A Strategy for Sustaining Growth

and Prosperity for Peru

Professor Michael E. Porter

Harvard Business School

Urubamba, Peru
November 12, 2010

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 Copyright 2010 © Professor Michael E. Porter

 Recent Performance of the Peruvian Economy
• Peru has been one of the most remarkable economic growth stories of the last decade,
both compared to its own historic record and to its peers

2 Copyright 2010 © Professor Michael E. Porter

 Peru’s Prosperity Performance
GDP per Capita
1950-2009
(in 1990 PPP US$)
CAGR: CAGR: CAGR:
$6,000
+2.07% - 0.73% +4.41%

$5,000

$4,000

$3,000

$2,000

$1,000

$0
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2009
Note: PPP using Geary Khamis calculation methodology. Source: Groningen Growth and Development Centre, Total Economy Database (June 2009)
3
 Prosperity Performance
Selected Countries, 1999 to 2009
PPP-adjusted GDP per
Capita, 2009 ($USD)

$ 20,000
United States ($46,460)
Canada ($37,840)
$ 18,000

$ 16,000
Panama
Russia
Mexico Chile Argentina
$ 14,000
Malaysia Trinidad & Tobago Uruguay
Venezuela
$ 12,000
Brazil Dominican Republic

$ 10,000 Cuba
Costa Rica Guatemala
Colombia
$ 8,000 Belize Thailand
Peru
Ecuador
China
$ 6,000
El Salvador
Jamaica Bolivia
$ 4,000 Paraguay Honduras Indonesia
Philippines India
Nicaragua
Vietnam
Laos
$ 2,000 Haiti Cambodia

$0
0% 2% 4% 6% 8% 10% 12% 14%

Growth of Real GDP per Capita (PPP-adjusted), CAGR, 1999 to 2009

Source: EIU (2010), authors calculations 4
 Recent Performance of the Peruvian Economy
• Peru has been one of the most remarkable economic growth stories of the last decade,
both compared to its own historic record and to its peers
• Sound macroeconomic policies since the mid 1990s, trade opening and a supportive
international economic environment have allowed the country to prosper

5 Copyright 2010 © Professor Michael E. Porter

 Export Intensity
Exports as % Selected Countries
GDP, 2009
80%

Trinidad & Tobago

70% Panama Thailand

Vietnam

60%

Belize
50% Paraguay

Honduras Cambodia
Chile
40% Costa Rica
Bolivia
Nicaragua
Jamaica Ecuador China
30% Canada
Russia Uruguay
Mexico Peru
Indonesia Guatemala
20% Dominican Republic El Salvador Argentina
Venezuela India
Colombia
Cuba
10% Haiti Brazil
USA

0%
-20% -15% -10% -5% 0% 5% 10% 15% 20% 25%

Change of Exports as Share of GDP, 1999 to 2009

Source: EIU (2010)
6
 Recent Performance of the Peruvian Economy
• Peru has been one of the most remarkable economic growth stories of the last decade,
both compared to its own historic record and to its peers
• Sound macroeconomic policies since the mid 1990s, trade opening and a supportive
international economic environment have allowed the country to prosper
• Improvements in basic security and political stability provided an important pre-
condition for these achievements

HOWEVER

• Growth has been highly heterogeneous across different segments of society and
different parts of the country

7 Copyright 2010 © Professor Michael E. Porter

 Unemployment Performance
Unemployment Selected Countries
Rate, 2009
16%
Improving Deteriorating
Dominican Republic
14%

Jamaica

12% Colombia

India
10% United States
Chile China
Canada
Ecuador Argentina Peru Bolivia
Russia
8% Venezuela Uruguay Philippines Costa Rica
Brazil Nicaragua El Salvador ParaguayIndonesia
Panama Vietnam
6%
Mexico
Trinidad & Tobago

4%
Malaysia
Honduras

2% Thailand
Cuba

0%
-10% -8% -6% -4% -2% 0% 2% 4% 6%

Change of Unemployment Rate in Percentage Points, 1999-2009

Source: EIU (2010)
8
 Poverty Rates
% of Population Under Peru, 2001 to 2009
the Poverty Line
60%

50%

40%

30%

20%

10%

0%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Informacion Socio Demografica, from El Instituto Nacional de Estadistica e Informatica (INEI), 2010
9
 Regional Poverty Rates
Peru, 2004 to 2009
% of Population
Under the
Poverty Line
Coast Sierra Lowlands
70%

60%

50%

40%

30%

20%

10%

0%
2004 2005 2006 2007 2008 2009
Source: Informacion Socio Demografica, from El Instituto Nacional de Estadistica e Informatica (INEI), 2010
10
 Recent Performance of the Peruvian Economy
• Peru has been one of the most remarkable economic growth stories of the last decade,
both compared to its own historic record and to its peers
• Sound macroeconomic policies since the mid 1990s, trade opening and a supportive
international economic environment have allowed the country to prosper
• Improvements in basic security and political stability provided an important pre-
condition for these achievements

HOWEVER

• Growth has been highly heterogeneous across different segments of society and
different parts of the country
• Lack of diversification and dependence on global commodity markets for natural
resources is exposing Peru to high levels of volatility

11 Copyright 2010 © Professor Michael E. Porter

 Exports as %
GDP, 2009
Export Intensity and Size
140 Selected Countries

Malaysia
120

100

80

Trinidad and Tobago

60 Panama

Paraguay
Costa Rica
40 Chile
Honduras
Canada
Bolivia Ecuador Mexico Russia
Uruguay Peru Argentina India China
El Salvador
20 Guatemala Venezuela, RB
Dominican Republic Indonesia
Haiti Colombia Brazil United States

