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Session 4:
The Diamond Model in Developing / Transition Economies
Prosperity Performance
PPP-adjusted GDP per Capita, 2006
Estonia
Saudi Arabia
Libya
Latvia
$3,000 0.0%
Chile Croatia Panama Russia Malaysia Mexico Costa Rica Romania Thailand Brazil Turkey Dominican Republic Tunisia Colombia Belize Ukraine Venezuela Peru Guatemala Philippines Morocco Egypt Indonesia Ecuador Sri Lanka India Syria El Salvador Vietnam South Africa
China
Cambodia
1.5%
3.0%
4.5%
7.5%
8.5%
Income Inequality
Gini Index
Selected Countries
60
50
40
30
20
10
0
a Br az il C h C os ile ta R ica C hi na Tu U n r R us ited key si St an Fe ate de s ra tio n G ha na La tv Vi ia et na m Li U th ni ua te ni d a Ki ng do m Es to ni a Sp ai n Po la nd Ire la nd R wa nd G er a m an Fi y nl an d C ze Nor wa ch Re y pu b Sw lic ed en
3
Copyright 2006 Professor Michael E. Porter
Note: Most recent Gini index data available for each country (1999 2003). Czech Republic data is from 1996. Source: World Bank, World Development Indicators, 2007.
MOC Session 1 - 2007
ol o
m bi
0.6
0.5
0.4
0.3
0.2
0.1
0
C TH HIN AI A LA N N D O R W A VI ET Y NA JA M C P ZE IR AN C H E LA N U RE D NI P TE UB D L ST IC A S W TE S ED ES EN TO N KO I A G RE ER A M AN LA Y U TV NI R IA TE D US KI S I A N G D FI OM N LA N G D H C A O ST NA A M RIC AL A AY LI TH SIA UA NI C A HI L BR E AZ IL IN PO DIA LA N TU D R KE Y
Note: Use most recent year available, either 2005 or 2006 Source: The Conference Board and Groningen Growth and Development Centre, Total Economy Database, November 2007
MOC Session 1 - 2007
100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 -1.0%
Mexico Brazil Saudi Arabia Norway Austria France Italy Israel Australia Canada Spain Germany USA Ireland Netherlands Belgium Greece Finland UK Taiwan Denmark Sweden Japan Slovenia
Estonia
Iran
Tunisia
Lithuania Turkey
Latvia (8.2%)
Egypt
Bangladesh
3.0% 4.0%
0.0%
1.0%
2.0%
5.0%
6.0%
7.0%
Compound annual growth rate (CAGR) of real GDP per employee (PPPadjusted), 2001-2006
Source: EIU (2007), Saudi Arabia employee data (number persons employed) from ILO LABORSTA (2007)
Competitiveness Master = 2007-11-14.ppt
Communications Equipment
Construction Services Processed Foods Construction Materials Apparel 0.10% Agricultural Products Automotive Chemical Products Entertainment Biopharmaceuticals 0% Textiles Plastics Footwear
Business Services Lighting and Electrical Equipment Heavy Machinery Communication Services Metal Mining and Manufacturing
-0.06%
-0.03%
0.00%
0.03%
0.06%
0.09%
0.12%
0.15%
0.18%
0.07%
Chiles Average World 0.05% Export Share: 0.49% 0.04% 0.03% 0.10% 0.02% 0% Jewelry, Precious Metals and Collectibles Motor Driven Products Processed Foods Hospitality and Tourism Business Services Chemical Products Building Fixtures and Equipment Heavy Machinery Prefabricated Enclosures and Structures Plastics Construction Materials Tobacco Oil and Gas Communications Equipment Change In Chiles Overall World Export Share: 0.15%
Automotive Publishing and Printing Financial Services Communication Services (-0.41%) Textiles Biopharmaceuticals
-0.25%
-0.20%
-0.15%
-0.10%
-0.05%
0.00%
0.05%
0.10%
0.15%
0.20%
0.25%
0.30%
Innovative Capacity
Innovation Output of Selected Countries
Average U.S. patents per 1 million population, 2002-2006
3.5
Hungary (5.2)
Belgium
3.0
2.5
2.0
Greece
1.5
Argentina Russia Latvia Chile
Brazil
1.0
Mexico Slovakia
Lithuania
0.5
Romania Philippines
0.0 -20%
-10%
0%
10%
8
20%
30%
40%
50%
45 patents =
Copyright 2007 Professor Michael E. Porter
Determinants of Competitiveness
Macroeconomic, Political, Legal, and Social Context Macroeconomic, Political, Legal, and Social Context
A sound macroeconomic, political, legal, and social context creates the potential for competitiveness, but is not sufficient Competitiveness ultimately depends on improving the microeconomic capability of the economy and the sophistication of local competition
20080204 MOC Session 3
The Diamond
Context for Context for Firm Firm Strategy Strategy and Rivalry and Rivalry
10
Governance Indicators
Selected Countries
Best country in the world
Voice and Accountability Political Stability/No Violence Government Effectiveness Regulatory Quality Rule of Law Control of Corruption
FI N
20080204 MOC Session 3
Note: Sorted left to right by decreasing average value across all indicators. The zero horizontal line corresponds to the median countrys average value across all indicators. Source: World Bank (2007)
SI N
LA N
Sophistication of local customers and needs Strict quality, safety, and environmental standards
Availability of suppliers and supporting industries Presence of clusters instead of isolated firms
Successful economic development is a process of successive upgrading, in which the business environment improves to enable increasingly sophisticated ways of competing
MOC Session 1 - 2007
12
2
Factor Factor (Input) (Input) Conditions Conditions Demand Demand Conditions Conditions
1
Related and Related and Supporting Supporting Industries Industries
3
MOC Session 1 - 2007
13
Source: Porter, Michael E., The Competitive Advantage of Nations, The Free Press, 1990
Cost of Inputs
Macro, political, and legal stability Efficient basic infrastructure Lowering the regulatory costs of doing business
Productivity
Local competition Market openness Advanced infrastructure Incentives and rules encouraging productivity Cluster formation and activation
Unique Value
Advanced skills Scientific and technological institutions Incentives and rules encouraging innovation Cluster upgrading
Source: Porter, Michael E., The Competitive Advantage of Nations, Macmillan Press, 1990
MOC Session 1 - 2007
