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Michael Porter - Peru

Professor Michael E. Porter's presentation outlines Peru's economic landscape and highlights the country's low competitiveness despite recent growth. It emphasizes the need for substantial improvements in productivity, innovation, and social infrastructure to boost economic diversification and reduce poverty. Key strategies include enhancing macroeconomic stability, addressing corruption, and improving education and health systems to create a more productive economy.

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Competitiveness: A New Economic Strategy for Peru Professor Michael E. Porter Harvard Business School Lima, Peru November 30, 2009 This presentation draws on ideas from Professor Porter’s books and articles, in particular, Competitive Strategy (The Free Press, 1980); Competitive Advantage (The Free Press, 1985); “What is Strategy?” (Harvard Business Review, Nov/Dec 1996); “Strategy and the Internet” (Harvard Business Review, March 2001); and a forthcoming book. 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. Additional information may be found at the website of the Institute for Strategy and Competitiveness, www.isc.hbs.edu. Version: November 27, 2009 20091130 – Peru.ppt 1 Copyright 2009 © Professor Michael E. Porter
Prosperity Performance Selected Lower and Middle Income Countries PPP-adjusted GDP per Capita, 2008 ($USD) $30,000 Slovenia UAE Greece ($30,650) Israel New Zealand South Korea Czech Republic $25,000 Cyprus Latin American countries Bahrain Saudi Arabia Oman Other countries Portugal Slovakia Estonia $20,000 Hungary Trinidad & Tobago Lithuania Poland Latvia Libya Croatia Russia $15,000 Panama Chile Argentina Mexico Malaysia Venezuela Turkey Bulgaria Uruguay Belarus Iran Romania Costa Rica Kazakhstan Lebanon Brazil South Africa $10,000 Dominican Republic Thailand Colombia Peru Belize Algeria Bosnia Ecuador Tunisia Ukraine Guyana Albania Guatemala Egypt China Jordan Paraguay Georgia $5,000 El Salvador Sri Lanka Bolivia Honduras Philippines Nicaragua Pakistan India Vietnam $0 0% 2% 4% 6% 8% 10% 12% 14% Source: Peru.ppt Growth of Real GDP per Capita (PPP-adjusted), CAGR, 2004 to 2008 20091130 – EIU (2009), authors calculations 2 Copyright 2009 © Professor Michael E. Porter
Unemployment Performance Unemployment Rate, 2008 Selected Countries Dominican Republic (15.5%) South Africa (22.9%) 14% Improving Tunisia Deteriorating Croatia Algeria Jordan Albania Iran 12% Saudi Arabia Colombia Turkey 10% Poland (-8.4%) China Indonesia Egypt Brazil Peru Syria 8% Uruguay Slovakia Argentina Chile Hungary Greece Bolivia Portugal Venezuela Philippines Ecuador Pakistan Slovenia Kazakhstan India Bulgaria Lithuania Russia El Salvador Israel Ireland 6% T&T Estonia Panama Czech Rep. Paraguay Nicaragua Latvia Sri Lanka Costa Rica Vietnam Romania 4% Cyprus Mexico Honduras Malaysia Korea Ukraine 2% Latin American countries Thailand Other countries 0% -6% -5% -4% -3% -2% -1% 0% 1% 2% Change of Unemployment Rate in Percentage Points, 2004 to 2008 Source: EIU (2009) 20091130 – Peru.ppt 3 Copyright 2009 © Professor Michael E. Porter
Poverty Rates % of Population Under Peru, 2001 to 2007 the Poverty Line 60% 50% 40% 30% 20% 10% 0% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: Informacion Socio Demografica, from El Instituto Nacional de Estadistica e Informatica (INEI), 2009 20091130 – Peru.ppt 4 Copyright 2009 © Professor Michael E. Porter
Export Performance Exports of Goods and Selected Countries Services (% of GDP), 2008 100% Malaysia (103.5%) 90% Slovakia Libya Latin American Countries Other countries Ireland Malta Czech Republic Panama Hungary 80% Vietnam Thailand Estonia Slovenia Saudi Arabia 70% Trinidad & Tobago Belarus Paraguay 60% Bulgaria Belize Lithuania Cambodia Tunisia Jordan Honduras Kazakhstan Algeria 50% Cyprus Macedonia Croatia Chile Ukraine (-17.5%) Costa Rica Egypt Latvia 40% Israel Poland Bolivia Philippines China Morocco South Africa Uruguay Ecuador Portugal Nicaragua Syria Venezuela Russia Romania Georgia Mexico 30% Indonesia Peru Lebanon Sri Lanka Iran El Salvador India Argentina Greece 20% Albania Colombia Guatemala Turkey Brazil Pakistan 10% Ethiopia 0% -15% -10% -5% 0% 5% 10% 15% 20% Change in Exports of Goods and Services (% of GDP), 2004 to 2008 Source: EIU (2008), authors’ analysis 20091130 – Peru.ppt 5 Copyright 2009 © Professor Michael E. Porter
Peru’s Exports By Type of Industry World Export Market Share (current USD) 0.80% Processed Goods Semi-processed Goods 0.70% Unprocessed Goods Services TOTAL 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 Source: UNComTrade, WTO (2009) 20091130 – Peru.ppt 6 Copyright 2009 © Professor Michael E. Porter
Inbound Foreign Investment Performance Stocks and Flows, Selected Countries Inward FDI Stocks as % of GDP, Average 2003 - 2007 80% Estonia Trinidad & Tobago Latin American countries Jordan (46.5%, 81.8%) Other countries Lebanon (6.7%) 70% Panama (48.2%) Tunisia Hungary Chile Cyprus 60% Vietnam Bulgaria (69%) Czech Republic Slovakia Belize 50% Bolivia Nicaragua Croatia Kazakhstan Portugal Cambodia Georgia 40% Morocco Macedonia Malaysia Thailand Latvia Honduras Venezuela Poland Egypt Israel South Africa Argentina Lithuania Bosnia 30% Colombia Romania Mexico Ecuador Costa Rica Brazil Russia El Salvador Slovenia Peru 20% Guatemala Ukraine UAE Uruguay Paraguay Dominican Republic Turkey Malaysia China Saudi Arabia 10% Indonesia Sri Lanka Pakistan India Libya Iran 0% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% FDI Inflows as % of Gross Fixed Capital Formation, Average 2003 - 2007 Source: UNCTAD, World Investment Report (2009) 20091130 – Peru.ppt 7 Copyright 2009 © Professor Michael E. Porter
Innovative Capacity Innovation Output of Selected Countries Average U.S. patents per 1 million population, 2004-2008 3.5 Czech Republic 3.0 Croatia 2.5 2.0 South Africa Greece 1.5 Portugal Russia 1.0 Chile Saudi Arabia Argentina Poland Venezuela Romania Bulgaria Brazil Thailand Mexico 0.5 China India Philippines Ukraine Peru Ecuador Colombia Turkey 0.0 -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% CAGR of US-registered patents, 2004 – 2008 120 patents = Source: USPTO (2009), EIU (2009) 20091130 – Peru.ppt 8 Copyright 2009 © Professor Michael E. Porter
The Peruvian Economy in 2009 • Peru has had a long history of instability • Since 2001, Peru has experienced high rates of economic growth – Recent surge in FDI and exports has been driven by commodities • Implementation of sound macroeconomic policies has allowed Peru to weather the current global crisis – Peru’s economy has been one of the most resilient in Latin America BUT • Prosperity remains low and large segments of the population lack access to basic needs • High unemployment and inequality persist • Peru is overly dependent on commodity exports with limited potential to drive job growth and economic diversification • Returning to 8 to 9% growth 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 20091130 – Peru.ppt 9 Copyright 2009 © Professor Michael E. Porter
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 economy 20091130 – Peru.ppt 10 Copyright 2009 © Professor Michael E. Porter
Comparative Labor Productivity Real GDP per employee (PPP adjusted US$), 2008 Selected Countries Austria Kuwait Australia $70,000 Greece Saudi Arabia Switzerland Germany Spain Japan Singapore Oman $60,000 Israel Malta Slovenia $50,000 New Zealand Korea Slovakia UAE Cyprus Hungary Czech Republic Portugal $40,000 Croatia Lithuania Estonia Poland Turkey Mexico Malaysia Russia Chile Latvia $30,000 Argentina Macedonia Romania Iran Belarus South Africa Bulgaria Azerbaijan $20,000 Kazakhstan Peru Albania Brazil Peru (Avg. growth 2001to 2008) Egypt Armenia Jordan Ukraine Bosnia Thailand Georgia $10,000 Syria Serbia China Philippines Indonesia Pakistan India Vietnam Cambodia $0 -3% 0% 3% 6% 9% Growth of real GDP per employee (PPP-adjusted), 1990 to 2008 Source: authors calculation Groningen Growth and Development Centre (2009), EIU (2009) 20091130 – Peru.ppt 11 Copyright 2009 © Professor Michael E. Porter
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 Natural 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 20091130 – Peru.ppt 12 Copyright 2009 © Professor Michael E. Porter
Determinants of Competitiveness Microeconomic Competitiveness Quality of the Sophistication National State of Cluster of Company Business Development Operations and Environment Strategy Macroeconomic Policy Macroeconomic Competitiveness Social Infrastructure Macroeconomic and Political Policies • Fiscal policy: public Institutions spending aligned with revenues over time Natural Endowments • Monetary policy: low levels of inflation • Macroeconomic management: avoiding structural imbalances and cyclical overheating 20091130 – Peru.ppt 13 Copyright 2009 © Professor Michael E. Porter
Determinants of Competitiveness Microeconomic Competitiveness Quality of the Sophistication National State of Cluster of Company Social Business Development Operations and Environment Strategy Infrastructure and Political Institutions Macroeconomic Competitiveness Social • Human Development: Infrastructure and Political Macroeconomic Policies basic education and Institutions health care • Rule of Law: property Natural Endowments rights and due process • Political Institutions: stable and effective political and governmental processes and organizations 20091130 – Peru.ppt 14 Copyright 2009 © Professor Michael E. Porter
Determinants of Competitiveness Microeconomic Competitiveness Quality of the Sophistication National State of Cluster of Company Business Development Operations and Sophistication Environment Strategy of Company Operations and Macroeconomic Competitiveness Strategy Social Infrastructure and Political Macroeconomic Policies • The internal company Institutions skills, capabilities, and management practices needed to Natural Endowments attain the highest level of productivity and innovation possible 20091130 – Peru.ppt 15 Copyright 2009 © Professor Michael E. Porter
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 and Political Macroeconomic Policies environment Institutions conditions that allow companies to reach Natural Endowments high levels of productivity and innovation 20091130 – Peru.ppt 16 Copyright 2009 © Professor Michael E. Porter
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 critical mass of firms Natural Endowments in particular fields, together with specialized skills, infrastructure, and supporting institutions, to support high productivity through efficiencies and synergies 20091130 – Peru.ppt 17 Copyright 2009 © Professor Michael E. Porter
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 simultaneously 20091130 – Peru.ppt 18 Copyright 2009 © Professor Michael E. Porter
Peru’s Competitiveness Profile, 2009 ISC Country Competitiveness Model Macroeconomic Microeconomic Competitiveness (82) Competitiveness (73) Social Infra- Business Company Macroeconomic structure and Pol. Environment Quality Sophistication Policy (69) Institutions (90) (74) (70) Peru’s GDP per capita rank is 71st versus 133 countries Note: Rank versus 133 countries; overall, Peru ranks 71st in 2008 PPP adjusted GDP per capita and 75th in 2009 Global Competitiveness Source: Country Competitiveness Model (CCM), Institute for Strategy and Competitiveness, Harvard University (2009) 20091130 – Peru.ppt 19 Copyright 2009 © Professor Michael E. Porter