-
1 10 100 1,000 10,000
GDP $Billions, 2009 (log scale)
Source: World Bank (2010) 12
 Peru’s Export Composition
by SITC categories 1962-2009

1962: $4 billion* 2009: $20 billion

Crude materials, inedible,

except fuels

Food and live animals

Manufact goods classified

chiefly by material

Mineral fuels, lubricants

and related materials

Manufactured articles

Chemicals

Machinery and transport

equipment

Animal and vegetable oils

and fats

* In 2009 dollars. Note: Showing standard SITC rev. 1 categories, goods only.
Source: UN Comtrade; authors’ analysis 13
 Peru’s Exports By Type of Industry
World Export Market
Share (current USD)
Processed Goods
0.90% Semi-processed Goods
Unprocessed Goods
0.80% Services
TOTAL
0.70%

0.60%

0.50%

0.40%

0.30%

0.20%

0.10%

0.00%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
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.
14
 Recent Performance of the Peruvian Economy
• Peru has been one of the most remarkable economic growth stories of the last decade,
both compared to its own historic record and to its peers
• Sound macroeconomic policies since the mid 1990s, trade opening and a supportive
international economic environment have allowed the country to prosper
• Improvements in basic security and political stability provided an important pre-
condition for these achievements

HOWEVER

• Growth has been highly heterogeneous across different segments of society and
different parts of the country
• Lack of diversification and dependence on global commodity markets for natural
resources is exposing Peru to high levels of volatility
• Sustained growth will depend on broad microeconomic and institutional improvement

15 Copyright 2010 © Professor Michael E. Porter

 Inbound Foreign Investment
Inbound FDI Stocks Stocks and Flows, Selected Countries
as % of GDP,
Average 1998-2008

90%
Trinidad and Tobago
80%

70%
Panama
Vietnam
60% Jamaica Chile

Bolivia
50% Belize
Nicaragua
Malaysia Cambodia
40%
Thailand
Laos
30% Venezuela Canada
Ecuador
Argentina Honduras Costa Rica
Guatemala Mexico
El Salvador
20% Peru Brazil
Paraguay Russia Uruguay
Philippines Colombia
Indonesia China Dominican Republic
10% United States
India
Haiti
Cuba
0%
0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

FDI Inflows as % of Gross Fixed Capital Formation, Average 1998 - 2008

Source: UNCTAD, World Investment Report (2009).
16
 Innovative Capacity
Average U.S. patents
Innovation Output of Selected Countries
per million population,
2005 – 2009
3.5
Croatia

3.0 Estonia

2.5

South Africa
2.0 Greece

Lithuania

1.5 Russia United Arab Emirates

Portugal
Costa Rica

Chile
1.0 Poland Argentina
Saudi Latvia China
Arabia Uruguay
Mexico
Brazil India

0.5
Ukraine Venezuela
Kazakhstan Philippines
Peru Colombia Thailand Turkey
Egypt Kenya Ecuador
0.0
-30% -20% -10% 0% 10% 20% 30% 40%
CAGR of US-registered patents, 2005 – 2009 170 patents =
Source: USPTO, World Bank
17
 Recent Performance of the Peruvian Economy
• Peru has been one of the most remarkable economic growth stories of the last decade,
both compared to its own historic record and to its peers
• Sound macroeconomic policies since the mid 1990s, trade opening and a supportive
international economic environment have allowed the country to prosper
• Improvements in basic security and political stability provided an important pre-
condition for these achievements

HOWEVER

• Growth has been highly heterogeneous across different segments of society and
different parts of the country
• Lack of diversification and dependence on global commodity markets for natural
resources is exposing Peru to high levels of volatility
• Sustained growth will depend on broad microeconomic and institutional improvement
• Among the biggest challenges for the country are complacency after years of solid
growth and the relatively mild impact of the global economic crisis

• Sustaining economic growth of 8 to 9% 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
18 Copyright 2010 © Professor Michael E. Porter
 The Need for a Peruvian Economic Strategy

• Strategy means focus: Peru can not improve everything at the same time but
need to prioritize the most pressing issues

• Strategy means choice: Peru can not be good at everything but needs to
define how existing strengths are to be deepened and broadened to provide
specific value to businesses

• Strategy means action: Peru does not need another plan but an action
agenda that drives change through a process and institutional structure
focused on implementation

• Peru needs to build a broad consensus on its strengths across society

19
 Structure of the Project
Advisory
Board

Joint
Peruvian and
Boston
Team

Macroeconomic Business Cluster Organizational

Competitiveness Environment Development Structure
Group Group Group Group

•Tax Reform •Education •Metal-Mechanic •Institutional

•Financial Cluster Strengthening
•Security
•Innovation
•Health Reform
•Infrastructure
•Labor
•Energy
•Water Resources
•Ease of Doing Business

20
 Executive Opinion Survey

• Survey conducted between May 18 and July 8, 2010

• Surveyed senior executives including presidents, CEOs and other C-level
managers
• Lima companies above $1 million in sales
• Other cities companies above $500,000 in sales

City Sample Size

Lima 160
Arequipa 80
Chiclayo 80
Cusco 80
Trujillo 80
Iquitos 71
TOTAL 551
 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
20100915 – Peru.ppt 22 Copyright 2010 © Professor Michael E. Porter
 Labor Productivity
Selected Countries, 1999 to 2009
Real GDP per employee
(PPP adjusted US$), 2009

