%

Massachusetts Overall Share of US Traded Employment: 2.65%

Added Jobs

Lost Jobs

Employment 2003-2013

Massachusetts National Employment Share, 2013

Business Services

Education and Knowledge Creation

(-.66%, 6.9%)

Marketing, Design, and Publishing

Performing Arts

Electric PowerGeneration

and Transmission

Video Productionand Distribution

Distribution and Electronic

Commerce

Financial Services

Information Technology and Analytical Instruments

(-.037%, 6.4%)


InsuranceServices

Transportation and Logistics

Plastics

Food Processingand Manufacturing

Production Technology and Heavy Machinery

Aerospace Vehiclesand Defense

MetalworkingTechnology

Communications Equipment

and Services

Printing Services

Medical DevicesLighting and

Electrical Equipment

Biopharmaceuticals

Paper and Packaging

Downstream Metal

Products

ConstructionProducts

and Services

Upstream Metal Manufacturing

Textile Manufacturing

Downstream Chemical Products

Furniture

Vulcanized and Fired Materials

Automotive

Apparel

Wood Products

Livestock Processing

Fishing and Fishing Products(-1.7%, 5.6%)

Environmental Services

Upstream Chemical Products

Jewelry and Precious Metals(-2.7%, 5.0%)

Water Transportation

Nonmetal Mining

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

-1.5% -1.0% -0.5% 0.0% 0.5% 1.0%Change in Massachusetts Share of National Employment 2003-2013


The Evolution of Regional EconomiesSan Diego

U.S. Military

CommunicationsEquipment

Sporting Goods

Analytical Instruments

Power Generation

Aerospace Vehiclesand Defense

Transportationand Logistics


1910 1930 1950 19901970

Bioscience Research Centers

Climate and Geography


Medical Devices

Biotech / Pharmaceuticals

Education andKnowledge Creation



• Many essential levers of competitiveness reside at the regional level

• Regions specialize in different sets of clusters

• The cluster portfolio and strength directly impacts not only regional performance but the path of development

• Regions are a critical unit in competitiveness

• Each region needs its own distinctive strategy and action agenda – Business environment improvement– Cluster upgrading– Improving institutional effectiveness

• Economic development is enhanced if significant resources and policy responsibility are decentralized to regions



Geographic Influences on Competitiveness

Neighboring Countries

Regions and Cities

Nation

“The Neighborhood”


Competitiveness and Integration with Neighboring CountriesTurkey’s Neighborhood

• Turkey sits at the crossroad between Europe and the Middle East• Economic coordination among neighboring countries can significantly enhance competitiveness• Integration offers greater opportunities than participation in broader economic forums (e.g., EU)


Models of Regional (Neighborhood) Economic Cooperation

• Establish free trade areas, customs unions or common markets

• Pursue regional economic integration and coordination to open trade and investment as well as enhancing multipledimensions of competitiveness

Market Opening

CompetitivenessUpgrading

Traditional Model Broader Model


Regional Integration and National Competitiveness

• Opening trade and investment among neighbors

– Expands the available market for each country

A nation’s neighbors are its most natural trading and investment partners

– The natural path of internationalization for local firms is the neighborhood

– Open trade and investment make each country a more attractive location for investment

• Capturing synergies in policy, infrastructure and other improvements in the business environment

• Leveraging synergies in clusters that cross borders

• Gaining greater clout in international negotiations

• Regional commitments help overcome domestic political and economic barriers to reform


• Eliminating trade and investment barriers within the region

• Simplifying and harmonizing cross-border regulations and paperwork

• Coordinatinganti-monopoly and fair competition policies

• Harmonizing IP protection

• Harmonizing environmental standards

• Harmonizing product quality, safety and technical standards

• Establishing reciprocal consumer protection laws

• Opening government procurement within the region

• Improving the efficiency of the regional transportation network

• Creating an efficient regional energynetwork

• Enhancing regional communicationsand connectivity

• Harmonizing administrative requirements for businesses across the region

• Linking financial markets

• Facilitating the movement of students for higher education

• Facilitating cross-border cluster development

– e.g., Supplier networks

– Efficient transport and logistics

– Quality standards

Factor (Input)Conditions

Context for Strategy

and Rivalry


Demand Conditions

Economic Integration Among NeighborsCapturing Synergies


• Coordinating macroeconomic policies

• Coordinating programs to improve security and public safety


The Dual Challenges of Development

Social Development

Economic Development

GDP per capita


The Dual Challenges of Development

• There is a powerful connection between economic and socialdevelopment, that goes in both directions

• Successful development requires improving the economic and social context simultaneously in ways that are reinforcing rather than work at cross purposes

Social Development

Economic Development

GDP per capita


What is Social Progress?

Social progress is the capacity of a society to meet the basic human needs of its citizens, establish the building blocks that allow citizens and communities to enhance and sustain the quality of their lives, and create the conditions for all

individuals to reach their full potential.

