A Strategy for Sustaining Growth                              and Prosperity for Peru                                     ...
Recent Performance of the Peruvian Economy•   Peru has been one of the most remarkable economic growth stories of the last...
Peru’s Prosperity Performance    GDP per Capita                                                                1950-2009  ...
Prosperity Performance                                                Selected Countries, 1999 to 2009PPP-adjusted GDP per...
Recent Performance of the Peruvian Economy•   Peru has been one of the most remarkable economic growth stories of the last...
Export Intensity  Exports as %                                          Selected Countries   GDP, 2009     80%            ...
Recent Performance of the Peruvian Economy•   Peru has been one of the most remarkable economic growth stories of the last...
Unemployment Performance Unemployment                                          Selected Countries   Rate, 2009          16...
Poverty Rates  % of Population Under                                          Peru, 2001 to 2009     the Poverty Line     ...
Regional Poverty Rates                                                                 Peru, 2004 to 2009% of Population  ...
Recent Performance of the Peruvian Economy•   Peru has been one of the most remarkable economic growth stories of the last...
Exports as %  GDP, 2009                                              Export Intensity and Size    140                     ...
Peru’s Export Composition                                                by SITC categories 1962-2009                  196...
Peru’s Exports By Type of Industry World Export Market Share (current USD)                                      Processed ...
Recent Performance of the Peruvian Economy•   Peru has been one of the most remarkable economic growth stories of the last...
Inbound Foreign InvestmentInbound FDI Stocks                       Stocks and Flows, Selected Countries   as % of GDP, Ave...
Innovative Capacity Average U.S. patents                                    Innovation Output of Selected Countriesper mil...
Recent Performance of the Peruvian Economy•   Peru has been one of the most remarkable economic growth stories of the last...
The Need for a Peruvian Economic Strategy• Strategy means focus: Peru can not improve everything at the same time but  nee...
Structure of the Project                                 Advisory                                  Board                  ...
Executive Opinion Survey• Survey conducted between May 18 and July 8, 2010• Surveyed senior executives including president...
What is Competitiveness? • Competitiveness depends on the productivity with which a nation uses   its human, capital, and ...
Labor Productivity                                             Selected Countries, 1999 to 2009 Real GDP per employee(PPP ...
Determinants of Competitiveness                               Microeconomic Competitiveness             Quality of the    ...
Perus Endowments              •Rich endowment of minerals, fishing resources, forest resources, and fertile land          ...
Determinants of Competitiveness                               Microeconomic Competitiveness             Quality of the    ...
Macroeconomic Competitiveness     Social Infrastructure and                                      Macroeconomic       Polit...
Competitiveness and Poverty Reduction                           Economic                 Social                          D...
Determinants of Competitiveness        Microeconomic CompetitivenessQuality of the                                        ...
Determinants of Competitiveness                                              Microeconomic Competitiveness                ...
Quality of the National Business Environment                                                Context for                   ...
Determinants of Competitiveness                                                          Microeconomic Competitiveness    ...
Cusco Tourism Cluster           Institutions for            Collaboration                                                 ...
Clusters and Competitiveness             • Clusters increase productivity and operational efficiency             • Cluster...
Clusters and Economic Diversification                                                    Linkages Across Clusters         ...
Stages of National Competitive Development                                                 Shifting Policy Imperatives    ...
Macroeconomic Policy: Assessment•   Sound policies have allowed Peru’s fundamental macroeconomic stability to steadily    ...
Political Institutions: AssessmentCorruption• One of critical weaknesses constraining Peruvian development• High corruptio...
Rank in Global                   Corruption Perception Index, 2009  Corruption Index,        2009                         ...
Political Institutions: AssessmentCorruption• One of critical weaknesses constraining Peruvian development• High corruptio...
Social Infrastructure: AssessmentEducation• High formal enrollment but low quality• Weak infrastructure in the public scho...
Assessment: Peru’s Business Environment                                                       Context for                 ...
Factor      Factor input conditions in Peru lag regional peers, particularly in (Input)     physical infrastructure.Condit...
Ease of Doing Business                                                         South America, 2011                        ...
Ease of Doing Business  Ranking, 2011(of 183 countries)                                                                   ...
Factor       Factor input conditions in Peru lag regional peers, particularly in (Input)      physical infrastructure.Cond...
Context for     Barriers to trade and investment have been reduced, but labor   Firm         market efficiency and local r...
Demand             Peruvian consumer sophistication is increasing. ConsumerConditions   protection and environmental regul...
Related and   Availability of suppliers and supporting industries remains low,Supporting    and Peruvian clusters are shal...
Peru’s National Export Portfolio                                                                                          ...
Peru’s National Export Portfolio                                                                                          ...
Share of World Exports by ClusterWorld Market Share                                                     Peru, 2008      0....
Specialization in Peru’s Regions                                      Selected ExamplesPiuraAgricultural Products: Mangoes...
Assessment: Peruvian Clusters• Peru’s current clusters are based heavily on natural endowments,  and have much room for fu...
Cluster Development Programs in Peru• There are some encouraging programs, such as the CITEs• Support programs for cluster...
Creating and Economic Strategy                             National Value Proposition             • What is the distinctiv...
Role of a National Value Proposition• The value proposition should be an inspiration to the Peruvian  population• The valu...
Perus Competitiveness Strategy      National Value Proposition                Goals           Action Agenda         Implem...
Towards a Peruvian Value Proposition                               What is Unique about Peru?       ENDOWMENTS            ...
Towards a Peruvian Value Proposition                          A secure,                         neutral and               ...
National Value Proposition: A secure, neutral and                       peaceful countryPeace and neutrality in Peru have ...
National Value Proposition: Utilizing EndowmentsPeru’s endowments have attracted significant interest from foreign anddome...
National Value Proposition: A Trade HubPeru’s geographic location, its array of free trade agreements, and itsmacroeconomi...
National Value Proposition: DecentralizationPeru’s development remains highly heterogeneous across different parts of thec...
Lima metalworking cluster: Example of a ClusterDevelopment Initiative                                                     ...
Action Agenda                                              POLICIES                             •Sustain the security impr...
