Improving Indonesia’s Competitiveness

Presentation to President Susilo Bambang Yudhoyono Professor Michael E. Porter Harvard Business School Boston, Massachusetts September 28, 2009
This presentation draws on ideas from Professor Porter’s articles and books, including, The Competitive Advantage of Nations (The Free Press, 1990), “The Microeconomic Foundations of Economic Development,” in The Global Competitiveness Report, (World Economic Forum), “Clusters and the New Competitive Agenda for Companies and Governments” in On Competition (Harvard Business School Press, 2008) and ongoing research at the Institute for Strategy and Competitiveness. 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. Further information on Professor Porter’s work and the Institute for Strategy and Competitiveness is available at www.isc.hbs.edu, Version: September 28, 2009, 2pm
20090928 – Indonesia President visit (handouts).ppt

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Copyright 2009 © Professor Michael E. Porter

Agenda for the Second Term
• Improving macroeconomic foundations
– Intensify the fight against corruption

• Upgrading the business environment • Clusters development • Provincial economic development • Economic coordination with neighboring countries

• National economic strategy • Organizing for competitiveness

20090928 – Indonesia President visit (handouts).ppt

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Copyright 2009 © Professor Michael E. Porter

Prosperity Performance
Lower and Middle Income Countries
PPP-adjusted GDP per Capita, 2008 ($USD)

$20,000 $18,000 $16,000 $14,000 $12,000
Ecuador

Hungary Poland

Lithuania Latvia Croatia Russia

Asian countries Other countries
Chile Venezuela

Mexico

Malaysia
Uruguay

Argentina Turkey Iran Kazakhstan Bulgaria Romania

$10,000 $8,000 $6,000 $4,000 $2,000 $0 3%

South Africa

Brazil

Dominican Republic Peru Ukraine Albania

Colombia Costa Rica Tunisia Guatemala Jordan

Thailand

Egypt Syria

China

Morocco Philippines
Papua New Guinea (-2.6%) Kenya

Indonesia
Pakistan
Nigeria

Sri Lanka India Vietnam Cambodia

Georgia

Laos

Bangladesh

Tanzania

5%

7%

9%

11%

13%

Growth of Real GDP per Capita (PPP-adjusted), CAGR, 2001 to 2008
Source: EIU (2009), authors calculations
20090928 – Indonesia President visit (handouts).ppt

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Copyright 2009 © Professor Michael E. Porter

Unemployment Performance
Unemployment Rate, 2008

Middle and Lower Income Countries
South Africa (22.9%) Croatia Tunisia

Dominican Republic (15.5%)

14%

Improving
Asian countries Other countries
Albania Spain

Deteriorating
Jordan Colombia Iran

12%

10%

Morocco

Poland

China
Syria Egypt Peru Bolivia El Salvador Chile

Indonesia

8%

6%

Brazil Argentina (-14.6%) Venezuela Ecuador Kazakhstan Bulgaria Russia Lithuania Estonia Panama Romania

Uruguay

Philippines India

Hungary Pakistan

Nicaragua Latvia

Sri Lanka Vietnam

Paraguay Costa Rica Mexico Honduras Ukraine

4%

Malaysia Bangladesh

2%
Thailand

0% -10%

-8%

-6%

-4%

-2%

0%

2%

4%

Change of Unemployment Rate in Percentage Points, 1999-2008
Note: In some cases, 1999 data was unavailable, so latest data used. Source: EIU (2009)
20090928 – Indonesia President visit (handouts).ppt

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Copyright 2009 © Professor Michael E. Porter

ppt 5 Copyright 2009 © Professor Michael E. Porter . authors’ analysis 20090928 – Indonesia President visit (handouts).5%) Vietnam Thailand Hungary 80% Asian countries Other countries 70% Papua New Guinea 60% Cambodia Nigeria Kazakhstan Bulgaria Jordan Croatia Chile Lithuania Tunisia 50% Costa Rica Ukraine (-17. 2004 to 2008 Source: EIU (2008).Export Performance Middle and Lower Income Countries Exports of Goods and Services (% of GDP).5%) Latvia Egypt Poland 40% Philippines 30% 20% China South Africa Uruguay Venezuela Morocco Syria Russia Georgia Romania Mexico Sri Lanka Indonesia Guatemala Peru Iran Kenya Ecuador India Bangladesh Argentina Turkey Australia Albania Colombia Tanzania Brazil Pakistan 10% -15% -10% -5% 0% 5% 10% 15% 20% Change in Exports of Goods and Services (% of GDP). 2008 90% Malaysia (103.

