Competitiveness: A New Economic Strategy for Peru

Professor Michael E. Porter Harvard Business School Lima, Peru November 30, 2009
This presentation draws on ideas from Professor Porter’s books and articles, in particular, Competitive Strategy (The Free Press, 1980); Competitive Advantage (The Free Press, 1985); “What is Strategy?” (Harvard Business Review, Nov/Dec 1996); “Strategy and the Internet” (Harvard Business Review, March 2001); and a forthcoming book. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Michael E. Porter. Additional information may be found at the website of the Institute for Strategy and Competitiveness, www.isc.hbs.edu. Version: November 27, 2009
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20091130 – Peru.ppt

Copyright 2009 © Professor Michael E. Porter

Prosperity Performance
PPP-adjusted GDP per Capita, 2008 ($USD) $30,000

Selected Lower and Middle Income Countries
UAE Greece ($30,650) Israel Slovenia

New Zealand

$25,000
Bahrain

South Korea Cyprus Oman Saudi Arabia Portugal Hungary

Czech Republic

Latin American countries Other countries Slovakia

Estonia

$20,000

Libya

Trinidad & Tobago Poland Croatia Panama

Lithuania Latvia Russia Argentina Venezuela Uruguay

$15,000
Mexico

Chile Malaysia Turkey Costa Rica Brazil Thailand

$10,000

Lebanon Belize

Bulgaria Belarus Romania Kazakhstan South Africa Dominican Republic Iran

Algeria
Ecuador

Colombia

Peru
China Georgia

Tunisia

$5,000

Guyana Egypt Jordan Paraguay El Salvador Bolivia Honduras Philippines Nicaragua Pakistan Guatemala

Bosnia Ukraine Albania Sri Lanka India Vietnam

$0 4% 6% 8% 10% Growth of Real GDP per Capita (PPP-adjusted), CAGR, 2004 to 2008 2 20091130 – EIU (2009), authors calculations Source: Peru.ppt 0% 2% 12% 14%

Copyright 2009 © Professor Michael E. Porter

Unemployment Performance
Unemployment Rate, 2008

Selected Countries
Dominican Republic (15.5%) Croatia Algeria Jordan Albania Colombia Turkey South Africa (22.9%) Tunisia

14%

Improving

Deteriorating
Iran Saudi Arabia

12%

10%

Poland (-8.4%) China

8%

6%

4%

Peru Syria Indonesia Egypt Brazil Argentina Uruguay Slovakia Hungary Chile Portugal Bolivia Greece Venezuela Ecuador Philippines Pakistan India Kazakhstan Slovenia Russia El Salvador Bulgaria Lithuania Ireland Israel T&T Estonia Panama Nicaragua Czech Rep. Paraguay Latvia Sri Lanka Costa Rica Vietnam Romania Mexico Cyprus Honduras Malaysia Korea Ukraine
Latin American countries Other countries Thailand

2%

0% -6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

Change of Unemployment Rate in Percentage Points, 2004 to 2008
Source: EIU (2009)
20091130 – Peru.ppt

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Copyright 2009 © Professor Michael E. Porter

ppt 1998 1999 2000 2001 2002 4 2003 2004 2005 2006 2007 Source: Informacion Socio Demografica. 2009 Copyright 2009 © Professor Michael E. from El Instituto Nacional de Estadistica e Informatica (INEI). Porter . 2001 to 2007 60% 50% 40% 30% 20% 10% 0% 1997 20091130 – Peru.Poverty Rates % of Population Under the Poverty Line Peru.

2008 100% 90% 80% 70% 60% Cambodia Latin American Countries Other countries Ireland Estonia Belarus Malta Czech Republic Thailand Panama Malaysia (103. Porter .5%) Slovakia Libya Hungary Vietnam Saudi Arabia Paraguay Lithuania Tunisia Algeria Chile Macedonia Egypt Selected Countries Slovenia Trinidad & Tobago Bulgaria Belize 50% 40% 30% 20% 10% 0% -15% Honduras Ukraine (-17.5%) Philippines Jordan Kazakhstan Cyprus Croatia Costa Rica Latvia Poland Israel Uruguay Venezuela Russia Syria Romania Indonesia Sri Lanka El Salvador Iran Greece Argentina Guatemala Albania Colombia Turkey Brazil Pakistan Ethiopia Bolivia China Morocco South Africa Ecuador Portugal Nicaragua Georgia Mexico Lebanon Peru India -10% -5% 0% 5% 10% 15% 20% Change in Exports of Goods and Services (% of GDP). 2004 to 2008 Source: EIU (2008). authors’ analysis 20091130 – Peru.ppt 5 Copyright 2009 © Professor Michael E.Export Performance Exports of Goods and Services (% of GDP).

