Transition Economies: Porter Model Comparisons

Maj Ryan Craycraft

Introduction

• Thesis

• Porter Model Explanation

• Case Studies– Russia– Poland– China

• Conclusion

Proposition

• If a country is to be successful in the global market economy, its domestic businesses must be competitive.

• IV: High levels of competitiveness

• DV: Successful Market Economy

Michael Porter’s Index

• Michael Porter, Harvard Business School has developed a competitive index– “The Current Competitiveness Index examines the

microeconomic bases of a nation’s GDP per capita.”

• Macroeconomic conditions are usually the object of study, but although necessary, they are not sufficient

• Microeconomic conditions are what actually create wealth and “sustainable productivity”

• Comparative in nature

Porter’s Model

• Like a business cycle, interactions among the previous activities help countries move along the macroeconomic country cycle

Porter’s Model

• Business Environment Diamond, aka “The Diamond”

(Consumers)

(Indirect Efficiencies)

(Supply Context)

(Nat’l Corporate Culture)

Poland

• Transition Plan:– Free Elections– Evolve to purely private economy– Create the Institutions of a capitalist economy

• Rapidly to market economy• Liberalize economic functions (int’l trade / FDI)• Privatization• Construct Social Safety Net• Mobilize Int’l Monetary Aid

Poland’s Successes

• Solid GDP Growth

• Stable currency

• Solid Manufacturing Sector

• Exports

• FDI

• Small / Medium business growth

Poland’s Challenges

• Poor Infrastructure

• Political Instability

• Small inflation (<5%)

• Social Safety Net in jeopardy

• Unemployment (esp. eastern Poland)

• Debt of 50% GDP (2004)

Poland in Porter’s Framework

• Moving from Factor Driven to Investment Driven

• Strong Manufacturing Sector, esp. automobiles due to relatively cheap, educated labor force

•Strong FDI

Poland in Porter’s Diamond

(Consumers

$14K PPP)

(Indirect Efficiencies)

(Supply Context)

(Nat’l Corporate Culture)

•Neutral Achievement

•Balanced Income and Competitiveness

Russia: A Middle Income Country

• Also a shock-therapy transition

• #1 CIS country, but behind E. Europe countries– No EU Charter guidance

Russia: Strengths

• Macroeconomic Stability (oil revenue)– 7th highest fiscal surplus in 2006

• Cold War capacities– Higher education– Research institutions spurring innovation– Cultural factors that support innovation

• Flexible labor market

Russia: Challenges

• Public institutions• Health factors

– Infant mortality– Life expectancy

• Petrodollars preventing necessary painful reforms

• Inflation near 10%• Technological readiness of business sector• Low intensity of domestic competition

Russia in Porter’s Framework

• Classified by WEF in the Efficiency-driven stage

• “Needs to focus on higher education and training, market efficiency and technological readiness”

• While continuing public institution reform

Russia in Porter’s Diamond

(Consumers

$12K PPP)

(Supporting Infrastructure)

(Mixed Bag)

(Low Competitiveness)

•Overachieving Country

•High Income compared to low competitiveness index

China: Commanded Transition

• Slow transition method

• Excess production allowed to go the open market

• When private enterprise failed, it was cancelled

• Government-controlled financial system

China: Strengths

• Macroeconomic indicators– High growth rates– Low inflation– High savings rate– Moderate public debt

China: Challenges

• State-controlled banking sector

• Low penetration of technology in industry

• Poor secondary / tertiary education system

• Public and Private institution quality– Turning to capital punishment for corruption– Burdensom government regulation– Poor property rights– Judiciary lacks independence

China in Porter’s Framework

• Moving from capture of cheap labor to need for efficiency to compete because cheap labor in other places

•Same as Russia’s recommendations:

• “Needs to focus on higher education and training, market efficiency and technological readiness”

• While continuing public institution reform

China in Porter’s Diamond

(Consumers

$7.5K PPP)

(Supporting Infrastructure)

(Macro indicators

Public Institutions)

(Low Technology)

•Underachieving Country

•Low Income compared to higher competitiveness index

Conclusion

• Transition from Factor-driven economy to Investment-driven economy has coincided with evolution from developing country to middle-income, developed country

• New challenge will be to move from Investment-driven to Innovation-driven in order to sustain growth

References

• Porter, Michael E. “Enhancing the Microeconomic Foundations of Prosperity: The Current Competitiveness Index”

• Hunter, Richard J. and Leo V. Ryan, “A Transitional Analysis of the Polish Economy: After Fifteen Years, Still a ‘Work in Progress,” Global Economic Journal 5:2, 2005.

• Economist.com, Poland Country Briefing Factsheet,

• Marageta Drzeniek, “Russia’s Competitiveness at the Crossroads”, Paper presented at World Economic Forum Russia CEO Roundtable, June 2007, http://www.weforum.org/en/events/russia2007/index.htm

• Economist.com, China Country Briefing Factsheet,

• Porter, Michael E., World Economic Forum, World Competitiveness Report 2006-2007