Peru’s Macroeconomic Competitiveness Macroeconomic Policy • Conservative fiscal policy 20091130 – Peru.ppt 20 Copyright 2009 © Professor Michael E. Porter
Government Budget Balances Selected Countries Budget Balance Ranked by (% of GDP) Surplus, 2008 10% Chile Peru 8% Argentina 6% Colombia Mexico 4% Brazil 2% 0% -2% -4% -6% -8% -10% 1996 1998 2000 2002 2004 2006 2008 Source: EIU, 2009 20091130 – Peru.ppt 21 Copyright 2009 © Professor Michael E. Porter
Peru’s Macroeconomic Competitiveness Macroeconomic Policy • Conservative fiscal policy • Sound macroeconomic management • Stabilization fund However • Peru’s macroeconomic position remains overly dependent on commodities and commodity prices 20091130 – Peru.ppt 22 Copyright 2009 © Professor Michael E. Porter
Peru’s Macroeconomic Competitiveness Macroeconomic Policy Social Infrastructure and Political Institutions • Conservative fiscal policy • Continued problems with corruption • Sound macroeconomic management • Stabilization fund However • Peru’s macroeconomic position remains overly dependent on commodities and commodity prices 20091130 – Peru.ppt 23 Copyright 2009 © Professor Michael E. Porter
Corruption Perception Index, 2007 1 Finland New Zealand Singapore Sweden Iceland Switzerland Worsening Improving Canada Norway Netherlands Low UK corruption Hong Kong Austria Germany Ireland Japan United States France Chile Spain Belgium Uruguay Portugal Estonia Slovenia Israel Botswana Taiwan Hungary South Africa Czech Republic Italy Malaysia South Korea Lithuania Costa Rica Slovakia Rank in Latvia Jordan Mauritius Global Namibia Greece Tunisia Poland Corruption Croatia Turkey Index, Colombia El Salvador Peru Ghana Romania 2007 Brazil Mexico Senegal China India Panama Thailand Tanzania Egypt Argentina Dominican Republic Bolivia Moldova Guatemala Uganda Malawi Ukraine High Vietnam Nicaragua Philippines Honduras Cameroon corruption Pakistan Kazakhstan Russia Indonesia Zimbabwe Cote d’Ivoire Ecuador Kenya Nigeria Venezuela Bangladesh 91 Uzbekistan -20 -15 -10 -5 0 5 10 15 20 Change in Rank, Global Corruption Report, 2007 versus 2001 Note: Ranks only countries available in both years (91 countries total) Source: Global Corruption Report, 2008 20091130 – Peru.ppt 24 Copyright 2009 © Professor Michael E. Porter
Peru’s Macroeconomic Competitiveness Macroeconomic Policy Social Infrastructure and Political Institutions • Conservative fiscal policy • Continued problems with corruption • Sound macroeconomic • Sharp inequality between indigenous management groups and other citizens • Stabilization fund • Weak education system • Inadequate health care system, despite some improvements However • Weak legal system and effectiveness of property rights • Peru’s macroeconomic position • Unstable political processes and remains overly dependent on institutions commodities and commodity prices • Government institutions are inefficient and held in low esteem by the public 20091130 – Peru.ppt 25 Copyright 2009 © Professor Michael E. Porter
Peru’s Macroeconomic Competitiveness Action Priorities Macroeconomic Policy Social Infrastructure and Political Institutions • Maintain macroeconomic • Modernize political and stability governmental institutions to improve policy formulation and execution • Broaden the tax base and improve collections • Tackle corruption at every level of government • Improve the effectiveness of the legal system • Improve property rights • Improve human development – Rapid improvements in education, health, and nutrition are needed • Create equal opportunity for all groups 20091130 – Peru.ppt 26 Copyright 2009 © Professor Michael E. Porter
Microeconomic Competitiveness: Quality of the Business Environment Context for Context for Firm Firm Strategy Strategy and Rivalry and Rivalry  Open and vigorous local competition – Openness to foreign competition Factor – Competition laws Factor Demand (Input) • Local rules and incentives that Demand (Input) Conditions Conditions encourage investment and Conditions Conditions productivity – e.g. incentives for capital • Efficient access to high quality investment, intellectual property • Demanding and sophisticated local business inputs protection, corporate governance customers and needs standards – Human resources – e.g., Strict quality, safety, and – Capital availability environmental standards – Physical infrastructure Related and Related and – Consumer protection laws – Administrative infrastructure (e.g. Supporting Supporting registration, permitting, transparency) Industries Industries – Scientific and technological infrastructure • Availability of suppliers, related industries, – Efficient utilization of natural and supporting institutions endowments • 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 20091130 – Peru.ppt 27 Copyright 2009 © Professor Michael E. Porter
Peru’s Business Environment Overall Strengths and Weaknesses STRENGTHS WEAKNESSES Trade and Investment Liberalization Physical Infrastructure • Openness to foreign investment • Low quality of air, transport and port infrastructure • Low restrictions on capital flows • Inadequate electricity supply • Simplification of custom procedures Workforce Development and Training • Low trade barriers • Poor quality of the higher education system • Improvements in investor protections • Low skill level of the labor force Improving Financial Markets • Limited availability of scientists and engineers • Soundness of banks Competitive Context • Improving financial market • Low intensity of local competition IT Infrastructure • Difficulty in business formation • Good quality of telecom infrastructure • Burdensome government regulations • Sound IT policies • Rigidity of employment Other • Weak intellectual property protection • High informality in the economy • Good management training Innovation Infrastructure • Improving sophistication of local buyers • Limited technological capacity • Efforts to strengthen competition policy • Weak university-industry research collaboration • Low patenting rates 20091130 – Peru.ppt 28 Copyright 2009 © Professor Michael E. Porter
Ease of Doing Business Peru, 2009 Ranking, 2009 (of 183 countries) Favorable Unfavorable 120 100 80 Peru’s per capita GDP rank: 72 60 40 20 0 Ease of Getting Protecting Registering Paying Trading Closing a Employing Starting a Enforcing Dealing Doing Credit Investors Property Taxes Across Business Workers Business Contracts with Business Borders Licenses Source: World Bank Report, Doing Business (2009/10) 20091130 – Peru.ppt 29 Copyright 2009 © Professor Michael E. Porter
Peru’s Business Environment Action Priorities • Improve physical infrastructure • Create an effective system for workforce training • Upgrade higher education • Encourage entrepreneurship and SME business formation – Simplify business formation – Reduce tax burden and labor market rigidities – Address other causes of informality – Strengthen financing for SMEs • Improve environmental standards • Develop innovation infrastructure – Upgrade technology standards in key clusters of the economy 20091130 – Peru.ppt 30 Copyright 2009 © Professor Michael E. Porter
Microeconomic Competitiveness: Cluster Development Tourism Cluster in Cairns, Australia Public Relations & Public Relations & Local retail, Local retail, Market Research Market Research Travel agents Tour operators health care, and health care, and Travel agents Tour operators Services Services other services other services Food Food Local Local Suppliers Suppliers Attractions and Attractions and Transportation Transportation Restaurants Activities Activities Restaurants e.g., theme parks, e.g., theme parks, casinos, sports casinos, sports Property Property Souvenirs, Souvenirs, Services Services Duty Free Duty Free Airlines, Airlines, Hotels Hotels Banks, Banks, Maintenance Maintenance Cruise Ships Cruise Ships Foreign Foreign Services Services Exchange Exchange Government agencies Government agencies Educational Institutions Educational Institutions Industry Groups Industry Groups e.g. Australian Tourism Commission, e.g. Australian Tourism Commission, e.g. James Cook University, e.g. James Cook University, e.g. Queensland Tourism e.g. Queensland Tourism Great Barrier Reef Authority Great Barrier Reef Authority Cairns College of TAFE Cairns College of TAFE Industry Council Industry Council Sources: HBS student team research (2003) - Peter Tynan, Chai McConnell, Alexandra West, Jean Hayden 20091130 – Peru.ppt 31 Copyright 2009 © Professor Michael E. Porter
Cluster in Developing Countries Kenya’s Cut Flower Cluster Sources: Student team research by Kusi Hornberger, Nick Ndiritu, Lalo Ponce-Brito, Melesse Tashu, and Tijan Watt, Microeconomics of Competitiveness Course, 2007 20091130 – Peru.ppt 32 Copyright 2009 © Professor Michael E. Porter
The Australian Wine Cluster History 1930 1965 1980 1991 to 1998 First oenology Australian Wine Australian Wine New organizations course at Bureau and Brandy created for education, Roseworthy established Corporation research, market Agricultural established 1990 information, and College 1955 1970 export promotions Winemaker’s Australian Wine Winemaking Federation of Research school at Charles Australia Institute founded Sturt University established founded 1950s 1960s 1970s 1980s 1990s Import of Recruiting of Continued inflow Creation of Surge in exports European winery experienced of foreign capital large number of and international technology foreign investors, and new wineries acquisitions e.g. Wolf Bass management Source: Michael E. Porter and Örjan Sölvell, The Australian Wine Cluster – Supplement, Harvard Business School Case Study, 2002 20091130 – Peru.ppt 33 Copyright 2009 © Professor Michael E. Porter
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 Equipment Biopharma- Heavy Services 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 Goods Note: Clusters with overlapping borders or identical shading have at least 20% overlap 20091130 – Peru.ppt (by number of industries) in both directions. 34 Copyright 2009 © Professor Michael E. Porter
Clusters as a Tool For Economic Policy • A forum for collaboration between government, the private sector, trade associations, educational institutions, and research institutions • Brings together firms of all sizes, including SME’s • Creates a mechanism for constructive business-government dialogue • A tool to identify problems and concrete action recommendations • A vehicle for identifying investments that strengthen multiple firms/institutions simultaneously • A framework for implementing government polices towards business • Foster more sophisticated competition rather than distorting the market 20091130 – Peru.ppt 35 Copyright 2009 © Professor Michael E. Porter