Secure, Neutral and Peaceful: Action AgendaSustain the security improvements against old and new threats Action Areas     ...
Secure, Neutral and Peaceful: Action AgendaSystematically reduce corruption Action Areas                                Sp...
Action Agenda                                            POLICIES                          •Focus efforts on becoming the ...
Action Agenda                                            POLICIES                           •Transform endowment-based ind...
Action Agenda                                          POLICIES                         • Design a modern policy for regio...
Improve Cross Cutting Policies•Sustain path of sound macroeconomic policy•Ensure adequate basic education and health care ...
Eleven Goals for 2021Income and Inclusion•   Peru will be in the upper tier of middle-income countries with an income per ...
Peru will be in the upper tier of middle-income countries with an    GDP per Capita                           income per c...
A Strategy for Sustaining Growthand Prosperity for Peru: Cade 2010
A Strategy for Sustaining Growthand Prosperity for Peru: Cade 2010
A Strategy for Sustaining Growthand Prosperity for Peru: Cade 2010
A Strategy for Sustaining Growthand Prosperity for Peru: Cade 2010
A Strategy for Sustaining Growthand Prosperity for Peru: Cade 2010
A Strategy for Sustaining Growthand Prosperity for Peru: Cade 2010
A Strategy for Sustaining Growthand Prosperity for Peru: Cade 2010
A Strategy for Sustaining Growthand Prosperity for Peru: Cade 2010
A Strategy for Sustaining Growthand Prosperity for Peru: Cade 2010
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A Strategy for Sustaining Growthand Prosperity for Peru: Cade 2010

  1. 1. A Strategy for Sustaining Growth and Prosperity for Peru Professor Michael E. Porter Harvard Business School Urubamba, Peru November 12, 2010This presentation draws on ideas from Professor Porter’s books and articles, in particular, Competitive Strategy (The Free Press, 1980); CompetitiveAdvantage (The Free Press, 1985); “What is Strategy?” (Harvard Business Review, Nov/Dec 1996); “Strategy and the Internet” (Harvard BusinessReview, March 2001); and a forthcoming book. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form orby any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Michael E. Porter. Additional information maybe found at the website of the Institute for Strategy and Competitiveness, www.isc.hbs.edu. Version: November 27, 2009 1 Copyright 2010 © Professor Michael E. Porter
  2. 2. Recent Performance of the Peruvian Economy• Peru has been one of the most remarkable economic growth stories of the last decade, both compared to its own historic record and to its peers 2 Copyright 2010 © Professor Michael E. Porter
  3. 3. Peru’s Prosperity Performance GDP per Capita 1950-2009 (in 1990 PPP US$) CAGR: CAGR: CAGR: $6,000 +2.07% - 0.73% +4.41% $5,000 $4,000 $3,000 $2,000 $1,000 $0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2009Note: PPP using Geary Khamis calculation methodology. Source: Groningen Growth and Development Centre, Total Economy Database (June 2009) 3
  4. 4. Prosperity Performance Selected Countries, 1999 to 2009PPP-adjusted GDP per Capita, 2009 ($USD) $ 20,000 United States ($46,460) Canada ($37,840) $ 18,000 $ 16,000 Panama Russia Mexico Chile Argentina $ 14,000 Malaysia Trinidad & Tobago Uruguay Venezuela $ 12,000 Brazil Dominican Republic $ 10,000 Cuba Costa Rica Guatemala Colombia $ 8,000 Belize Thailand Peru Ecuador China $ 6,000 El Salvador Jamaica Bolivia $ 4,000 Paraguay Honduras Indonesia Philippines India Nicaragua Vietnam Laos $ 2,000 Haiti Cambodia $0 0% 2% 4% 6% 8% 10% 12% 14% Growth of Real GDP per Capita (PPP-adjusted), CAGR, 1999 to 2009Source: EIU (2010), authors calculations 4
  5. 5. Recent Performance of the Peruvian Economy• Peru has been one of the most remarkable economic growth stories of the last decade, both compared to its own historic record and to its peers• Sound macroeconomic policies since the mid 1990s, trade opening and a supportive international economic environment have allowed the country to prosper 5 Copyright 2010 © Professor Michael E. Porter
  6. 6. Export Intensity Exports as % Selected Countries GDP, 2009 80% Trinidad & Tobago 70% Panama Thailand Vietnam 60% Belize 50% Paraguay Honduras Cambodia Chile 40% Costa Rica Bolivia Nicaragua Jamaica Ecuador China 30% Canada Russia Uruguay Mexico Peru Indonesia Guatemala 20% Dominican Republic El Salvador Argentina Venezuela India Colombia Cuba 10% Haiti Brazil USA 0% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% Change of Exports as Share of GDP, 1999 to 2009Source: EIU (2010) 6
  7. 7. Recent Performance of the Peruvian Economy• Peru has been one of the most remarkable economic growth stories of the last decade, both compared to its own historic record and to its peers• Sound macroeconomic policies since the mid 1990s, trade opening and a supportive international economic environment have allowed the country to prosper• Improvements in basic security and political stability provided an important pre- condition for these achievements HOWEVER• Growth has been highly heterogeneous across different segments of society and different parts of the country 7 Copyright 2010 © Professor Michael E. Porter
  8. 8. Unemployment Performance Unemployment Selected Countries Rate, 2009 16% Improving Deteriorating Dominican Republic 14% Jamaica 12% Colombia India 10% United States Chile China Canada Ecuador Argentina Peru Bolivia Russia 8% Venezuela Uruguay Philippines Costa Rica Brazil Nicaragua El Salvador ParaguayIndonesia Panama Vietnam 6% Mexico Trinidad & Tobago 4% Malaysia Honduras 2% Thailand Cuba 0% -10% -8% -6% -4% -2% 0% 2% 4% 6% Change of Unemployment Rate in Percentage Points, 1999-2009Source: EIU (2010) 8
  9. 9. Poverty Rates % of Population Under Peru, 2001 to 2009 the Poverty Line 60% 50% 40% 30% 20% 10% 0% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Source: Informacion Socio Demografica, from El Instituto Nacional de Estadistica e Informatica (INEI), 2010 9
  10. 10. Regional Poverty Rates Peru, 2004 to 2009% of Population Under the Poverty Line Coast Sierra Lowlands 70% 60% 50% 40% 30% 20% 10% 0% 2004 2005 2006 2007 2008 2009Source: Informacion Socio Demografica, from El Instituto Nacional de Estadistica e Informatica (INEI), 2010 10
  11. 11. Recent Performance of the Peruvian Economy• Peru has been one of the most remarkable economic growth stories of the last decade, both compared to its own historic record and to its peers• Sound macroeconomic policies since the mid 1990s, trade opening and a supportive international economic environment have allowed the country to prosper• Improvements in basic security and political stability provided an important pre- condition for these achievements HOWEVER• Growth has been highly heterogeneous across different segments of society and different parts of the country• Lack of diversification and dependence on global commodity markets for natural resources is exposing Peru to high levels of volatility 11 Copyright 2010 © Professor Michael E. Porter
