The Competitive Advantage of Nations, States and Regions

The Competitive Advantage of Nations, States and Regions Professor Michael E. Porter Harvard Business School National Council of Professors Kuala Lumpur, Malaysia July 7, 2011 This 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 New Competitive Agenda for Companies and Governments” in On Competition (Harvard Business School Press, 2008), and ongoing research on clusters and competitiveness. 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 the Institute for Strategy and Competitiveness is available at www.isc.hbs.edu 20110707 – Malaysia VC – v3 07072011 – prepared by RA Stacie Rabinowitz

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Copyright © 2011 Professor Michael E. Porter

Prosperity Performance OECD Countries PPP-adjusted GDP per Capita, 2010 ($USD) OECD Average: 3.68%

$50,000

United States

Switzerland

$40,000

Iceland Denmark

Netherlands Austria Canada Sweden

Ireland Australia

Belgium Germany Finland France Japan UK

$30,000

OECD Average: $30,592

Spain Israel

Italy New Zealand

South Korea

Greece Slovenia

Czech Republic Slovakia Estonia

Portugal

$20,000

Hungary Mexico

Poland Chile

Turkey

$10,000

$0 1%

2%

Note: Luxembourg Excluded

3%

4%

5%

6%

7%

8%

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

Source: EIU (2011), authors calculations 20110707 – Malaysia VC – v3 07072011 – prepared by RA Stacie Rabinowitz

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Prosperity Performance Lower and Middle Income Countries PPP-adjusted GDP per Capita, 2010 ($USD) $20,000

Sample Average: 5.67%

$18,000 Croatia

$16,000

Panama

Lithuania Russia

Argentina Uruguay

Malaysia $14,000

Latvia Botswana Lebanon

Trinidad and Tobago Mauritius

$12,000

Venezuela Serbia Brazil Costa Rica South Africa Macedonia Thailand Colombia Algeria Ecuador Guatemala

$10,000 $8,000

El Salvador

$6,000 Jamaica

$4,000

Paraguay Bolivia Honduras

Namibia Jordan Egypt Syria Philippines Kyrgyz Republic Pakistan

Nicaragua Cameroon Senegal Mauritania Kenya Benin Zambia Madagascar Nepal Burkina Faso Mali Zimbabwe (-2.89%)

$2,000 $0 2%

3%

4%

5%

Kazakhstan

Bulgaria Iran Romania Dominican Republic Tunisia Peru Bosnia and Hercegovina

China (12.47%)

Albania

Sample Average: $6,720

Ukraine Morocco

Angola (11.05%)

Sri Lanka

Georgia

India Mongolia Vietnam Moldova Nigeria Ghana Chad Cambodia Uganda Bangladesh Tanzania Ethiopia Mozambique Rwanda Malawi Indonesia

6%

7%

8%

9%

10%

Growth of Real GDP per Capita (PPP-adjusted), CAGR, 2000-2010 Source: EIU (2011), authors calculations 20110707 – Malaysia VC – v3 07072011 – prepared by RA Stacie Rabinowitz

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Innovation Output Selected Countries, 1999 to 2009 Average U.S. utility patents per 1 million population, 2007-2009 Japan

Taiwan

250 United States

200 Israel Finland

Switzerland

150 Sweden

South Korea

Germany

Canada

100

Singapore Denmark Belgium

50

Netherlands Austria

Australia

Norway

France

Hong Kong Ireland

UK New Zealand

Italy

Hungary Mexico South Africa Russia

0 -5%

0%

China (33.80%)

Malaysia

Spain

5% 10% CAGR of US-registered patents, 1999 to 2009

India

15%

20%

10,000 patents (avg. 1999 – 2009) = Source: USPTO (2010), Groningen Growth and Development Centre, Total Economy Database (2010) 20110707 – Malaysia VC – v3 07072011 – prepared by RA Stacie Rabinowitz

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What is Competitiveness? • 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

• 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

20110707 – Malaysia VC – v3 07072011 – prepared by RA Stacie Rabinowitz

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What Determines Competitiveness?