Peru’s Export Portfolio 1997 to 2007 1.4% Change In Peru’s Overall Jewelry, Precious Metals and Collectibles (0.88%, 1.69%) World Export Share: +0.07% 1.2% Metal, Mining and Manufacturing Peru’s world export market share, 2007 1.0% 0.8% 0.6% Fishing Agriculture 0.4% Apparel Hospitality and Tourism Peru’s Average World Oil & Gas Export Share: 0.20% 0.2% Publishing and Printing Textiles Construction Materials Financial Services Communication Services 0.0% -0.4% -0.2% 0.0% 0.2% 0.4% 0.6% Change in Peru’s world export market share, 1997 to 2007 Exports of US$2.4 Billion = Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics Database and the IMF BOP statistics. 20091130 – Peru.ppt 36 Copyright 2009 © Professor Michael E. Porter
Peru’s Export Portfolio 1997 to 2007 0.20% Peru’s world export market share, 2007 0.15% Oil and Gas Construction Materials Furniture Textiles 0.10% Transportation and Logistics Financial Services Chemical Products Processed Foods Leather and Related Products Plastics 0.05% Business Services Heavy Machinery Motor Driven Products Forest Products Building Fixtures and Equipment Footwear Biopharmaceuticals Power and Power Generation Equipment Sport Communications Equipment Production Technology Prefabricated Enclosures and Structures 0.00% -0.06% -0.04% -0.02% 0.00% 0.02% 0.04% 0.06% 0.08% 0.10% Change in Peru’s world export market share, 1997 to 2007 Exports of US$2.4 Billion = Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics Database and the IMF BOP statistics. 20091130 – Peru.ppt 37 Copyright 2009 © Professor Michael E. Porter
Malaysia’s Export Portfolio 1997 to 2007 2.5% Change In Malaysia’s Overall Entertainment and Reproduction World Export Share: -0.20% Information Technology (6.46%) Equipment (2.19%, 3.09%) Communications Equipment Furniture Malaysia’s world export market share, 2007 2.0% Agriculture Building Fixtures and Equipment Construction Services Plastics Lighting and Electrical Equipment 1.5% Construction Materials Analytical Instruments Oil & Gas Malaysia’s Average World Export Share: 1.24% Motor Driven Products Processed Foods Transportation and Logistics Publishing and Printing 1.0% Apparel Chemical Products Power and Power Generation Equipment Fishing & Fish Products Jewelry, Precious Metals and Collectibles Prefabricated Enclosures and Structures Metal, Mining and Manufacturing Communication Services Forest Products Textiles Production Technology Business Services (-2.36%) 0.5% Aerospace Vehicles and Defense Sport Medical Devices Marine Equipment Heavy Machinery Footwear Financial Services Hospitality and Tourism Biopharmaceuticals Automotive 0.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% Change in Malaysia’s world export market share, 1997 to 2007 Exports of US$9.3 Billion = Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics Database and the IMF BOP statistics. 20091130 – Peru.ppt 38 Copyright 2009 © Professor Michael E. Porter
Share of World Exports by Cluster World Market Share Peru, 2007 0.2% - 0.5% 0.5% - 1.0% Fishing & Enter- Textiles Fishing tainment Prefabricated > 1.0% 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 Analytical Services Business Equipment Education & Instruments Services Power Forest Knowledge Medical Creation Generation Products Devices Communi- Publishing cations & Printing Equipment Biopharma- Heavy Financial 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 Goods Note: Clusters with overlapping borders have at least 20% overlap (by number of industries) in both directions. 20091130 – Peru.ppt 39 Copyright 2009 © Professor Michael E. Porter
Share of World Exports by Cluster World Market Share Malaysia, 2007 1.24% - 1.75% 1.75% - 2.25% Fishing & Enter- Textiles Fishing tainment Prefabricated > 2.25% 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 Analytical Services Business Equipment Education & Instruments Services Power Forest Knowledge Medical Creation Generation Products Devices Communi- Publishing cations & Printing Equipment Biopharma- Heavy Financial 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 Goods Note: Clusters with overlapping borders have at least 20% overlap (by number of industries) in both directions. 20091130 – Peru.ppt 40 Copyright 2009 © Professor Michael E. Porter
State of Cluster Development in Peru • Peru has strengths in several clusters, including mining, fishing, agribusiness, tourism, jewelry and apparel • Peru’s clusters are based heavily on natural endowments, with limited further upgrading • Peru’s clusters are shallow, with weak supplier bases and supporting institutions • The limited cluster development efforts underway in Peru suffer from poor coordination between the private and public sectors • Clusters are so far an unexploited dimension of economic policy at the national and regional levels 20091130 – Peru.ppt 41 Copyright 2009 © Professor Michael E. Porter
Cluster Development in Peru Action Priorities • Adopt cluster development as a central tool for organizing business development and implementation of economic policies supporting businesses • Use cluster development to encourage value-add upgrading within existing clusters – Promote spillovers and synergies to upgrade local economies • Apply a cluster based approach to economic diversification 20091130 – Peru.ppt 42 Copyright 2009 © Professor Michael E. Porter
Clusters and Economic Diversification Upgrade Existing Export Upgrade Existing Export Products and Services Products and Services • Local firms Turn Products Into Clusters Turn Products Into Clusters • MNCs Deepen Existing Clusters Deepen Existing Clusters Develop Related Clusters Develop Related Clusters 20091130 – Peru.ppt 43 Copyright 2009 © Professor Michael E. Porter
Cluster Development in Peru Action Priorities • Adopt cluster development as a central tool for organizing business development and implementation of economic policies supporting businesses • Use cluster development to encourage value-add upgrading within existing clusters – Promote spillovers and synergies to upgrade local economies • Apply a cluster based approach to economic diversification • Leverage clusters to attract FDI and facilitate integration with the global economy • Use cluster initiatives to engage the private sector in more effective collaboration with government at the national and regional levels – Cluster development is an effective approach to promote private sector-led growth – Create Institutions for Collaboration (e.g., trade associations) to organize cluster participants 20091130 – Peru.ppt 44 Copyright 2009 © Professor Michael E. Porter
Geographic Influences on Competitiveness Nation Nation Regions and Cities Regions and Cities 20091130 – Peru.ppt 45 Copyright 2009 © 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 • Region’s specialize in different sets of clusters 20091130 – Peru.ppt 46 Copyright 2009 © Professor Michael E. Porter
Specialization by Cluster, Turkish Regions 2007 Istanbul Istanbul Textiles Textiles Leather and Apparel Bati Marmara Bati Marmara Bati Karadeniz Bati Karadeniz Orta Anadolu Orta Anadolu Dogu Karadeniz Dogu Karadeniz Leather and Apparel Distribution Services Apparel Apparel Tobacco Tobacco Furniture Furniture Food Processing Food Processing Distribution Services Jewelry Textiles Textiles Apparel Apparel Textiles Textiles Distribution Services Distribution Services Jewelry Chemicals Chemicals Metal Mining and Manufacturing Metal Mining and Manufacturing Agricultural Products Agricultural Products Furniture Furniture Construction Materials Construction Materials Forest Products Forest Products Metal Mining and Manufacturing Metal Mining and Manufacturing Forest Products Forest Products Dogu Marmara Dogu Marmara Textiles Kuzeydogu Anadolu Kuzeydogu Anadolu Textiles Agricultural Products Automotive Automotive Agricultural Products Apparel Footwear Footwear Apparel Distribution Services Furniture Furniture Distribution Services Hospitality and Tourism Hospitality and Tourism Guneydogu Anadolu Guneydogu Anadolu Ege Ege Textiles Textiles Tobacco Tobacco Tobacco Tobacco Textiles Textiles Oil and Gas Oil and Gas Construction Materials Construction Materials Food Processing Food Processing Apparel Apparel Bati Anadolu Bati Anadolu Furniture Furniture Ortadogu Anadolu Akdenziz Akdenziz Ortadogu Anadolu Construction Materials Construction Materials Textiles Textiles Textiles Textiles Distribution Services Distribution Services Agricultural Products Hospitality and Tourism Hospitality and Tourism Agricultural Products Aerospace Aerospace Apparel Apparel Apparel Apparel Distribution Services Distribution Services Distribution Services Distribution Services Note: Source: European Cluster Observatory, 2009 20091130 – Peru.ppt 47 Copyright 2009 © 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 • Region’s specialize in different sets of clusters • Cluster strength directly impacts regional performance • Each region requires its own distinctive competitiveness agenda • Improving competitiveness requires effective policy collaboration between regions and the national government • Decentralization of economic policy is especially important in larger countries to foster regional specialization, internal competition, and greater government accountability 20091130 – Peru.ppt 48 Copyright 2009 © Professor Michael E. Porter
Competitiveness of Peru’s Regions • Strong disparities exist across Peruvian regions in business environment, innovative capacity, and economic performance 20091130 – Peru.ppt 49 Copyright 2009 © Professor Michael E. Porter
Prosperity Performance Peru’s Regions GDP per Capita, 2008 (1994 New Peruvian Soles) 16,000 Peru’s Weighted Moquegua Average: 6.0% 14,000 12,000 Lima 10,000 Areguipa 8,000 Tacna Peru’s Weighted Ica Average: 6,513 Pasco 6,000 Madre de Dios Ancash La Libertad Junin Lambayeque Ucayali Piura 4,000 Loreto Tumbes Cusco Cajamarca Amazonas Huancavelica Puno San Martin Ayachucho Huanuco 2,000 Apurimac 0 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% Growth in GDP per Capital (CAGR), 2001 to 2008 Source: Fuente: Instituto Nacional de Estadistica e Informatica - Dirección Nacional de Cuentas Nacionales 20091130 – Peru.ppt 50 Copyright 2009 © Professor Michael E. Porter
Competitiveness of Peru’s Regions • Strong disparities exist across Peruvian regions in business environment, innovative capacity, and economic performance • Decentralization remains incomplete and has produced some social tension and unrest • There is weak planning, design, and implementation capacity at the local level • Sub-national governments are highly dependent on transfers from the central government 20091130 – Peru.ppt 51 Copyright 2009 © Professor Michael E. Porter
Peru’s Regions Action Priorities • Continue decentralization of responsibilities and resources to sub-national governments • Improve the capacity of local governments to plan, design and implement development polices • Improve national-regional collaboration to implement regional programs • Adopt specific steps to reduce corruption at the regional level • Improve physical connections among regions to support economic and social integration • Promote greater linkages between resource clusters and regional economies • Address the underlying causes of inequality between the highland, coastal and Amazon regions – Strengthen human development in the poorer highland regions 20091130 – Peru.ppt 52 Copyright 2009 © Professor Michael E. Porter