  12. 12. Exports as % GDP, 2009 Export Intensity and Size 140 Selected Countries Malaysia 120 100 80 Trinidad and Tobago 60 Panama Paraguay Costa Rica 40 Chile Honduras Canada Bolivia Ecuador Mexico Russia Uruguay Peru Argentina India China El Salvador 20 Guatemala Venezuela, RB Dominican Republic Indonesia Haiti Colombia Brazil United States - 1 10 100 1,000 10,000 GDP $Billions, 2009 (log scale)Source: World Bank (2010) 12
  13. 13. Peru’s Export Composition by SITC categories 1962-2009 1962: $4 billion* 2009: $20 billion Crude materials, inedible, except fuels Food and live animals Manufact goods classified chiefly by material Mineral fuels, lubricants and related materials Manufactured articles Chemicals Machinery and transport equipment Animal and vegetable oils and fats* In 2009 dollars. Note: Showing standard SITC rev. 1 categories, goods only. Source: UN Comtrade; authors’ analysis 13
  14. 14. Peru’s Exports By Type of Industry World Export Market Share (current USD) Processed Goods 0.90% Semi-processed Goods Unprocessed Goods 0.80% Services TOTAL 0.70% 0.60% 0.50% 0.40% 0.30% 0.20% 0.10% 0.00% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard BusinessSchool; Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics Database and the IMF BOP statistics. 14
  15. 15. Recent Performance of the Peruvian Economy• Peru has been one of the most remarkable economic growth stories of the last decade, both compared to its own historic record and to its peers• Sound macroeconomic policies since the mid 1990s, trade opening and a supportive international economic environment have allowed the country to prosper• Improvements in basic security and political stability provided an important pre- condition for these achievements HOWEVER• Growth has been highly heterogeneous across different segments of society and different parts of the country• Lack of diversification and dependence on global commodity markets for natural resources is exposing Peru to high levels of volatility• Sustained growth will depend on broad microeconomic and institutional improvement 15 Copyright 2010 © Professor Michael E. Porter
  16. 16. Inbound Foreign InvestmentInbound FDI Stocks Stocks and Flows, Selected Countries as % of GDP, Average 1998-2008 90% Trinidad and Tobago 80% 70% Panama Vietnam 60% Jamaica Chile Bolivia 50% Belize Nicaragua Malaysia Cambodia 40% Thailand Laos 30% Venezuela Canada Ecuador Argentina Honduras Costa Rica Guatemala Mexico El Salvador 20% Peru Brazil Paraguay Russia Uruguay Philippines Colombia Indonesia China Dominican Republic 10% United States India Haiti Cuba 0% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% FDI Inflows as % of Gross Fixed Capital Formation, Average 1998 - 2008Source: UNCTAD, World Investment Report (2009). 16
  17. 17. Innovative Capacity Average U.S. patents Innovation Output of Selected Countriesper million population, 2005 – 2009 3.5 Croatia 3.0 Estonia 2.5 South Africa 2.0 Greece Lithuania 1.5 Russia United Arab Emirates Portugal Costa Rica Chile 1.0 Poland Argentina Saudi Latvia China Arabia Uruguay Mexico Brazil India 0.5 Ukraine Venezuela Kazakhstan Philippines Peru Colombia Thailand Turkey Egypt Kenya Ecuador 0.0 -30% -20% -10% 0% 10% 20% 30% 40% CAGR of US-registered patents, 2005 – 2009 170 patents = Source: USPTO, World Bank 17
  18. 18. Recent Performance of the Peruvian Economy• Peru has been one of the most remarkable economic growth stories of the last decade, both compared to its own historic record and to its peers• Sound macroeconomic policies since the mid 1990s, trade opening and a supportive international economic environment have allowed the country to prosper• Improvements in basic security and political stability provided an important pre- condition for these achievements HOWEVER• Growth has been highly heterogeneous across different segments of society and different parts of the country• Lack of diversification and dependence on global commodity markets for natural resources is exposing Peru to high levels of volatility• Sustained growth will depend on broad microeconomic and institutional improvement• Among the biggest challenges for the country are complacency after years of solid growth and the relatively mild impact of the global economic crisis• Sustaining economic growth of 8 to 9% is possible only if Peru can substantially improve competitiveness• Peru will need an ambitious economic and social strategy, building on the country’s unique competitive advantages 18 Copyright 2010 © Professor Michael E. Porter
  19. 19. The Need for a Peruvian Economic Strategy• Strategy means focus: Peru can not improve everything at the same time but need to prioritize the most pressing issues• Strategy means choice: Peru can not be good at everything but needs to define how existing strengths are to be deepened and broadened to provide specific value to businesses• Strategy means action: Peru does not need another plan but an action agenda that drives change through a process and institutional structure focused on implementation• Peru needs to build a broad consensus on its strengths across society 19
  20. 20. Structure of the Project Advisory Board Joint Peruvian and Boston TeamMacroeconomic Business Cluster OrganizationalCompetitiveness Environment Development Structure Group Group Group Group•Tax Reform •Education •Metal-Mechanic •Institutional •Financial Cluster Strengthening•Security •Innovation•Health Reform •Infrastructure •Labor •Energy •Water Resources •Ease of Doing Business 20
  21. 21. Executive Opinion Survey• Survey conducted between May 18 and July 8, 2010• Surveyed senior executives including presidents, CEOs and other C-level managers• Lima companies above $1 million in sales• Other cities companies above $500,000 in sales City Sample Size Lima 160 Arequipa 80 Chiclayo 80 Cusco 80 Trujillo 80 Iquitos 71 TOTAL 551
  22. 22. What is Competitiveness? • Competitiveness depends on the productivity with which a nation uses its human, capital, and natural resources. – Productivity sets the sustainable standard of living (wages, returns on capital, returns on natural resources) – It is not what industries a nation competes in that matters for prosperity, but how productively it competes in those industries – Productivity in a national economy arises from a combination of domestic and foreign firms – The productivity of “local” or domestic industries is fundamental to competitiveness, not just that of export industries• Only competitive businesses can create wealth and jobs• Nations compete to offer the most productive environment for business• The public and private sectors play different but interrelated roles in creating a productive economy20100915 – Peru.ppt 22 Copyright 2010 © Professor Michael E. Porter
