The Competitive Advantage of Nations, States and Regions Files/2011-0707...Uganda High corruption Low corruption Worsening Improving Change in Rank, Global Corruption Report, 2009

1 Copyright © 2011 Professor Michael E. Porter20110707 – Malaysia VC – v3 07072011 – prepared by RA Stacie Rabinowitz

The Competitive Advantage of Nations, States and Regions

Professor Michael E. PorterHarvard Business School

National Council of ProfessorsKuala Lumpur, Malaysia

July 7, 2011This presentation draws on ideas from Professor Porter’s articles and books, in particular, The Competitive Advantage of Nations (The Free Press, 1990),“Building the Microeconomic Foundations of Competitiveness,” in The Global Competitiveness Report (World Economic Forum), “Clusters and the NewCompetitive Agenda for Companies and Governments” in On Competition (Harvard Business School Press, 2008), and ongoing research on clusters andcompetitiveness. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means - electronic,mechanical, photocopying, recording, or otherwise - without the permission of Michael E. Porter. Further information on Professor Porter’s work and theInstitute for Strategy and Competitiveness is available at www.isc.hbs.edu


PPP-adjusted GDP per Capita, 2010 ($USD)

Growth of Real GDP per Capita (PPP-adjusted), CAGR, 2000-2010Note: Luxembourg ExcludedSource: EIU (2011), authors calculations

Prosperity PerformanceOECD Countries

Australia

Belgium

Chile

Denmark

France

Greece

Iceland

Israel

Japan

Estonia

Netherlands

Portugal

Slovenia

Sweden

Turkey

United States

Austria Canada

Czech Republic

FinlandGermany

Hungary

Ireland

ItalySouth Korea

Mexico

New Zealand

Poland

Slovakia

Spain

Switzerland

UK

$0

$10,000

$20,000

$30,000

$40,000

$50,000

1% 2% 3% 4% 5% 6% 7% 8%

OECD Average: 3.68%

OECD Average: $30,592


PPP-adjusted GDP per Capita, 2010 ($USD)

Growth of Real GDP per Capita (PPP-adjusted), CAGR, 2000-2010

Source: EIU (2011), authors calculations

Prosperity PerformanceLower and Middle Income Countries

Sample Average: 5.67%

Sample Average: $6,720

CroatiaLithuaniaPanama

RussiaArgentina

LatviaTrinidad and Tobago

Malaysia Uruguay

LebanonMauritiusBotswana

Venezuela BulgariaRomaniaIran

Kazakhstan

SerbiaDominican RepublicBrazil

South AfricaCosta Rica

MacedoniaColombia Bosnia and Hercegovina

PeruTunisiaThailand

AlgeriaEcuador AlbaniaGuatemala Angola (11.05%)

China (12.47%)

Namibia UkraineEl Salvador

EgyptJordanJamaica Sri LankaSyria GeorgiaBolivia Morocco

Paraguay

IndonesiaHonduras MongoliaPhilippines IndiaVietnamNicaragua Moldova

Pakistan NigeriaKyrgyz Republic

Cameroon CambodiaMauritaniaSenegal

Benin KenyaChad

Ghana

Zambia BangladeshUganda TanzaniaBurkina Faso Mali

Nepal EthiopiaMadagascarRwandaMozambique MalawiZimbabwe (-2.89%)$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

$20,000

2% 3% 4% 5% 6% 7% 8% 9% 10%

4 Copyright © 2011 Professor Michael E. Porter20110707 – Malaysia VC – v3 07072011 – prepared by RA Stacie RabinowitzSource: USPTO (2010), Groningen Growth and Development Centre, Total Economy Database (2010)

Average U.S. utility patents per 1 million population, 2007-2009

CAGR of US-registered patents, 1999 to 2009

Innovation OutputSelected Countries, 1999 to 2009

10,000 patents (avg. 1999 – 2009) =

United States

Japan

Germany

UKFrance

Canada

South KoreaSwitzerland

Italy

Sweden

Netherlands

Australia

Israel

Belgium Austria

Finland

Denmark

China (33.80%)

Spain

Norway

India

Singapore

Hong Kong

South Africa Hungary

New ZealandIreland

RussiaMexico Malaysia0

50

100

150

200

250

-5% 0% 5% 10% 15% 20%

Taiwan


What is Competitiveness?