Geographic Influences on Competitiveness Neighboring Countries Neighboring Countries Nation Nation Regions and Cities Regions and Cities 20091130 – Peru.ppt 53 Copyright 2009 © Professor Michael E. Porter
Economic Coordination with Neighboring Countries 20091130 – Peru.ppt 54 Copyright 2009 © Professor Michael E. Porter
Competitiveness and the Neighborhood • Opening trade and investment among neighbors fuels growth and specialization – A country’s neighbors are its most natural trading and investment partners – The most natural path for internationalization by local firms is the neighborhood – Open trade and investment make each country a more attractive location for foreign investment • Economic coordination with neighbors drives improvements in the business environment – Capturing synergies in policy and infrastructure – Gaining greater clout in international negotiations • External agreements help overcome domestic political barriers to reform 20091130 – Peru.ppt 55 Copyright 2009 © Professor Michael E. Porter
Economic Integration Among Neighbors Capturing Synergies Context for Context for Related and Related and Factor Factor Demand Demand Macroeconomic Macroeconomic Strategy Strategy Supporting Supporting Conditions Conditions Conditions Conditions Competitiveness Competitiveness and Rivalry and Rivalry Industries Industries • Improving the • Eliminating • Opening • Facilitating cross- • Coordinating efficiency of the trade and government border cluster macroeconomic regional investment procurement development policies transportation barriers within within the region – e.g., Supplier • Coordinating network the region Harmonizing networks programs to environmental • Creating an efficient • Simplifying and improve security standards – Transport & energy network harmonizing and public safety Logistics cross-border • Harmonizing • Enhancing regional regulations and product safety – Quality communications paperwork standards standards and connectivity • Coordinating • Establishing • Harmonizing anti-monopoly reciprocal administrative and fair consumer requirements for competition protection laws businesses policies • Linking financial markets • Facilitating the movement of students for higher education 20091130 – Peru.ppt 56 Copyright 2009 © Professor Michael E. Porter
Peru and the Neighborhood Assessment • Peru remains a relatively isolated country for geographic reasons • Peru has weak relations with some of its neighbors • Peru has taken some positive steps to improve relations with some neighbors • Peru’s recent trade liberalization program, including with the U.S. and China, has created significant opportunities for new economic linkages with neighbors Action Agenda • Economic coordination with neighboring countries is an important tool in economic development • Peru can take a proactive leadership role in promoting trade liberalization efforts with particular neighbors and the region • Peru can be a platform for South American firms seeking to access the U.S. and Asian markets • Leverage inbound and outbound FDI with neighbors to upgrade local competitiveness 20091130 – Peru.ppt 57 Copyright 2009 © Professor Michael E. Porter
The Need for an Economic Strategy Policy Economic Improvement Strategy • Implementing best • A prioritized agenda to practices in each policy create a unique area competitive position for a country or region • There are a huge number of policy areas that matter • No country can or should try to make progress in all areas simultaneously 20091130 – Peru.ppt 58 Copyright 2009 © Professor Michael E. Porter
The Need for an Economic Strategy National Value Proposition National Value Proposition • What are the distinctive competitive assets of the nation’s economy given its location, legacy, rate of progress, existing strengths, and potential strengths? – What unique value as a business location? – In what types of fields / clusters? – What roles with neighbors, the broader region, and the wider world? Refining Unique Strengths Refining Unique Strengths Addressing Crucial Constraints Addressing Crucial Constraints • What elements of the business • What are the crucial weaknesses and environment and institutional context constraints that must be addressed to can be unique strengths relative to achieve parity with peer countries and peers/neighbors? allow the country to move to the next • What existing and emerging clusters level? can be developed? • Priorities and sequencing are a necessity in economic development 20091130 – Peru.ppt 59 Copyright 2009 © Professor Michael E. Porter
Toward a Peruvian Economic Strategy Unique Strengths Implications Upgrade Ground, Air and Port • Abundant natural Transportation Infrastructure to Connect endowments Peruvian Regions with Neighbors and • Vast biodiversity and the World ecosystems • Central location in South Foster Cluster Development Around America Resource Strengths • Young, hard working population Reduce and Eliminate Corruption • Rich culture and history • Legacy of domestic Create New, More Stable Effective Political Institutions collaboration to overcome obstacles Implement Next Stage Regulatory • Open to FDI and capital Reforms to Improve the Business flows Environment • Privileged access to major foreign markets (United Improve the Quality of Education and States, China, etc.) Workforce Training • Upgrade Peru’s competitive assets to achieve high rates of sustainable 20091130 – Peru.ppt economic growth while improving welfare of the poor 60 Copyright 2009 © Professor Michael E. Porter
Accelerating Poverty Reduction in Peru Increase Reduce Poverty Competitiveness 20091130 – Peru.ppt 61 Copyright 2009 © Professor Michael E. Porter
The Process of Economic Development Shifting Roles and Responsibilities Old Model Old Model New Model New Model •• The central government drives The central government drives •• Economic development is a Economic development is a economic development through economic development through collaborative process involving collaborative process involving policy decisions, spending and policy decisions, spending and government at multiple levels, government at multiple levels, incentives incentives companies, educational and companies, educational and research institutions, and private research institutions, and private sector organizations sector organizations • Competitiveness must be a bottom-up process in which many individuals, companies, and institutions take responsibility and act 20091130 – Peru.ppt 62 Copyright 2009 © Professor Michael E. Porter
Organizing for Competitiveness in Peru Assessment • Peru has weak coordination among government ministries and agencies responsible for improving competitiveness – Across different ministries to align policies – Across geographic levels of government • The National Council on Competitiveness was created in 2002, a positive step, but it has had limited impact • There are few competitiveness initiatives at the regional level to mobilize strategic thinking and drive action • The private sector has limited engagement in competitiveness development 20091130 – Peru.ppt 63 Copyright 2009 © Professor Michael E. Porter
Revitalizing Peru’s Organization to Drive Competitiveness Action Agenda • Create an effective coordination structure within government across ministries and agencies • Restart the National Council on Competitiveness to build consensus on an overall economic strategy and track implementation – The council will require strong private sector leadership • Create Regional Competitiveness Councils to drive consensus on state plans and monitor implementation – Involve representatives from the private, public and academic sectors as well as federal government participation • The private sector must assume a catalytic role in economic strategy formulation and implementation 20091130 – Peru.ppt 64 Copyright 2009 © Professor Michael E. Porter
Integrating Business and the Society Economic Social Objectives Objectives • There is an inevitable link between business and society • A healthy business depends on a healthy community to create demand for its products and provide a supportive business environment • A healthy society depends on competitive companies that can create jobs, support high wages, build wealth, buy local goods, and pay taxes • There is a long-term synergy between economic and social objectives 20091130 – Peru.ppt 65 Copyright 2009 © Professor Michael E. Porter
Competitiveness and Social Issues Worker Education and Poverty in Skills the Company’s Worker Safety Communities Environmental Company Gender Equity Impact Productivity Employee Energy Use Health Water Use 20091130 – Peru.ppt 66 Copyright 2009 © Professor Michael E. Porter
Corporate Role in Competitiveness The Concept of Shared Value Shared Value: Policies and practices that enhance the competitiveness of a company while simultaneously advancing economic and social conditions in the communities in which it operates • Find the points of convergence between economic and social objectives, not assumed tradeoffs or the need for redistribution – These points of convergence are growing • Achieving shared value requires new thinking, new technologies, and new approaches to management • Shared value opportunities are even greater in developing countries • Shared value thinking applies equally to NGOs and governments 20091130 – Peru.ppt 67 Copyright 2009 © Professor Michael E. Porter
Corporate Role in Competitiveness Action Agenda • Organize the private sector to have a collective voice in competitiveness • Participate actively in national and regional competitiveness initiatives • Inform government on business needs and constraints bearing on company and cluster development • Nurture local suppliers and attract foreign suppliers • Work closely with local educational and research institutions to improve their quality and create specialized programs addressing the cluster’s needs • Collaborate with other companies to enhance competitiveness through trade associations and other mechanisms • Focus corporate social responsibility initiatives on enhancing the business environment 20091130 – Peru.ppt 68 Copyright 2009 © Professor Michael E. Porter

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Michael Porter - Peru

  • 1.
    Competitiveness: A New Economic Strategy for Peru Professor Michael E. Porter Harvard Business School Lima, Peru November 30, 2009 This presentation draws on ideas from Professor Porter’s books and articles, in particular, Competitive Strategy (The Free Press, 1980); Competitive Advantage (The Free Press, 1985); “What is Strategy?” (Harvard Business Review, Nov/Dec 1996); “Strategy and the Internet” (Harvard Business Review, March 2001); and a forthcoming book. 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. Additional information may be found at the website of the Institute for Strategy and Competitiveness, www.isc.hbs.edu. Version: November 27, 2009 20091130 – Peru.ppt 1 Copyright 2009 © Professor Michael E. Porter
  • 2.