Porter .00% 1997 20091130 – Peru.80% 0. WTO (2009) Copyright 2009 © Professor Michael E.40% 0.ppt Processed Goods Semi-processed Goods Unprocessed Goods Services TOTAL 1998 1999 2000 2001 6 2002 2003 2004 2005 2006 2007 Source: UNComTrade.20% 0.50% 0.70% 0.60% 0.10% 0.Peru’s Exports By Type of Industry World Export Market Share (current USD) 0.30% 0.

ppt Source: UNCTAD.2007 20091130 – Peru.2007 80% Latin American countries Other countries Tunisia Hungary Trinidad & Tobago Estonia Jordan (46. Average 2003 .Inbound Foreign Investment Performance Stocks and Flows. 81. World Investment Report (2009) 7 Copyright 2009 © Professor Michael E.7%) Panama (48. Average 2003 .5%.8%) Lebanon (6.2%) Cyprus Bulgaria (69%) 70% Chile 60% Vietnam Czech Republic Nicaragua Slovakia Croatia Kazakhstan Belize 50% Bolivia 40% Venezuela South Africa Slovenia Portugal Morocco Cambodia Macedonia Georgia 30% Malaysia Thailand Honduras Latvia Egypt Poland Israel Lithuania Argentina Colombia Romania Mexico Ecuador Costa Rica El Salvador Brazil Russia Bosnia 20% Peru 10% Ukraine Guatemala Paraguay Dominican Republic Turkey Malaysia Saudi Arabia China Pakistan Indonesia Sri Lanka Libya India Iran UAE Uruguay 0% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% FDI Inflows as % of Gross Fixed Capital Formation. Porter . Selected Countries Inward FDI Stocks as % of GDP.

Porter . patents per 1 million population.5 2.0 South Africa Greece 1.5 Portugal Russia 1. 2004-2008 3. 2004 – 2008 Source: USPTO (2009).0 -30% 20091130 – Peru.0 Croatia 2.ppt -20% -10% 0% 10% 8 20% 30% 40% CAGR of US-registered patents.S.5 Peru Philippines Ecuador Ukraine India China Colombia Turkey 0.5 Czech Republic 3.Innovative Capacity Innovation Output of Selected Countries Average U. EIU (2009) 50% 60% 120 patents = Copyright 2009 © Professor Michael E.0 Argentina Chile Romania Brazil Thailand Saudi Arabia Poland Bulgaria Venezuela Mexico 0.

Porter 20091130 – Peru.ppt .The Peruvian Economy in 2009 • • • Peru has had a long history of instability Since 2001. Peru has experienced high rates of economic growth – Recent surge in FDI and exports has been driven by commodities Implementation of sound macroeconomic policies has allowed Peru to weather the current global crisis – Peru’s economy has been one of the most resilient in Latin America BUT • • • Prosperity remains low and large segments of the population lack access to basic needs High unemployment and inequality persist Peru is overly dependent on commodity exports with limited potential to drive job growth and economic diversification • • Returning to 8 to 9% growth is possible only if Peru can substantially improve competitiveness Peru will need an ambitious economic and social strategy. building on the country’s unique competitive advantages 9 Copyright 2009 © Professor Michael E.

ppt 10 Copyright 2009 © Professor Michael E.What is Competitiveness? • Competitiveness depends on the productivity with which a nation uses its human. capital. Porter . not just that of export industries • Only competitive businesses can create wealth and jobs • Nations compete to offer the most productive environment for business • The public and private sectors play different but interrelated roles in creating a productive economy 20091130 – Peru. returns on natural resources) – It is not what industries a nation competes in that matters for prosperity. – Productivity sets the sustainable standard of living (wages. 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. returns on capital.

2008 Selected Countries Austria Australia Kuwait Greece Saudi Arabia Germany Switzerland Japan Spain Singapore Oman Israel Malta Slovenia Korea Hungary Czech Republic Slovakia $70.000 $50.000 $30.000 $10.000 $60.Comparative Labor Productivity Real GDP per employee (PPP adjusted US$).ppt 11 Copyright 2009 © Professor Michael E. Porter .000 UAE New Zealand Cyprus Croatia Portugal Lithuania $40.000 Estonia Poland Turkey Malaysia Mexico Latvia Chile Russia Argentina Macedonia Romania Iran Belarus South Africa Bulgaria Azerbaijan Albania Kazakhstan Peru Brazil Peru (Avg.000 $20. EIU (2009) 20091130 – Peru. growth 2001to 2008) Egypt Armenia Ukraine Jordan Thailand Georgia Serbia Syria Indonesia Philippines India Pakistan Vietnam Cambodia Bosnia China $0 -3% 0% 3% 6% 9% Growth of real GDP per employee (PPP-adjusted). 1990 to 2008 Source: authors calculation Groningen Growth and Development Centre (2009).