Endowments

•

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


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What Determines Competitiveness?

Macroeconomic Competitiveness Human Macroeconomic Development Policies and Political Institutions

Macroeconomic Policies

Endowments

•

Macroeconomic competitiveness sets the potential for high productivity, but is not sufficient

•



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Macroeconomic Competitiveness Macroeconomic Policies

• •

Fiscal policy – –

•

• •

Government surplus/deficit Government debt

Human development – –

Monetary policy – – –

Social Infrastructure and Political Institutions

•

Inflation Business cycle management Savings

Political institutions – – – – –

•

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

Rule of law – – – – –


Basic education Health

Security Civil rights Judicial independence Efficiency of legal framework Freedom from corruption


Rank in Global Corruption Index, 2009

Corruption Perception Index, 2009 United Kingdom Spain Portugal

Lebanon

Iran

High corruption

Netherlands New Zealand Canada Hong Kong United States

Finland Iceland Norway

Low corruption

Israel Botswana Mauritius Costa Rica Hungary Poland South Africa Malaysia Namibia Italy Cuba Saudi Arabia Tunisia Kuwait Croatia Georgia Romania Greece Ghana FYR Macedonia China Brazil Colombia Thailand Burkina Faso Swaziland Guatemala Serbia El Salvador India Malawi Panama Mexico Zambia Rwanda Albania Jamaica Senegal Madagascar Gambia Niger Algeria Mali Egypt Togo Vietnam Ethiopia Tanzania Uganda Mongolia Honduras Mauritania Nigeria Pakistan Mozambique Cameroon Bangladesh Philippines Belarus Ukraine Kenya Russia Zimbabwe Paraguay Côte d´Ivoire Cambodia Laos Venezuela DRC Haiti Burundi Chad Turkmenistan Guinea Iraq Myanmar Uzbekistan Equatorial Guinea Sudan Chile

Improving

Worsening

Change in Rank, Global Corruption Report, 2009 versus 2006 Note: Ranks only countries available in both years (161 countries total) Source:Global Corruption Report, 2010 20110707 – Malaysia VC – v3 07072011 – prepared by RA Stacie Rabinowitz

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What Determines Competitiveness? Microeconomic Competitiveness Quality of the National Business Environment

State of Cluster Development

Sophistication of Company Operations and Strategy

Macroeconomic Competitiveness Human Macroeconomic Development Policies and Political Institutions

Macroeconomic Policies

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

•



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What Determines Competitiveness? The external business environment conditions that enable company productivity and innovation

Microeconomic Competitiveness Quality of the National Business Environment



Macroeconomic Competitiveness Macroeconomic Policies

Social Infrastructure and Political Institutions

Endowments


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Quality of the National Business Environment Context for Firm Strategy and Rivalry • Local rules and incentives that encourage investment and productivity

Factor (Input) Conditions • Access to high quality business inputs

– e.g. salaries, incentives for capital investments, intellectual property protection, corporate governance standards

Demand Conditions

• Open and vigorous local competition – Openness to foreign competition – Competition laws

• Sophisticated and demanding local customers and needs

– – – –

Human resources – e.g., Strict quality, safety, and Capital availability environmental standards Related and Physical infrastructure – Consumer protection laws Administrative and information Supporting infrastructure (e.g., registration, Industries permitting, transparency) – Scientific and technological • Availability of suppliers and supporting infrastructure – Efficient access to natural endowments industries

• 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 20110707 – Malaysia VC – v3 07072011 – prepared by RA Stacie Rabinowitz

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What Determines Competitiveness? A critical mass of firms and institutions in each field to harness efficiencies and externalities across related entities

Microeconomic Competitiveness Quality of the National Business Environment



Macroeconomic Competitiveness Social Infrastructure Macroeconomic and Political Policies Institutions