• Only business can create wealth• Nations compete to offer the most productive environment for business• The public and private sectors play different but interrelated roles in

creating a productive economy

• Competitiveness is the productivity with which a nation uses its human, capital, and natural resources.

– Productivity sets the sustainable standard of living (wages, returns on capital, returns on natural resources)

– It is not what industries a nation competes in that matters for prosperity, but how it competes in those industries

– Productivity in a national economy arises from a combination of domestic and foreign firms


What Determines Competitiveness?

Endowments

• Endowments create a foundation for prosperity, but true prosperity is created by productivity in the use of endowments


Macroeconomic Competitiveness

MacroeconomicPolicies

Human Development and PoliticalInstitutions


Endowments

• Macroeconomic competitiveness sets the potential for high productivity, but is not sufficient• Endowments create a foundation for prosperity, but true prosperity is created by productivity in the use

of endowments




•

• Fiscal policy– Government surplus/deficit– Government debt

• Monetary policy– Inflation– Business cycle management– Savings

Macroeconomic Policies

•

• Human development– Basic education– Health

• Political institutions– Political freedom– Voice and accountability– Political stability– Government effectiveness– Decentralization of economic policymaking

• Rule of law– Security – Civil rights– Judicial independence– Efficiency of legal framework– Freedom from corruption

Social Infrastructure and Political Institutions


Corruption Perception Index, 2009

Note: Ranks only countries available in both years (161 countries total) Source:Global Corruption Report, 2010

Albania

BangladeshBelarus

Brazil

Cambodia

Canada

Chile

ChinaColombia

Costa Rica

CroatiaCuba

El Salvador

Finland

FYR MacedoniaGeorgia

Greece

Guatemala

Haiti

Honduras

Hong Kong

Hungary

Iceland

India

Iran

Iraq

Israel

Italy

Jamaica

Kuwait

Laos

Lebanon

Malaysia

Mexico

Mongolia

Myanmar

Netherlands New Zealand

Norway

Pakistan

Panama

Paraguay

Philippines

Poland

Portugal

Romania

Russia

Saudi Arabia

Serbia

Spain

Thailand

Turkmenistan

Ukraine

United Kingdom United States

Uzbekistan

Venezuela

VietnamAlgeria

Botswana

Burkina Faso

Cameroon

Chad

Côte d´Ivoire

DRC

Egypt

Equatorial Guinea

Ethiopia

Gambia

Ghana

Guinea

Madagascar

Malawi

Mali

Mauritania

Mauritius

Mozambique

Namibia

Niger

Nigeria

Senegal

South Africa

Sudan

Swaziland

Togo

Tunisia

Zambia

Zimbabwe

Burundi

Kenya

Rwanda

TanzaniaUganda

High corruption

Low corruption

Worsening ImprovingChange in Rank, Global Corruption Report, 2009 versus 2006

Rank in Global Corruption Index,

2009



Microeconomic Competitiveness

Sophisticationof Company

Operations andStrategy

Quality of the NationalBusiness

Environment


Human Development and PoliticalInstitutions

State of Cluster Development


Endowments

• Productivity ultimately depends on improving the microeconomic capability of the economy and the sophistication of local competition

• Macroeconomic competitiveness sets the potential for high productivity, but is not sufficient• Endowments create a foundation for prosperity, but true prosperity is created by productivity in the use

of endowments








Environment

SocialInfrastructure and PoliticalInstitutions




Endowments

The external business environment conditions

that enable company productivity and

innovation


Quality of the National Business EnvironmentContext for

Firm Strategy

and Rivalry

Related and Supporting Industries

Factor(Input)

ConditionsDemand

Conditions

• Sophisticated and demanding local customers and needs

– e.g., Strict quality, safety, and environmental standards

– Consumer protection laws

• Many things 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. salaries, incentives for capital investments, intellectual property protection, corporate governance standards

• Open and vigorous local competition– Openness to foreign competition– Competition laws• Access to high quality business

inputs– Human resources– Capital availability– Physical infrastructure– Administrative and information

infrastructure (e.g., registration, permitting, transparency)