5% 1.Indonesia Exports By Type of Industry World Export Market Share (current USD) Excluding Oil and Gas Industry 3. Porter .0% 1.ppt 20090928 UNComTrade.0% 0.5% 2. WTO (2008) Copyright 2009 © Professor Michael E.0% 1997 1998 1999 2000 2001 6 2002 2003 2004 2005 2006 2007 Note: Excluding Oil and Gas cluster Source: – Indonesia President visit (handouts).5% 3.5% 0.0% Processed Goods Semi-processed Goods Unprocessed Goods Services TOTAL 2.

World Investment Report (2009) 20090928 – Indonesia President visit (handouts). Average 2003 .Inbound Foreign Investment Performance Stocks and Flows. Selected Middle and Lower Income Countries Inward FDI Stocks as % of GDP.2007 Source: UNCTAD.8%) Asian countries Other countries Tunisia Hungary Vietnam Bulgaria (69%) Croatia Kazakhstan Chile 70% 60% 50% 40% Papua New Guinea Morocco Venezuela South Africa Laos Ecuador Guatemala Albania Thailand Argentina Mexico Brazil Cambodia Tanzania Malaysia Latvia Lithuania Georgia Nigeria (49.ppt 7 Copyright 2009 © Professor Michael E.5%. Porter .2007 Jordan (46. 81.5%) 30% Egypt Poland Colombia Romania Costa Rica Russia Peru Dominican Republic Ukraine Uruguay 20% 10% Indonesia Bangladesh Kenya Iran India Turkey Philippines Pakistan China Sri Lanka 0% -5% 0% 5% 10% 15% 20% 25% 30% 35% 40% FDI Inflows as % of Gross Fixed Capital Formation. Average 2003 .

ppt . Porter 20090928 – Indonesia President visit (handouts). 2007 6% 5% 4% 3% 2% Russia Brazil China India 1% Indonesia 0% -1% -2% -3% 2000 2001 2002 2003 2004 8 2005 2006 2007 Copyright 2009 © Professor Michael E. % of GDP Ranked by Inward FDI Flows (% of GDP). Selected Countries Inward FDI Flows.Inbound Foreign Investment Performance Flows.

Innovative Output. 2004-2008 3. Selected Countries Average U. EIU (2008) 20090928 – Indonesia President visit (handouts).0 South Africa Greece 1.5 Philippines Egypt Brazil Ukraine Lebanon Romania Thailand India Colombia Turkey 0.0 -20% Indonesia 0% 10% 20% 9 -10% 30% 40% 50% 60% CAGR of US-registered patents.0 Croatia 2. 2004 – 2008 Source: USPTO (2008).0 Argentina Mexico Chile Saudi Arabia Poland China UAE Bulgaria 0.5 Portugal Russia 1.ppt Copyright 2009 © Professor Michael E. Porter .5 Malaysia (4.4) Czech Republic 3.5 Kuwait 2. patents per 1 million population.S.

Porter . and prosperity growth rates have only been average relative to regional peers • Indonesia’s limited integration into the global economy has provided shelter but greatly limits Indonesia’s long-term growth prospects • Indonesia continues to face significant competitive weaknesses • The second term is the time to move to a more ambitious economic strategy which will place Indonesia on a higher growth path 20090928 – Indonesia President visit (handouts).ppt 10 Copyright 2009 © Professor Michael E.Indonesian Competitiveness in 2009 • Solid growth rates over the medium term • The impact of the global crisis has been comparably modest • Political stability has improved significantly • The achievements of the first term have laid a good foundation for rapid progress HOWEVER • Indonesia’s prosperity remains low.

returns on natural resources) – It is not what industries a nation competes in that matters for prosperity. and natural resources. 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. capital.ppt 11 Copyright 2009 © Professor Michael E. Porter .What is Competitiveness? • Competitiveness is the productivity with which a nation uses its human. – Productivity sets the sustainable standard of living (wages. not just that of export industries • Only competitive businesses can create sustainable jobs and attractive wages • 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 20090928 – Indonesia President visit (handouts). returns on capital.

