09.11.30 Presentacion Porter Delfines

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 Porters 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 meanselectronic, mechanical, photocopying, recording, or otherwisewithout 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
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20091130 Peru.ppt
Copyright 2009 Professor Michael E. Porter
Prosperity Performance
PPP-adjusted GDP per Capita, 2008 ($USD) $30,000
Selected Lower and Middle Income Countries

UAE Greece ($30,650) Israel Slovenia
New Zealand
$25,000
Bahrain
South Korea Cyprus Oman Saudi Arabia Portugal Hungary
Czech Republic
Latin American countries Other countries Slovakia
Estonia
$20,000
Libya
Trinidad & Tobago Poland Croatia Panama
Lithuania Latvia Russia Argentina Venezuela Uruguay
$15,000
Mexico
Chile Malaysia Turkey Costa Rica Brazil Thailand
$10,000
Lebanon Belize
Bulgaria Belarus Romania Kazakhstan South Africa Dominican Republic Iran
Algeria
Ecuador
Colombia
Peru
China Georgia
Tunisia
$5,000
Guyana Egypt Jordan Paraguay El Salvador Bolivia Honduras Philippines Nicaragua Pakistan Guatemala
Bosnia Ukraine Albania Sri Lanka India Vietnam
$0 4% 6% 8% 10% Growth of Real GDP per Capita (PPP-adjusted), CAGR, 2004 to 2008 2 20091130 Peru.ppt Source: EIU (2009), authors calculations 0% 2% 12% 14%
Unemployment Performance
Unemployment Rate, 2008
Selected Countries
Dominican Republic (15.5%) Croatia Algeria Jordan Albania Colombia Turkey South Africa (22.9%) Tunisia
14%
Improving
Deteriorating
Iran Saudi Arabia
12%
10%
Poland (-8.4%) China
8%
6%
4%
Peru Syria Indonesia Egypt Brazil Argentina Uruguay Slovakia Hungary Chile Portugal Bolivia Greece Venezuela Ecuador Philippines Pakistan India Kazakhstan Slovenia Russia El Salvador Bulgaria Lithuania Ireland Israel T&T Estonia Panama Nicaragua Czech Rep. Paraguay Latvia Sri Lanka Costa Rica Vietnam Romania Mexico Cyprus Honduras Malaysia Korea Ukraine
Latin American countries Other countries Thailand
2%
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
Poverty Rates
% of Population Under the Poverty Line
Peru, 2001 to 2007
60%
50%
40%
30%
20%
10%
0% 1997
20091130 Peru.ppt
1998
1999
2000
2001
2002
4
2003
2004
2005
2006
2007
Source: Informacion Socio Demografica, from El Instituto Nacional de Estadistica e Informatica (INEI), 2009
Export Performance
Exports of Goods and Services (% of GDP), 2008
100% 90% 80% 70% 60%
Cambodia Latin American Countries Other countries Ireland Estonia Belarus Malta Czech Republic Thailand Panama Malaysia (103.5%) Slovakia Libya Hungary Vietnam Saudi Arabia Paraguay Lithuania Tunisia Algeria Chile Macedonia Egypt
Selected Countries
Slovenia Trinidad & Tobago Bulgaria Belize
50% 40% 30% 20% 10% 0% -15%
Honduras Ukraine (-17.5%) Philippines
Jordan Kazakhstan Cyprus Croatia Costa Rica Latvia Poland Israel

Uruguay Venezuela Russia
Syria Romania Indonesia Sri Lanka El Salvador Iran Greece Argentina Guatemala Albania Colombia Turkey Brazil Pakistan Ethiopia
Bolivia China Morocco South Africa Ecuador Portugal Nicaragua Georgia Mexico Lebanon Peru India
-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
Perus Exports By Type of Industry