– Scientific and technological infrastructure

– Efficient access to natural endowments• Availability of suppliers and supporting

industries







Environment





Endowments

A critical mass of firms and institutions in each

field to harness efficiencies and externalities across

related entities



14 Copyright © 2011 Professor Michael E. Porter20110707 – Malaysia VC – v3 07072011 – prepared by RA Stacie RabinowitzSources: HBS student team research (2003) - Peter Tynan, Chai McConnell, Alexandra West, Jean Hayden

Hotels

Attractions andActivities

e.g., theme parks, casinos, sports

Airlines, Cruise Ships

Travel agents Tour operators

Restaurants

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

State of Cluster DevelopmentTourism Cluster in Cairns, Australia


Kenya’s Cut Flower Cluster

Sources: MOC student team research by Kusi Hornberger, Nick Ndiritu, Lalo Ponce-Brito, Melesse Tashu, Tijan Watt, Harvard Business School, 2007

Government Agencies, NGOs & Industry Associations

Education, Research & Quality Standards Organizations

FlowerFarming

Post-HarvestHandling;

Transport toMarket

FreightForwarders

Clearing andForwarding

Agents

Air Carriers(Commercial /

Charters)

PlantstockTrade & Industry Associations

Kenya Flower Council (KFC)Fresh Produce Exporters Association of Kenya (FPEAK)

Regional Growers Associations e.g., North & South Kinangop; Lake Naivasha, etcGreenhouse;Shading

Structures

Pre-CoolingTechnology

Irrigationtechnology

Grading /Packaging Sheds

Post-HarvestCooling

Technology

AgriculturalCluster

HorticulturalCluster

(Fruits & Vegetables)

Public universities with post graduate degrees inhorticulture:

University of Nairobi; Jomo Kenyatta University of Agriculture & Technology

Horticultural Crops Development Authority (HCDA)Government Export Policies targeting Horticulture

Government Policy for Revitalizing Agriculture; National Export Strategy; ExportPromotion Council (EPC)

Fertilizers,pesticides,herbicides

Research Institutions:Kenya Agricultural Research Institute (KARI)

International Center for Insect Physiology and Ecology (ICIPE)

RefrigeratedTrucks

Quality & Standards:EUREGAP Standard (UK & Dutch Supermarkets)

Kenya Plant Health Inspectorate Services (KEPHIS)

Non-Governmental OrganizationsThe Rural Enterprise Agri-Business Promotion Project (USAID, CARE, IFAD)

Horticultural Produce Handling Facilities Project (JBIC)

Packaging &LabelingMaterials

TourismCluster


Development of the 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

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 collective 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


National Cluster Export PortfolioMalaysia, 1999-2009

Change in Malaysia’s world export market share, 1999 – 2009

Mal

aysi

a’s

wor

ld e

xpor

t mar

ket s

hare

, 200

9

Exports of US$2.3 Billion = Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics Database and the IMF BOP statistics.

Change In Malaysia’s average world export share: - 0.16%

Malaysia’s average world export share: 1.34%

Rising Exports

Declining Exports

Change (99-09)

Information Technology (6.24%)

Oil and Gas

Products

Hospitality and Tourism (1.22%)

Agricultural Products

Entertainment and Reproduction Equipment

Plastics

Metal Mining and Manufacturing

Communications Equipment

Chemical ProductsTransportation and Logistics

Business Services

Analytical Instruments Processed Food

Apparel

Building Fixtures and Equipment

LightingAnd

Electrical

Production Technology

Furniture

Motor Driven Products

Jewelry, Precious Metals and Collectibles

Communications Services

Construction Materials (1.12%)

Textiles

Automotive

Forest Products

Medical Devices

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

-1.2% -1.0% -0.8% -0.6% -0.4% -0.2% 0.0% 0.2% 0.4%


Aerospace Vehicles &

Defense

FurnitureBuilding Fixtures,

Equipment & Services

Fishing & Fishing Products

Hospitality & TourismAgricultural

Products

Transportation & Logistics

Cluster Linkages and Economic Diversification

Plastics

Oil & Gas

Chemical Products

Biopharma-ceuticals

Power Generation

Lightning & ElectricalEquipment

Financial Services

Publishing & Printing

Communi-cations

Equipment

Aerospace Engines

Business Services

DistributionServices

Forest Products

Heavy Construction

Services

ConstructionMaterials

Prefabricated Enclosures

Heavy Machinery

Sporting & Recreation

Goods

Automotive



Mining & Metal Manufacturing

Apparel

Leather & Related Products

Jewelry & Precious Metals

Textiles

Footwear

Processed Food

Tobacco

Enter-tainment

Information Tech.