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 • Natural endowments alone are not enough to support a high standard of living • Macroeconomic competitiveness creates the potential for productivity • Productivity ultimately depends on improving the microeconomic capability of the economy and the sophistication of local competition 20090928 – Indonesia President visit (handouts). Porter .ppt 12 Copyright 2009 © Professor Michael E.

Indonesia’s Macroeconomic Competitiveness • Indonesia has made significant progress solidifying and improving political institutions • Macroeconomic policy is solid. but has not improved its position significantly over time 20090928 – Indonesia President visit (handouts). spread out country such as Indonesia. especially at the provincial level • Decentralization of authority to the provinces is an important step in a large. but this remains a central obstacle to further improvements in competitiveness • Indonesia performs relatively well in some aspects of basic human development. but stable fiscal balances are partly due to the inability to execute planned spending. Porter .ppt 13 Copyright 2009 © Professor Michael E. but better policy coordination and implementation is needed • There has been some progress in reducing corruption.

2008 20090928 – Indonesia President visit (handouts). Porter . 2007 Tunisia Peru Panama Egypt New Zealand Finland Sweden Iceland Switzerland Improving Norway Canada UK Hong Kong Austria Germany Ireland Japan United States France Chile Spain Uruguay Portugal Estonia Slovenia Taiwan Botswana Czech Republic Hungary South Africa Italy South Korea Malaysia Costa Rica Lithuania Slovakia Latvia Jordan Greece Poland Croatia Turkey El Salvador Colombia Romania Ghana Brazil India Mexico China Senegal Argentina Moldova Honduras Russia Thailand Guatemala Vietnam Pakistan Kenya Bangladesh Nicaragua Cameroon Ukraine Tanzania Uganda Philippines High corruption Zimbabwe Venezuela Cote d’Ivoire Kazakhstan Indonesia Nigeria 91 -20 -15 -10 -5 0 5 10 15 20 Change in Rank. 2007 1 Low corruption Deteriorating Israel Rank in Global Corruption Index. 2007 versus 2001 Note: Ranks only countries available in both years (91 countries total) Source: Global Corruption Report.ppt 14 Copyright 2009 © Professor Michael E.Corruption Perception Index. Global Corruption Report.

Porter . while enabling more effective execution of public sector investments • Create and implement a clear strategy for improving education and health care. for example. especially the quality of delivery • Improve the effectiveness of policies to ameliorate poverty. through a social safety net instead of broad consumption subsidies • Continue strengthening the legal system 20090928 – Indonesia President visit (handouts).ppt 15 Copyright 2009 © Professor Michael E.Indonesia’s Macroeconomic Competitiveness Action Priorities • Sustain progress in improving the stability of the political system and the battle against terrorism • Intensify the fight against corruption • Sustain the focus on stable government finances.

corporate governance standards Demanding and sophisticated local customers and needs Related and Related and Supporting Supporting Industries Industries  – e.Microeconomic Competitiveness: Improving the Business Environment Context for Context for Firm Firm Strategy Strategy and Rivalry and Rivalry  Vigorous local competition – Openness to foreign competition – Competition laws Factor Factor (Input) (Input) Conditions Conditions   Local rules and incentives encouraging productivity and investment Demand Demand Conditions Conditions Access to high quality business inputs – – – – Human resources Capital availability Physical infrastructure Administrative infrastructure (e. registration.g. transparency) – Scientific and technological infrastructure – e. Strict quality. intellectual property protection.. permitting.g. Porter . in which the business environment improves to enable increasingly sophisticated ways of competing 20090928 – Indonesia President visit (handouts). safety.ppt 16 Copyright 2009 © Professor Michael E. incentives for investment.g. and environmental standards – Consumer protection laws Availability of suppliers and supporting industries • Many things matter for competitiveness • Successful economic development is a process of successive upgrading.