$120,000

UnitedStates
$100,000

$80,000
Canada

$60,000

Mexico
$40,000 Malaysia Russia
Argentina
Venezuela
Uruguay Chile Colombia Peru
$20,000 Brazil Ecuador
Thailand China
Bolivia Indonesia
India
Philippines Vietnam
Cambodia
$0
-2% 0% 2% 4% 6% 8% 10% 12%
Growth of real GDP per employee (PPP-adjusted), 1999 to 2009
Source: authors calculation Groningen Growth and Development Centre (2010)
20100915 – Peru.ppt 23 Copyright 2010 © Professor Michael E. Porter
 Determinants of Competitiveness
Microeconomic Competitiveness

Quality of the Sophistication

National State of Cluster of Company
Business Development Operations and
Environment Strategy

Macroeconomic Competitiveness

Social
Infrastructure Macroeconomic
and Political Policies
Institutions

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

24 Copyright 2010 © Professor Michael E. Porter

Peru's Endowments

•Rich endowment of minerals, fishing resources, forest resources, and fertile land
•Unique environment for fishing resources
Natural •One of the largest concentrations of tropical rainforests in the world
•70 percent of the world's biodiversity
Resources •The Amazon region represents an untapped treasure

•Location in the central zone of South America, on the Pacific coast

•Shares a border with Brazil, the largest market in South America.
Geographic •Access to the Pacific Ocean and to the Atlantic Ocean through the Amazon River
•Long coastline that extends 1,914 miles along the Pacific Ocean
Location •Natural conditions to develop large and efficient ports

•Deep historical roots with ancient cultures

•Rich ethnic and cultural diversity
Cultural •Great variety of archeological sites. Machu Picchu is recognized as one of
the wonders of the world
Legacy •Commitment to work, creativity, and entrepreneurial spirit of Peruvians

25
 Determinants of Competitiveness
Microeconomic Competitiveness

Quality of the Sophistication

National State of Cluster of Company
Business Development Operations and
Environment Strategy

Macroeconomic Competitiveness

Social
Infrastructure Macroeconomic
and Political Policies
Institutions

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

26 Copyright 2010 © Professor Michael E. Porter

 Macroeconomic Competitiveness

Social Infrastructure and Macroeconomic

Political Institutions Policies
• •

• Human development • Fiscal policy

– Basic education – Government surplus/deficit
– Health system – Government debt

• Political institutions • Monetary policy

– Political freedom – Inflation
– Voice and accountability
– Political stability
– Government effectiveness
– Centralization of economic policymaking

• Rule of law
– Security
– Judicial independence
– Efficiency of legal framework
– Business costs of corruption
– Civil rights

27 Copyright 2010 © Professor Michael E. Porter

 Competitiveness and Poverty Reduction

Economic Social
Development Development

• There is a strong connection between economic and social

development
• Improving competitiveness and decreasing poverty requires
improving the economic and social context simultaneously

20100915 – Peru.ppt 28 Copyright 2010 © Professor Michael E. Porter

 Determinants of Competitiveness

Microeconomic Competitiveness
Quality of the Sophistication
National State of Cluster of Company
Business Development Operations and
Sophistication
Environment Strategy of Company
Operations and
Macroeconomic Competitiveness Strategy
Social
Infrastructure Macroeconomic • The internal skills,
and Political Policies capabilities, and management
Institutions
practices needed for
companies to attain the
highest level of productivity
Endowments and innovation possible

29 Copyright 2010 © Professor Michael E. Porter

 Determinants of Competitiveness

Microeconomic Competitiveness
Quality of the Sophistication
National State of Cluster of Company
Business Development Operations and
Quality of the Environment Strategy
National Business
Environment Macroeconomic Competitiveness
Social
• The external business Infrastructure Macroeconomic
environment conditions that and Political Policies
Institutions
allow companies to reach high
levels of productivity and
innovation
Endowments

30 Copyright 2010 © Professor Michael E. Porter

 Quality of the National Business Environment
Context for
Firm
Strategy
and Rivalry

• Local rules and incentives that

encourage investment and productivity
 Open and vigorous local competition
Factor
Demand
(Input)
Conditions
Conditions

• Access to high quality business • Sophisticated and demanding local

inputs customers and needs

Related and
Supporting
Industries

• Availability of suppliers and supporting

industries

• 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
31 Copyright 2010 © Professor Michael E. Porter
 Determinants of Competitiveness

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

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

• A geographic concentration of Endowments

firms, specialized assets, and
institutions in particular fields.

20100915 – Peru.ppt 32 Copyright 2010 © Professor Michael E. Porter

 Cusco Tourism Cluster
Institutions for
Collaboration

Local retail and

Travel Agents Tour Operators other services
Marketing
(Internet cafes, etc.)
Agencies

Food Restoration/
Suppliers Attractions and conservation

Restaurants activities
(e.g. National Parks,
Property cultural shows) Crafts
Services

Banking Services /
Maintenance Accommodations Transport Foreign Exchange
Services (hotels, hostels, lodges) (land, air, rail and river)

Hospitality
equipment Related clusters
suppliers

Food
Educational and Cluster
Government Agencies
Research Institutions

Health
Cluster
Source: Adapted from HBS student project, 2010
“Peru Tourism Cluster”; Agung, Anand, Bhardan, Ilanos, Nosher
 Clusters and Competitiveness

• Clusters increase productivity and operational efficiency

• Clusters stimulate and enable innovations

• Clusters facilitate commercialization and new business formation

• Clusters reflect the fundamental influence of linkages and spill-overs

across firms and associated institutions in competition

Competitiveness Master - 2009-04-20.ppt 34 Copyright 2009 © Professor Michael E. Porter

