HARVARD|BUSINESS|SCHOOL Competitiveness of Nations and Regions: The New Learning Professor Michael E. Porter Harvard Business School New Delhi, May 25', 2017 This presontaton Grave on Woas Tom Professor Poners books and aricles, in partouar, Compoulne Strategy (The Free Press, 1900), Compertne further materia ee the website ofthe neuter Strategy and CompattivensssProsperity Performance Ppp-Adjusted Real app. LOW and Lower Middle Income Countries per Capita, 2016 (SUSD at 2005 prices) ‘$9,000 High but Desiining "Average Prosperiy Gromhis29% — High and Improving $8,000 Armenia Neen © Georgia © E1Salvader oer Ukr $7,000 = 0 Sere ehutan o.. Moroes ® | Samoa Gone © Philippines $6,000 © Polgchana FAA Congo @ ll, (Brazzaile) Verran Sudan @ Uzbekistan Moljova $5,000 Pakistan ° Hondui8ag $4,000 — Average Real GDP per| 71 . Kyraye igae = $3,000 venlars —_ HOTHCIC® OE nw vitous CIPO Paster cena AicanRepusie @ __ Cameron ©. @ Kerya a soon | 7 oeees Sener, Lng groan Bt Madagascar Haiti @ Benin® O15 = Ethiopia agoace rt jomontslonds = Rana ome Se Cha 2 Ne ° $1000 iste } = “Menu SSiora—entrantive eons: TY lalawi Burund @ duinea-Bissau NO ® congo (D.R.) hee go [Low and Dectining ! Low but. me % OSCOi SCC CSCC Growth in Real GDP per Capita (PPP $US at 2005 prices), CAGR, 2006-2016 Source: EIU (2015), authors calculations. Noe’ Low and Lower Mice Countries according to World Bank Income Groups based on GNI per capa,What is Competitiveness? Anation or region is competitive to the extent that firms operating there are able to compete successfully in the national and global economy while maintaining and improving wages and living standards for the average citizen + Competitiveness depends on the long-run productivity of a location as a place for firms to do business - Productivity of existing firms and workers - High participation of citizens in the workforce + Competitiveness is not: - Low wages - Aweak currency s + Successful economic development requires improving competitivenessThe Dual Challenges of Development Economic Development + There is a powerful connection between economic and social development + Improving competitiveness requires improving economic and social conditions simultaneously corerIndia in 2017 + India has made significant economic progress over the last few years, despite a challenging global context ~ Robust growth of GDP, prosperity, and productivity ~ Rising FDI inflows and exports, - Falling poverty + Policy choices have begun to address some of India’s deep-seated structural challenges ~ Sustainability of macroeconomic policies ~ Effectiveness of public programs ~ Corruption ~ Upgrading specific elements of the business environment such as infrastructure, skills, business regulationsThe Path Ahead +India has a promising future, but multiple weaknesses and distortions remain that will require time and determined action to overcome — £4. high informality, bureaucratic complexity, limited access to capital, public education and infrastructure deficits s +Reaching India’s full potential, both domestically and in the global economy, requires: —a shared understanding of competitiveness ~a coherent strategy — excellence in implementationWhat Determines Competitiveness? + Endowments, including natural resources, geographical location, population, and land area, create a foundation for prosperity, but true prosperity arises from productivity in the use of endowmentsWhat Determines Competitiveness? + Macroeconomic competitiveness sets the economy-wide context for productivity to emerge, but is not sufficient to ensure productivityWhat Determines Competitiveness? Fiscal Policy: Public spending aligned with revenues over time oases Low levels of inflation + Economic Stabilization: Avoiding structural imbalances ‘and cyclical overheating ae aWhat Determines Competitiveness? Cera ‘and Etfective ‘Macroeconomic Competitiveness bigiedacita = So * Rule of Law: RA sa security, and due process + Human De nt: Basic education, health + Govemment institutions: Stable and offecive pubic and governmental organizations and processesHow Do We Measure Development Coe Dette sua Social GDP per CapitaSocial Progress Index Frameworkasftatliddutianlt i Social Progress 2005-2016 2005, Speen es inn ewWhat Determines Competitiveness? Microeconomic Competitiveness + Productivity ultimately depends on improving the microeconomic capability of the economy + Many things matter; there is no silver bulletWhat Determines Competitiveness? ‘The internal skills, Microeconomic Competitiveness = uaty ot tne ‘Sopmstcaion ‘management Sees opmaton ard Pracilosa tat nate! Environment ‘Strategy companies to achieve higher levels ‘of productivity and Macroeconomic Competitiveness paceniedWhat Determines Competitiveness? ‘The quality of the business environment that innovation, and ‘growth Microeconomic Competitiveness uaty ofthe ‘Sophatiation natonal ‘Company Soares Operators and Environment ‘Strategy Macroeconomic CompetitivenessImproving the Quality of the Business Environment The Diamond Model (orton ima tu) SIC and Rivalry * Local rules and incentives that encourage investment and productivity ~ 2.9, incentives for capital investment, IP protection —~ sound corporate governance and accountability * Open and vigorous local competition x i i = Openness to competition * Improving access