ppt 17 Copyright 2009 © Professor Michael E. Asia and Pacific Region 100 80 60 40 20 0 Ease of Doing Business Protecting Investors Trading Across Borders Dealing Registering with Property Licenses Getting Credit Paying Taxes Closing a Business Enforcing Employing Starting a Contracts Workers Business Source: World Bank Report. 2009 Favorable Unfavorable 180 160 140 120 Indonesia’s per capita GDP rank: 101 Median Ranking. 2009 (of 183 countries) Indonesia. Porter .Ease of Doing Business Ranking. Doing Business (2009) 20090928 – Indonesia President visit (handouts).

especially in natural resources-related fields 20090928 – Indonesia President visit (handouts). Porter .ppt 18 Copyright 2009 © Professor Michael E.Indonesia’s Business Environment Critical Strengths and Weaknesses STRENGTHS • • Solid basic skills and a large available workforce Promising reforms of rules and regulations affecting business – Top Asian reformer in 2010 World Bank Doing Business ranking WEAKNESSES • • • • • • • • • • • Weak logistical and communication infrastructure Unreliable electricity supply Labor market rigidity Regulations and customs procedures remain complex Limited depth in the financial system Weak educational quality Legal system uncertainty for investors. especially at the provincial level Dominance of large business groups and state-owned enterprises Weak cluster collaboration and development Lack of advanced skills Weak science and technology system • • Solid financial system Greater formal opening of the economy to trade and investment – New Investment Law passed in 2007 • Wide array of potential clusters.

Indonesian Business Environment Action Priorities • Continue progress on regulatory reforms • Improve logistical infrastructure • Improve communications infrastructure • Improve the quality of electricity supply • Reduce rigidities in the labor market • Reform customs procedures and continue the process of opening to international trade and investment • Increase domestic competition.ppt 19 Copyright 2009 © Professor Michael E. including limits on dominant domestic market positions • Create stronger institutions to disseminate management best practices and support the adoption of new technologies 20090928 – Indonesia President visit (handouts). Porter .

sports Souvenirs. sports casinos.. Duty Free Duty Free Banks.g.g. James Cook University.g. Queensland Tourism e. Australian Tourism Commission. Porter . e. e. Airlines. casinos. Chai McConnell. and health care. theme parks. James Cook University.ppt 20 Copyright 2009 © Professor Michael E. Jean Hayden 20090928 – Indonesia President visit (handouts). theme parks. Alexandra West.Peter Tynan. Australia Public Relations & Public Relations & Market Research Market Research Services Services Travel agents Travel agents Tour operators Tour operators Local retail. 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. Australian Tourism Commission. Queensland Tourism Industry Council Industry Council Sources: HBS student team research (2003) .g. Great Barrier Reef Authority Great Barrier Reef Authority Educational Institutions Educational Institutions e.g. Local retail.g. Souvenirs. e. Cruise Ships Cruise Ships Government agencies Government agencies e.g..Microeconomic Competitiveness: Cluster Development Tourism Cluster in Cairns. Foreign Foreign Exchange Exchange Maintenance Maintenance Services Services Airlines. health care. Banks. Cairns College of TAFE Cairns College of TAFE Industry Groups Industry Groups e.g.

