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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
1

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 – EIU (2009), authors calculations Source: Peru.ppt 0% 2% 12% 14%

Copyright 2009 © Professor Michael E. Porter

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

3

Copyright 2009 © Professor Michael E. Porter

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
Copyright 2009 © Professor Michael E. Porter

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

5

Copyright 2009 © Professor Michael E. Porter

Peru’s 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)
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%
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 – Peru.ppt Source: UNCTAD, World Investment Report (2009)

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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

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 =
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
9
Copyright 2009 © Professor Michael E. Porter

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
20091130 – Peru.ppt

10

Copyright 2009 © Professor Michael E. Porter

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)
20091130 – Peru.ppt

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Copyright 2009 © Professor Michael E. Porter

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
20091130 – Peru.ppt

12

Copyright 2009 © Professor Michael E. Porter

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

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

20091130 – Peru.ppt

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Copyright 2009 © Professor Michael E. Porter

Determinants of Competitiveness

Microeconomic Competitiveness Social Infrastructure and Political Institutions
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

• 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

20091130 – Peru.ppt

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Copyright 2009 © Professor Michael E. Porter

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

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

20091130 – Peru.ppt

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Copyright 2009 © Professor Michael E. Porter

Determinants of Competitiveness

Microeconomic Competitiveness
Quality of the National Business Environment State of Cluster Development Sophistication of Company Operations and Strategy

Quality of the National Business Environment

Macroeconomic Competitiveness
Social Infrastructure and Political Institutions Macroeconomic Policies

• The external business environment conditions that allow companies to reach high levels of productivity and innovation

Natural Endowments

20091130 – Peru.ppt

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Copyright 2009 © Professor Michael E. Porter

Determinants of Competitiveness

Microeconomic Competitiveness
Quality of the National Business Environment State of Cluster Development Sophistication of Company Operations and Strategy

Macroeconomic Competitiveness State of Cluster Development
Social Infrastructure and Political Institutions Macroeconomic Policies

• 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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Copyright 2009 © Professor Michael E. Porter

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

20091130 – Peru.ppt

18

Copyright 2009 © Professor Michael E. Porter

Peru’s 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)

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 (% 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

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
• Conservative fiscal policy • Sound macroeconomic management • Stabilization fund

Social Infrastructure and Political Institutions
• Continued problems with corruption

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
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 d’Ivoire 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

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

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Copyright 2009 © Professor Michael E. Porter

Peru’s Macroeconomic Competitiveness
Macroeconomic Policy
• Conservative fiscal policy • Sound macroeconomic management • Stabilization fund

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

• Peru’s macroeconomic position remains overly dependent on commodities and commodity prices

• Unstable political processes and institutions • 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 • 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
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 – 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
20091130 – Peru.ppt

27

Copyright 2009 © Professor Michael E. Porter

Peru’s 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
28
Copyright 2009 © Professor Michael E. Porter

20091130 – Peru.ppt

Ease of Doing Business
Ranking, 2009 (of 183 countries)

Peru, 2009
Favorable Unfavorable

120

100

80
Peru’s 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)
20091130 – Peru.ppt

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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 & Market Research Market Research Services Services

Travel agents Travel agents

Tour operators Tour operators

Local retail, Local retail, health care, and health care, and other services other services Local Local Transportation Transportation

Food Food Suppliers Suppliers Restaurants Restaurants Property Property Services Services Hotels Hotels

Attractions and Attractions and Activities Activities
e.g., theme parks, e.g., theme parks, casinos, sports casinos, sports

Souvenirs, Souvenirs, Duty Free Duty Free Banks, Banks, Foreign Foreign Exchange Exchange

Maintenance Maintenance Services Services

Airlines, Airlines, Cruise Ships Cruise Ships

Government agencies Government agencies
e.g. Australian Tourism Commission, e.g. Australian Tourism Commission, Great Barrier Reef Authority Great Barrier Reef Authority

Educational Institutions Educational Institutions
e.g. James Cook University, e.g. James Cook University, Cairns College of TAFE Cairns College of TAFE

Industry Groups Industry Groups
e.g. Queensland Tourism e.g. Queensland Tourism 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

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Copyright 2009 © Professor Michael E. Porter

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 Winemaker’s 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 Örjan Sölvell, The Australian Wine Cluster – Supplement, Harvard Business School Case Study, 2002
20091130 – Peru.ppt

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Copyright 2009 © Professor Michael E. Porter

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
Copyright 2009 © Professor Michael E. Porter

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 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

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Copyright 2009 © Professor Michael E. Porter

Peru’s Export Portfolio
1997 to 2007
1.4%
Change In Peru’s Overall World Export Share: +0.07% Jewelry, Precious Metals and Collectibles (0.88%, 1.69%)