    Prosperity Performance Selected Lower and Middle Income Countries PPP-adjusted GDP per Capita, 2008 ($USD) $30,000 Slovenia UAE Greece ($30,650) Israel New Zealand South Korea Czech Republic $25,000 Cyprus Latin American countries Bahrain Saudi Arabia Oman Other countries Portugal Slovakia Estonia $20,000 Hungary Trinidad & Tobago Lithuania Poland Latvia Libya Croatia Russia $15,000 Panama Chile Argentina Mexico Malaysia Venezuela Turkey Bulgaria Uruguay Belarus Iran Romania Costa Rica Kazakhstan Lebanon Brazil South Africa $10,000 Dominican Republic Thailand Colombia Peru Belize Algeria Bosnia Ecuador Tunisia Ukraine Guyana Albania Guatemala Egypt China Jordan Paraguay Georgia $5,000 El Salvador Sri Lanka Bolivia Honduras Philippines Nicaragua Pakistan India Vietnam $0 0% 2% 4% 6% 8% 10% 12% 14% Source: Peru.ppt Growth of Real GDP per Capita (PPP-adjusted), CAGR, 2004 to 2008 20091130 – EIU (2009), authors calculations 2 Copyright 2009 © Professor Michael E. Porter
  • 3.
    Unemployment Performance Unemployment Rate, 2008 Selected Countries Dominican Republic (15.5%) South Africa (22.9%) 14% Improving Tunisia Deteriorating Croatia Algeria Jordan Albania Iran 12% Saudi Arabia Colombia Turkey 10% Poland (-8.4%) China Indonesia Egypt Brazil Peru Syria 8% Uruguay Slovakia Argentina Chile Hungary Greece Bolivia Portugal Venezuela Philippines Ecuador Pakistan Slovenia Kazakhstan India Bulgaria Lithuania Russia El Salvador Israel Ireland 6% T&T Estonia Panama Czech Rep. Paraguay Nicaragua Latvia Sri Lanka Costa Rica Vietnam Romania 4% Cyprus Mexico Honduras Malaysia Korea Ukraine 2% Latin American countries Thailand Other countries 0% -6% -5% -4% -3% -2% -1% 0% 1% 2% Change of Unemployment Rate in Percentage Points, 2004 to 2008 Source: EIU (2009) 20091130 – Peru.ppt 3 Copyright 2009 © Professor Michael E. Porter
  • 4.
    Poverty Rates % of Population Under Peru, 2001 to 2007 the Poverty Line 60% 50% 40% 30% 20% 10% 0% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: Informacion Socio Demografica, from El Instituto Nacional de Estadistica e Informatica (INEI), 2009 20091130 – Peru.ppt 4 Copyright 2009 © Professor Michael E. Porter
  • 5.
    Export Performance Exports of Goods and Selected Countries Services (% of GDP), 2008 100% Malaysia (103.5%) 90% Slovakia Libya Latin American Countries Other countries Ireland Malta Czech Republic Panama Hungary 80% Vietnam Thailand Estonia Slovenia Saudi Arabia 70% Trinidad & Tobago Belarus Paraguay 60% Bulgaria Belize Lithuania Cambodia Tunisia Jordan Honduras Kazakhstan Algeria 50% Cyprus Macedonia Croatia Chile Ukraine (-17.5%) Costa Rica Egypt Latvia 40% Israel Poland Bolivia Philippines China Morocco South Africa Uruguay Ecuador Portugal Nicaragua Syria Venezuela Russia Romania Georgia Mexico 30% Indonesia Peru Lebanon Sri Lanka Iran El Salvador India Argentina Greece 20% Albania Colombia Guatemala Turkey Brazil Pakistan 10% Ethiopia 0% -15% -10% -5% 0% 5% 10% 15% 20% Change in Exports of Goods and Services (% of GDP), 2004 to 2008 Source: EIU (2008), authors’ analysis 20091130 – Peru.ppt 5 Copyright 2009 © Professor Michael E. Porter
  • 6.
    Peru’s Exports ByType of Industry World Export Market Share (current USD) 0.80% Processed Goods Semi-processed Goods 0.70% Unprocessed Goods Services TOTAL 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 Source: UNComTrade, WTO (2009) 20091130 – Peru.ppt 6 Copyright 2009 © Professor Michael E. Porter
  • 7.
    Inbound Foreign InvestmentPerformance Stocks and Flows, Selected Countries Inward FDI Stocks as % of GDP, Average 2003 - 2007 80% Estonia Trinidad & Tobago Latin American countries Jordan (46.5%, 81.8%) Other countries Lebanon (6.7%) 70% Panama (48.2%) Tunisia Hungary Chile Cyprus 60% Vietnam Bulgaria (69%) Czech Republic Slovakia Belize 50% Bolivia Nicaragua Croatia Kazakhstan Portugal Cambodia Georgia 40% Morocco Macedonia Malaysia Thailand Latvia Honduras Venezuela Poland Egypt Israel South Africa Argentina Lithuania Bosnia 30% Colombia Romania Mexico Ecuador Costa Rica Brazil Russia El Salvador Slovenia Peru 20% Guatemala Ukraine UAE Uruguay Paraguay Dominican Republic Turkey Malaysia China Saudi Arabia 10% Indonesia Sri Lanka Pakistan India Libya Iran 0% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% FDI Inflows as % of Gross Fixed Capital Formation, Average 2003 - 2007 Source: UNCTAD, World Investment Report (2009) 20091130 – Peru.ppt 7 Copyright 2009 © Professor Michael E. Porter
  • 8.
    Innovative Capacity Innovation Output of Selected Countries Average U.S. patents per 1 million population, 2004-2008 3.5 Czech Republic 3.0 Croatia 2.5 2.0 South Africa Greece 1.5 Portugal Russia 1.0 Chile Saudi Arabia Argentina Poland Venezuela Romania Bulgaria Brazil Thailand Mexico 0.5 China India Philippines Ukraine Peru Ecuador Colombia Turkey 0.0 -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% CAGR of US-registered patents, 2004 – 2008 120 patents = Source: USPTO (2009), EIU (2009) 20091130 – Peru.ppt 8 Copyright 2009 © Professor Michael E. Porter
  • 9.
    The Peruvian Economyin 2009 • Peru has had a long history of instability • Since 2001, Peru has experienced high rates of economic growth – Recent surge in FDI and exports has been driven by commodities • Implementation of sound macroeconomic policies has allowed Peru to weather the current global crisis – Peru’s economy has been one of the most resilient in Latin America BUT • Prosperity remains low and large segments of the population lack access to basic needs • High unemployment and inequality persist • Peru is overly dependent on commodity exports with limited potential to drive job growth and economic diversification • Returning to 8 to 9% growth 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 20091130 – Peru.ppt 9 Copyright 2009 © Professor Michael E. Porter
  • 10.
    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 economy 20091130 – Peru.ppt 10 Copyright 2009 © Professor Michael E. Porter
  • 11.
    Comparative Labor Productivity Real GDP per employee (PPP adjusted US$), 2008 Selected Countries Austria Kuwait Australia $70,000 Greece Saudi Arabia Switzerland Germany Spain Japan Singapore Oman $60,000 Israel Malta Slovenia $50,000 New Zealand Korea Slovakia UAE Cyprus Hungary Czech Republic Portugal $40,000 Croatia Lithuania Estonia Poland Turkey Mexico Malaysia Russia Chile Latvia $30,000 Argentina Macedonia Romania Iran Belarus South Africa Bulgaria Azerbaijan $20,000 Kazakhstan Peru Albania Brazil Peru (Avg. growth 2001to 2008) Egypt Armenia Jordan Ukraine Bosnia Thailand Georgia $10,000 Syria Serbia China Philippines Indonesia Pakistan India Vietnam Cambodia $0 -3% 0% 3% 6% 9% Growth of real GDP per employee (PPP-adjusted), 1990 to 2008 Source: authors calculation Groningen Growth and Development Centre (2009), EIU (2009) 20091130 – Peru.ppt 11 Copyright 2009 © Professor Michael E. Porter
  • 12.
    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 Natural 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 20091130 – Peru.ppt 12 Copyright 2009 © Professor Michael E. Porter
  • 13.
    Determinants of Competitiveness Microeconomic Competitiveness Quality of the Sophistication National State of Cluster of Company Business Development Operations and Environment Strategy Macroeconomic Policy Macroeconomic Competitiveness Social Infrastructure Macroeconomic and Political Policies • Fiscal policy: public Institutions spending aligned with revenues over time Natural Endowments • Monetary policy: low levels of inflation • Macroeconomic management: avoiding structural imbalances and cyclical overheating 20091130 – Peru.ppt 13 Copyright 2009 © Professor Michael E. Porter
  • 14.
    Determinants of Competitiveness Microeconomic Competitiveness Quality of the Sophistication National State of Cluster of Company Social Business Development Operations and Environment Strategy Infrastructure and Political Institutions Macroeconomic Competitiveness Social • Human Development: Infrastructure and Political Macroeconomic Policies basic education and Institutions health care • Rule of Law: property Natural Endowments rights and due process • Political Institutions: stable and effective political and governmental processes and organizations 20091130 – Peru.ppt 14 Copyright 2009 © Professor Michael E. Porter
  • 15.
    Determinants of Competitiveness Microeconomic Competitiveness Quality of the Sophistication National State of Cluster of Company Business Development Operations and Sophistication Environment Strategy of Company Operations and Macroeconomic Competitiveness Strategy Social Infrastructure and Political Macroeconomic Policies • The internal company Institutions skills, capabilities, and management practices needed to Natural Endowments attain the highest level of productivity and innovation possible 20091130 – Peru.ppt 15 Copyright 2009 © Professor Michael E. Porter
  • 16.
    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 and Political Macroeconomic Policies environment Institutions conditions that allow companies to reach Natural Endowments high levels of productivity and innovation 20091130 – Peru.ppt 16 Copyright 2009 © Professor Michael E. Porter
  • 17.