implementation of standards. Judd Belstock. research. Fertilizer.Chilean Wine Cluster Related and Related and Supported Supported Industries Industries Irrigation Irrigation technology technology Grapestock Grapestock Fertilizer. 2005 Research by HBS student team (Asier Arney. export/import/FDI policies) export/import/FDI policies) Educational. taken from ‘On Competition’. pesticides. 2003 20090928 – Indonesia President visit (handouts). (trade promotion offices. Alea. and trade Educational.ppt 21 Copyright 2009 © Professor Michael E. Jacqueline O’Neill. herbicides herbicides Grape Grape harvesting harvesting equipment equipment Growers Growers / / vineyards vineyards Wineries processing Wineries / /processing facilities facilities = Strong domestic capacity = Moderate domestic capacity = Weak domestic capacity Specialized Specialized financing financing Barrels Barrels Bottles Bottles Plastics Plastics / / Tetrapacks Tetrapacks Corks Corks Labels Labels Government Government (trade promotion offices. research. Michael Porter. pesticides. Shivananda. and trade organization organization Public relations Public relations and advertising and advertising Specialized Specialized publications publications Export Export promotion promotion Agriculture Cluster Agriculture Cluster Food Cluster Food Cluster Pisco Cluster Pisco Cluster Tourism Cluster Tourism Cluster Source:Sources: Based on diagram by Alexander. Porter . implementation of standards. Noah Sawyer). Frost. Black. Don Lambert.

including SME’s • Creates a mechanism for constructive business-government dialog • A tool to identify problems and action recommendations • A vehicle for investments that strengthen multiple firms/institutions simultaneously • Fosters greater competition rather than distorting the market 20090928 – Indonesia President visit (handouts).ppt 22 Copyright 2009 © Professor Michael E. government. trade associations.Clusters as a Tool For Economic Policy • A forum for collaboration between the private sector. educational. and research institutions • Brings together firms of all sizes. Porter .

technology transfer) Standard setting and quality initiatives Business Attraction Clusters Export Promotion Environmental Stewardship Natural Resource Protection Physical Infrastructure Market Information and Disclosure • Clusters provide a framework for implementing public policy and organizing public-private collaboration to enhance competitiveness 20090928 – Indonesia President visit (handouts).ppt 23 Copyright 2009 © Professor Michael E.g. university departments. Porter .Clusters and Policy Implementation Education and Workforce Training Management Training Science and Technology Investments (e. centers..

oil and gas.Indonesian Clusters • Indonesia has potential strengths in a wide array of clusters. including agriculture.ppt 24 Copyright 2009 © Professor Michael E. tourism. and forms of mining 20090928 – Indonesia President visit (handouts). Porter . forest products. coal.

0% 0. Mining and Manufacturing 1. International Cluster Competitiveness Project.034% Coal and Briquettes (5.5% Oil and Gas Metal. Michael E.2 Billion = 1.0% -2.5% Prefabricated Enclosures and Structures Jewelry.79% 0.0% Exports of US$4. Porter .5% 1.5% 0. Copyright 2009 © Professor Michael E.5% -1.Indonesia’s National Cluster Export Portfolio 1997 to 2007 2.0% -1. Recreational and Children's Goods Communications Equipment Chemical Products Construction Materials Motor Driven Products Communication Services Lighting and Electrical Equipment Marine Equipment Processed Foods Transportation and Logistics Heavy Machinery Production Technology Automotive Aerospace Vehicles and Defense Financial Services Average World Export Share: 0. 1997 to 2007 Source: Prof.0% -0. Porter.76%) Textiles Apparel Plastics Tobacco 1.5% Fishing and Fishing Products Change In Overall World Export Share: +0. Underlying data drawn from the UN Commodity Trade Statistics Database and the IMF BOP statistics. Harvard Business 25 20090928 – Indonesia President visit (handouts).5% Change in Indonesia’s world export market share.ppt School. Precious Metals and Collectibles Business Services IT Analytical Instruments Biopharmaceuticals 0.35%. Project Director.0% Forest Products Furniture Building Fixtures and Equipment (-3. Institute for Strategy and Competitiveness. 12. 2007 2.36%) Footwear Agriculture Products Indonesia’s world export market share.0% Entertainment Leather and Related Products Publishing and Printing Construction Services Sporting. Richard Bryden.

forest products.ppt 26 Copyright 2009 © Professor Michael E. Porter . coal. tourism. with few activities in related and supporting industries • The National Industrial Policy approved in 2008 identifies priority sectors. and forms of mining • Indonesia’s emerging clusters are heavily based on the country’s abundant natural endowments. but there is no effective cluster development effort • Existing cluster related efforts suffer from weak coordination across ministries and agencies 20090928 – Indonesia President visit (handouts). including agriculture.Indonesian Clusters • Indonesia has potential strengths in a wide array of clusters. oil and gas.