World Export Market Share (current USD)
0.80% 0.70% 0.60% 0.50% 0.40% 0.30% 0.20% 0.10% 0.00% 1997
20091130 Peru.ppt
Processed Goods Semi-processed Goods Unprocessed Goods Services TOTAL
1998
1999
2000
2001
6
2002
2003
2004
2005
2006
2007
Source: UNComTrade, WTO (2009)

Inbound Foreign Investment Performance

Stocks and Flows, Selected Countries
Inward FDI Stocks as % of GDP, Average 2003 - 2007
80%
Latin American countries Other countries Tunisia Hungary Trinidad & Tobago
Estonia Jordan (46.5%, 81.8%) Lebanon (6.7%) Panama (48.2%) Cyprus Bulgaria (69%)
70%
Chile
60%
Vietnam Czech Republic Nicaragua Slovakia Croatia Kazakhstan Belize
50%
Bolivia
40%
Venezuela South Africa Slovenia
Portugal Morocco
Cambodia Macedonia
Georgia
30%
Malaysia Thailand Honduras Latvia Egypt Poland Israel Lithuania Argentina Colombia Romania Mexico Ecuador Costa Rica El Salvador Brazil Russia
Bosnia
20%
Peru
10%
Ukraine Guatemala Paraguay Dominican Republic Turkey Malaysia Saudi Arabia China Pakistan Indonesia Sri Lanka Libya India Iran
UAE
Uruguay
0% 0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
FDI Inflows as % of Gross Fixed Capital Formation, Average 2003 - 2007

20091130 UNCTAD, Peru.ppt Source: World Investment Report (2009)
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
Argentina
Chile Romania Brazil Thailand
Saudi Arabia Poland Bulgaria
Venezuela
Mexico
0.5
Peru
Philippines Ecuador Ukraine
India
China
Colombia
Turkey
0.0 -30%
20091130 Peru.ppt
-20%
-10%
0%
10%
8
20%
30%
40%
CAGR of US-registered patents, 2004 2008

Source: USPTO (2009), EIU (2009)
50% 60% 120 patents =

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
Perus 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 countrys unique competitive advantages
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20091130 Peru.ppt
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
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Comparative Labor Productivity

Real GDP per employee (PPP adjusted US$), 2008
Selected Countries
Austria Australia Kuwait Greece Saudi Arabia Germany Switzerland Japan Spain Singapore Oman Israel Malta Slovenia Korea Hungary Czech Republic Slovakia
$70,000
$60,000
$50,000
UAE
New Zealand Cyprus Croatia Portugal Lithuania
$40,000
$30,000
$20,000
$10,000
Estonia Poland Turkey Malaysia Mexico Latvia Chile Russia Argentina Macedonia Romania Iran Belarus South Africa Bulgaria Azerbaijan Albania Kazakhstan Peru Brazil Peru (Avg. growth 2001to 2008) Egypt Armenia Ukraine Jordan Thailand Georgia Serbia Syria Indonesia Philippines India Pakistan Vietnam Cambodia
Bosnia China
$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)
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Determinants of Competitiveness
Microeconomic Competitiveness
Quality of the National Business Environment State of Cluster Development Sophistication of Company Operations and Strategy
Macroeconomic Competitiveness
Social Infrastructure and Political Institutions Macroeconomic Policies
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
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Macroeconomic Policy
Natural Endowments
Fiscal policy: public spending aligned with revenues over time Monetary policy: low levels of inflation Macroeconomic management: avoiding structural imbalances and cyclical overheating
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Microeconomic Competitiveness Social Infrastructure and Political Institutions

Human Development: basic education and health care Rule of Law: property rights and due process Political Institutions: stable and effective political and governmental processes and organizations
Natural Endowments
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Sophistication of Company Operations and Strategy
Natural Endowments
The internal company skills, capabilities, and management practices needed to attain the highest level of productivity and innovation possible
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Quality of the National Business Environment
The external business environment conditions that allow companies to reach high levels of productivity and innovation
Natural Endowments
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Macroeconomic Competitiveness State of Cluster Development