  23. 23. Labor Productivity Selected Countries, 1999 to 2009 Real GDP per employee(PPP adjusted US$), 2009 $120,000 UnitedStates $100,000 $80,000 Canada $60,000 Mexico $40,000 Malaysia Russia Argentina Venezuela Uruguay Chile Colombia Peru $20,000 Brazil Ecuador Thailand China Bolivia Indonesia India Philippines Vietnam Cambodia $0 -2% 0% 2% 4% 6% 8% 10% 12% Growth of real GDP per employee (PPP-adjusted), 1999 to 2009Source: authors calculation Groningen Growth and Development Centre (2010)20100915 – Peru.ppt 23 Copyright 2010 © Professor Michael E. Porter
  24. 24. Determinants of Competitiveness Microeconomic Competitiveness Quality of the Sophistication National State of Cluster of Company Business Development Operations and Environment Strategy Macroeconomic Competitiveness Social Infrastructure Macroeconomic and Political Policies Institutions Endowments• Macroeconomic competitiveness creates the potential for high productivity, but is not sufficient• Productivity ultimately depends on improving the microeconomic capability of the economy and the sophistication of local competition 24 Copyright 2010 © Professor Michael E. Porter
  25. 25. Perus Endowments •Rich endowment of minerals, fishing resources, forest resources, and fertile land •Unique environment for fishing resources Natural •One of the largest concentrations of tropical rainforests in the world •70 percent of the worlds biodiversity Resources •The Amazon region represents an untapped treasure •Location in the central zone of South America, on the Pacific coast •Shares a border with Brazil, the largest market in South America. Geographic •Access to the Pacific Ocean and to the Atlantic Ocean through the Amazon River •Long coastline that extends 1,914 miles along the Pacific Ocean Location •Natural conditions to develop large and efficient ports •Deep historical roots with ancient cultures •Rich ethnic and cultural diversity Cultural •Great variety of archeological sites. Machu Picchu is recognized as one of the wonders of the world Legacy •Commitment to work, creativity, and entrepreneurial spirit of Peruvians 25
  26. 26. Determinants of Competitiveness Microeconomic Competitiveness Quality of the Sophistication National State of Cluster of Company Business Development Operations and Environment Strategy Macroeconomic Competitiveness Social Infrastructure Macroeconomic and Political Policies Institutions Endowments• Macroeconomic competitiveness creates the potential for high productivity, but is not sufficient• Productivity ultimately depends on improving the microeconomic capability of the economy and the sophistication of local competition 26 Copyright 2010 © Professor Michael E. Porter
  27. 27. Macroeconomic Competitiveness Social Infrastructure and Macroeconomic Political Institutions Policies• •• Human development • Fiscal policy – Basic education – Government surplus/deficit – Health system – Government debt• Political institutions • Monetary policy – Political freedom – Inflation – Voice and accountability – Political stability – Government effectiveness – Centralization of economic policymaking• Rule of law – Security – Judicial independence – Efficiency of legal framework – Business costs of corruption – Civil rights 27 Copyright 2010 © Professor Michael E. Porter
  28. 28. Competitiveness and Poverty Reduction Economic Social Development Development • There is a strong connection between economic and social development • Improving competitiveness and decreasing poverty requires improving the economic and social context simultaneously20100915 – Peru.ppt 28 Copyright 2010 © Professor Michael E. Porter
  29. 29. Determinants of Competitiveness Microeconomic CompetitivenessQuality of the Sophistication National State of Cluster of Company Business Development Operations and SophisticationEnvironment Strategy of Company Operations and Macroeconomic Competitiveness Strategy Social Infrastructure Macroeconomic • The internal skills, and Political Policies capabilities, and management Institutions practices needed for companies to attain the highest level of productivity Endowments and innovation possible 29 Copyright 2010 © Professor Michael E. Porter
  30. 30. Determinants of Competitiveness Microeconomic Competitiveness Quality of the Sophistication National State of Cluster of Company Business Development Operations and Quality of the Environment Strategy National Business Environment Macroeconomic Competitiveness Social• The external business Infrastructure Macroeconomic environment conditions that and Political Policies Institutions allow companies to reach high levels of productivity and innovation Endowments 30 Copyright 2010 © Professor Michael E. Porter
  31. 31. Quality of the National Business Environment Context for Firm Strategy and Rivalry • Local rules and incentives that encourage investment and productivity  Open and vigorous local competition Factor Demand (Input) Conditions Conditions• Access to high quality business • Sophisticated and demanding local inputs customers and needs Related and Supporting Industries • Availability of suppliers and supporting 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 31 Copyright 2010 © Professor Michael E. Porter
  32. 32. Determinants of Competitiveness Microeconomic Competitiveness Quality of the Sophistication National State of Cluster of Company Business Development Operations and Environment Strategy Macroeconomic Competitiveness Social Infrastructure Macroeconomic State of Cluster and Political Policies Development Institutions • A geographic concentration of Endowments firms, specialized assets, and institutions in particular fields.20100915 – Peru.ppt 32 Copyright 2010 © Professor Michael E. Porter
  33. 33. Cusco Tourism Cluster Institutions for Collaboration Local retail and Travel Agents Tour Operators other services Marketing (Internet cafes, etc.) Agencies Food Restoration/ Suppliers Attractions and conservation Restaurants activities (e.g. National Parks, Property cultural shows) Crafts Services Banking Services / Maintenance Accommodations Transport Foreign Exchange Services (hotels, hostels, lodges) (land, air, rail and river) Hospitality equipment Related clusters suppliers Food Educational and Cluster Government Agencies Research Institutions Health ClusterSource: Adapted from HBS student project, 2010“Peru Tourism Cluster”; Agung, Anand, Bhardan, Ilanos, Nosher