Share of World Exports by Cluster Indonesia.ppt Copyright 2009 © Professor Michael E. 2007 Strong Stronger Strongest Fishing & Fishing Products Entertainment Agricultural Products Transportation & Logistics Hospitality & Tourism Textiles Prefabricated Enclosures Furniture Building Fixtures. Analytical Education & Instruments Knowledge Medical Creation Devices Communications Publishing Equipment & Printing Biopharmaceuticals Chemical Products Oil & Gas Plastics Jewelry & Precious Metals Financial Services Business Services Apparel Leather & Related Products Motor Driven Products Tobacco Heavy Machinery Production Technology Automotive Aerospace Mining & Metal Engines Manufacturing Footwear Sporting & Recreation Goods 27 Marine Equipment Note: Clusters with overlapping borders have at least 20% overlap (by number of industries) in both directions. Porter . 20090928 – Indonesia President visit (handouts). Equipment & Services Lightning & Electrical Equipment Power Generation Construction Materials Heavy Construction Services Forest Products Processed Food Distribution Services Aerospace Vehicles & Information Defense Tech.

Porter .Indonesian Clusters Action Priorities • Adopt cluster development as a central approach for organizing the government’s business development efforts • Utilize cluster initiatives as a tool to engage the private sector in more effective collaboration with government at the national and regional level • Use clusters to organize export promotion and FDI attraction 20090928 – Indonesia President visit (handouts).ppt 28 Copyright 2009 © Professor Michael E.

Porter .Geographic Influences on Competitiveness Neighboring Countries Neighboring Countries Nation Nation Regions and Cities Regions and Cities 20090928 – Indonesia President visit (handouts).ppt 29 Copyright 2009 © Professor Michael E.

Recreational and Children's Goods and Children's Goods Financial Services Financial Services Processed Food Processed Food Illinois Illinois Biopharmaceuticals Biopharmaceuticals Lighting and Electrical Equipment Lighting and Electrical Equipment Heavy Machinery Heavy Machinery Metal Manufacturing Metal Manufacturing Maine Maine Forest Products Forest Products Aerospace Engines Aerospace Engines Communications Equipment Communications Equipment Hospitality and Tourism Hospitality and Tourism Idaho Idaho Agricultural Products Agricultural Products Information Technology Information Technology Prefabricated Enclosures Prefabricated Enclosures Furniture Furniture Forest Products Forest Products Nevada Nevada Leather and Related Products Leather and Related Products Heavy Construction Services Heavy Construction Services Hospitality and Tourism Hospitality and Tourism Transportation and Logistics Transportation and Logistics Kentucky Kentucky Automotive Automotive Plastics Plastics Construction Materials Construction Materials Transportation and Logistics Transportation and Logistics South Carolina South Carolina Textiles Textiles Forest Products Forest Products Automotive Automotive Production Technology Production Technology Colorado Colorado Oil and Gas Products and Services Oil and Gas Products and Services Medical Devices Medical Devices Aerospace Vehicles and Defense Aerospace Vehicles and Defense Entertainment Entertainment Mississippi Mississippi Furniture Furniture Fishing and Fishing Products Fishing and Fishing Products Power Generation and Transmission Power Generation and Transmission Motor Driven Products Motor Driven Products Copyright 2009 © Professor Michael E. Porter. Institute for Strategy and Competitiveness. 2006 Oregon Oregon Agricultural Products Agricultural Products Prefabricated Enclosures Prefabricated Enclosures Forest Products Forest Products Analytical Instruments Analytical Instruments South Dakota South Dakota Heavy Machinery Heavy Machinery Sporting.ppt . States.Specialization by Traded Clusters U. Harvard Business School. Richard Bryden. Cluster Mapping Project. Michael E. 30 20090928 – Indonesia President visit (handouts). Recreational Sporting. Porter Alaska Alaska Fishing and Fishing Products Fishing and Fishing Products Power Generation and Transmission Power Generation and Transmission Heavy Construction Services Heavy Construction Services Hospitality and Tourism Hospitality and Tourism Source: Prof.S. Project Director.