A holistic framework is needed


Social Progress Index Model 2015

Social Progress Index

Nutrition and Basic Medical Care

Water and Sanitation

Shelter

Personal Safety

Access to Basic Knowledge

Access to Information and Communications

Health and Wellness

Ecosystem Sustainability

Personal Rights

Access to Advanced Education

Personal Freedom and Choice

Tolerance and Inclusion

OpportunityFoundations of WellbeingBasic Human Needs


KWT

NZL

RUSSAU

ARE

IRQ

RWAIRNCHN

CHE

CRI

SWE

JAM

URY

AGO

MWI

Correlation: 0.78

Social Progress Index vs. GDP per Capita, 2015


Social Progress and Economic Development:Key Findings

Economic development alone is not sufficient to explain social progress outcomes

• There is a non-linear relationship between Social Progress Index scores and GDP per capita

• Social Progress Index scores display significant deviation from the GDP per capita regression line. Even wider at component and indicator level- How well economic growth translates into social improvement

• GDP per capita is an incomplete measure of a country's overall performance


Relative Strength Neutral Relative Weakness

Strengths and weaknesses are relative to 15 countries of similar GDP:Algeria, Serbia, Thailand, Iraq, South Africa, Montenegro, Botswana, Brazil, Colombia, Dominican Republic, Jordan, Macedonia, Egypt, Peru, and Tunisia

Score Rank Score Rank Score Rank

BASIC HUMAN NEEDS 84.22 41 S FOUNDATIONS OF WELLBEING 78.83 17 S OPPORTUNITY 70.59 25 S

Nutrition and Basic Medical Care 96.60 59 N Access to Basic Knowledge 93.96 56 N Personal Rights 83.28 21 S

Undernourishment (% of pop.) 5.9 73 N Adult literacy rate (% of pop. aged 15+) 97.8 54 N Political rights (1=full rights; 7=no rights) 1 1 SDepth of food deficit (cal./undernourished person) 41 73 N Primary school enrollment (% of children) 92.0 72 N Freedom of speech (0=low; 2=high) 2 1 SMaternal mortality rate (deaths/100,000 live births) 38 62 N Lower secondary school enrollment (% of children) 120.6 1 N Freedom of assembly/association (0=low; 2=high) 2 1 NChild mortality rate (deaths/1,000 live births) 9.6 46 N Upper secondary school enrollment (% of children) 78.8 62 N Freedom of movement (0=low; 4=high) 3 67 WDeaths from infectious diseases (deaths/100,000) 30.5 35 N Gender parity in secondary enrollment (girls/boys) 1.1 1 N Private property rights (0=none; 100=full) 50 39 N

Water and Sanitation 92.65 48 N Access to Information and Communications 80.66 35 S Personal Freedom and Choice 76.27 24 S

Access to piped water (% of pop.) 95.9 35 S Mobile telephone subscriptions (subscriptions/100 people) 146.0 1 N Freedom over life choices (% satisfied) 91.9 11 SRural access to improved water source (% of pop.) 90.9 61 N Internet users (% of pop.) 46.0 63 N Freedom of religion (1=low; 4=high) 3 55 WAccess to improved sanitation facilities (% of pop.) 93.9 50 N Press Freedom Index (0=most free; 100=least free) 12.2 18 S Early marriage (% of women aged 15-19) 0.13 78 W

Satisfied demand for contraception (% of women) 89.1 5 NCorruption (0=high; 100=low) 54 33 S

Shelter 81.98 30 S Health and Wellness 78.09 8 S Tolerance and Inclusion 73.58 17 S

Availability of affordable housing (% satisfied) 47.9 60 N Life expectancy (years) 79.7 26 S Tolerance for immigrants (0=low; 100=high) 75.3 26 N

Access to electricity (% of pop.) 99.0 65 N Premature deaths from non-comm. diseases (prob. of dying) 12.2 26 S Tolerance for homosexuals (0=low; 100=high) 52.4 31 S

Quality of electricity supply (1=low; 7=high) 5.6 34 N Obesity rate (% of pop.) 24.6 105 W Discrim. and viol. against minorities (0=low; 10=high) 4.4 29 SHousehold air pollution attr. deaths (deaths/100,000) 5.4 1 N Outdoor air pollution attributable deaths (deaths/100,000) 7.7 30 N Religious tolerance (1=low; 4=high) 4 1 N

Suicide rate (deaths/100,000) 7.5 54 W Community safety net (0=low; 100=high) 91.1 21 S

Personal Safety 65.65 63 N Ecosystem Sustainability 62.61 31 N Access to Advanced Education 49.24 58 N

Homicide rate (1= <2/100,000; 5= >20/100,000) 4 89 W Greenhouse gas emissions (CO2 equivalents per GDP) 248.1 4 N Years of tertiary schooling 0.7 34 SLevel of violent crime (1=low; 5=high) 2 20 S Water withdrawals as a percentage of resources 1.9 76 W Women's average years in school 10.8 62 NPerceived criminality (1=low; 5=high) 3 33 N Biodiv. and habitat (0=no protection; 100=high protection) 89.6 24 N Inequality in the attainment of edu. (0=low; 1=high) 0.16 61 NPolitical terror (1=low; 5=high) 2 39 N Number of globally ranked universities 2 54 NTraffic deaths (deaths/100,000) 12.7 48 N

COSTA RICAGDP per capita rank: 59/133Social Progress Index rank: 28/133


Social Progress and Shared Prosperity

• The Social Progress Index can serve as a powerful measurement framework to complement a country’s economic measurement

• SPI allows a strategic approach to social development

• The Social Progress Index creates a common language among government, business, and civil society that fosters collaboration

• SPI allows a deeper understanding of the underpinnings of inclusive development, and the factors that underpin overall economic development

• The SPI framework can be applied at different geographic levels, offering a more granular assessment down to the individual community level


Decomposing Economic Prosperity

• Local prices– Efficiency of local

industries– Level of local

market competition• Consumption taxes

• Standard of living

• Average Income• Income inequality

Per Capita IncomeDomestic

PurchasingPower

Labor Utilization

• Workforce participation– Population age profile

• Working hours

Economic Prosperity

Shared Prosperity

Documents

Microeconomics of Competitiveness · central actor in the economy • Resource revenues allow . unproductive policies and practices to persist . and fuel. corruption. Created Prosperity