Social Macroeconomic Infrastructure Policies and Political Institutions

Endowments


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State of Cluster Development Tourism Cluster in Cairns, Australia Public Relations & Market Research Services

Travel agents

Tour operators

Restaurants

Attractions and Activities

Food Suppliers

Local Transportation

e.g., theme parks, casinos, sports

Property Services

Maintenance Services

Local retail, health care, and other services

Souvenirs, Duty Free Airlines, Cruise Ships

Hotels

Banks, Foreign Exchange

Government agencies

Educational Institutions

Industry Groups

e.g. Australian Tourism Commission, Great Barrier Reef Authority

e.g. James Cook University, Cairns College of TAFE

e.g. Queensland Tourism Industry Council

Sources: HBS student team research (2003) - Peter Tynan, Chai McConnell, Alexandra West, Jean Hayden 20110707 – Malaysia VC – v3 07072011 – prepared by RA Stacie Rabinowitz

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Kenya’s Cut Flower Cluster Government Agencies, NGOs & Industry Associations Horticultural Crops Development Authority (HCDA) Government Export Policies targeting Horticulture Government Policy for Revitalizing Agriculture; National Export Strategy; Export Promotion Council (EPC)

Non-Governmental Organizations

The Rural Enterprise Agri-Business Promotion Project (USAID, CARE, IFAD) Horticultural Produce Handling Facilities Project (JBIC)

Plantstock

Greenhouse; Shading Structures

Trade & Industry Associations Kenya Flower Council (KFC) Fresh Produce Exporters Association of Kenya (FPEAK) Regional Growers Associations e.g., North & South Kinangop; Lake Naivasha, etc

Irrigation technology

Pre-Cooling Technology

Fertilizers, pesticides, herbicides

Agricultural Cluster

Horticultural Cluster

Post-Harvest Handling; Transport to Market

Flower Farming

Post-Harvest Cooling Technology

Grading / Packaging Sheds

Packaging & Labeling Materials

Refrigerated Trucks

Freight Forwarders Education, Research & Quality Standards Organizations Research Institutions:

Clearing and Forwarding Agents

Public universities with post graduate degrees in horticulture:

Air Carriers (Commercial / Charters)

Kenya Agricultural Research Institute (KARI) International Center for Insect Physiology and Ecology (ICIPE)

University of Nairobi; Jomo Kenyatta University of Agriculture & Technology

(Fruits & Vegetables)

Quality & Standards:

EUREGAP Standard (UK & Dutch Supermarkets) Kenya Plant Health Inspectorate Services (KEPHIS)

Tourism Cluster

Sources: MOC student team research by Kusi Hornberger, Nick Ndiritu, Lalo Ponce-Brito, Melesse Tashu, Tijan Watt, Harvard Business School, 2007 20110707 – Malaysia VC – v3 07072011 – prepared by RA Stacie Rabinowitz

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Development of the Australian Wine Cluster 1930

1965

1980

1991 to 1998

First oenology course at Roseworthy Agricultural College 1955

Australian Wine Bureau established

Australian Wine and Brandy Corporation established 1990

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

1970 Winemaking school at Charles Sturt University founded

Australian Wine Research Institute founded

Winemaker’s Federation of Australia established

1950s

1960s

1970s

1980s

1990s

Import of European winery technology

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

Continued inflow of foreign capital and management

Creation of large number of new wineries

Surge in exports and international acquisitions

Source: Michael E. Porter and Örjan Sölvell, The Australian Wine Cluster – Supplement, Harvard Business School Case Study, 2002 20110707 – Malaysia VC – v3 07072011 – prepared by RA Stacie Rabinowitz

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National Cluster Export Portfolio Malaysia, 1999-2009 4.0% Entertainment and Reproduction Equipment

Malaysia’s world export market share, 2009

3.5%

Change (99-09)

Information Technology (6.24%)

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

Declining Exports

3.0%

Construction Materials (1.12%) Hospitality and Tourism (1.22%)