ppt 31 Copyright 2009 © Professor Michael E. Provinces of Indonesia • Indonesia’s provinces are geographically dispersed and culturally diverse • Indonesia’s population is becoming increasingly urban • Weak infrastructure has limited internal trade and specialization and made it difficult to access Indonesia’s large national market • Decentralization in government has led initially to inefficiency and corruption 20090928 – Indonesia President visit (handouts).Indonesia’s Provinces Source: Wikipedia. Porter .

82% Rp0 3. 2000.5% 8.0% 6.5% 7. 2007 (Constant Market Prices.ppt 32 Copyright 2009 © Professor Michael E.25%.41 Rp5 Naggroe Aceh Darussalam (-5. Yogyakarta Sulawesi Utara Jambai Sulawesi Tenggara Sulawesi Selatan Jawa Tengah Lampung Sulawesi Barat Bengkulu Nusa Tenggara Barat Nusa Tenggara Timur Maluku Maluku Utara Gorontalo Weighted Indonesian Average: 4. Rp39.5% 4. population held constant when calculating per capita levels.0% 7.0% 4.5% 5. Porter .84) Riau Rp15 Rp10 Kepulauan Bangka Belitung Kalimantan Tengah Banten Jawa Timur Weighted Indonesian Average: Rp9.69) Kepulauan Riau (Rp28.5% 6.23%) Kalimantan Selatan Papau (-2. CAGR 2003 to 2007 Note: Since population only available for 2000.0% 5. 2000).27%) Sumatera Utara Jawa Barat Sumatera Selatan Bali Papua Barat Sumatera Barat Kalimantan Barat Sulawesi Tengah Dl. Million Rupiah) Divergent Performance DKI Jakarta Rp39.Indonesia’s Provinces GDP per Capita. 20090928 – Indonesia President visit (handouts).0% Growth of GDP per Capita (Constant Market Prices.0% 3.96) Rp20 Kalimantan Timur (2.

and open internal competition • Reduce internal administrative and policy barriers to inter-provincial trade and investment • Improve the capabilities of provincial governments to improve policy formulation and implementation. Porter .Indonesian Provinces Action Priorities • Strengthen logistical and communications infrastructure linking the provinces to expand trade.ppt 33 Copyright 2009 © Professor Michael E. and to reduce corruption • Support provinces in creating distinctive economic strategies • Create rules that limit destructive competition among provinces for investments. such as large subsidies • Create a structure and incentives to align and harmonize national and provincial policies 20090928 – Indonesia President visit (handouts). encourage economic specialization.

Geographic Influences on Competitiveness Neighboring Countries Neighboring Countries Nation Nation Regions and Cities Regions and Cities 20090928 – Indonesia President visit (handouts). Porter .ppt 34 Copyright 2009 © Professor Michael E.

Porter .Economic Integration with Neighboring Countries South East Asia • Economic coordination among neighboring countries can significantly enhance competitiveness 20090928 – Indonesia President visit (handouts).ppt 35 Copyright 2009 © Professor Michael E.

Economic Strategy For Cross-National Regions Traditional View • Regions as free trade zones Emerging View • Regional strategy as a powerful tool to enhance competitiveness across countries – Expand trade and investment within the region – Attract more foreign investment to the region – Capture synergies in improving the business environment – Accelerate the rate of domestic policy improvement – Enhance interest and investment in the region by the international community 20090928 – Indonesia President visit (handouts).ppt 36 Copyright 2009 © Professor Michael E. Porter .