Medical Devices

Analytical InstrumentsEducation &

Knowledge Creation

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


FurnitureBuilding Fixtures,

Equipment & Services

Fishing & Fishing Products Hospitality

& TourismAgricultural

ProductsTransportation

& Logistics

Share of World Exports by ClusterMalaysia, 2009

Plastics

Oil & Gas

Chemical Products

Biopharma-ceuticals

Power Generation

Aerospace Vehicles &

Defense

Lightning & ElectricalEquipment

Financial Services

Publishing & Printing

Information Tech.

Communi-cations

Equipment

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

Marine Equipment

Aerospace Engines

Heavy Machinery

Sporting & Recreation

Goods

Automotive



Mining & Metal Manufacturing

Enter-tainment

LQ > 4

LQ > 2

LQ > 1.

LQ, or Location Quotient, measures the country’s share in cluster exports relative to its overall share of world exports.An LQ > 1 indicates an above average export share in a cluster.


Geographic Influences on Competitiveness

Neighboring Countries

Regions and Cities

Nation


Prosperity PerformanceU.S. States, 1999 to 2009

Gross Domestic Product per Capita Real Growth Rate, 1999 to 2009

$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% 2.5% 3.0% 3.5% 4.0%

U.S. GDP per Capita: $46,093

High and rising prosperity versus U.S.

Notes: Real GDP figures in 2005 chained US dollars from the Bureau of Economic Analysis. Growth rate is calculated as compound annual growth rate. D.C. excluded

U.S. GDP per CapitaReal Growth Rate: 0.86%

Gross Domestic Product per Capita Real Growth Rate, 1999 to 2009

Gro

ss D

omes

tic P

rodu

ct p

er C

apita

, 200

9

High but declining versus U.S.

Low and declining versus U.S. Low but rising versus U.S.

Illinois

Wyoming

North Dakota

South Dakota

Delaware

AlaskaConnecticut

Wisconsin

Nevada

Arizona

New York

New JerseyMassachusetts

California

West Virginia

Mississippi

VermontOklahoma

IowaNebraska

North Carolina

Georgia Florida

Michigan

IdahoSouth Carolina

Texas

Oregon

Rhode Island

Louisiana

PennsylvaniaKansas

New Hampshire

Arkansas

Maine

ColoradoWashington

Virginia

Minnesota

HawaiiMaryland

Alabama Montana

KentuckyNew Mexico

MissouriOhio

IndianaUtah

Tennessee


Regions and Competitiveness

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

• Many essential levers of competitiveness reside at the regional level

• Regions specialize in different sets of clusters

• Cluster strength directly impacts regional performance


Specialization of Regional EconomiesLeading Clusters by U.S. Economic Area, 2008

Boston, MA-NHAnalytical Instruments Education and Knowledge CreationMedical DevicesFinancial Services

Los Angeles, CAEntertainmentApparelDistribution ServicesHospitality and Tourism

San Jose-San Francisco, CABusiness ServicesInformation TechnologyAgricultural ProductsCommunications EquipmentBiopharmaceuticals

New York, NY-NJ-CT-PAFinancial ServicesBiopharmaceuticalsJewelry and Precious MetalsPublishing and Printing

Seattle, WAAerospace Vehicles and DefenseInformation TechnologyEntertainmentFishing and Fishing Products

San Diego, CAMedical DevicesAnalytical InstrumentsHospitality and TourismEducation and Knowledge Creation

Chicago, IL-IN-WIMetal ManufacturingLighting and Electrical EquipmentProduction TechnologyPlastics

Denver, COBusiness ServicesMedical DevicesEntertainmentOil and Gas Products and Services

Raleigh-Durham, NCEducation and Knowledge CreationBiopharmaceuticalsCommunications EquipmentTextiles

Atlanta, GATransportation and LogisticsTextilesMotor Driven ProductsConstruction Materials

DallasAerospace Vehicles and DefenseOil and Gas Products and ServicesInformation TechnologyTransportation and Logistics

Source: Prof. Michael E. Porter, Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director.