  34. 34. Clusters and Competitiveness • Clusters increase productivity and operational efficiency • Clusters stimulate and enable innovations • Clusters facilitate commercialization and new business formation • Clusters reflect the fundamental influence of linkages and spill-overs across firms and associated institutions in competitionCompetitiveness Master - 2009-04-20.ppt 34 Copyright 2009 © Professor Michael E. Porter
  35. 35. Clusters and Economic Diversification Linkages Across Clusters Fishing & Fishing Products Textiles Entertainment Prefabricated Hospitality Agricultural Enclosures & Tourism Products Processed Food Transportation Furniture & Logistics Building Aerospace Fixtures, Construction Vehicles & Equipment & Materials Distribution Information Defense Services Jewelry & Tech. Precious Services Heavy Lightning & Metals Electrical Construction Business Analytical Equipment Services Services Education & Instruments Knowledge Power Forest Medical Products Creation Generation Devices Communi- Publishing cations Financial & Printing Biopharma- Equipment Services Heavy ceuticals Machinery Motor Driven Production Chemical Products Technology Products Tobacco Oil & Apparel Gas Mining & Metal Automotive Plastics Aerospace Manufacturing Engines Footwear Leather & Related Sporting Products & Recreation GoodsNote: Clusters with overlapping borders or identical shading have at least 20% overlap(by number of industries) in both directions. Competitiveness Master - 2009-04-20.ppt 35 Copyright 2009 © Professor Michael E. Porter
  36. 36. Stages of National Competitive Development Shifting Policy Imperatives Factor-Driven Investment- Innovation- Economy Driven Economy Driven Economy Low Cost Inputs Productivity Unique Value • Macro, political, and legal • Increasing local rivalry • Advanced skills stability • Market opening • Scientific and technological • Improving human capital • Advanced infrastructure institutions • Efficient basic • Incentives and rules • Incentives and rules infrastructure encouraging productivity encouraging innovation • Lowering regulatory costs • Cluster formation and • Cluster upgrading of doing business activationSource: Porter, Michael E., The Competitive Advantage of Nations, Macmillan Press, 1990 Competitiveness Master - 2009-04-20.ppt 36 Copyright 2010 © Professor Michael E. Porter
  37. 37. Macroeconomic Policy: Assessment• Sound policies have allowed Peru’s fundamental macroeconomic stability to steadily improve over the past decade• The implementation of the inflation-targeting framework has been successful in reducing inflation• Perus fiscal stabilization fund provided stability and allowed effective stimulus during the global crisis• The economy continues to be highly dollarized with most credits denominated in dollars – About half of the banking system is currently dollarized and most commodity exports are priced in US-dollars BUT• Peru’s public finances remain overly dependent on commodities, with as much as one third of tax revenues coming from commodity-related sources• Peruvian tax rates are high relative to peers• Peru must set policies that ensured the responsible use of credit 37
  38. 38. Political Institutions: AssessmentCorruption• One of critical weaknesses constraining Peruvian development• High corruption is due to weak institutions, poor governance practices and the excessive influence of private interests• Corruption cases are usually not reported to authorities• The institutions perceived to be most corrupt are Congress, the political parties, the national police, and judicial institutions 38
  39. 39. Rank in Global Corruption Perception Index, 2009 Corruption Index, 2009 Canada Deteriorating Improving Low USAcorruption Uruguay Chile Costa Rica Cuba Brazil Peru, Colombia Trinidad and Tobago China El Salvador India Panama Guatemala Mexico Dominican Republic Argentina Bolivia Nicaragua High Hondurascorruption Russia Ecuador Venezuela Paraguay Change in Rank, Global Corruption Report, 2009 versus 2003Note: Ranks only countries available in both years (131 countries total)Source: Global Corruption Report, 2009 39 Copyright 2010 © Professor Michael E. Porter
  40. 40. Political Institutions: AssessmentCorruption• One of critical weaknesses constraining Peruvian development• High corruption is due to weak institutions, poor governance practices and the excessive influence of private interests• Corruption cases are usually not reported to authorities• The institutions perceived to be most corrupt are Congress, the political parties, the national police, and judicial institutionsSecurity• There has been a deterioration of the security situation, mainly due to the organized crime, illegal drug trade, terrorism and a general decline in public safety• The influence of drug traffickers is starting to penetrate institutions and the political system• Social unrest occurs most often in places where government institutions are weak 40
  41. 41. Social Infrastructure: AssessmentEducation• High formal enrollment but low quality• Weak infrastructure in the public school system• Curriculum is poorly structured, and one teacher must cover multiple gradesHealth• The health system continues to be characterized by generally low quality and high disparities in quality, particularly affecting the poor• “Poverty diseases” such as tuberculosis are still more prevalent than in peer countries• Health care spending in Peru remains the lowest among its Latin American peers• There is a mismatch between the supply and demand for health professionals 41
  42. 42. Assessment: Peru’s Business Environment Context for Firm Strategy and Rivalry + Openness to foreign investment, trade, capital flows + Improvements in investor protections Factor ± Efforts to strengthen competition Demand (Input) policy Conditions Conditions – Rigidity of employment – Difficulty in business formation – Low intensity of local competition+ Abundant resources: mineral, – High Informality of the economy + Improving consumer protection agricultural, fishing, and cultural regulation+ Advantageous location ± Improving sophistication of local buyers+ Improving administrative infrastructure – Weak environmental standards Related and enforcement+ Simplified customs procedures Supporting± Sound banking system, but high interest spreads Industries± Improving financial markets, but limited venture capital availability – Limited local suppliers and– Poor physical infrastructure supporting industries– Low skill levels in the labor force, – Shallow clusters mismatch with demand– Weak university-industry research collaboration– Few high-quality research and scientific institutions
  43. 43. Factor Factor input conditions in Peru lag regional peers, particularly in (Input) physical infrastructure.ConditionsAdministrative infrastructure• Peru has made important reforms in simplifying administrative procedures