A critical mass of firms in particular fields, together with specialized skills, infrastructure, and supporting institutions, to support high productivity through efficiencies and synergies
20091130 Peru.ppt
Natural Endowments
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Competitiveness and Poverty Reduction
Economic Development
Social Development
There is a strong connection between economic and social development Improving competitiveness and decreasing poverty requires improving the economic and social context simultaneously
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Perus Competitiveness Profile, 2009

ISC Country Competitiveness Model
Macroeconomic Competitiveness (82)

Social Infrastructure and Pol. Institutions (90)
Microeconomic Competitiveness (73)
Macroeconomic Policy (69)
Business Environment Quality (74)
Company Sophistication (70)
Perus 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
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Perus Macroeconomic Competitiveness

Conservative fiscal policy
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Government Budget Balances

Selected Countries
Budget Balance (% of GDP) Ranked by Surplus, 2008
10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% 1996

Source: EIU, 2009
20091130 Peru.ppt
Chile Peru Argentina Colombia Mexico Brazil
1998
2000
2002
2004
2006
2008
21

Conservative fiscal policy Sound macroeconomic management Stabilization fund
However
Perus macroeconomic position remains overly dependent on commodities and commodity prices
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Social Infrastructure and Political Institutions

Continued problems with corruption
However
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Corruption Perception Index, 2007

1
Worsening Low corruption
New Zealand Sweden Switzerland Improving Norway Netherlands UK Hong Kong Austria Germany Japan Ireland United States France Chile Spain Belgium Uruguay Slovenia Portugal Estonia Taiwan Botswana Czech Republic Hungary South Africa Italy Malaysia South Korea Costa Rica Lithuania Slovakia Latvia Jordan Mauritius Greece Poland Croatia Turkey El Salvador Colombia Romania Ghana Senegal Brazil Mexico India China Singapore Argentina Moldova Honduras Cote dIvoire Thailand Dominican Republic Guatemala Vietnam Russia Ecuador Nicaragua Cameroon Pakistan Indonesia Nigeria Kenya Bangladesh Ukraine Tanzania Bolivia Uganda Finland Iceland Canada
Israel
Rank in Global Corruption Index, 2007
Namibia
Tunisia
Peru
Panama Egypt Malawi
High corruption
Philippines Kazakhstan Zimbabwe
91 Uzbekistan
Venezuela
-20
-15
-10
-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
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Social Infrastructure and Political Institutions

Continued problems with corruption Sharp inequality between indigenous groups and other citizens Weak education system Inadequate health care system, despite some improvements Weak legal system and effectiveness of property rights
However
Unstable political processes and institutions Government institutions are inefficient and held in low esteem by the public
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Action Priorities Macroeconomic Policy Maintain macroeconomic stability Broaden the tax base and improve collections Social Infrastructure and Political Institutions Modernize political and governmental institutions to improve policy formulation and execution 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

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Microeconomic Competitiveness: Quality of the Business Environment

Context Contextfor for Firm Firm Strategy Strategy and andRivalry Rivalry
Open and vigorous local competition

Openness to foreign competition Competition laws
Factor Factor (Input) (Input) Conditions Conditions

Efficient access to high quality business inputs

Local rules and incentives that encourage investment and productivity
Demand Demand Conditions Conditions
Human resources Capital availability Physical infrastructure Supporting Supporting Administrative infrastructure (e.g. Industries registration, permitting, transparency) Industries Scientific and technological infrastructure Availability of suppliers, related industries, Efficient utilization of natural and supporting institutions endowments
e.g. incentives for capital investment, intellectual property Demanding and sophisticated local protection, corporate governance customers and needs standards e.g., Strict quality, safety, and environmental standards Related and Related and Consumer protection laws
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
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Perus Business Environment