    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 critical mass of firms Natural Endowments in particular fields, together with specialized skills, infrastructure, and supporting institutions, to support high productivity through efficiencies and synergies 20091130 – Peru.ppt 17 Copyright 2009 © Professor Michael E. Porter
  • 18.
    Competitiveness and PovertyReduction 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 simultaneously 20091130 – Peru.ppt 18 Copyright 2009 © Professor Michael E. Porter
  • 19.
    Peru’s Competitiveness Profile,2009 ISC Country Competitiveness Model Macroeconomic Microeconomic Competitiveness (82) Competitiveness (73) Social Infra- Business Company Macroeconomic structure and Pol. Environment Quality Sophistication Policy (69) Institutions (90) (74) (70) Peru’s GDP per capita rank is 71st versus 133 countries Note: Rank versus 133 countries; overall, Peru ranks 71st in 2008 PPP adjusted GDP per capita and 75th in 2009 Global Competitiveness Source: Country Competitiveness Model (CCM), Institute for Strategy and Competitiveness, Harvard University (2009) 20091130 – Peru.ppt 19 Copyright 2009 © Professor Michael E. Porter
  • 20.
    Peru’s Macroeconomic Competitiveness Macroeconomic Policy • Conservative fiscal policy 20091130 – Peru.ppt 20 Copyright 2009 © Professor Michael E. Porter
  • 21.
    Government Budget Balances Selected Countries Budget Balance Ranked by (% of GDP) Surplus, 2008 10% Chile Peru 8% Argentina 6% Colombia Mexico 4% Brazil 2% 0% -2% -4% -6% -8% -10% 1996 1998 2000 2002 2004 2006 2008 Source: EIU, 2009 20091130 – Peru.ppt 21 Copyright 2009 © Professor Michael E. Porter
  • 22.
    Peru’s Macroeconomic Competitiveness Macroeconomic Policy • Conservative fiscal policy • Sound macroeconomic management • Stabilization fund However • Peru’s macroeconomic position remains overly dependent on commodities and commodity prices 20091130 – Peru.ppt 22 Copyright 2009 © Professor Michael E. Porter
  • 23.
    Peru’s Macroeconomic Competitiveness Macroeconomic Policy Social Infrastructure and Political Institutions • Conservative fiscal policy • Continued problems with corruption • Sound macroeconomic management • Stabilization fund However • Peru’s macroeconomic position remains overly dependent on commodities and commodity prices 20091130 – Peru.ppt 23 Copyright 2009 © Professor Michael E. Porter
  • 24.
    Corruption Perception Index,2007 1 Finland New Zealand Singapore Sweden Iceland Switzerland Worsening Improving Canada Norway Netherlands Low UK corruption Hong Kong Austria Germany Ireland Japan United States France Chile Spain Belgium Uruguay Portugal Estonia Slovenia Israel Botswana Taiwan Hungary South Africa Czech Republic Italy Malaysia South Korea Lithuania Costa Rica Slovakia Rank in Latvia Jordan Mauritius Global Namibia Greece Tunisia Poland Corruption Croatia Turkey Index, Colombia El Salvador Peru Ghana Romania 2007 Brazil Mexico Senegal China India Panama Thailand Tanzania Egypt Argentina Dominican Republic Bolivia Moldova Guatemala Uganda Malawi Ukraine High Vietnam Nicaragua Philippines Honduras Cameroon corruption Pakistan Kazakhstan Russia Indonesia Zimbabwe Cote d’Ivoire Ecuador Kenya Nigeria Venezuela Bangladesh 91 Uzbekistan -20 -15 -10 -5 0 5 10 15 20 Change in Rank, Global Corruption Report, 2007 versus 2001 Note: Ranks only countries available in both years (91 countries total) Source: Global Corruption Report, 2008 20091130 – Peru.ppt 24 Copyright 2009 © Professor Michael E. Porter
  • 25.
    Peru’s Macroeconomic Competitiveness Macroeconomic Policy Social Infrastructure and Political Institutions • Conservative fiscal policy • Continued problems with corruption • Sound macroeconomic • Sharp inequality between indigenous management groups and other citizens • Stabilization fund • Weak education system • Inadequate health care system, despite some improvements However • Weak legal system and effectiveness of property rights • Peru’s macroeconomic position • Unstable political processes and remains overly dependent on institutions commodities and commodity prices • Government institutions are inefficient and held in low esteem by the public 20091130 – Peru.ppt 25 Copyright 2009 © Professor Michael E. Porter
  • 26.
    Peru’s Macroeconomic Competitiveness Action Priorities Macroeconomic Policy Social Infrastructure and Political Institutions • Maintain macroeconomic • Modernize political and stability governmental institutions to improve policy formulation and execution • Broaden the tax base and improve collections • Tackle corruption at every level of government • Improve the effectiveness of the legal system • Improve property rights • Improve human development – Rapid improvements in education, health, and nutrition are needed • Create equal opportunity for all groups 20091130 – Peru.ppt 26 Copyright 2009 © Professor Michael E. Porter
  • 27.
    Microeconomic Competitiveness: Qualityof the Business Environment Context for Context for Firm Firm Strategy Strategy and Rivalry and Rivalry  Open and vigorous local competition – Openness to foreign competition Factor – Competition laws Factor Demand (Input) • Local rules and incentives that Demand (Input) Conditions Conditions encourage investment and Conditions Conditions productivity – e.g. incentives for capital • Efficient access to high quality investment, intellectual property • Demanding and sophisticated local business inputs protection, corporate governance customers and needs standards – Human resources – e.g., Strict quality, safety, and – Capital availability environmental standards – Physical infrastructure Related and Related and – Consumer protection laws – Administrative infrastructure (e.g. Supporting Supporting registration, permitting, transparency) Industries Industries – Scientific and technological infrastructure • Availability of suppliers, related industries, – Efficient utilization of natural and supporting institutions endowments • 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 20091130 – Peru.ppt 27 Copyright 2009 © Professor Michael E. Porter
  • 28.
    Peru’s Business Environment Overall Strengths and Weaknesses STRENGTHS WEAKNESSES Trade and Investment Liberalization Physical Infrastructure • Openness to foreign investment • Low quality of air, transport and port infrastructure • Low restrictions on capital flows • Inadequate electricity supply • Simplification of custom procedures Workforce Development and Training • Low trade barriers • Poor quality of the higher education system • Improvements in investor protections • Low skill level of the labor force Improving Financial Markets • Limited availability of scientists and engineers • Soundness of banks Competitive Context • Improving financial market • Low intensity of local competition IT Infrastructure • Difficulty in business formation • Good quality of telecom infrastructure • Burdensome government regulations • Sound IT policies • Rigidity of employment Other • Weak intellectual property protection • High informality in the economy • Good management training Innovation Infrastructure • Improving sophistication of local buyers • Limited technological capacity • Efforts to strengthen competition policy • Weak university-industry research collaboration • Low patenting rates 20091130 – Peru.ppt 28 Copyright 2009 © Professor Michael E. Porter
  • 29.
    Ease of DoingBusiness Peru, 2009 Ranking, 2009 (of 183 countries) Favorable Unfavorable 120 100 80 Peru’s per capita GDP rank: 72 60 40 20 0 Ease of Getting Protecting Registering Paying Trading Closing a Employing Starting a Enforcing Dealing Doing Credit Investors Property Taxes Across Business Workers Business Contracts with Business Borders Licenses Source: World Bank Report, Doing Business (2009/10) 20091130 – Peru.ppt 29 Copyright 2009 © Professor Michael E. Porter
  • 30.
    Peru’s Business Environment Action Priorities • Improve physical infrastructure • Create an effective system for workforce training • Upgrade higher education • Encourage entrepreneurship and SME business formation – Simplify business formation – Reduce tax burden and labor market rigidities – Address other causes of informality – Strengthen financing for SMEs • Improve environmental standards • Develop innovation infrastructure – Upgrade technology standards in key clusters of the economy 20091130 – Peru.ppt 30 Copyright 2009 © Professor Michael E. Porter
  • 31.
    Microeconomic Competitiveness: ClusterDevelopment Tourism Cluster in Cairns, Australia Public Relations & Public Relations & Local retail, Local retail, Market Research Market Research Travel agents Tour operators health care, and health care, and Travel agents Tour operators Services Services other services other services Food Food Local Local Suppliers Suppliers Attractions and Attractions and Transportation Transportation Restaurants Activities Activities Restaurants e.g., theme parks, e.g., theme parks, casinos, sports casinos, sports Property Property Souvenirs, Souvenirs, Services Services Duty Free Duty Free Airlines, Airlines, Hotels Hotels Banks, Banks, Maintenance Maintenance Cruise Ships Cruise Ships Foreign Foreign Services Services Exchange Exchange Government agencies Government agencies Educational Institutions Educational Institutions Industry Groups Industry Groups e.g. Australian Tourism Commission, e.g. Australian Tourism Commission, e.g. James Cook University, e.g. James Cook University, e.g. Queensland Tourism e.g. Queensland Tourism Great Barrier Reef Authority Great Barrier Reef Authority Cairns College of TAFE Cairns College of TAFE Industry Council Industry Council Sources: HBS student team research (2003) - Peter Tynan, Chai McConnell, Alexandra West, Jean Hayden 20091130 – Peru.ppt 31 Copyright 2009 © Professor Michael E. Porter
  • 32.
    Cluster in DevelopingCountries Kenya’s Cut Flower Cluster Sources: Student team research by Kusi Hornberger, Nick Ndiritu, Lalo Ponce-Brito, Melesse Tashu, and Tijan Watt, Microeconomics of Competitiveness Course, 2007 20091130 – Peru.ppt 32 Copyright 2009 © Professor Michael E. Porter
  • 33.
    The Australian WineCluster History 1930 1965 1980 1991 to 1998 First oenology Australian Wine Australian Wine New organizations course at Bureau and Brandy created for education, Roseworthy established Corporation research, market Agricultural established 1990 information, and College 1955 1970 export promotions Winemaker’s Australian Wine Winemaking Federation of Research school at Charles Australia Institute founded Sturt University established founded 1950s 1960s 1970s 1980s 1990s Import of Recruiting of Continued inflow Creation of Surge in exports European winery experienced of foreign capital large number of and international technology foreign investors, and new wineries acquisitions e.g. Wolf Bass management Source: Michael E. Porter and Örjan Sölvell, The Australian Wine Cluster – Supplement, Harvard Business School Case Study, 2002 20091130 – Peru.ppt 33 Copyright 2009 © Professor Michael E. Porter
  • 34.