1.2%
Metal, Mining and Manufacturing

Peru’s world export market share, 2007

1.0%

0.8%

0.6%
Agriculture

Fishing

0.4%
Peru’s 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 Peru’s world export market share, 1997 to 2007
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. 36 20091130 – Peru.ppt

Exports of US$2.4 Billion =
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%
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 Peru’s world export market share, 1997 to 2007
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. 37 20091130 – Peru.ppt

Exports of US$2.4 Billion =
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% Equipment (2.19%, 3.09%) Communications Equipment Furniture Information Technology (6.46%)

Malaysia’s world export market share, 2007

2.0%
Building Fixtures and Equipment Plastics

Agriculture Construction Services

Lighting and Electrical Equipment

1.5%
Analytical Instruments Malaysia’s 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 Malaysia’s world export market share, 1997 to 2007
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. 38 20091130 – Peru.ppt

Exports of US$9.3 Billion =
Copyright 2009 © Professor Michael E. Porter

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
39

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
40

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

• 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

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Copyright 2009 © Professor Michael E. Porter

Clusters and Economic Diversification
Upgrade Existing Export Upgrade Existing Export Products and Services Products and Services

Turn Products Into Clusters Turn Products Into Clusters

• Local firms • MNCs

Deepen Existing Clusters Deepen Existing Clusters

Develop Related Clusters Develop Related 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 and Cities Regions and 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 • Region’s specialize in different sets of clusters

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Specialization by Cluster, Turkish Regions 2007
Istanbul Istanbul Textiles Textiles Leather and Apparel Leather and Apparel Distribution Services Distribution Services Jewelry Jewelry

Bati Marmara Bati Marmara Apparel Apparel Textiles Textiles Chemicals Chemicals Construction Materials Construction Materials

Bati Karadeniz Bati Karadeniz Tobacco Tobacco Apparel Apparel Metal Mining and Manufacturing Metal Mining and Manufacturing Forest Products Forest Products

Orta Anadolu Orta Anadolu Furniture Furniture Textiles Textiles Agricultural Products Agricultural Products Metal Mining and Manufacturing Metal Mining and Manufacturing

Dogu Karadeniz Dogu Karadeniz Food Processing Food Processing Distribution Services Distribution Services Furniture Furniture Forest Products Forest Products

Dogu Marmara Dogu Marmara Textiles Textiles Automotive Automotive Apparel Apparel Furniture Furniture

Kuzeydogu Anadolu Kuzeydogu Anadolu Agricultural Products Agricultural Products Footwear Footwear Distribution Services Distribution Services Hospitality and Tourism Hospitality and Tourism

Ege Ege Tobacco Tobacco Textiles Textiles Construction Materials Construction Materials Apparel Apparel

Guneydogu Anadolu Guneydogu Anadolu Textiles Textiles Tobacco Tobacco Oil and Gas Oil and Gas Food Processing Food Processing Bati Anadolu Bati Anadolu Furniture Furniture Construction Materials Construction Materials Distribution Services Distribution Services Aerospace Aerospace Akdenziz Akdenziz Textiles Textiles Hospitality and Tourism Hospitality and Tourism Apparel Apparel Distribution Services Distribution Services Ortadogu Anadolu Ortadogu Anadolu Textiles Textiles Agricultural Products Agricultural Products Apparel Apparel Distribution Services Distribution Services

Note: Source: European Cluster Observatory, 2009
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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

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Competitiveness of Peru’s Regions
• Strong disparities exist across Peruvian regions in business environment, innovative capacity, and economic performance

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Copyright 2009 © Professor Michael E. Porter

Prosperity Performance
Peru’s Regions
GDP per Capita, 2008 (1994 New Peruvian Soles)

16,000
Moquegua

Peru’s Weighted Average: 6.0%

14,000 12,000
Lima

10,000
Areguipa

8,000 6,000

Tacna

Peru’s 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 - Dirección Nacional de Cuentas Nacionales
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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
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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

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Geographic Influences on Competitiveness

Neighboring Countries Neighboring Countries

Nation Nation

Regions and Cities Regions and Cities

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Economic Coordination with Neighboring Countries

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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
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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 for Context for Strategy Strategy and Rivalry and 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 and Related 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 • 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
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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 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
• 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 Crucial Constraints Addressing Crucial 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

• •

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• Upgrade Peru’s competitive assets to achieve high rates of sustainable economic growth while improving welfare of the poor 60

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Accelerating Poverty Reduction in Peru

Reduce Poverty

Increase Competitiveness

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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 through economic development through policy decisions, spending and policy decisions, spending and incentives incentives

•• Economic development is a Economic development is a collaborative process involving collaborative process involving government at multiple levels, government at multiple levels, 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
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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 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

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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 Company’s 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 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
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