Overall Strengths and Weaknesses
STRENGTHS
Trade and Investment Liberalization Openness to foreign investment Low restrictions on capital flows Simplification of custom procedures Low trade barriers Improvements in investor protections Improving Financial Markets Soundness of banks Improving financial market IT Infrastructure Good quality of telecom infrastructure Sound IT policies Other Good management training Improving sophistication of local buyers Efforts to strengthen competition policy
WEAKNESSES
Physical Infrastructure Low quality of air, transport and port infrastructure Inadequate electricity supply Workforce Development and Training Poor quality of the higher education system Low skill level of the labor force Limited availability of scientists and engineers Competitive Context Low intensity of local competition Difficulty in business formation Burdensome government regulations Rigidity of employment Weak intellectual property protection High informality in the economy Innovation Infrastructure Limited technological capacity Weak university-industry research collaboration Low patenting rates
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20091130 Peru.ppt
Ease of Doing Business

Ranking, 2009 (of 183 countries)
Peru, 2009
Favorable Unfavorable
120
100
80
Perus per capita GDP rank: 72
60
40
20
0
Ease of Doing Business Getting Credit Protecting Registering Investors Property Paying Taxes Trading Across Borders Closing a Employing Starting a Business Workers Business Enforcing Contracts Dealing with Licenses
Source: World Bank Report, Doing Business (2009/10)

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Perus 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
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Microeconomic Competitiveness: Cluster Development

Tourism Cluster in Cairns, Australia
Public Public Relations Relations & & Market Market Research Research Services Services
Travel Travel agents agents
Tour Tour operators operators
Local Local retail, retail, health health care, care, and and other other services services Local Local Transportation Transportation
Food Food Suppliers Suppliers Restaurants Restaurants Property Property Services Services Hotels Hotels
Attractions Attractions and and Activities Activities

e.g., e.g., theme theme parks, parks, casinos, casinos, sports sports
Souvenirs, Souvenirs, Duty Duty Free Free Banks, Banks, Foreign Foreign Exchange Exchange
Maintenance Maintenance Services Services
Airlines, Airlines, Cruise Cruise Ships Ships
Government Government agencies agencies

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

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

e.g. e.g. Queensland Queensland Tourism Tourism Industry Council Industry Council
Sources: HBS student team research (2003) - Peter Tynan, Chai McConnell, Alexandra West, Jean Hayden
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Cluster in Developing Countries

Kenyas 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
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The Australian Wine Cluster

History
1930 First oenology course at Roseworthy Agricultural College 1955 1965 Australian Wine Bureau established 1970 Winemaking school at Charles Sturt University founded 1980 Australian Wine and Brandy Corporation established 1990 1991 to 1998 New organizations created for education, research, market information, and export promotions Winemakers Federation of Australia established
Australian Wine Research Institute founded
1950s Import of European winery technology
1960s Recruiting of experienced foreign investors, e.g. Wolf Bass
1970s Continued inflow of foreign capital and management
1980s Creation of large number of new wineries
1990s Surge in exports and international acquisitions
Source: Michael E. Porter and rjan Slvell, The Australian Wine Cluster Supplement, Harvard Business School Case Study, 2002
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Clusters and Economic Diversification

Linkages Across Clusters
Fishing & Fishing Products Agricultural Products Processed Food Hospitality & Tourism Entertainment Textiles Prefabricated Enclosures
Transportation & Logistics
Furniture Building Fixtures, Equipment & Services Lightning & Electrical Equipment Power Generation Heavy Construction Services Forest Products Construction Materials
Jewelry & Precious Metals
Distribution Services Business Services
Aerospace Vehicles & Information Defense Tech. Analytical Instruments Medical Devices
Education & Knowledge Creation Publishing & Printing
Financial Services
Biopharmaceuticals Chemical Products
Communications Equipment
Heavy Machinery Motor Driven Products Production Technology
Tobacco Mining & Metal Automotive Aerospace Manufacturing Engines Sporting & Recreation Goods
Apparel
Oil & Gas Plastics
Footwear
Leather & Related Products
Note: Clusters with overlapping borders or identical shading have at least 20% overlap 34 20091130 Peru.ppt (by number of industries) in both directions.
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 SMEs 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