2.5% Furniture

2.0%

1.5%

1.0%

Oil and Gas Products

Building Fixtures and Equipment

Lighting And Electrical

Jewelry, Precious Metals and Collectibles Chemical Products

Malaysia’s average world export share: 1.34%

Motor Driven Products Apparel Transportation and Logistics Forest Textiles Communications Products Metal Mining and Services Medical Production Manufacturing Devices Technology Automotive

0.5% Business Services

-1.0%

Plastics Processed Food

Analytical Instruments

Communications Equipment

0.0% -1.2%

Agricultural Products

-0.8%

-0.6%

-0.4%

-0.2%

0.0%

Change in Malaysia’s world export market share, 1999 – 2009 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. 17 20110707 – Malaysia VC – v3 07072011 – prepared by RA Stacie Rabinowitz

0.2%

0.4%

Exports of US$2.3 Billion = Copyright © 2011 Professor Michael E. Porter

Cluster Linkages and Economic Diversification Fishing & Fishing Products

Textiles Hospitality & Tourism

Agricultural Products Processed Food

Jewelry & Precious Metals

Transportation & Logistics

Distribution Services Business Services

Financial Services

Building Fixtures, Equipment & Services

Construction Materials Heavy Construction Services

Lightning & Electrical Equipment Power Generation

Medical Devices

Communications Equipment

Forest Products

Heavy Machinery Production Technology

Motor Driven Products Tobacco

Oil & Gas

Mining & Metal Automotive Aerospace Manufacturing Engines

Plastics Footwear

Aerospace Vehicles & Defense

Analytical Instruments

Biopharmaceuticals Chemical Products

Apparel

Furniture

Entertainment

Information Tech.

Education & Knowledge Creation Publishing & Printing

Prefabricated Enclosures

Leather & Related Products

Sporting & Recreation Goods

Note: Clusters with overlapping borders or identical shading have at least 20% overlap (by number of industries) in both directions. 20110707 – Malaysia VC – v3 07072011 – prepared by RA Stacie Rabinowitz

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Share of World Exports by Cluster Malaysia, 2009 Fishing & Fishing Products

Processed Food

Hospitality & Tourism

Business Services

Financial Services

Prefabricated Enclosures

Agricultural Products Transportation & Logistics

Distribution Services

Jewelry & Precious Metals

Textiles

Entertainment

Furniture Building Fixtures, Equipment & Services

Aerospace Vehicles & Information Defense Tech.

Forest Products

Power Generation

Heavy Machinery

ceuticals Chemical Products

Motor Driven Products

Apparel

Automotive Plastics

LQ > 4

Aerospace Mining & Metal Engines Manufacturing

LQ > 2

Leather & Related Products

LQ > 1.

Sporting & Recreation Goods

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.


Production Technology

Tobacco

Oil & Gas

Footwear

Heavy Construction Services

Lightning & Electrical Equipment

Analytical Education & Instruments Knowledge Medical Creation Devices Communications Publishing Equipment & Printing Biopharma-

Construction Materials

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Marine Equipment


Geographic Influences on Competitiveness

Neighboring Countries

Nation

Regions and Cities


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Prosperity Performance U.S. States, 1999 to 2009 $70,000 Delaware

Gross Domestic Product per Capita, 2009

$65,000

High but declining versus U.S.

Wyoming

U.S. GDP per Capita Real Growth Rate: 0.86%

Alaska

High and rising prosperity versus U.S.

Connecticut

$60,000 New York Massachusetts New Jersey

$55,000

Washington

$50,000

Illinois

Nevada

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

Minnesota

Texas North Carolina

New Hampshire Rhode Island Kansas Pennsylvania Wisconsin

Indiana Ohio Utah Missouri Florida Maine Arizona Tennessee

Georgia Michigan

$35,000

New Mexico Kentucky South Carolina West Virginia

North Dakota

Nebraska

Louisiana

$45,000

$40,000

Virginia Hawaii Maryland

Colorado California

Iowa

Oregon Oklahoma

Vermont

Alabama Arkansas

Montana Idaho

Mississippi

Low and declining versus U.S.