to high quality _ of business inputs Strict competition laws = Qualified human resources ~ e¢9., Sophisticated demand in the ~ Capital availabity EOE) private sector and government — Physical infrastructure Eien ~ Strict quality, safety, and ~ Scientific and technological Lal stogtl environmental standards infrastructure rT el) — Administrative and regulatory infrastructure * Availability and quality of suppliers and supporting industries Bs * Many things in the business environment 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Improving the National Business Environment Peru, 2012 Corner for Firm eceyy Eur iinr7 + Openness to foreign invastment, trade, capital flows + Improvements in investor protections + Efforts to strengthen competition policy = Rigidity of employment ~ Difficulty in business formation ~ Low intensity of local competition AC High informality ofthe economy A sdareencuesetrealsorsleal + Improving consumer protection fishing, and cultural J regulation + Improving sophistication of local buyers = Weak environmental standards + Advantageous location + Improving administrative infrastructure ENE Ute enforcement + Sound banking system, but high interest Eta re) spreads and limited venture capital ries availabilty ~ Poor physical infrastructure — Low skill levels in the labor force, — Limited local suppliers and mismatch with demand ‘Supporting industries — Weak university-industry research ~ Shallow clusters collaboration — Few high-quality research and scientific institutions Sai saBusiness Environment Quality Ease of Doing Business Rankings. India aig 207 cov somes)What Determines Competitiveness? Geographic ‘concentrations of Microeconomic Competitiveness = go. Sitar ang ‘uaay ot me ‘Sopmucaton related institutions in atonal” Stale of Custer “of Company particular fields (0.9. eee Development Cereal tourism, automotive) E that enable productivity and innovation Macroeconomic CompetitivenessWhat is a Cluster? fourism Cluster in C: fy it a iPharmaceutical Cluster in Andhra PradeshWhy Clusters Matter? Research Findings + Job grow + Higher wages: + Higher patenting rates + Greater new business formation, growth and survival + Resilience in downturns s + Build on the rogion’s existing and emerging clusters rather than chase hot fields. + Eoonomie dversifeation occurs within clusters and across related clustersIndia’s Exports by Traded Cluster se Se 215Related Clusters and Economic Diversification World Export Share India 2015 oe @ ay 4.5% - 9.0% xy ‘ Va, ae ‘y 2.25% - 4.5% Per) Wrecan We : LP Nea \ SS eS fra! eli RASS re or eeteny ay Upstream aClusters and Economic Diversification Singapore _-—_—_ “> — = ae Rog) $$ Teme ta HAsntensive eecrones. —p AeClusters as a Tool for Economic Policy + Stengthens multiple related firms/institutions simultaneously Brings together firms of all sizes, including SME's Enhances the effectiveness of traditional economie policy areas, ‘such as training, R&D, export promotion, FDI attraction, ete + Aforum for collaboration between the private sector, trade ‘associations, goverment, educational, and research institutions + Apowerfut tool for publicprivae éollaboration s Sound cluster policy should address all existing and emerging clusters, and not pick winnersGeographic Influences on Competitiveness + Regions are the most important economic unit for competitiveness in larger countries, especially countries beyond subsistence developmentThe Role of Sub-National Regions in Economic Development * Economic performance varies significantly across sub-national regions (¢.g., provinces, states, metropolitan areas)Prosperity Performance of U.S. States Real GDP per Capita, 2015 2005-2015 $70,000 17 ch but declining High and rising prosperity prosperity versus U.S. ae versus US. 5.000 = 6 Delaware a.eMassachuserts North Dakota * Connecticut 5g New York $80,000 Wyoming ilinois: California $55,000 New Jersey gst a\ ® Washington © Texas Maryland eNebraska U.S. Average GDP Per Virginia, erie sensoo | Coeta 2204 $5005 dina, | corado NewHamoshire _ Pengsvivania ; as oiand Haw iowa Rhode Hsland mS Wisconsin 8 ohio © South Dakota Oregon Teean0o Louisiana North Carolina sionneseet! indi Kansas ° : —~? ‘Missouri Indiana $ Nevada ©Ge0rg of eeUlah Oklahoma Michiga® a ‘Vermont $40,000 New Mexico Pp Florida South Carolinas Rentucky ® Montana Alabama’ Maine] @ © West Virginia $35,000 Idaho® Arkansas Low and dectining Mississippi U.s-averaze aronin GDP Low but rising prosperity sono /ArOSberiy versus U.S. Por Capita, 2014: 0.4% versus US. "1.0% 0.5% 0.0% 0.5% 1.0% 1.5% 2.0% Real Growth in Gross Domestic Product per Capita, 2005 to 2015 Source BER Noes: GOP res 2009 sola, Grown ra ene Uesas comprar roa aeProsperity Performance of Indian States GDP per Capita, 2014 (2005 Indian Rupees) 2005-2014 © 1,60,000 ° Goa %1,40,000 Delhi £4,20,000 Puducherry %1,00,000 t ic ikKim @ * chandigarh ‘Andaman & Nicobar Islands 20,000 Haryana Maharastra Utarakrand) iimachal Prades ee Pi © ekerala Tamil Nadu eon 3 Nagaland Telangana—e Arunachal Pradesh oe tarnataka Ee a ie é © 40,000 West Bengal® Mizoram ~Andhra Pradesh Inde Overal:€45 750 Jammu & Kashmir Qdishag_* | @ Rajasthan e ‘Assam® Jharkhand: “Madhya Pradesh 20,000 {Manipur Uttar Prad@sh i Chattisgarh fepihar eo | India Overall: 6.6% 3B % 5% 6% Th a 9% Real growtl GDP per Capita, 