    Clusters and EconomicDiversification 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 Equipment Biopharma- Heavy Services 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 Goods Note: Clusters with overlapping borders or identical shading have at least 20% overlap 20091130 – Peru.ppt (by number of industries) in both directions. 34 Copyright 2009 © Professor Michael E. Porter
  • 35.
    Clusters as aTool For Economic Policy • A forum for collaboration between government, the private sector, trade associations, educational institutions, and research institutions • Brings together firms of all sizes, including SME’s • Creates a mechanism for constructive business-government dialogue • A tool to identify problems and concrete action recommendations • A vehicle for identifying investments that strengthen multiple firms/institutions simultaneously • A framework for implementing government polices towards business • Foster more sophisticated competition rather than distorting the market 20091130 – Peru.ppt 35 Copyright 2009 © Professor Michael E. Porter
  • 36.
    Peru’s Export Portfolio 1997 to 2007 1.4% Change In Peru’s Overall Jewelry, Precious Metals and Collectibles (0.88%, 1.69%) World Export Share: +0.07% 1.2% Metal, Mining and Manufacturing Peru’s world export market share, 2007 1.0% 0.8% 0.6% Fishing Agriculture 0.4% Apparel Hospitality and Tourism Peru’s Average World Oil & Gas Export Share: 0.20% 0.2% Publishing and Printing Textiles Construction Materials Financial Services Communication Services 0.0% -0.4% -0.2% 0.0% 0.2% 0.4% 0.6% Change in Peru’s world export market share, 1997 to 2007 Exports of US$2.4 Billion = Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics Database and the IMF BOP statistics. 20091130 – Peru.ppt 36 Copyright 2009 © Professor Michael E. Porter
  • 37.
    Peru’s Export Portfolio 1997 to 2007 0.20% Peru’s world export market share, 2007 0.15% Oil and Gas Construction Materials Furniture Textiles 0.10% Transportation and Logistics Financial Services Chemical Products Processed Foods Leather and Related Products Plastics 0.05% Business Services Heavy Machinery Motor Driven Products Forest Products Building Fixtures and Equipment Footwear Biopharmaceuticals Power and Power Generation Equipment Sport Communications Equipment Production Technology Prefabricated Enclosures and Structures 0.00% -0.06% -0.04% -0.02% 0.00% 0.02% 0.04% 0.06% 0.08% 0.10% Change in Peru’s world export market share, 1997 to 2007 Exports of US$2.4 Billion = Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics Database and the IMF BOP statistics. 20091130 – Peru.ppt 37 Copyright 2009 © Professor Michael E. Porter
  • 38.
    Malaysia’s Export Portfolio 1997 to 2007 2.5% Change In Malaysia’s Overall Entertainment and Reproduction World Export Share: -0.20% Information Technology (6.46%) Equipment (2.19%, 3.09%) Communications Equipment Furniture Malaysia’s world export market share, 2007 2.0% Agriculture Building Fixtures and Equipment Construction Services Plastics Lighting and Electrical Equipment 1.5% Construction Materials Analytical Instruments Oil & Gas Malaysia’s Average World Export Share: 1.24% Motor Driven Products Processed Foods Transportation and Logistics Publishing and Printing 1.0% Apparel Chemical Products Power and Power Generation Equipment Fishing & Fish Products Jewelry, Precious Metals and Collectibles Prefabricated Enclosures and Structures Metal, Mining and Manufacturing Communication Services Forest Products Textiles Production Technology Business Services (-2.36%) 0.5% Aerospace Vehicles and Defense Sport Medical Devices Marine Equipment Heavy Machinery Footwear Financial Services Hospitality and Tourism Biopharmaceuticals Automotive 0.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% Change in Malaysia’s world export market share, 1997 to 2007 Exports of US$9.3 Billion = Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics Database and the IMF BOP statistics. 20091130 – Peru.ppt 38 Copyright 2009 © Professor Michael E. Porter
  • 39.
    Share of WorldExports by Cluster World Market Share Peru, 2007 0.2% - 0.5% 0.5% - 1.0% Fishing & Enter- Textiles Fishing tainment Prefabricated > 1.0% 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 Analytical Services Business Equipment Education & Instruments Services Power Forest Knowledge Medical Creation Generation Products Devices Communi- Publishing cations & Printing Equipment Biopharma- Heavy Financial 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 Goods Note: Clusters with overlapping borders have at least 20% overlap (by number of industries) in both directions. 20091130 – Peru.ppt 39 Copyright 2009 © Professor Michael E. Porter
  • 40.
    Share of WorldExports by Cluster World Market Share Malaysia, 2007 1.24% - 1.75% 1.75% - 2.25% Fishing & Enter- Textiles Fishing tainment Prefabricated > 2.25% 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 Analytical Services Business Equipment Education & Instruments Services Power Forest Knowledge Medical Creation Generation Products Devices Communi- Publishing cations & Printing Equipment Biopharma- Heavy Financial 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 Goods Note: Clusters with overlapping borders have at least 20% overlap (by number of industries) in both directions. 20091130 – Peru.ppt 40 Copyright 2009 © Professor Michael E. Porter
  • 41.
    State of ClusterDevelopment in Peru • Peru has strengths in several clusters, including mining, fishing, agribusiness, tourism, jewelry and apparel • Peru’s clusters are based heavily on natural endowments, with limited further upgrading • Peru’s clusters are shallow, with weak supplier bases and supporting institutions • The limited cluster development efforts underway in Peru suffer from poor coordination between the private and public sectors • Clusters are so far an unexploited dimension of economic policy at the national and regional levels 20091130 – Peru.ppt 41 Copyright 2009 © Professor Michael E. Porter
  • 42.
    Cluster Development inPeru Action Priorities • Adopt cluster development as a central tool for organizing business development and implementation of economic policies supporting businesses • Use cluster development to encourage value-add upgrading within existing clusters – Promote spillovers and synergies to upgrade local economies • Apply a cluster based approach to economic diversification 20091130 – Peru.ppt 42 Copyright 2009 © Professor Michael E. Porter
  • 43.
    Clusters and EconomicDiversification Upgrade Existing Export Upgrade Existing Export Products and Services Products and Services • Local firms Turn Products Into Clusters Turn Products Into Clusters • MNCs Deepen Existing Clusters Deepen Existing Clusters Develop Related Clusters Develop Related Clusters 20091130 – Peru.ppt 43 Copyright 2009 © Professor Michael E. Porter
  • 44.
    Cluster Development inPeru Action Priorities • Adopt cluster development as a central tool for organizing business development and implementation of economic policies supporting businesses • Use cluster development to encourage value-add upgrading within existing clusters – Promote spillovers and synergies to upgrade local economies • Apply a cluster based approach to economic diversification • Leverage clusters to attract FDI and facilitate integration with the global economy • Use cluster initiatives to engage the private sector in more effective collaboration with government at the national and regional levels – Cluster development is an effective approach to promote private sector-led growth – Create Institutions for Collaboration (e.g., trade associations) to organize cluster participants 20091130 – Peru.ppt 44 Copyright 2009 © Professor Michael E. Porter
  • 45.
    Geographic Influences onCompetitiveness Nation Nation Regions and Cities Regions and Cities 20091130 – Peru.ppt 45 Copyright 2009 © Professor Michael E. Porter
  • 46.
    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 • Region’s specialize in different sets of clusters 20091130 – Peru.ppt 46 Copyright 2009 © Professor Michael E. Porter
  • 47.
    Specialization by Cluster,Turkish Regions 2007 Istanbul Istanbul Textiles Textiles Leather and Apparel Bati Marmara Bati Marmara Bati Karadeniz Bati Karadeniz Orta Anadolu Orta Anadolu Dogu Karadeniz Dogu Karadeniz Leather and Apparel Distribution Services Apparel Apparel Tobacco Tobacco Furniture Furniture Food Processing Food Processing Distribution Services Jewelry Textiles Textiles Apparel Apparel Textiles Textiles Distribution Services Distribution Services Jewelry Chemicals Chemicals Metal Mining and Manufacturing Metal Mining and Manufacturing Agricultural Products Agricultural Products Furniture Furniture Construction Materials Construction Materials Forest Products Forest Products Metal Mining and Manufacturing Metal Mining and Manufacturing Forest Products Forest Products Dogu Marmara Dogu Marmara Textiles Kuzeydogu Anadolu Kuzeydogu Anadolu Textiles Agricultural Products Automotive Automotive Agricultural Products Apparel Footwear Footwear Apparel Distribution Services Furniture Furniture Distribution Services Hospitality and Tourism Hospitality and Tourism Guneydogu Anadolu Guneydogu Anadolu Ege Ege Textiles Textiles Tobacco Tobacco Tobacco Tobacco Textiles Textiles Oil and Gas Oil and Gas Construction Materials Construction Materials Food Processing Food Processing Apparel Apparel Bati Anadolu Bati Anadolu Furniture Furniture Ortadogu Anadolu Akdenziz Akdenziz Ortadogu Anadolu Construction Materials Construction Materials Textiles Textiles Textiles Textiles Distribution Services Distribution Services Agricultural Products Hospitality and Tourism Hospitality and Tourism Agricultural Products Aerospace Aerospace Apparel Apparel Apparel Apparel Distribution Services Distribution Services Distribution Services Distribution Services Note: Source: European Cluster Observatory, 2009 20091130 – Peru.ppt 47 Copyright 2009 © Professor Michael E. Porter
  • 48.
    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 • Region’s specialize in different sets of clusters • Cluster strength directly impacts regional performance • Each region requires its own distinctive competitiveness agenda • Improving competitiveness requires effective policy collaboration between regions and the national government • Decentralization of economic policy is especially important in larger countries to foster regional specialization, internal competition, and greater government accountability 20091130 – Peru.ppt 48 Copyright 2009 © Professor Michael E. Porter
  • 49.
    Competitiveness of Peru’sRegions • Strong disparities exist across Peruvian regions in business environment, innovative capacity, and economic performance 20091130 – Peru.ppt 49 Copyright 2009 © Professor Michael E. Porter
  • 50.