  44. 44. Ease of Doing Business South America, 2011 Venezuela: 172 Guyana: 100 Colombia: 39 Suriname: 161 Ecuador: 130 Peru: 36 Brazil: 127 Bolivia: 149 Paraguay: 106 Chile: 43 Uruguay: 124 Argentina: 115Source: The World Bank, Doing Business (2011), 183 countries20100915 – Peru.ppt 44 Copyright 2010 © Professor Michael E. Porter
  45. 45. Ease of Doing Business Ranking, 2011(of 183 countries) Peru, 2011120 Favorable Unfavorable100 Peru’s per capita GDP rank: 81 80 60 40 20 0 Ease of Doing Getting Credit Protecting Registering Trading Starting a Paying Taxes Closing a Dealing with Enforcing Business Investors Property Across Business Business Construction Contracts Borders Permits Source: The World Bank, Doing Business (2011), GDP rank on GDP per capita, ppp-adjusted 20100915 – Peru.ppt 45 Copyright 2010 © Professor Michael E. Porter
  46. 46. Factor Factor input conditions in Peru lag regional peers, particularly in (Input) physical infrastructure.ConditionsAdministrative infrastructure• Peru has made important reforms in simplifying administrative proceduresPhysical infrastructure• While Peru has increased infrastructure investment in recent years, it lags in electrical generation capacity, telephone lines, and paved roads relative to its Latin American peers. Infrastructure services remain expensiveEducation and workforce skills• The education system produces comparatively few graduates in technical areas, engineering, and physical sciences• Peru is last in spending on education among its peersFinancial system• Financial assets are highly concentrated. Four banks hold 83% of all bank loans –Borrowing costs are high –The Peruvian pension fund system is characterized by low participationScience and technology infrastructure• Peru’s science and technology infrastructure is very weak.
  47. 47. Context for Barriers to trade and investment have been reduced, but labor Firm market efficiency and local rivalry remain limited Strategyand RivalryForeign trade and investment policy• Since the early 1990s, Peru’s foreign trade and investment policy has been aimed at a process of deregulation and liberalization of the trade regime• Peru has signed a significant number of free trade agreements with several countries, such as the United States and China• However, investment flows (in and out) remain low in comparison with its neighborsAnti-trust policy• Peru has an advanced regulatory framework for antitrust. But, implementation is weak• Perus domestic industries are highly concentrated, with evidence of oligopolistic practices and cartels• A high level of informality in the economy eases counterfeiting and money launderingLabor market• Peru’s labor market is highly rigid, ranked by the World Bank as 149 out of 181 economies. There is no unified labor code in Peru• High non-wage labor costs deter formal job creation
  48. 48. Demand Peruvian consumer sophistication is increasing. ConsumerConditions protection and environmental regulations are in place but not well enforcedLocal demand sophistication Economic growth has led to the emergence of a new middle class that has access to consumer credit, has become aware of new products and brands, and demands qualityQuality and environmental standards Regulations exist to protect quality, health, safety, and environmental standards, but there is no mechanism to enforce these regulations or the consumer code. And, in practice, the large informal sector operates outside of these protections
  49. 49. Related and Availability of suppliers and supporting industries remains low,Supporting and Peruvian clusters are shallow Industries Export industries • Peru’s exports are highly concentrated on natural resource-based products. These activities are not well integrated into the local economy and have not generated local upstream and downstream industrial activities Presence of suppliers • There is a lack of local suppliers of machinery, equipment and services. Most e products and services are imported • Local production of inputs and machinery is in its infancy and cannot support advanced export-oriented companies Cluster Development • Nascent clusters are present, but there are few cluster initiatives.. • There is a poor tradition of collaboration between the government and the private sector in the area of cluster development
  50. 50. Peru’s National Export Portfolio 1997 to 2009 2.5% Change In Peru’s Overall World Export Share: +0.09% Jewelry and Precious Metals 2.0%Peru’s world export market share, 2009 1.5% Metal, Mining and Manufacturing 1.0% Fishing and Agricultural Fishing Products Products 0.5% Financial Apparel Peru’s Average World Services Export Share: 0.22% Hospitality and Tourism Communications Publishing and Printing Services 0.0% -0.5% 0.0% 0.5% 1.0% 1.5% Change in Peru’s world export market share, 1997 to 2009 Exports of US$2 Billion =Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard BusinessSchool; Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics Database and the IMF BOP statistics. 50 Copyright 2010 © Professor Michael E. Porter
  51. 51. Peru’s National Export Portfolio 1997 to 2009 0.14% Transportation Oil and Gas and Logistics Products and Services 0.12% Peru’s world export market share, 2009 Furniture Textiles 0.10% Construction Materials Chemical Products Processed Food 0.08% Plastics 0.06% Leather and Related Products Forest Products 0.04% Business Services Heavy Machinery Motor Driven Biopharmaceuticals Products Footwear 0.02% Power and Power Generation Equipment Building Fixtures Prefabricated Enclosures and Structures and Equipment Production Technology Communications Equipment Automotive 0.00% -0.02% -0.01% 0.00% 0.01% 0.02% 0.03% 0.04% 0.05% 0.06% 0.07% 0.08% Change in Peru’s world export market share, 1997 to 2009 Exports of US$2 Billion =Note: Showing clusters with greater than $10 mil exports. 51Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, HBS; Richard Bryden, Project Director. Copyright 2010 © Professor Michael E. Porter
  52. 52. Share of World Exports by ClusterWorld Market Share Peru, 2008 0.2% - 0.5% 0.5% - 1.0% Fishing & Enter- Textiles Fishing tainment Prefabricated 0.95% - 1.9% Products Hospitality Enclosures & Tourism Agricultural Products Transportation Furniture Processed & Logistics Building Food Aerospace Fixtures, Construction Vehicles & Equipment & Materials Distribution Information Defense Services Jewelry & Services Tech. Precious Lightning & Heavy Metals Electrical Construction Business Analytical Services Education & Instruments Equipment Services Power Forest Knowledge Medical Products Creation Generation Devices Communi- Publishing cations & Printing Biopharma- Equipment Financial Heavy ceuticals Machinery Services Motor Driven Production Chemical Products Technology Products Tobacco Oil & Automotive Gas Aerospace Mining & Metal Plastics Engines Manufacturing Apparel Leather & Footwear Related Sporting Marine Products & Recreation Equipment GoodsNote: Clusters with overlapping borders have at least 20% overlap (by number of industries) in both directions. 52 Copyright 2010 © Professor Michael E. Porter