 Clusters and Economic Diversification
Linkages Across Clusters
Fishing &
Fishing
Products Textiles
Entertainment
Prefabricated
Hospitality
Agricultural Enclosures
& Tourism
Products
Processed
Food Transportation Furniture
& Logistics Building
Aerospace Fixtures, Construction
Vehicles & Equipment & Materials
Distribution Information Defense Services
Jewelry & Tech.
Precious Services Heavy
Lightning &
Metals Electrical Construction
Business Analytical
Equipment Services
Services Education & Instruments
Knowledge Power Forest
Medical Products
Creation Generation
Devices Communi-
Publishing cations
Financial & Printing Biopharma- Equipment
Services Heavy
ceuticals Machinery
Motor Driven Production
Chemical Products Technology
Products Tobacco
Oil &
Apparel Gas Mining & Metal
Automotive
Plastics Aerospace Manufacturing
Engines
Footwear Leather &
Related Sporting
Products & Recreation
Goods
Note: Clusters with overlapping borders or identical shading have at least 20% overlap
(by number of
Competitiveness industries)
Master in both directions.
- 2009-04-20.ppt 35 Copyright 2009 © Professor Michael E. Porter
 Stages of National Competitive Development
Shifting Policy Imperatives

Factor-Driven Investment- Innovation-

Economy Driven Economy Driven Economy

Low Cost Inputs Productivity Unique Value

• Macro, political, and legal • Increasing local rivalry • Advanced skills
stability • Market opening • Scientific and technological
• Improving human capital • Advanced infrastructure institutions
• Efficient basic • Incentives and rules • Incentives and rules
infrastructure encouraging productivity encouraging innovation
• Lowering regulatory costs • Cluster formation and • Cluster upgrading
of doing business activation

Source: Porter, Michael E., The Competitive Advantage of Nations, Macmillan Press, 1990
Competitiveness Master - 2009-04-20.ppt 36 Copyright 2010 © Professor Michael E. Porter
 Macroeconomic Policy: Assessment
• Sound policies have allowed Peru’s fundamental macroeconomic stability to steadily
improve over the past decade

• The implementation of the inflation-targeting framework has been successful in reducing

inflation

• Peru's fiscal stabilization fund provided stability and allowed effective stimulus during the
global crisis

• The economy continues to be highly dollarized with most credits denominated in dollars
– About half of the banking system is currently dollarized and most commodity exports are
priced in US-dollars
BUT
• Peru’s public finances remain overly dependent on commodities, with as much as one
third of tax revenues coming from commodity-related sources

• Peruvian tax rates are high relative to peers

• Peru must set policies that ensured the responsible use of credit

37
 Political Institutions: Assessment

Corruption
• One of critical weaknesses constraining Peruvian development
• High corruption is due to weak institutions, poor governance practices and the
excessive influence of private interests
• Corruption cases are usually not reported to authorities
• The institutions perceived to be most corrupt are Congress, the political parties,
the national police, and judicial institutions

38
 Rank in Global Corruption Perception Index, 2009
Corruption Index,
2009

Canada
Deteriorating Improving
Low
USA
corruption Uruguay
Chile

Costa Rica

Cuba

Brazil Peru, Colombia

Trinidad and Tobago China
El Salvador India
Panama Guatemala
Mexico

Dominican Republic
Argentina
Bolivia

Nicaragua
High Honduras
corruption
Russia
Ecuador
Venezuela Paraguay

Change in Rank, Global Corruption Report, 2009 versus 2003

Note: Ranks only countries available in both years (131 countries total)
Source: Global Corruption Report, 2009
39 Copyright 2010 © Professor Michael E. Porter
 Political Institutions: Assessment

Corruption
• One of critical weaknesses constraining Peruvian development
• High corruption is due to weak institutions, poor governance practices and the
excessive influence of private interests
• Corruption cases are usually not reported to authorities
• The institutions perceived to be most corrupt are Congress, the political parties,
the national police, and judicial institutions

Security
• There has been a deterioration of the security situation, mainly due to the
organized crime, illegal drug trade, terrorism and a general decline in public safety
• The influence of drug traffickers is starting to penetrate institutions and the
political system
• Social unrest occurs most often in places where government institutions are
weak

40
 Social Infrastructure: Assessment

Education

• High formal enrollment but low quality

• Weak infrastructure in the public school system
• Curriculum is poorly structured, and one teacher must cover multiple grades

Health

• The health system continues to be characterized by generally low quality and

high disparities in quality, particularly affecting the poor
• “Poverty diseases” such as tuberculosis are still more prevalent than in peer
countries
• Health care spending in Peru remains the lowest among its Latin American peers
• There is a mismatch between the supply and demand for health professionals

41
 Assessment: Peru’s Business Environment

Context for
Firm
Strategy
and Rivalry

+ Openness to foreign investment,

trade, capital flows
+ Improvements in investor protections
Factor ± Efforts to strengthen competition Demand
(Input) policy
Conditions
Conditions – Rigidity of employment
– Difficulty in business formation
– Low intensity of local competition
+ Abundant resources: mineral, – High Informality of the economy + Improving consumer protection
agricultural, fishing, and cultural regulation
+ Advantageous location ± Improving sophistication of local buyers
+ Improving administrative infrastructure – Weak environmental standards
Related and enforcement
+ Simplified customs procedures
Supporting
± Sound banking system, but high interest
spreads Industries
± Improving financial markets, but limited
venture capital availability – Limited local suppliers and
– Poor physical infrastructure supporting industries
– Low skill levels in the labor force, – Shallow clusters
mismatch with demand
– Weak university-industry research
collaboration
– Few high-quality research and scientific
institutions
 Factor Factor input conditions in Peru lag regional peers, particularly in
(Input) physical infrastructure.
Conditions

Administrative infrastructure
• Peru has made important reforms in simplifying administrative
procedures
 Ease of Doing Business
South America, 2011