2005-2014 ‘Note: Growth rae ls calculated 2s compound annual grouth rate. Source: GEIC.The Role of Sub-National Regions in Economic Development + Economic performance varies significantly across sub- national regions (e.g., provinces, states, metropolitan areas) + Many essential levers of competitiveness reside at the regional and sub-regional level + Regions specialize in different clustersCluster Specialization Selected Indian States Haryana «Automotive + Apparel + Recreational and Small Electronic Goods + Medical Devices Gujarat ‘Jewelry and Precious Metals Upsiream Chemical Products Water Transportation Nonmetal Mining [Uttar Pradesh * Livestock Processing * Footwear + Downstream Chemical Products + Food Processing and Manufacturing ‘Maharashtra jophamaceuticals + (and Analytical instruments + Jewolry and Precious Metals + Furniture ‘Tamil Nadu Textle Manufacturing + Automotive + Footwear + Leather and Related Products Clusters with strongest employment ‘specialization based on annual survey ‘of manufacturing industries 2014; ‘Sous: India ASI 2014; iia Guster Mapping Project, Harvard ISC — Prot Michael E. Potter, India IFC ~ Amit KepoorThe Role of Sub-National Regions in Economic Development + Regions are a critical unit of competitiveness + Each region needs its own distinctive strategy and action agenda = Business ervronmert improvement = Custer upgrading = improving insitutonaletfectvoness + Much economic policy responsibilty and accountability should be decentralized to regions + The role ofthe national government should be to set the overall policy framework wile enabling open competition and economic intogration| ‘across regions Diszation Infrastructure for connecting states and regions Harmonizing rules and incortves across regionsThe Need for an Economic Strategy eed Srey Ceo aes + Implementing best practices + An overall agenda for in gach potcy area creating a more distinctive ‘and compatitive position for s ‘a country or regon, based conits particular circumstances + There are a huge number of policy areas that matter + No region or country can (or should try to) make progress In all areas simultanoouslyDeveloping an Economic Strategy r Windus ea ae eu) + Vadis a chetnclive competiive positon for he raion given is lecation, legacy, exsting strengths, and potental strengths? Waal unique advantages as Beaton? = Forwhat yp of aches ard cuss? ~ Wa olin the broader ltl econo? 2 ~ Pee hate ee) Sid Aa ue "+ What elements of the business ‘environment canbe unique strengths Talatve w poersmeignoers? + What existing and emerging clusters canbe bull upon? + What weaknesses mus be accressod'to remove hey consrants to grou and achieve party with ‘esr locatons? . ws + Priorities and sequencing are fundamental to successful economic developmentWhat is Unique About India? Vibrant and largest democracy in the world Large domestic market Growing labor force, including strong reservoir of skilled graduates Well-established position in IT services Growing number of internationally active firms. Large, heterogeneous country Deep international linkages through history, diaspora, and growing trade and investment Arich history, culture, and diversity s What will be India’s distinctive role in the global economy? ‘What will be India's unique competitive advantages?Government Structure and Economic Development + Competitiveness improvement will roquire sustained efforts across decades and government administrations ~ Mechanisms needed to improve the continuity of policy over time + Competitiveness is affected by numerous government entities and levels of government — Multiple agencies and departments (0.9. finance, trade, science and. technology, commerce, regional policy, energy, agriculture) have an influence ‘on competitiveness. = *Eeonomic” agencies and ‘soclal” agencies are both involved ~ Multiple levels of government (nations, states, ces, etc.) affect the business ‘environment = Intergovernmental rotations with neighboring countries atfect productivily Coordinating structures are needed to bring together ministries, agencies and levels of government around an integrated strategy i i Fe |The Private Sector's Role in Economic Development Inform goverment on the needs of business and the constraints on company and cluster development Work closely wi local educational and research institutions to improve their quality and create specialized programs addressing the cluster's needs ‘Nurture local suppliors and attract foreign suppliers Collaborate with other companies to enhance competitiveness through trade associations and other mechanisms Participate actively in national and regional competitiveness initatves Compete with sharod value stratogios that address social needs and challenges wih a businass mode! ~ Beyond corporate philanthropyThemes for India Broad-based inclusive development, which integrates economic and social progress A cluster-based economic development mode! Clear roles for the national and state governments in upgrading competitiveness Make the private sector a true partner in competitiveness upgrading Better data and benchmarking to inform evidence-based policy ‘Articulate a shared vision for India’s economic and social future that motivates and inspires citizens Create a culture of participation and responsibility amongst citizens