  53. 53. Specialization in Peru’s Regions Selected ExamplesPiuraAgricultural Products: Mangoes,Lemons, Brown Sugar SyrupCajamarca (Bambamarca)Dairy, Processed FoodsLa Libertad (El Porvenir, Trujillo)Leather, FootwearAncash (Chimbote)Fishing and Fish ProductsLima (Infantas, Los Olivos)Metal Manufacturing, MetalFurnitureLima (La Victoria)ApparelIcaWineCuzcoTourismPuno and ArequipaApparel from Alpaca 53
  54. 54. Assessment: Peruvian Clusters• Peru’s current clusters are based heavily on natural endowments, and have much room for further upgrading• Regions such as the Cajamarca, Arequipa, and Moquegua have concentrations in mining, but the clusters are mostly shallow with weak linkages between firms and local suppliers and experiencing significant technological bottlenecks• In the main cities of Peru there are some emerging clusters consisting largely of small firms• Peru’s clusters have weak suppliers and few supporting institutions• There is a weak institutional capacity in the regions hampering the development of clusters• There is a limited tradition of collaboration among actors for regional development 54 Copyright 2010 © Professor Michael E. Porter
  55. 55. Cluster Development Programs in Peru• There are some encouraging programs, such as the CITEs• Support programs for cluster development have limited resources and scope, and have been directed toward SMEs• Cluster development have been supported primarily multilaterals and international cooperation agencies• Programs were driven centrally without building capacity at the regional level• Programs have failed to create permanent institutions and sustainable processes of collaboration amongst key actors such as local governments, academic institutions, training centers, private sector and relevant institutions for collaboration 55 Copyright 2010 © Professor Michael E. Porter
  56. 56. Creating and Economic Strategy National Value Proposition • What is the distinctive competitive position of Peru 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 Developing Unique Strengths with Peers• What elements of the business • What weaknesses must be addressed to environment can be unique strengths remove key constraints and achieve parity relative to peers/neighbors? with peer countries?• What existing and emerging clusters represent local strengths? • Priorities and sequencing are necessity in economic development 56 Copyright 2010 © Professor Michael E. Porter
  57. 57. Role of a National Value Proposition• The value proposition should be an inspiration to the Peruvian population• The value proposition is a signal to companies from abroad and at home about what assets and conditions can expect to find in Peru• The value proposition is a signal to policy makers in Peru of what type of improvements are most critical in order to make the value proposition a reality 57 Copyright 2010 © Professor Michael E. Porter
  58. 58. Perus Competitiveness Strategy National Value Proposition Goals Action Agenda Implementation Plan 58 Copyright 2010 © Professor Michael E. Porter
  59. 59. Towards a Peruvian Value Proposition What is Unique about Peru? ENDOWMENTS BUSINESS ENVIRONMENT PEOPLE AND CULTURE• Abundant natural resources • Privileged access to foreign • Rich culture and history markets• Central location in South • Creative and entrepreneurial America • Open to FDI and capital flows population• Vast biodiversity and • Young, hardworking population ecosystems • Legacy of domestic cooperation to overcome obstacles 59 Copyright 2010 © Professor Michael E. Porter
  60. 60. Towards a Peruvian Value Proposition A secure, neutral and peaceful countryEnhanced the DynamicSophistication regionalof Endowment Preserving Natural and development Related Cultural Resources with vibrant Exports clusters A hub for trade between Latin America, Asia, and North America Improve Cross-Cutting Policies 60 Copyright 2010 © Professor Michael E. Porter
  61. 61. National Value Proposition: A secure, neutral and peaceful countryPeace and neutrality in Peru have been crucial to the good economicperformance of the last two decades, but Peru remains at risk of deterioratingsecurity. Reduce corruption to fight informality and inequality Empower security institutions and foster links with local communities A secure, neutral and Break the cycle of drug trafficking and insurgency peaceful Develop regional clusters to generate a stronger link country between the growth process and new employment 61 Copyright 2010 © Professor Michael E. Porter
  62. 62. National Value Proposition: Utilizing EndowmentsPeru’s endowments have attracted significant interest from foreign anddomestic investors already in the past. Peru must create higher value from itsendowments driven clusters. •Provide highly efficient infrastructure and an efficient regulatory environment to make Peru one of the most productive locations for accessing natural Enhanced the resources Sophistication of Endowment Related Exports •Ensure that regulatory conditions enable endowments to be used in ways that are ecologically and culturally sustainable •Upgrade and deepen clusters drawing on Perus endowments and develop suppliers, services and related clusters 62 Copyright 2010 © Professor Michael E. Porter
  63. 63. National Value Proposition: A Trade HubPeru’s geographic location, its array of free trade agreements, and itsmacroeconomic and political stability make it a natural hub for trade between LatinAmerica, North America, and Asia Maintain and extend low trade barriers A hub for trade Improve the efficiency and quality of trade enabling between Latin regulation and infrastructure. America, Asia, and North America Mobilize and develop clusters of trade related services including logistics and finance 63 Copyright 2010 © Professor Michael E. Porter
  64. 64. National Value Proposition: DecentralizationPeru’s development remains highly heterogeneous across different parts of thecountry. The emergence of a larger middle class remains limited to a few regions inthe country. Sustained growth can only be achieved if all subnational regionsdevelop by upgrading their competitiveness. Build unique regional economies based on local strengths. Dynamic regional Upgrade key weaknesses including regional development education, regulatory conditions, and infrastructure with vibrant clusters Strengthen regions through upgrading regional institutions 64 Copyright 2010 © Professor Michael E. Porter