Venezuela: 172
Guyana: 100
Colombia: 39 Suriname: 161

Ecuador: 130

Peru: 36 Brazil: 127

Bolivia: 149

Paraguay: 106

Chile: 43
Uruguay: 124

Argentina: 115

Source: The World Bank, Doing Business (2011), 183 countries

20100915 – Peru.ppt 44 Copyright 2010 © Professor Michael E. Porter
 Ease of Doing Business
Ranking, 2011
(of 183 countries)
Peru, 2011
120 Favorable Unfavorable

100

Peru’s per capita GDP rank: 81

80

60

40

20

0
Ease of Doing Getting Credit Protecting Registering Trading Starting a Paying Taxes Closing a Dealing with Enforcing
Business Investors Property Across Business Business Construction Contracts
Borders Permits

Source: The World Bank, Doing Business (2011), GDP rank on GDP per capita, ppp-adjusted
20100915 – Peru.ppt 45 Copyright 2010 © Professor Michael E. Porter
 Factor Factor input conditions in Peru lag regional peers, particularly in
(Input) physical infrastructure.
Conditions

Administrative infrastructure
• Peru has made important reforms in simplifying administrative procedures
Physical infrastructure
• While Peru has increased infrastructure investment in recent years, it lags in electrical
generation capacity, telephone lines, and paved roads relative to its Latin American
peers. Infrastructure services remain expensive
Education and workforce skills
• The education system produces comparatively few graduates in technical areas,
engineering, and physical sciences
• Peru is last in spending on education among its peers
Financial system
• Financial assets are highly concentrated. Four banks hold 83% of all bank loans
–Borrowing costs are high
–The Peruvian pension fund system is characterized by low participation
Science and technology infrastructure
• Peru’s science and technology infrastructure is very weak.
Context for Barriers to trade and investment have been reduced, but labor
Firm market efficiency and local rivalry remain limited
Strategy
and Rivalry

Foreign trade and investment policy

• Since the early 1990s, Peru’s foreign trade and investment policy has been aimed at a process
of deregulation and liberalization of the trade regime
• Peru has signed a significant number of free trade agreements with several countries, such
as the United States and China
• However, investment flows (in and out) remain low in comparison with its neighbors

Anti-trust policy
• Peru has an advanced regulatory framework for antitrust. But, implementation is weak
• Peru's domestic industries are highly concentrated, with evidence of oligopolistic practices
and cartels
• A high level of informality in the economy eases counterfeiting and money laundering

Labor market
• Peru’s labor market is highly rigid, ranked by the World Bank as 149 out of 181 economies.
There is no unified labor code in Peru
• High non-wage labor costs deter formal job creation
 Demand
Peruvian consumer sophistication is increasing. Consumer
Conditions protection and environmental regulations are in place but not
well enforced

Local demand sophistication

Economic growth has led to the emergence of a new middle class that has access to
consumer credit, has become aware of new products and brands, and demands quality

Quality and environmental standards

Regulations exist to protect quality, health, safety, and environmental standards, but there
is no mechanism to enforce these regulations or the consumer code. And, in practice, the
large informal sector operates outside of these protections
Related and Availability of suppliers and supporting industries remains low,
Supporting and Peruvian clusters are shallow
Industries

Export industries
• Peru’s exports are highly concentrated on natural resource-based products. These
activities are not well integrated into the local economy and have not generated
local upstream and downstream industrial activities

Presence of suppliers
• There is a lack of local suppliers of machinery, equipment and services. Most e
products and services are imported
• Local production of inputs and machinery is in its infancy and cannot support
advanced export-oriented companies

Cluster Development
• Nascent clusters are present, but there are few cluster initiatives..
• There is a poor tradition of collaboration between the government and the
private sector in the area of cluster development
 Peru’s National Export Portfolio
1997 to 2009
2.5%
Change In Peru’s Overall
World Export Share: +0.09%

Jewelry and Precious Metals

2.0%
Peru’s world export market share, 2009

1.5%

Metal, Mining
and Manufacturing

1.0%

Fishing and
Agricultural Fishing Products
Products
0.5%
Financial Apparel
Peru’s Average World
Services Export Share: 0.22%
Hospitality and Tourism
Communications Publishing and Printing
Services
0.0%
-0.5% 0.0% 0.5% 1.0% 1.5%
Change in Peru’s world export market share, 1997 to 2009 Exports of US$2 Billion =
Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business
School; Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics
50 Database and the IMF BOP statistics. Copyright 2010 © Professor Michael E. Porter
 Peru’s National Export Portfolio
1997 to 2009

0.14%
Transportation Oil and Gas
and Logistics Products and Services

0.12%
Peru’s world export market share, 2009

Furniture
Textiles
0.10% Construction Materials

Chemical Products
Processed Food

0.08%

Plastics

0.06%

Leather and Related Products Forest Products

0.04%
Business Services Heavy Machinery
Motor Driven
Biopharmaceuticals Products Footwear
0.02% Power and Power Generation Equipment
Building Fixtures Prefabricated Enclosures and Structures
and Equipment Production Technology
Communications Equipment
Automotive
0.00%
-0.02% -0.01% 0.00% 0.01% 0.02% 0.03% 0.04% 0.05% 0.06% 0.07% 0.08%
Change in Peru’s world export market share, 1997 to 2009 Exports of US$2 Billion =
Note: Showing clusters with greater than $10 mil exports.
Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy51and Competitiveness, HBS; Richard Bryden, Project Director. Copyright 2010 © Professor Michael E. Porter
 Share of World Exports by Cluster
World Market Share Peru, 2008
0.2% - 0.5%

