Cluster basics: Competitiveness - Coming to Grips With a Difficult Term

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By Christian Ketels at the 14th TCI Global Conference, Auckland, 2011

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Cluster basics: Competitiveness - Coming to Grips With a Difficult Term

  1. 1. 1 Copyright 2011 © Christian Ketels
  2. 2. Competitiveness:Coming to Grips With a Difficult TermProf. Christian H. M. KetelsInstitute for Strategy and CompetitivenessHarvard Business School14th TCI Annual ConferenceAuckland, New Zealand1 December 2011
  3. 3. The Current Economic ContextAchievingSpendUS, Europe, and JapanAchievingProvide Cheap LaborMuch of the Rest3 Copyright 2011 © Christian KetelsAchievingsustainableprosperitygrowthSaveImproveproductivitySell Natural ResourcesAchievingsustainableprosperitygrowth
  4. 4. • What do we know about the drivers of productivity differencesacross locations?• How can locations devise an effective competitiveness strategy tosupport high and rising levels of productivity and prosperity?4 Copyright 2011 © Christian Ketelssupport high and rising levels of productivity and prosperity?• What’s the role of clusters in competitiveness?
  5. 5. Explaining Differences in ProductivityTheory-Driven ApproachesKnowledgeKnowledgeCreationCreation• Knowledge creation overcomes the challenges ofdiminishing returns• Invest in education and the knowledge-creatingsectors of the economyInstitutionsInstitutions• Institutional legacy largely explains currentoutcomes• Room for current policy choices?5 Copyright 2011 © Christian KetelsFactorFactorAccumulationAccumulationCreationCreation sectors of the economy• Empirically not proven to be sufficient• Capital deepening as a key driver of prosperity• Support savings and investment, attract capital• Empirically not proven to be sufficient• Provide a solid conceptual framework for understanding prosperity differences• Little if any guidance to policy makers on how to improve prosperity
  6. 6. Explaining Differences in ProductivityData-Driven Approaches‘Benchmarking’CompetitivenessCompetitivenessIndicatorsIndicators• Provide country-specific data andrankings on specific dimensions ofcompetitivenessProvide dataCompetitivenessCompetitivenessIndexesIndexes• Create synthetic aggregates of indicatorsto rank overall competitivenessProvide data6 Copyright 2011 © Christian KetelsEmpirical GrowthEmpirical GrowthLiteratureLiterature• Many factors matter for prosperity outcomes; let the datashow which ones matter most• Openness, sound money, and strong property rights mattermost ‘on average’• Empirically not proven sufficient• Generic blue-print of ‘ideal profile’, not how to get there• Effective in increasing the willingness to change, not in identifying howAnalyze dataIndicatorsIndicators competitiveness
  7. 7. Explaining Differences in Economic PerformanceCompetitiveness• The term competitiveness has been used widely and vaguely to capturewhat explains cross-country differences in economic performanceCostCost7 Copyright 2011 © Christian KetelsBalance ProductivityMarket ShareMarket Share
  8. 8. Views about Competitiveness – Ability to Sell• Competitiveness as wages• Competitiveness as market share8 Copyright 2011 © Christian Ketels• Locations can achieve short-run growth in ways that ultimately hurtcompetitiveness• Such approaches ultimately come at significant costs to their citizens andundermine support for an open global economy
  9. 9. Views about Competitiveness – Balance• Competitiveness as stable unit labor costs• Competitiveness as a current account/trade surplus• Competitiveness as sustainable public finances9 Copyright 2011 © Christian Ketels• Locations that are competitive tend to display many of these characteristics,but having these characteristics is no guarantee for prosperity• Organizing policies around these goals is at best insufficient to achieve highand growing standards of living
  10. 10. Views about Competitiveness: Productivity• Competitiveness as the productivityof the available labor force given thequality of a location as a place to dobusinessProsperityLaborProductivityLabor ForceMobilization10 Copyright 2011 © Christian Ketels• Labor productivity and labor forcemobilization are key drivers ofprosperity• Productivity is a symptom of theunderlying competitivenessfundamentalsCompetitiveness FundamentalsProductivity Mobilization
  11. 11. Macroeconomic CompetitivenessMicroeconomic Competitiveness (MICRO)BusinessEnvironmentQualitySophisticationof CompanyOperations andStrategySocialClustersThe Productivity-based View of CompetitivenessDimensions of Competitiveness FundamentalsCompanySophistication11 Copyright 2011 © Christian KetelsMacroeconomicPolicy (MP)SocialInfrastructureand PoliticalInstitutions (SIPI)EndowmentsSizeNaturalResourcesGeographicLocation
  12. 12. Testing the Productivity-based View of CompetitivenessAn Empirical Approach• Data– Broad set of data covering all dimensions of the framework– Unit of observation is the average response per indicator, country, and year– Data set is a panel across more than 130 countries and up to 8 years, using theWorld Economic Forum’s Global Executive Survey and other sources• Approach12 Copyright 2011 © Christian Ketels– Step 1: Conduct separate, step-wise principal components analyses for MICRO, SIPI,to derive their averages per country-year; simple average for MP– Step 2: Comprehensive regression of MICRO, SIPI and MP on log GDP per capitawith endowment controls and year dummies.Source: Delgado/Ketels/Porter/Stern, 20111 1 11 tc,t MICRO c,t SIPI c,t MP c,tEND c,t t c,tLn Output perPotential Worker MICRO SIPI MPENDOWMENTS year (1)α β β βα α ε− − −−= + + + ++ +