Porter . e.g. – Tourism – Agribusiness – Transport & Logistics – Business services Macroeconomic Macroeconomic Competitiveness Competitiveness Regional Regional Strategy & Strategy & Governance Governance • Creating a regional strategy and marketing program • Sharing best practices in government operations • Creating regional institutions – Dispute resolution mechanisms – Regional development bank • Developing a regional position with international organizations • Coordinating programs to improve public safety • Coordinating macro-economic policies 20090928 – Indonesia President visit (handouts).ppt 37 Copyright 2009 © Professor Michael E.Economic Coordination Among Neighbors Capturing Synergies Factor Factor (Input) (Input) Conditions Conditions • Improving regional transportation infrastructure • Enhancing regional communications and connectivity • Creating an efficient energy network • Linking financial markets • Harmonizing administrative requirements for businesses • Opening 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 • Harmonizing environmental standards • Harmonizing product safety standards • Establishing reciprocal consumer protection laws • Opening government procurement within the region Related and Related and Supporting Supporting Industries Industries • Facilitating crossborder cluster upgrading.

Porter .Indonesia and ASEAN • ASEAN has set ambitious policy goals but there is limited implementation • ASEAN’s agenda is focused on a reciprocal trade liberalization.ppt 38 Copyright 2009 © Professor Michael E. rather than upgrading regional competitiveness • ASEAN is moving too slowly towards greater economic integration • Indonesia has played a largely passive role in ASEAN • Indonesian firms have been slow to penetrate regional markets • Indonesia can be a leading force in driving ASEAN forward 20090928 – Indonesia President visit (handouts).

endowments. and potential strengths? What is Indonesia’s value proposition for business? In what clusters can Indonesia excel? What role can Indonesia play in its region? Developing Unique Strengths Developing Unique Strengths • What are the key strengths that Indonesia must build upon? Addressing Crucial Constraints Addressing Crucial Constraints • What weaknesses must be addressed to achieve parity with peer countries? • An economic strategy requires rigorous prioritization and sequencing 20090928 – Indonesia President visit (handouts). legacy.ppt 39 Copyright 2009 © Professor Michael E. Porter .Developing an Indonesian Economic Strategy National Value Proposition National Value Proposition • • • • What is the unique competitive position of Indonesia given its location.

investment and Regional integration Infrastructure Implications Political and Legal Stability Human Development Regulatory Reforms Cluster Development Government Effectiveness and Organization 20090928 – Indonesia President visit (handouts).ppt 40 Copyright 2009 © Professor Michael E. Porter . with proximity to numerous foreign markets Trade. diverse society increasingly embracing democratic principles Creative and energetic workforce Large domestic market with a growing number of urban consumers Complex geography with thousands of islands and long distances A central location in Asia.Toward an Indonesian Economic Strategy Unique Strengths • • • • • • Significant natural resources Pluralistic.

Organizing for Competitiveness • Sustained improvements in competitiveness require coordination among many parts of government – Across different ministries to align all the policies that affect clusters or aspects of competitiveness – Across geographic levels of government • Improving competitiveness requires collaboration with the private sector – Public-private dialogue to identify competitiveness priorities and implement solutions • While Indonesia has made progress on advancing competitiveness policies at the national level. Porter . policy coordination within government with the private sector remains a challenge 20090928 – Indonesia President visit (handouts).ppt 41 Copyright 2009 © Professor Michael E.

Organizing for Competitiveness Action priorities for Indonesia • Create a strategy unit in the Office of the President • Strengthen the coordinating structure within the national government • Create a public-private National Council on Competitiveness to build consensus on an overall economic strategy and track implementation • Foster Provincial Competitiveness Councils to drive consensus on provincial plans.ppt 42 Copyright 2009 © Professor Michael E. Porter . involving representatives from both public and private sector and participation by the national government 20090928 – Indonesia President visit (handouts).

Porter .Agenda for the Second Term • Improving macroeconomic foundations – Intensify the fight against corruption • Upgrading the business environment • Clusters development • Provincial economic development • Economic coordination with neighboring countries • National economic strategy • Organizing for competitiveness 20090928 – Indonesia President visit (handouts).ppt 43 Copyright 2009 © Professor Michael E.