0.5% - 1.0% Fishing & Enter- Textiles

Fishing tainment Prefabricated
0.95% - 1.9% Products Hospitality
Enclosures
& Tourism
Agricultural
Products
Transportation Furniture
Processed & Logistics Building
Food Aerospace Fixtures, Construction
Vehicles & Equipment & Materials
Distribution Information Defense Services
Jewelry &
Services Tech.
Precious Lightning & Heavy
Metals Electrical Construction
Business Analytical Services
Education & Instruments Equipment
Services Power Forest
Knowledge
Medical Products
Creation Generation
Devices Communi-
Publishing cations
& Printing Biopharma- Equipment
Financial Heavy
ceuticals Machinery
Services
Motor Driven Production
Chemical Products Technology
Products Tobacco
Oil & Automotive
Gas Aerospace Mining & Metal
Plastics Engines Manufacturing
Apparel

Leather &
Footwear Related Sporting Marine
Products & Recreation Equipment
Goods
Note: Clusters with overlapping borders have at least 20% overlap (by number of industries) in both directions.
52 Copyright 2010 © Professor Michael E. Porter
 Specialization in Peru’s Regions
Selected Examples
Piura
Agricultural Products: Mangoes,
Lemons, Brown Sugar Syrup

Cajamarca (Bambamarca)
Dairy, Processed Foods

La Libertad (El Porvenir, Trujillo)

Leather, Footwear

Ancash (Chimbote)
Fishing and Fish Products

Lima (Infantas, Los Olivos)

Metal Manufacturing, Metal
Furniture

Lima (La Victoria)

Apparel

Ica
Wine

Cuzco
Tourism

Puno and Arequipa

Apparel from Alpaca

53
 Assessment: Peruvian Clusters
• Peru’s current clusters are based heavily on natural endowments,
and have much room for further upgrading

• Regions such as the Cajamarca, Arequipa, and Moquegua have

concentrations in mining, but the clusters are mostly shallow with
weak linkages between firms and local suppliers and experiencing
significant technological bottlenecks

• In the main cities of Peru there are some emerging clusters

consisting largely of small firms

• Peru’s clusters have weak suppliers and few supporting institutions

• There is a weak institutional capacity in the regions hampering the

development of clusters

• There is a limited tradition of collaboration among actors for

regional development
54 Copyright 2010 © Professor Michael E. Porter
 Cluster Development Programs in Peru

• There are some encouraging programs, such as the CITEs

• Support programs for cluster development have limited resources

and scope, and have been directed toward SMEs

• Cluster development have been supported primarily multilaterals and

international cooperation agencies

• Programs were driven centrally without building capacity at the

regional level

• Programs have failed to create permanent institutions and

sustainable processes of collaboration amongst key actors such as
local governments, academic institutions, training centers, private
sector and relevant institutions for collaboration

55 Copyright 2010 © Professor Michael E. Porter

 Creating and Economic Strategy

National Value Proposition

• What is the distinctive competitive position of Peru given

its location, legacy, existing strengths, and potential
strengths?
– What unique value as a business location?
– For what types of activities and clusters?
– And what roles with neighbors, the region, and the broader
world?

Achieving and Maintaining Parity

Developing Unique Strengths
with Peers

• What elements of the business • What weaknesses must be addressed to

environment can be unique strengths remove key constraints and achieve parity
relative to peers/neighbors? with peer countries?
• What existing and emerging clusters
represent local strengths?

• Priorities and sequencing are necessity in economic development

56 Copyright 2010 © Professor Michael E. Porter
 Role of a National Value Proposition

• The value proposition should be an inspiration to the Peruvian

population

• The value proposition is a signal to companies from abroad and at

home about what assets and conditions can expect to find in Peru

• The value proposition is a signal to policy makers in Peru of what type

of improvements are most critical in order to make the value
proposition a reality

57 Copyright 2010 © Professor Michael E. Porter

Peru's Competitiveness Strategy

National Value Proposition

Goals

Action Agenda

Implementation Plan

58 Copyright 2010 © Professor Michael E. Porter

 Towards a Peruvian Value Proposition

What is Unique about Peru?

ENDOWMENTS BUSINESS ENVIRONMENT PEOPLE AND CULTURE

• Abundant natural resources • Privileged access to foreign • Rich culture and history
markets
• Central location in South • Creative and entrepreneurial
America • Open to FDI and capital flows population

• Vast biodiversity and • Young, hardworking population

ecosystems
• Legacy of domestic
cooperation to overcome
obstacles

59 Copyright 2010 © Professor Michael E. Porter

 Towards a Peruvian Value Proposition

A secure,
neutral and
peaceful
country

Enhanced the
Dynamic
Sophistication
regional
of Endowment Preserving Natural and
development
Related Cultural Resources with vibrant
Exports
clusters

A hub for trade

between Latin
America, Asia, and
North America

Improve Cross-Cutting Policies

60 Copyright 2010 © Professor Michael E. Porter

 National Value Proposition: A secure, neutral and
peaceful country
Peace and neutrality in Peru have been crucial to the good economic
performance of the last two decades, but Peru remains at risk of deteriorating
security.

Reduce corruption to fight informality and inequality

Empower security institutions and foster links with

local communities
A secure,
neutral and Break the cycle of drug trafficking and insurgency
peaceful Develop regional clusters to generate a stronger link
country between the growth process and new employment

61 Copyright 2010 © Professor Michael E. Porter

 National Value Proposition: Utilizing Endowments

Peru’s endowments have attracted significant interest from foreign and

domestic investors already in the past. Peru must create higher value from its
endowments driven clusters.