  13. 13. Findings: Competitiveness and Prosperity• The linear model explains 83% of the variation of GDP per potential workeracross countries• The model reveals that each broad competitiveness category matters, evenwhen controlling for the others and for endowments– Microeconomic factors areimportant, independent driversof prosperity Weights in13 Copyright 2011 © Christian Ketels• Current conditions matter, evenwhen controlling for legacy effects(institutional legacy, country fixed-effects)• Extends the findings of the theory-driven literature• Integrates the now available data in a coherent conceptual frameworkWeights inoverall modelSIPI 53%MICRO 35%Macro Policy 12%100%Source: Delgado/Ketels/Porter/Stern, 2011
  14. 14. • An integrated, empirically grounded framework tounderstand competitiveness and its relation to sustainableprosperity in general14 Copyright 2011 © Christian Ketels• …but still little guidance on how to prioritize and sequencepolicies for a specific location
  15. 15. Social Infrastructureand Political InstitutionsMacroeconomicPoliciesThe Two Sides of CompetitivenessMacroeconomicCompetitivenessMicroeconomicCompetitivenessCompanySophisticationClustersBusinessEnvironment• Largely driven by centralgovernment decisions• “Good practice” standards apply• Decisions taken by manyindependent actors• Action priorities highly context15 Copyright 2011 © Christian Ketels• “Good practice” standards applyuniversally• Moderate level of interdependenceacross policy areas• Challenge is the political will toimplement a generic set of policies• Action priorities highly contextdependent• High level of interdependenceacross policy areas• Challenge is consensual choiceof an integrated set of actionswhere limited resources have thehighest impact in a given context
  16. 16. Analytical Approach1. Track performance on a wide range of indicators from fundamentalcompetitiveness to intermediate indicators to prosperity outcomes2. Identify indicators as strengths or weaknesses relative to thecountries current stage of development16 Copyright 2011 © Christian Ketels3. Diagnose competitiveness fundamental-root causes of intermediateindicators and prosperity outcomes that stick out in such ways4. Analyze complementarity across policy areas5. Define an implementation strategy
  17. 17. Step 1: Dimensions of the Competitiveness DiagnosticsProsperity OutcomesIntermediate IndicatorsInnovationFDI flowsInvestmentProductivityEqualityLabor utilizationEntrepreneurshipQuality of LifePurchasingPowerEnvironmentalconditions17 Copyright 2011 © Christian KetelsIntermediate IndicatorsCompetitivenessGlobalCompetitivenessReportDoing BusinessGovernanceLogistical PerformanceIndexCorruptionKnowledgeEconomyInnovationExports/ImportsImbalancesTrustSpecialization
  18. 18. Step 2: Identifying Strengths and WeaknessesLatviaHighInequalityProsperity Outcomes18 Copyright 2011 © Christian KetelsHighInformalityLowManufacturingIntermediate IndicatorsCompetitiveness
  19. 19. Step 3: Link Outcomes to Fundamental Competitiveness19 Copyright 2011 © Christian KetelsSource: Hausmann/Rodrik, 2008
  20. 20. Step 4: Analyze Complementarity Across Policy Arease.g., InfrastructureInvestment20 Copyright 2011 © Christian Ketelse.g., WorkforceSkillse.g., InvestmentAttractionSpecific Segment ofthe EconomySpecific Segment ofthe Economyific Segment ofhe EconomySpecific Segment ofthe EconomySpecth
  21. 21. Step 5: Define an Implementation StrategyWhat to do How to get it done21 Copyright 2011 © Christian Ketels• Institutional structure• Capacity• Consensus• Leadership• External environment
  22. 22. Clusters and CompetitivenessClustersOther Dimensions ofCompetitivenessENHANCEStatic(Leverage)Dynamic(Upgrade)11 3322 Copyright 2011 © Christian KetelsCompetitivenessENABLE• Co-location of companiesand other institutionsaffecting the potential forlocal value creation within agiven economic field throughspillovers and linkages• Economic fundamentalsthat set the productivitylevel companies can reachwithin a given geographiclocation22
  23. 23. Clusters Enhancing CompetitivenessThe Impact on Regional ProsperityDeterminants of Regional Job Growth, Wages, and Patenting• Specialization in strong clusters• Breadth of position within each cluster23 Copyright 2011 © Christian Ketels• Positions in related clusters• Presence of a region‘s clusters in neighboring regionsNot significant• Positions in “high-tech“ versus other clustersSource: Porter/Stern/Delgado (2010), Porter (2003)
  24. 24. Clusters Enhancing CompetitivenessThe Impact on EntrepreneurshipSurvial Ratesof New Businesses (+)The stronger thecluster, the moreThe stronger thecluster , the higherthe survial rate ofnew businessesCLUSTERCLUSTER24 Copyright 2011 © Christian KetelsNew Industries (+) New Business Formation (+)New Business Formation (+)Job GrowthJob GrowthIn New Businesses (+)The stronger the cluster, the more likelynew industries within the cluster are toemergecluster, the moredynamic is theprocess of newbusiness formationThe strongerthe cluster, thehigher the jobgrowth in newbusinessesSource: Porter, The Economic Performance of Regions, Regional Studies, 2003; Delgado/Porter/Stern, Clusters and Entrepreneurship, Journal of Economic Geography, 2010;Delgado/bPorter/Stern, Clusters, Convergence, and Economic Performance, mimeo., 2010.