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Perus Export Portfolio

1997 to 2007
1.4%
Change In Perus Overall World Export Share: +0.07% Jewelry, Precious Metals and Collectibles (0.88%, 1.69%)
1.2%
Metal, Mining and Manufacturing
Perus world export market share, 2007
1.0%
0.8%
0.6%
Agriculture
Fishing
0.4%
Perus Average World Export Share: 0.20%
Apparel Hospitality and Tourism Oil & Gas Publishing and Printing Construction Materials
0.2%
Textiles Financial Services Communication Services
0.0% -0.4%
-0.2%
0.0%
0.2%
0.4%
0.6%
Change in Perus world export market share, 1997 to 2007

Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business School; Database and the IMF BOP statistics. 36 20091130Richard Peru.pptBryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics
Exports of US$2.4 Billion =

Perus Export Portfolio

1997 to 2007
0.20%
Perus world export market share, 2007
0.15%
Oil and Gas Construction Materials Furniture
Textiles
0.10%
Financial Services
Transportation and Logistics 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 Communications Equipment Sport Prefabricated Enclosures and Structures Production Technology
0.00% -0.06%
-0.04%
-0.02%
0.00%
0.02%
0.04%
0.06%
0.08%
0.10%
Change in Perus world export market share, 1997 to 2007


Malaysias Export Portfolio

1997 to 2007
2.5%
Change In Malaysias Overall Entertainment and Reproduction World Export Share: -0.20% Equipment (2.19%, 3.09%) Communications Equipment Furniture Information Technology (6.46%)
Malaysias world export market share, 2007
2.0%
Building Fixtures and Equipment Plastics
Agriculture Construction Services
Lighting and Electrical Equipment
1.5%
Analytical Instruments Malaysias Average World Export Share: 1.24% Oil & Gas
Construction Materials
Motor Driven Products Transportation and Logistics
Processed Foods Publishing and Printing Chemical Products Prefabricated Enclosures and Structures Communication Services Production Technology Medical Devices
1.0%
Apparel Power and Power Generation Equipment Fishing & Fish Products Jewelry, Precious Metals and Collectibles Metal, Mining and Manufacturing
0.5%
Forest Products Business Services (-2.36%) Aerospace Vehicles and Defense Marine Equipment
Textiles Sport
Financial Services Biopharmaceuticals
Heavy Machinery Footwear Hospitality and Tourism Automotive
0.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0%
Change in Malaysias world export market share, 1997 to 2007


Share of World Exports by Cluster

World Market Share 0.2% - 0.5% 0.5% - 1.0% > 1.0%
Fishing & Fishing Products Entertainment Textiles Prefabricated Enclosures
Peru, 2007
Hospitality & Tourism
Processed Food Jewelry & Precious Metals Business Services
Agricultural Products Transportation & Logistics
Furniture Building Fixtures, Equipment & Services Lightning & Electrical Equipment Power Generation Construction Materials Heavy Construction Services Forest Products
Distribution Services
Aerospace Vehicles & Information Defense Tech.
Financial Services
Analytical Education & Instruments Knowledge Medical Creation Devices Communications Publishing Equipment & Printing Biopharmaceuticals Chemical Products Oil & Gas
Motor Driven Products Tobacco
Heavy Machinery
Production Technology Automotive
Apparel Leather & Related Products
Plastics
Aerospace Mining & Metal Engines Manufacturing
Footwear
Sporting & Recreation Goods

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Marine Equipment
Note: Clusters with overlapping borders have at least 20% overlap (by number of industries) in both directions.
20091130 Peru.ppt Copyright 2009 Professor Michael E. Porter
Share of World Exports by Cluster