  65. 65. Lima metalworking cluster: Example of a ClusterDevelopment Initiative Agriculture Automotive Foundries Electricity Plastics Mining companies Restaurants Appliances PlasticsDesign shops Financial Equipment Metals Molds (electrical, mining, etc) Logistics Paints and chemicals Tools Parts (isolators, etc) Services Packaging (lab, etc) Custom Advisory RecyclingSoftware / IT services services Technology Security transfer Government Educational Business Multilateral Institutions Institutions Institutions Institutions
  66. 66. Action Agenda POLICIES •Sustain the security improvements against old and new threats • Maintain improvements achieved in security and prevent a pronouncedA secure, neutral and increased in organized crime an violence • Empower security institutions and foster peaceful country links with the community •Systematically reduce corruption • Simplify rules and regulations to reduce the cases in which corruption can occur • Promote a new governance ethic in political and business leaders 66 Copyright 2010 © Professor Michael E. Porter
  67. 67. Secure, Neutral and Peaceful: Action AgendaSustain the security improvements against old and new threats Action Areas Specific Recommendations • Public safety is critical to becoming a trading • Frame an institutional setting where a single institution hub concentrates efforts to fight drug trafficking and terrorist activities • Maintain improvements - Support market-based income-substitution programs, achieved in security control of chemical inputs for coca transformation, drug interdiction, and anti-money laundering efforts and prevent a pronounced increased • Reform the police force considering labor regime, in crime an violence salary and equipment and needs • Empower security • Strengthen the powers of local mayors as presidents of institutions and foster local public safety committees in coordination with the links with the police community • Engage local communities to prevent social unrest • Support comprehensive policies - covering crime prevention, crime investigation, the judicial system, the jail system, and re-insertion programs. 67 Copyright 2010 © Professor Michael E. Porter
  68. 68. Secure, Neutral and Peaceful: Action AgendaSystematically reduce corruption Action Areas Specific Recommendations • Reduce corruption to thrust domestic economic activity and • Launch a systematic campaign to reduce corruption take advantage of and investigate corruption cases opportunities created • Simplify rules and regulations to reduce the cases in through open trade which corruption can occur policy • Foster clean governance in political and business • Generate a strong leaders track record of fighting against corruption • Improve the quality of the civil service. Support meritocracy, responsibility, accountability, training and • Consider its effects on adequate compensation. informality and inequality • Key public officials should be appointed in a process with the consent of the Congress 68 Copyright 2010 © Professor Michael E. Porter
  69. 69. Action Agenda POLICIES •Focus efforts on becoming the springboard for South American firms seeking access to U.S. and Asian markets •Deepen free trade policies • Intensify policy of negotiating free trade agreements A hub for trade • Eliminate remaining domestic barriers to between Latin trade and investment: tariffs, non-tariff measures and export subsidiesAmerica, Asia and North America •Improve physical connections with other countries • Transportation • Energy and Water CLUSTERS Transportation and Logistics Financial Services 69 Copyright 2010 © Professor Michael E. Porter
  70. 70. Action Agenda POLICIES •Transform endowment-based industries into broad clusters • Launch an ambitious cluster development program •Build organizational processes in which Enhanced the all actors, particularly private sector representatives, collaborate in building a Sophistication of common vision for each clusterEndowment Related Exports •Diversify the economy by developing related clusters CLUSTERS Metal Mining and Manufacturing Hospitality and Tourism Biodiversity 70 Copyright 2010 © Professor Michael E. Porter
  71. 71. Action Agenda POLICIES • Design a modern policy for regional development • Devise a strategy for each region based on its unique attributes and strengths Dynamic • Enhance education and workforce skill development regionalized • Focus on education as a central enablingdevelopment with condition for productivity • Align education supply with needs through vibrant clusters collaboration with clusters CLUSTERS Metalworking Apparel Leather Fishing and Fishing Products Footwear Agricultural Products Wine 71 Copyright 2010 © Professor Michael E. Porter
  72. 72. Improve Cross Cutting Policies•Sustain path of sound macroeconomic policy•Ensure adequate basic education and health care •Focus basic education on enforcing quality standards •Improve basic education services with the vision to reduce inequality and foster social inclusion •Reform healthcare system to increase coverage and provide better value •Focus on preventive care to reduce costs •Concentrate on vulnerable segments of the population•Reduce the cost of doing business through better rules and regulations: •Rules of the judiciary system •Taxes •Labor market regulations•Strengthen access to capital •Increase financial-sector competition and access to capital •Encourage the development of new financial instruments•Develop science and technology capabilities •Expand university-business collaboration •Encourage industry to absorb and improve foreign technology •Involve talented expatriate professionals •Improve innovation infrastructure•Improve the effectiveness of the government 72 Copyright 2010 © Professor Michael E. Porter
  73. 73. Eleven Goals for 2021Income and Inclusion• Peru will be in the upper tier of middle-income countries with an income per capita of $10,000• Peru will reduce its poverty level to 20 percent• Peru will reduce rates of malnutrition to less than 10 percentInternational• Peru will be one of the top two South American countries in volume of trade with Asia• Peru will be the first-ranked recipient of foreign direct investment among the countries along the South American Pacific coastRegional development• Peru will have at least seven regional centers of development across the coastal, highlands and Amazon regions 73 Copyright 2010 © Professor Michael E. Porter
  74. 74. Peru will be in the upper tier of middle-income countries with an GDP per Capita income per capita of $10,000 (in 1990 PPP US$) $12,000 GOAL $10,000 $8,000 $6,000 $4,000 $2,000 PAST PRESENT $0 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016 2021Note: PPP using Geary Khamis calculation methodology. 74 Copyright 2010 © Professor Michael E. PorterSource: Groningen Growth and Development Centre, Total Economy Database
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