    Prosperity Performance Peru’s Regions GDP per Capita, 2008 (1994 New Peruvian Soles) 16,000 Peru’s Weighted Moquegua Average: 6.0% 14,000 12,000 Lima 10,000 Areguipa 8,000 Tacna Peru’s Weighted Ica Average: 6,513 Pasco 6,000 Madre de Dios Ancash La Libertad Junin Lambayeque Ucayali Piura 4,000 Loreto Tumbes Cusco Cajamarca Amazonas Huancavelica Puno San Martin Ayachucho Huanuco 2,000 Apurimac 0 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% Growth in GDP per Capital (CAGR), 2001 to 2008 Source: Fuente: Instituto Nacional de Estadistica e Informatica - Dirección Nacional de Cuentas Nacionales 20091130 – Peru.ppt 50 Copyright 2009 © Professor Michael E. Porter
  • 51.
    Competitiveness of Peru’sRegions • Strong disparities exist across Peruvian regions in business environment, innovative capacity, and economic performance • Decentralization remains incomplete and has produced some social tension and unrest • There is weak planning, design, and implementation capacity at the local level • Sub-national governments are highly dependent on transfers from the central government 20091130 – Peru.ppt 51 Copyright 2009 © Professor Michael E. Porter
  • 52.
    Peru’s Regions Action Priorities • Continue decentralization of responsibilities and resources to sub-national governments • Improve the capacity of local governments to plan, design and implement development polices • Improve national-regional collaboration to implement regional programs • Adopt specific steps to reduce corruption at the regional level • Improve physical connections among regions to support economic and social integration • Promote greater linkages between resource clusters and regional economies • Address the underlying causes of inequality between the highland, coastal and Amazon regions – Strengthen human development in the poorer highland regions 20091130 – Peru.ppt 52 Copyright 2009 © Professor Michael E. Porter
  • 53.
    Geographic Influences onCompetitiveness Neighboring Countries Neighboring Countries Nation Nation Regions and Cities Regions and Cities 20091130 – Peru.ppt 53 Copyright 2009 © Professor Michael E. Porter
  • 54.
    Economic Coordination withNeighboring Countries 20091130 – Peru.ppt 54 Copyright 2009 © Professor Michael E. Porter
  • 55.
    Competitiveness and theNeighborhood • Opening trade and investment among neighbors fuels growth and specialization – A country’s neighbors are its most natural trading and investment partners – The most natural path for internationalization by local firms is the neighborhood – Open trade and investment make each country a more attractive location for foreign investment • Economic coordination with neighbors drives improvements in the business environment – Capturing synergies in policy and infrastructure – Gaining greater clout in international negotiations • External agreements help overcome domestic political barriers to reform 20091130 – Peru.ppt 55 Copyright 2009 © Professor Michael E. Porter
  • 56.
    Economic Integration AmongNeighbors Capturing Synergies Context for Context for Related and Related and Factor Factor Demand Demand Macroeconomic Macroeconomic Strategy Strategy Supporting Supporting Conditions Conditions Conditions Conditions Competitiveness Competitiveness and Rivalry and Rivalry Industries Industries • Improving the • Eliminating • Opening • Facilitating cross- • Coordinating efficiency of the trade and government border cluster macroeconomic regional investment procurement development policies transportation barriers within within the region – e.g., Supplier • Coordinating network the region Harmonizing networks programs to environmental • Creating an efficient • Simplifying and improve security standards – Transport & energy network harmonizing and public safety Logistics cross-border • Harmonizing • Enhancing regional regulations and product safety – Quality communications paperwork standards standards and connectivity • Coordinating • Establishing • Harmonizing anti-monopoly reciprocal administrative and fair consumer requirements for competition protection laws businesses policies • Linking financial markets • Facilitating the movement of students for higher education 20091130 – Peru.ppt 56 Copyright 2009 © Professor Michael E. Porter
  • 57.
    Peru and theNeighborhood Assessment • Peru remains a relatively isolated country for geographic reasons • Peru has weak relations with some of its neighbors • Peru has taken some positive steps to improve relations with some neighbors • Peru’s recent trade liberalization program, including with the U.S. and China, has created significant opportunities for new economic linkages with neighbors Action Agenda • Economic coordination with neighboring countries is an important tool in economic development • Peru can take a proactive leadership role in promoting trade liberalization efforts with particular neighbors and the region • Peru can be a platform for South American firms seeking to access the U.S. and Asian markets • Leverage inbound and outbound FDI with neighbors to upgrade local competitiveness 20091130 – Peru.ppt 57 Copyright 2009 © Professor Michael E. Porter
  • 58.
    The Need foran Economic Strategy Policy Economic Improvement Strategy • Implementing best • A prioritized agenda to practices in each policy create a unique area competitive position for a country or region • There are a huge number of policy areas that matter • No country can or should try to make progress in all areas simultaneously 20091130 – Peru.ppt 58 Copyright 2009 © Professor Michael E. Porter
  • 59.
    The Need foran Economic Strategy National Value Proposition National Value Proposition • What are the distinctive competitive assets of the nation’s economy given its location, legacy, rate of progress, existing strengths, and potential strengths? – What unique value as a business location? – In what types of fields / clusters? – What roles with neighbors, the broader region, and the wider world? Refining Unique Strengths Refining Unique Strengths Addressing Crucial Constraints Addressing Crucial Constraints • What elements of the business • What are the crucial weaknesses and environment and institutional context constraints that must be addressed to can be unique strengths relative to achieve parity with peer countries and peers/neighbors? allow the country to move to the next • What existing and emerging clusters level? can be developed? • Priorities and sequencing are a necessity in economic development 20091130 – Peru.ppt 59 Copyright 2009 © Professor Michael E. Porter
  • 60.
    Toward a PeruvianEconomic Strategy Unique Strengths Implications Upgrade Ground, Air and Port • Abundant natural Transportation Infrastructure to Connect endowments Peruvian Regions with Neighbors and • Vast biodiversity and the World ecosystems • Central location in South Foster Cluster Development Around America Resource Strengths • Young, hard working population Reduce and Eliminate Corruption • Rich culture and history • Legacy of domestic Create New, More Stable Effective Political Institutions collaboration to overcome obstacles Implement Next Stage Regulatory • Open to FDI and capital Reforms to Improve the Business flows Environment • Privileged access to major foreign markets (United Improve the Quality of Education and States, China, etc.) Workforce Training • Upgrade Peru’s competitive assets to achieve high rates of sustainable 20091130 – Peru.ppt economic growth while improving welfare of the poor 60 Copyright 2009 © Professor Michael E. Porter
  • 61.
    Accelerating Poverty Reductionin Peru Increase Reduce Poverty Competitiveness 20091130 – Peru.ppt 61 Copyright 2009 © Professor Michael E. Porter
  • 62.
    The Process ofEconomic Development Shifting Roles and Responsibilities Old Model Old Model New Model New Model •• The central government drives The central government drives •• Economic development is a Economic development is a economic development through economic development through collaborative process involving collaborative process involving policy decisions, spending and policy decisions, spending and government at multiple levels, government at multiple levels, incentives incentives companies, educational and companies, educational and research institutions, and private research institutions, and private sector organizations sector organizations • Competitiveness must be a bottom-up process in which many individuals, companies, and institutions take responsibility and act 20091130 – Peru.ppt 62 Copyright 2009 © Professor Michael E. Porter
  • 63.
    Organizing for Competitivenessin Peru Assessment • Peru has weak coordination among government ministries and agencies responsible for improving competitiveness – Across different ministries to align policies – Across geographic levels of government • The National Council on Competitiveness was created in 2002, a positive step, but it has had limited impact • There are few competitiveness initiatives at the regional level to mobilize strategic thinking and drive action • The private sector has limited engagement in competitiveness development 20091130 – Peru.ppt 63 Copyright 2009 © Professor Michael E. Porter
  • 64.
    Revitalizing Peru’s Organizationto Drive Competitiveness Action Agenda • Create an effective coordination structure within government across ministries and agencies • Restart the National Council on Competitiveness to build consensus on an overall economic strategy and track implementation – The council will require strong private sector leadership • Create Regional Competitiveness Councils to drive consensus on state plans and monitor implementation – Involve representatives from the private, public and academic sectors as well as federal government participation • The private sector must assume a catalytic role in economic strategy formulation and implementation 20091130 – Peru.ppt 64 Copyright 2009 © Professor Michael E. Porter
  • 65.
    Integrating Business andthe Society Economic Social Objectives Objectives • There is an inevitable link between business and society • A healthy business depends on a healthy community to create demand for its products and provide a supportive business environment • A healthy society depends on competitive companies that can create jobs, support high wages, build wealth, buy local goods, and pay taxes • There is a long-term synergy between economic and social objectives 20091130 – Peru.ppt 65 Copyright 2009 © Professor Michael E. Porter
  • 66.
    Competitiveness and SocialIssues Worker Education and Poverty in Skills the Company’s Worker Safety Communities Environmental Company Gender Equity Impact Productivity Employee Energy Use Health Water Use 20091130 – Peru.ppt 66 Copyright 2009 © Professor Michael E. Porter
  • 67.
    Corporate Role inCompetitiveness The Concept of Shared Value Shared Value: Policies and practices that enhance the competitiveness of a company while simultaneously advancing economic and social conditions in the communities in which it operates • Find the points of convergence between economic and social objectives, not assumed tradeoffs or the need for redistribution – These points of convergence are growing • Achieving shared value requires new thinking, new technologies, and new approaches to management • Shared value opportunities are even greater in developing countries • Shared value thinking applies equally to NGOs and governments 20091130 – Peru.ppt 67 Copyright 2009 © Professor Michael E. Porter
  • 68.
    Corporate Role inCompetitiveness Action Agenda • Organize the private sector to have a collective voice in competitiveness • Participate actively in national and regional competitiveness initiatives • Inform government on business needs and constraints bearing on company and cluster development • Nurture local suppliers and attract foreign suppliers • Work closely with local educational and research institutions to improve their quality and create specialized programs addressing the cluster’s needs • Collaborate with other companies to enhance competitiveness through trade associations and other mechanisms • Focus corporate social responsibility initiatives on enhancing the business environment 20091130 – Peru.ppt 68 Copyright 2009 © Professor Michael E. Porter