World Market Share 1.24% - 1.75% 1.75% - 2.25% > 2.25%
Fishing & Fishing Products Entertainment Textiles Prefabricated Enclosures
Malaysia, 2007
Hospitality & Tourism
Processed Food Jewelry & Precious Metals Business Services
Agricultural Products Transportation & Logistics
Furniture Building Fixtures, Equipment & Services Lightning & Electrical Equipment Power Generation Construction Materials Heavy Construction Services Forest Products
Distribution Services
Aerospace Vehicles & Information Defense Tech.
Financial Services
Analytical Education & Instruments Knowledge Medical Creation Devices Communications Publishing Equipment & Printing Biopharmaceuticals Chemical Products Oil & Gas
Motor Driven Products Tobacco
Heavy Machinery
Production Technology Automotive
Apparel Leather & Related Products
Plastics
Aerospace Mining & Metal Engines Manufacturing
Footwear
Sporting & Recreation Goods

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Marine Equipment
Note: Clusters with overlapping borders have at least 20% overlap (by number of industries) in both directions.
20091130 Peru.ppt 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
Perus clusters are based heavily on natural endowments, with limited further upgrading
Perus 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
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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
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Clusters and Economic Diversification

Upgrade UpgradeExisting ExistingExport Export Products and Services Products and Services
Turn TurnProducts ProductsInto IntoClusters Clusters
Local firms MNCs
Deepen DeepenExisting ExistingClusters Clusters
Develop DevelopRelated RelatedClusters Clusters
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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
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Geographic Influences on Competitiveness
Nation Nation
Regions Regions and and Cities Cities
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Regions and Competitiveness

Economic performance varies significantly across sub-national regions (e.g., provinces, states, metropolitan areas) Many essential levers of competitiveness reside at the regional level Regions specialize in different sets of clusters
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Specialization by Cluster, Turkish Regions 2007

Istanbul Istanbul Textiles Textiles Leather Leatherand andApparel Apparel Distribution DistributionServices Services Jewelry Jewelry
Bati BatiMarmara Marmara Apparel Apparel Textiles Textiles Chemicals Chemicals Construction ConstructionMaterials Materials
Bati BatiKaradeniz Karadeniz Tobacco Tobacco Apparel Apparel Metal MetalMining Miningand andManufacturing Manufacturing Forest Products Forest Products
Orta OrtaAnadolu Anadolu Furniture Furniture Textiles Textiles Agricultural AgriculturalProducts Products Metal MetalMining Miningand andManufacturing Manufacturing
Dogu DoguKaradeniz Karadeniz Food FoodProcessing Processing Distribution DistributionServices Services Furniture Furniture Forest ForestProducts Products
Dogu DoguMarmara Marmara Textiles Textiles Automotive Automotive Apparel Apparel Furniture Furniture
Kuzeydogu KuzeydoguAnadolu Anadolu Agricultural AgriculturalProducts Products Footwear Footwear Distribution DistributionServices Services Hospitality Hospitalityand andTourism Tourism
Ege Ege Tobacco Tobacco Textiles Textiles Construction ConstructionMaterials Materials Apparel Apparel
Guneydogu GuneydoguAnadolu Anadolu Textiles Textiles Tobacco Tobacco Oil Oiland andGas Gas Food FoodProcessing Processing Bati BatiAnadolu Anadolu Furniture Furniture Construction ConstructionMaterials Materials Distribution DistributionServices Services Aerospace Aerospace Akdenziz Akdenziz Textiles Textiles Hospitality Hospitalityand andTourism Tourism Apparel Apparel Distribution DistributionServices Services Ortadogu OrtadoguAnadolu Anadolu Textiles Textiles Agricultural AgriculturalProducts Products Apparel Apparel Distribution DistributionServices Services
Note: Source: European Cluster Observatory, 2009

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Regions and Competitiveness

Economic performance varies significantly across sub-national regions (e.g., provinces, states, metropolitan areas) Many essential levers of competitiveness reside at the regional level Regions specialize in different sets of clusters Cluster strength directly impacts regional performance 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
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Competitiveness of Perus Regions