16
High reliance on the availability of low wage, unskilled labor and natural resources
Inefficient public administration and regulatory processes which are subject to corruption
Underdeveloped infrastructure, capital markets, and educational system Most technology is externally supplied and controlled
Low productivity
17
Context for Context for Firm Strategy Firm Strategy and Rivalry and Rivalry
Begin an irreversible process of opening the economy to foreign competition, including FDI Create and implement an effective competition policy Develop an effective legal structure and enforcement mechanisms for intellectual property Reduce investment hurdle rates and lengthen time horizons Move beyond price cutting and product imitation to encompass availability and differentiation E. Porter Copyright 2006 Professor Michael
MOC Session 1 - 2007
18
Demand Demand Conditions Conditions Typical Starting Point for Developing Countries
Product and service designs are imitated or licensed from abroad Lax product, health, safety and environmental standards Large home demand, where it is present, distracts attention from developing internationally competitive products
Raise product, safety, health, and environmental standards towards international levels Use government procurement to stimulate the supply of higher quality products Facilitate exports to neighboring countries or other countries where needs are similar Support cluster formation in areas where local demand is relatively advanced due to history, customs, culture, or geography Set policies that foster early demand for more advanced products and services
19
Typical Starting Point for Developing Countries Isolated exporting firms and industries Local suppliers are scarce and uncompetitive Most sophisticated machinery, components, and more advanced equipment and services must be imported Clusters are shallow or non-existent
Unproductive local suppliers create disadvantages for downstream industries
Successful Economic Development Open market access to foreign suppliers of sophisticated components, machinery, and services Seek FDI that attracts world class suppliers to support and deepen emerging local clusters Establish programs to support improvements in the local supplier base
Inefficient vertical integration reflects the lack of local suppliers and barriers to imported inputs
Early export successes often occur in industries with weak inter-industry linkages
20
Copyright 2006 Professor Michael E. Porter
Note: Rank versus 74 countries; overall, Estonia ranks 30th in 2006 PPP adjusted GDP per capita and 25h in Business Competitiveness. Source: Institute for Strategy and Competitiveness, Harvard University (2007)
Competitiveness Master = 2007-11-14.ppt
21
Competitive Advantages Relative to GDP per Capita Laws relating to ICT Decentralization of economic policymaking Ease of access to loans Quality of primary education Quality of math and science education Cooperation in labor-employer relations Venture capital availability Quality of port infrastructure Efficiency of legal framework Quality of telephone/fax infrastructure Judicial independence Low business costs of corruption Local equity market access Quality of scientific research institutions Financial market sophistication Overall infrastructure quality
Availability of scientists and engineers Air transport infrastructure quality Reliability of police services Railroad infrastructure Quality of electricity supply Quality of management schools University/industry research collaboration
49 40 33 32 31 31 29
Note: Rank versus 74 countries; overall, Estonia ranks 30th in 2006 PPP adjusted GDP per capita and 25h in Business Competitiveness. Source: Institute for Strategy and Competitiveness, Harvard University (2007)
Competitiveness Master = 2007-11-14.ppt
22
Demand Conditions
Estonias Relative Position 2007
Competitive Advantages Relative to GDP per Capita Government procurement of advanced technology products Stringency of environmental regulations 18 27
Competitive Disadvantages Relative to GDP per Capita Buyer sophistication Presence of demanding regulatory standards 38 31
Note: Rank versus 74 countries; overall, Estonia ranks 30th in 2006 PPP adjusted GDP per capita and 25h in Business Competitiveness. Source: Institute for Strategy and Competitiveness, Harvard University (2007)
Competitiveness Master = 2007-11-14.ppt
23
Competitive Advantages Relative to GDP per Capita Local availability of specialized research and training services
Note: Rank versus 74 countries; overall, Estonia ranks 30th in 2006 PPP adjusted GDP per capita and 25h in Business Competitiveness. Source: Institute for Strategy and Competitiveness, Harvard University (2007)
Competitiveness Master = 2007-11-14.ppt
24
Context for Firm Context for Firm Strategy Strategy and Rivalry and Rivalry
Competitive Advantages Relative to GDP per Capita Absence of trade barriers Intensity of local competition Intellectual property protection
Note: Rank versus 74 countries; overall, Estonia ranks 30th in 2006 PPP adjusted GDP per capita and 25h in Business Competitiveness. Source: Institute for Strategy and Competitiveness, Harvard University (2007)
Competitiveness Master = 2007-11-14.ppt
25
Estonia, 2007
Favorable
Median Ranking, Eastern and Central Europe
Unfavorable
20 0
Doing Business Trading Across Borders Dealing with Licenses Starting a Registering Enforcing Business Property Contracts Paying Taxes Protecting Investors Getting Credit Closing a Employing Business Workers
26
Diamond improvements should be sequenced to address the binding constraints to productivity at each income level
27
Copyright 2006 Professor Michael E. Porter