•Provide highly efficient infrastructure and an

efficient regulatory environment to make Peru one of
the most productive locations for accessing natural
Enhanced the
resources
Sophistication
of Endowment
Related Exports •Ensure that regulatory conditions enable endowments
to be used in ways that are ecologically and culturally
sustainable

•Upgrade and deepen clusters drawing on Peru's

endowments and develop suppliers, services and
related clusters

62 Copyright 2010 © Professor Michael E. Porter

 National Value Proposition: A Trade Hub

Peru’s geographic location, its array of free trade agreements, and its
macroeconomic and political stability make it a natural hub for trade between Latin
America, North America, and Asia

Maintain and extend low trade barriers

A hub for trade Improve the efficiency and quality of trade enabling
between Latin regulation and infrastructure.
America, Asia, and
North America
Mobilize and develop clusters of trade related services
including logistics and finance

63 Copyright 2010 © Professor Michael E. Porter

 National Value Proposition: Decentralization

Peru’s development remains highly heterogeneous across different parts of the

country. The emergence of a larger middle class remains limited to a few regions in
the country. Sustained growth can only be achieved if all subnational regions
develop by upgrading their competitiveness.

Build unique regional economies based on local

strengths.

Dynamic regional Upgrade key weaknesses including regional

development education, regulatory conditions, and infrastructure
with vibrant
clusters
Strengthen regions through upgrading regional
institutions

64 Copyright 2010 © Professor Michael E. Porter

Lima metalworking cluster: Example of a Cluster
Development Initiative
Agriculture Automotive
Foundries Electricity
Plastics Mining
companies
Restaurants Appliances
Plastics

Design shops
Financial
Equipment
Metals Molds (electrical, mining,
etc)
Logistics
Paints and
chemicals Tools Parts
(isolators, etc)
Services Packaging
(lab, etc)
Custom Advisory
Recycling
Software / IT services services

Technology Security
transfer

Government Educational Business Multilateral

Institutions Institutions Institutions Institutions
 Action Agenda

POLICIES

•Sustain the security improvements

against old and new threats
• Maintain improvements achieved in
security and prevent a pronounced
A secure, neutral and increased in organized crime an violence
• Empower security institutions and foster
peaceful country links with the community

•Systematically reduce corruption

• Simplify rules and regulations to reduce
the cases in which corruption can occur
• Promote a new governance ethic in
political and business leaders

66 Copyright 2010 © Professor Michael E. Porter

 Secure, Neutral and Peaceful: Action Agenda
Sustain the security improvements against old and new threats

Action Areas
Specific Recommendations
• Public safety is critical
to becoming a trading • Frame an institutional setting where a single institution
hub concentrates efforts to fight drug trafficking and terrorist
activities
• Maintain
improvements - Support market-based income-substitution programs,
achieved in security control of chemical inputs for coca transformation, drug
interdiction, and anti-money laundering efforts
and prevent a
pronounced increased • Reform the police force considering labor regime,
in crime an violence salary and equipment and needs
• Empower security • Strengthen the powers of local mayors as presidents of
institutions and foster local public safety committees in coordination with the
links with the police
community • Engage local communities to prevent social unrest
• Support comprehensive policies - covering crime
prevention, crime investigation, the judicial system, the
jail system, and re-insertion programs.

67 Copyright 2010 © Professor Michael E. Porter

 Secure, Neutral and Peaceful: Action Agenda
Systematically reduce corruption

Action Areas
Specific Recommendations
• Reduce corruption to
thrust domestic
economic activity and • Launch a systematic campaign to reduce corruption
take advantage of and investigate corruption cases
opportunities created
• Simplify rules and regulations to reduce the cases in
through open trade
which corruption can occur
policy
• Foster clean governance in political and business
• Generate a strong
leaders
track record of fighting
against corruption • Improve the quality of the civil service. Support
meritocracy, responsibility, accountability, training and
• Consider its effects on
adequate compensation.
informality and
inequality • Key public officials should be appointed in a process
with the consent of the Congress

68 Copyright 2010 © Professor Michael E. Porter

 Action Agenda

POLICIES

•Focus efforts on becoming the

springboard for South American firms
seeking access to U.S. and Asian markets

•Deepen free trade policies

• Intensify policy of negotiating free trade
agreements
A hub for trade • Eliminate remaining domestic barriers to
between Latin trade and investment: tariffs, non-tariff
measures and export subsidies
America, Asia and
North America •Improve physical connections with other
countries
• Transportation
• Energy and Water

CLUSTERS
Transportation and Logistics
Financial Services

69 Copyright 2010 © Professor Michael E. Porter

 Action Agenda
POLICIES

•Transform endowment-based industries

into broad clusters
• Launch an ambitious cluster
development program

•Build organizational processes in which

Enhanced the all actors, particularly private sector
representatives, collaborate in building a
Sophistication of common vision for each cluster
Endowment Related
Exports •Diversify the economy by developing
related clusters

CLUSTERS
Metal Mining and Manufacturing
Hospitality and Tourism
Biodiversity

70 Copyright 2010 © Professor Michael E. Porter

 Action Agenda
POLICIES

• Design a modern policy for regional

development
• Devise a strategy for each region based
on its unique attributes and strengths

Dynamic • Enhance education and workforce skill

development
regionalized • Focus on education as a central enabling
development with condition for productivity
• Align education supply with needs through
vibrant clusters collaboration with clusters

CLUSTERS
Metalworking
Apparel
Leather
Fishing and Fishing Products
Footwear
Agricultural Products
Wine