Strong disparities exist across Peruvian regions in business environment, innovative capacity, and economic performance
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Prosperity Performance
Perus Regions
GDP per Capita, 2008 (1994 New Peruvian Soles)
16,000
Moquegua
Perus Weighted Average: 6.0%
14,000 12,000
Lima
10,000
Areguipa
8,000 6,000
Tacna
Perus Weighted Average: 6,513
Ica Pasco Madre de Dios Junin Ancash La Libertad Lambayeque Tumbes
4,000
Huancavelica Cajamarca Huanuco
Ucayali Loreto
Piura
Puno
San Martin Apurimac
Cusco Amazonas Ayachucho
2,000 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 - Direccin Nacional de Cuentas Nacionales
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Competitiveness of Perus 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
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Perus 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
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Geographic Influences on Competitiveness
Neighboring Neighboring Countries Countries
Nation Nation
Regions Regions and and Cities Cities
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Economic Coordination with Neighboring Countries
20091130 Peru.ppt
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Competitiveness and the Neighborhood

Opening trade and investment among neighbors fuels growth and specialization
A countrys 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

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Economic Integration Among Neighbors

Capturing Synergies
Factor Factor Conditions Conditions
Improving the efficiency of the regional transportation network Creating an efficient energy network Enhancing regional communications and connectivity Harmonizing administrative requirements for businesses Linking financial markets Facilitating the movement of students for higher education
Context Contextfor for Strategy Strategy and andRivalry Rivalry

Eliminating trade and investment barriers within the region Simplifying and harmonizing cross-border regulations and paperwork
Coordinating anti-monopoly and fair competition policies
Demand Demand Conditions Conditions

Opening government procurement within the region Harmonizing environmental standards Harmonizing product safety standards Establishing reciprocal consumer protection laws
Related Relatedand and Supporting Supporting Industries Industries

Facilitating crossborder cluster development e.g., Supplier networks Transport & Logistics Quality standards
Macroeconomic Macroeconomic Competitiveness Competitiveness
Coordinating macroeconomic policies Coordinating programs to improve security and public safety
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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 Perus 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
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The Need for an Economic Strategy
Policy Improvement
Economic Strategy
Implementing best practices in each policy area
A prioritized agenda to create a unique 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
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The Need for an Economic Strategy

National NationalValue ValueProposition Proposition
What are the distinctive competitive assets of the nations 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 RefiningUnique UniqueStrengths Strengths

What elements of the business environment and institutional context can be unique strengths relative to peers/neighbors? What existing and emerging clusters can be developed?
Addressing AddressingCrucial CrucialConstraints Constraints

What are the crucial weaknesses and constraints that must be addressed to achieve parity with peer countries and allow the country to move to the next level?
Priorities and sequencing are a necessity in economic development

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Toward a Peruvian Economic Strategy

Unique Strengths
Abundant natural endowments Vast biodiversity and ecosystems Central location in South America Young, hard working population Rich culture and history Legacy of domestic collaboration to overcome obstacles Open to FDI and capital flows Privileged access to major foreign markets (United States, China, etc.)
Implications
Upgrade Ground, Air and Port Transportation Infrastructure to Connect Peruvian Regions with Neighbors and the World Foster Cluster Development Around Resource Strengths Reduce and Eliminate Corruption Create New, More Stable Effective Political Institutions Implement Next Stage Regulatory Reforms to Improve the Business Environment Improve the Quality of Education and Workforce Training
20091130 Peru.ppt
Upgrade Perus competitive assets to achieve high rates of sustainable economic growth while improving welfare of the poor 60
Accelerating Poverty Reduction in Peru
Reduce Poverty
Increase Competitiveness
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The Process of Economic Development