  25. 25. Clusters Enhancing Competitiveness:The Case for Action• Agglomeration largely driven by business environment conditions and‘automatic’ cluster effects in a market processBUT25 Copyright 2011 © Christian Ketels• Exploitation of localized spill-overs not automatic• Exploration of opportunities for joint action not automatic• Cluster efforts enable locations to benefit more from what they have
  26. 26. POLICYPOLICYCompetitiveness Enabling Clusters:Sources of Cluster EmergenceLocation Existing ClustersBusiness Environment26 Copyright 2011 © Christian KetelsNatural ResourcesContext for competition across regionsEntrepreneurs
  27. 27. Competitiveness Enabling ClustersCompetitiveness and the State of Cluster DevelopmentState of ClusterDevelopmentHigh27 Copyright 2011 © Christian KetelsCompetitivenessSource: ISC analysis based on WEF Global Executive Opinion Survey, 2010HighLowLowNew Zealand
  28. 28. New Zealand Competitiveness Profile 2011Macro (4)Rule of Law(2)Context for Strategy andRivalry (2)Micro (18)Social Infra-structure and Pol.Institutions (4)MacroeconomicPolicy (1)BusinessEnvironment Quality(17)CompanySophistication(19)Source:UnpublisheddatafromtheGlobalCompetitivenessReport(2011),author’sanalysis.Organizational Practices(7)28 Copyright 2011 © Christian KetelsPolitical Institutions(5)Human Development(8)Demand Conditions(14)Related and SupportingIndustries (34)Factor Input Conditions(10)Administrat.(2)Skills(8)Innovation(25)ICT /Energy(18)Capital(14)Source:UnpublisheddatafromtheGlobalCompetitivenessReport(Internationalization(12)Strategy(23)Logistical(23)SignificantadvantageModerateadvantageNeutralModeratedisadvantageSignificantdisadvantage
  29. 29. Clusters as Drivers of Competiveness UpgradingClusters as ToolBetter Actions More Impact29 Copyright 2011 © Christian KetelsBetter Actions More ImpactCluster initiatives provide aplatform to discuss necessaryimprovements incompetitiveness at the levelwhere firms competeThe organization of economicdevelopment actions aroundclusters leverages positivespill-overs and mobilizesprivate sector co-investment
  30. 30. What is Different about Cluster-Based Policy?Cluster vs.NarrowIndustriesRegionalPerspectivePublic-PrivateCollaboration30 Copyright 2011 © Christian KetelsBuild onRegionalStrengthsDemand-drivenPolicyPrioritiesCompetitivenessFocus
  31. 31. Clusters as Drivers of Competiveness Upgrading:The Challenge1001006031 Copyright 2011 © Christian Ketels45451515All employment All employmentin clustersAll employmentin strong clustersNote: Income in light blueSource: European Cluster Observatory, 2011~25
  32. 32. Clusters as Drivers of Competiveness Upgrading:Cracking the Glass CeilingFrom a few successfulcluster islands……to a morecompetitive economy• Systematic use of clusters as adelivery channel for microeconomicpolicies• Active management of regional32 Copyright 2011 © Christian Ketels• Active management of regionalcluster portfolios that engage manyclusters and harness cross-clusterlinkages• Design of feed-back mechanismsfrom cluster efforts to generalbusiness environment upgrading• Leverage cluster organizations toenhance public private dialogue onregional competitiveness
  33. 33. Clusters and Competitiveness StrategyBusinessBusiness ClusterClusterPositioning• Identifies, communicates, and strengthensthe specific value proposition of the location33 Copyright 2011 © Christian KetelsBusinessBusinessEnvironmentEnvironmentClusterClusterPortfolioPortfolio• Accelerates growth inthose fields where thelocation has strengths• Enables the emergenceof new clusters fromexisting clusters• Improves theeconomic platformfor all clusters andcompanies
  34. 34. Lessons for Cluster PractitionersPublic Officials• Support clusters through competitiveness upgrading, not just moneyfor cluster organizations• Integrate cluster efforts into a broader competitiveness strategy• Work with an (ever evolving) regional portfolio of clusters, notclusters in isolation34 Copyright 2011 © Christian KetelsCluster Initiative Managers• Lobby for a more competitive business environment, not justsupport for collaboration inside the cluster initiative• Offer your insights and structures as an input for broadercompetitiveness efforts• Look for collaboration opportunities in your location’s overall clusterportfolio

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