71 Copyright 2010 © Professor Michael E. Porter

 Improve Cross Cutting Policies

•Sustain path of sound macroeconomic policy

•Ensure adequate basic education and health care
•Focus basic education on enforcing quality standards
•Improve basic education services with the vision to reduce inequality and foster
social inclusion
•Reform healthcare system to increase coverage and provide better value
•Focus on preventive care to reduce costs
•Concentrate on vulnerable segments of the population
•Reduce the cost of doing business through better rules and regulations:
•Rules of the judiciary system
•Taxes
•Labor market regulations

•Strengthen access to capital

•Increase financial-sector competition and access to capital
•Encourage the development of new financial instruments
•Develop science and technology capabilities
•Expand university-business collaboration
•Encourage industry to absorb and improve foreign technology
•Involve talented expatriate professionals
•Improve innovation infrastructure
•Improve the effectiveness of the government

72 Copyright 2010 © Professor Michael E. Porter

 Eleven Goals for 2021

Income and Inclusion

• Peru will be in the upper tier of middle-income countries with an income per
capita of $10,000
• Peru will reduce its poverty level to 20 percent
• Peru will reduce rates of malnutrition to less than 10 percent

International

• Peru will be one of the top two South American countries in volume of trade
with Asia

• Peru will be the first-ranked recipient of foreign direct investment among the
countries along the South American Pacific coast

Regional development

• Peru will have at least seven regional centers of development across the
coastal, highlands and Amazon regions

73 Copyright 2010 © Professor Michael E. Porter

 Peru will be in the upper tier of middle-income countries with an
GDP per Capita
income per capita of $10,000
(in 1990 PPP US$)

$12,000

GOAL
$10,000

$8,000

$6,000

$4,000

$2,000 PAST PRESENT

$0
1971 1976 1981 1986 1991 1996 2001 2006 2011 2016 2021
Note: PPP using Geary Khamis calculation methodology.
Source: Groningen Growth and Development Centre, Total Economy Database74 Copyright 2010 © Professor Michael E. Porter
 Peru will reduce its poverty level to 20 percent
% of Population Under
the Poverty Line

GOAL

PAST PRESENT

Source: Compendio Estadístico, Instituto Nacional de Estadistica e Informatica (INEI), 2010; own projections
75 Copyright 2010 © Professor Michael E. Porter
 Peru will be one of the top two South American countries in volume
Total trade (USD
of trade with Asia
millions)

PAST PRESENT GOAL

Source: Trade Map from official sources (http://trademap.org) ; own projections

76 Copyright 2010 © Professor Michael E. Porter
 Peru will be the first-ranked recipient of foreign direct investment
among the countries along the South American Pacific coast
FDI Inflows (USD
millions)

GOAL

PAST PRESENT

Source: UNCTADSTAT (http://unctadstat.unctad.org); own projections

77 Copyright 2010 © Professor Michael E. Porter
 Eleven Goals for 2021

Education
• Peru will pass from the third to the second tier in the evaluation made by
the OECD Program for International Student Assessment (PISA)
• All high school graduates will be proficient in the English language

Corruption
• The country will pass from "mid-level" to "low-level" for corruption in
the region, as measured by Transparency International's Corruption
Perceptions Index

Cluster Development
• Peru will adopt a cluster-based strategy for development
• Peru will upgrade and develop well-established clusters in mining,
tourism/gastronomy, fishing, agribusiness, and manufacturing

78 Copyright 2010 © Professor Michael E. Porter

 Peru will pass from the third to the second tier in the evaluation made by the
OECD Program for International Student Assessment (PISA)
% of top countries
(out of 65 countries)

120%

100%

80%

60%

40%

20% PAST
GOAL

0%
2000 2014 2018 2021
Source: OECD Program for International Student Assessment (PISA) 2000. Authors calculations
79 Copyright 2010 © Professor Michael E. Porter
 Peru will pass from "mid-level" to "low-level" for corruption in the region, as
measured by Transparency International's Corruption Perceptions Index
% of less corrupted countries
(out of 180 countries)

70%

60%

50%

40%

30%

20%

10%
PAST TODAY GOAL

0%
2006 2007 2008 2009 2010 2014 2018 2021
Source: Transparency Report. 2010 Corruption Perception Index. Authors calculations
80 Copyright 2010 © Professor Michael E. Porter
Implementation Strategy: Sequencing of Policies

• Financial system
• Science and Technology

• Education and Health Care

• Regional Development
• Cluster Development
• Regional Development
• Security
• Anticorruption
• Physical Infrastructure
• Skills

• Maintain Government Policy Programs

Immediate Long term

Priority
81 Copyright 2010 © Professor Michael E. Porter
 Implementation Peru's Economic Strategy:
Organizational Structure
• Reinvigorate the Peruvian National Competitiveness Council (NCC) to
coordinate economic strategy and implementation
– Chaired by the Prime Minister
– Set within the Prime Minister's office
– Membership by all involved ministers and government officials
– Secretariat responsible for agenda and accountability

• The NCC should have an appropriate budget and a well-trained and

qualified staff for technical support

• Representative university and civil society leaders should be formal

members in the NCC

• Private sector participation in economic policy should be coordinated by

a Peruvian Private Competiveness Council (PPCC)

82 Copyright 2010 © Professor Michael E. Porter

 Summary
• Peru has made significant progress towards becoming a prosperous
economy and a better society

• Peru has many assets, and already made important policy choices
towards a better future. The results over the last few years are a clear
validation of this course
BUT
• There is much more to do
– Many parts of society and regions of the country have not fully participated
in the country’s recent growth
– Many dimensions of competitiveness remain weak and have to be improved

• The proposed strategy outlined here offers an ambitious but realistic

plan forward
It defines clear priorities, identifies concrete action steps, and sets measurable
objectives

• Change will occur only if consensus builds within Peru

• The process 83needs to continue Copyright 2010 © Professor Michael E. Porter