Shifting Roles and Responsibilities
Old Old Model Model
New New Model Model
The The central central government government drives drives economic economic development development through through policy policy decisions, decisions, spending spending and and incentives incentives
Economic Economic development development is is a a collaborative collaborative process process involving involving government government at at multiple multiple levels, levels, companies, companies, educational educational and and research research institutions, institutions, and and private private sector sector organizations organizations
Competitiveness must be a bottom-up process in which many individuals, companies, and institutions take responsibility and act
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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
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Revitalizing Perus 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
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Integrating Business and the Society
Economic Objectives
Social 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
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Competitiveness and Social Issues

Worker Education and Skills Worker Safety
Poverty in the Companys Communities
Environmental Impact
Company Productivity
Gender Equity
Energy Use
Employee Health Water Use
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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
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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 clusters needs Collaborate with other companies to enhance competitiveness through trade associations and other mechanisms Focus corporate social responsibility initiatives on enhancing the business environment
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Competitiveness: A New Economic Strategy for Peru

Copyright 2009 Professor Michael E. Porter

Selected Lower and Middle Income Countries

South Korea Cyprus Oman Saudi Arabia Portugal Hungary

Latin American countries Other countries Slovakia

Trinidad & Tobago Poland Croatia Panama

Lithuania Latvia Russia Argentina Venezuela Uruguay

Chile Malaysia Turkey Costa Rica Brazil Thailand

Bulgaria Belarus Romania Kazakhstan South Africa Dominican Republic Iran

Bosnia Ukraine Albania Sri Lanka India Vietnam

Copyright 2009 Professor Michael E. Porter

Poland (-8.4%) China

Change of Unemployment Rate in Percentage Points, 2004 to 2008

Copyright 2009 Professor Michael E. Porter

Peru, 2001 to 2007

Slovenia Trinidad & Tobago Bulgaria Belize

50% 40% 30% 20% 10% 0% -15%

Honduras Ukraine (-17.5%) Philippines

Jordan Kazakhstan Cyprus Croatia Costa Rica Latvia Poland Israel

Change in Exports of Goods and Services (% of GDP), 2004 to 2008

Copyright 2009 Professor Michael E. Porter

Perus Exports By Type of Industry

Processed Goods Semi-processed Goods Unprocessed Goods Services TOTAL

Source: UNComTrade, WTO (2009)

Inbound Foreign Investment Performance

Vietnam Czech Republic Nicaragua Slovakia Croatia Kazakhstan Belize

FDI Inflows as % of Gross Fixed Capital Formation, Average 2003 - 2007

Copyright 2009 Professor Michael E. Porter

South Africa Greece

Chile Romania Brazil Thailand

Saudi Arabia Poland Bulgaria

CAGR of US-registered patents, 2004 2008

50% 60% 120 patents =

The Peruvian Economy in 2009

Copyright 2009 Professor Michael E. Porter

Comparative Labor Productivity

New Zealand Cyprus Croatia Portugal Lithuania

Growth of real GDP per employee (PPP-adjusted), 1990 to 2008

Copyright 2009 Professor Michael E. Porter

Copyright 2009 Professor Michael E. Porter

Copyright 2009 Professor Michael E. Porter

Microeconomic Competitiveness Social Infrastructure and Political Institutions

Copyright 2009 Professor Michael E. Porter

Sophistication of Company Operations and Strategy

Copyright 2009 Professor Michael E. Porter

Quality of the National Business Environment

Copyright 2009 Professor Michael E. Porter

Macroeconomic Competitiveness State of Cluster Development

Copyright 2009 Professor Michael E. Porter

Competitiveness and Poverty Reduction

Copyright 2009 Professor Michael E. Porter

Perus Competitiveness Profile, 2009

Macroeconomic Competitiveness (82)

Microeconomic Competitiveness (73)

Macroeconomic Policy (69)

Business Environment Quality (74)

Company Sophistication (70)

Perus GDP per capita rank is 71st versus 133 countries

Copyright 2009 Professor Michael E. Porter