Houston, TXOil and Gas Products and ServicesChemical ProductsHeavy Construction ServicesTransportation and Logistics

Pittsburgh, PAEducation and Knowledge CreationMetal ManufacturingChemical ProductsPower Generation and Transmission


The Evolution of Regional EconomiesSan Diego

U.S. Military

Communications

Equipment

Sporting Goods

Analytical Instruments

Power Generation

Aerospace Vehicles

and Defense

Transportation

and Logistics

Information Technology

1910 1930 1950 19901970

Bioscience Bioscience Research Centers

Geography

Climate and

Geography

Hospitality and Tourism

Medical Devices

Biotech / Pharmaceuticals

Education and

Knowledge Creation


Regions and Competitiveness

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

• Many essential levers of competitiveness reside at the regional level

• Regions specialize in different sets of clusters

• Cluster strength directly impacts regional performance

• Each region needs its own distinctive competitiveness strategy and action agenda

• Improving competitiveness requires effective policy collaborationbetween regions and the national government

• Decentralization is important to foster regional specialization, internal competition, and greater government accountability

• Effective decentralization requires clarity on roles and responsibilities, and sufficient administrative capacity at local and regional level


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)


Competitiveness and the Neighborhood

• Opening trade and investment among neighbors

– Expands the available market– 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

• Economic coordination to drive improvements in the business environment– Capture synergies in policy and infrastructure

– Gain greater clout in international negotiations

• External agreements to help overcome domestic political and economic barriers to reform


Roads

AirportsPorts

Logistic Corridor

Competitiveness and Integration with Neighboring CountriesCentral American Logistical Corridor

Mexico

Belize

Honduras

El SalvadorNicaragua

Costa Rica Panama

Guatemala

Country Boundary


The Shifting Process of Economic Development

Old Model

• Government drives economic development through policy decisions

New Model

• Economic development is a collaborative process involving government at multiple levels, companies, teaching and research institutions, and private sector organizations


National Value Proposition

Creating a National Economic Strategy

• What is the distinctive competitive position of a nation given its location, legacy, existing strengths, and potential strengths?

– What unique value as a business location?– For what types of activities and clusters?– And what roles with neighbors, the region, and the broader

world?

Developing Unique Strengths Achieving and Maintaining Parity with Peers

• What elements of the business environment can be unique strengths relative to peers/neighbors?

• What existing and emerging clustersrepresent local strengths?

• What weaknesses must be addressed to remove key constraints and achieve parity with peer countries?

• Priorities and sequencing are necessity in economic development


Universities’ Role in Competitiveness

• Educate future managers, researchers, and employees

• Transfer of technology and knowledge• Adapt global knowledge to local

circumstances• Act as a launching pad for new

companies and clusters• Create networks of alumni and other

partners to enable collaboration• Collect and provide data on all aspects

of the economy• Create new knowledge• Raise visibility and provide profile to the

region and its economy

• Generate specific data and analysis on competitiveness

• Educate public and private leaders about competitiveness

• Provide a platform for public-private action

• Initiate and lead competitiveness efforts

Competitiveness Efforts

Business EnvironmentQuality

• Competition in the global economy is increasingly knowledge-driven, putting universities at the very heart of the competitiveness agenda


Universities and Cluster Development

• Universities should identify and reach out to local clusters

• Universities should focus on clusters where they have a material impact on cluster performance

• Universities should consider specializing in areas in which the local economy has an established position

• Universities should, alone or with others, get involved in upgrading the cluster-specific cluster environment

– Conduct joint R&D programs with companies– Develop training programs with the cluster– Participate in the attraction of companies and research centers

important for the development of the cluster

Documents

The Competitive Advantage of Nations, States and Regions Files/2011-0707...Uganda High corruption Low corruption Worsening Improving Change in Rank, Global Corruption Report, 2009