South Dakota

Low but rising versus U.S.

$30,000 -1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

Gross Domestic Product per Capita Real Growth Rate, 1999 to 2009 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 20110707 – Malaysia VC – v3 07072011 – prepared by RA Stacie Rabinowitz

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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


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Specialization of Regional Economies Leading Clusters by U.S. Economic Area, 2008 Denver, CO Business Services Medical Devices Entertainment Oil and Gas Products and Services

Chicago, IL-IN-WI Metal Manufacturing Lighting and Electrical Equipment Production Technology Plastics

Pittsburgh, PA Education and Knowledge Creation Metal Manufacturing Chemical Products Power Generation and Transmission

Boston, MA-NH Analytical Instruments Education and Knowledge Creation Medical Devices Financial Services

Seattle, WA Aerospace Vehicles and Defense Information Technology Entertainment Fishing and Fishing Products New York, NY-NJ-CT-PA Financial Services Biopharmaceuticals Jewelry and Precious Metals Publishing and Printing

San Jose-San Francisco, CA Business Services Information Technology Agricultural Products Communications Equipment Biopharmaceuticals Los Angeles, CA Entertainment Apparel Distribution Services Hospitality and Tourism

San Diego, CA Medical Devices Analytical Instruments Hospitality and Tourism Education and Knowledge Creation

Raleigh-Durham, NC Education and Knowledge Creation Biopharmaceuticals Communications Equipment Textiles

Dallas Aerospace Vehicles and Defense Oil and Gas Products and Services Information Technology Transportation and Logistics

Houston, TX Oil and Gas Products and Services Chemical Products Heavy Construction Services Transportation and Logistics

Atlanta, GA Transportation and Logistics Textiles Motor Driven Products Construction Materials

Source: Prof. Michael E. Porter, Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. 20110707 – Malaysia VC – v3 07072011 – prepared by RA Stacie Rabinowitz

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The Evolution of Regional Economies San Diego

Climate and Geography

Hospitality and Tourism Sporting Goods Transportation and Logistics

Power Generation

Aerospace Vehicles

Communications

Equipment Information Technology Analytical Instruments

U.S. Military

and Defense

Education and Knowledge Creation

Bioscience Research Centers 1910

1930


1950

Biotech / Pharmaceuticals

1970 24

Medical Devices

1990 Copyright © 2011 Professor Michael E. Porter

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 collaboration between 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 20110707 – Malaysia VC – v3 07072011 – prepared by RA Stacie Rabinowitz

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Competitiveness and Integration with Neighboring Countries Turkey’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) 20110707 – Malaysia VC – v3 07072011 – prepared by RA Stacie Rabinowitz

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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 20110707 – Malaysia VC – v3 07072011 – prepared by RA Stacie Rabinowitz

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Competitiveness and Integration with Neighboring Countries Central American Logistical Corridor

Belize Mexico

Guatemala Honduras

Nicaragua El Salvador

Roads Ports Airports Logistic Corridor Costa Rica

Country Boundary


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Panama


The Shifting Process of Economic Development

Old Model

New Model

• Government drives economic

• Economic development is a

development through policy decisions


collaborative process involving government at multiple levels, companies, teaching and research institutions, and private sector organizations

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Creating a National Economic Strategy National Value Proposition • 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?

Achieving and Maintaining Parity with Peers

Developing Unique Strengths • What elements of the business environment can be unique strengths relative to peers/neighbors? • What existing and emerging clusters represent 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 20110707 – Malaysia VC – v3 07072011 – prepared by RA Stacie Rabinowitz

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Universities’ Role in Competitiveness Business Environment Quality • • • • • • • •

•

Competitiveness Efforts

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

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


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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


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The Competitive Advantage of Nations, States and Regions

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