Determinants of Competitiveness Microeconomic Competitiveness Quality of the National Business Environment State of Cluster Development Sophistication of Company Operations and Strategy Macroeconomic Competitiveness Social Infrastructure and Political Institutions Macroeconomic Policies Natural Endowments • Macroeconomic competitiveness creates the potential for high productivity.ppt 12 Copyright 2009 © Professor Michael E. but is not sufficient • Productivity ultimately depends on improving the microeconomic capability of the economy and the sophistication of local competition 20091130 – Peru. Porter .

ppt 13 Copyright 2009 © Professor Michael E.Determinants of Competitiveness Microeconomic Competitiveness Quality of the National Business Environment State of Cluster Development Sophistication of Company Operations and Strategy Macroeconomic Competitiveness Social Infrastructure and Political Institutions Macroeconomic Policies Macroeconomic Policy Natural Endowments • Fiscal policy: public spending aligned with revenues over time • Monetary policy: low levels of inflation • Macroeconomic management: avoiding structural imbalances and cyclical overheating 20091130 – Peru. Porter .

ppt 14 Copyright 2009 © Professor Michael E. Porter .Determinants of Competitiveness Microeconomic Competitiveness Social Infrastructure and Political Institutions Quality of the National Business Environment State of Cluster Development Sophistication of Company Operations and Strategy Macroeconomic Competitiveness Social Infrastructure and Political Institutions Macroeconomic Policies • Human Development: basic education and health care • Rule of Law: property rights and due process • Political Institutions: stable and effective political and governmental processes and organizations Natural Endowments 20091130 – Peru.

and management practices needed to attain the highest level of productivity and innovation possible 20091130 – Peru.ppt 15 Copyright 2009 © Professor Michael E.Determinants of Competitiveness Microeconomic Competitiveness Quality of the National Business Environment State of Cluster Development Sophistication of Company Operations and Strategy Macroeconomic Competitiveness Social Infrastructure and Political Institutions Macroeconomic Policies Sophistication of Company Operations and Strategy Natural Endowments • The internal company skills. Porter . capabilities.

Determinants of Competitiveness Microeconomic Competitiveness Quality of the National Business Environment State of Cluster Development Sophistication of Company Operations and Strategy Quality of the National Business Environment Macroeconomic Competitiveness Social Infrastructure and Political Institutions Macroeconomic Policies • The external business environment conditions that allow companies to reach high levels of productivity and innovation Natural Endowments 20091130 – Peru. Porter .ppt 16 Copyright 2009 © Professor Michael E.

Determinants of Competitiveness Microeconomic Competitiveness Quality of the National Business Environment State of Cluster Development Sophistication of Company Operations and Strategy Macroeconomic Competitiveness State of Cluster Development Social Infrastructure and Political Institutions Macroeconomic Policies • A critical mass of firms in particular fields.ppt Natural Endowments 17 Copyright 2009 © Professor Michael E. Porter . and supporting institutions. together with specialized skills. to support high productivity through efficiencies and synergies 20091130 – Peru. infrastructure.

ppt 18 Copyright 2009 © Professor Michael E.Competitiveness and Poverty Reduction Economic Development Social Development • There is a strong connection between economic and social development • Improving competitiveness and decreasing poverty requires improving the economic and social context simultaneously 20091130 – Peru. Porter .

overall.Peru’s Competitiveness Profile. 2009 ISC Country Competitiveness Model Macroeconomic Competitiveness (82) Social Infrastructure and Pol. Institutions (90) Microeconomic Competitiveness (73) Macroeconomic Policy (69) Business Environment Quality (74) Company Sophistication (70) Peru’s GDP per capita rank is 71st versus 133 countries Note: Rank versus 133 countries. Harvard University (2009) 20091130 – Peru. Peru ranks 71st in 2008 PPP adjusted GDP per capita and 75th in 2009 Global Competitiveness Source: Country Competitiveness Model (CCM).ppt 19 Copyright 2009 © Professor Michael E. Porter . Institute for Strategy and Competitiveness.

ppt 20 Copyright 2009 © Professor Michael E. Porter .Peru’s Macroeconomic Competitiveness Macroeconomic Policy • Conservative fiscal policy 20091130 – Peru.

Porter . 2008 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% 1996 Source: EIU. 2009 20091130 – Peru.ppt Chile Peru Argentina Colombia Mexico Brazil 1998 2000 2002 2004 2006 2008 21 Copyright 2009 © Professor Michael E.Government Budget Balances Selected Countries Budget Balance (% of GDP) Ranked by Surplus.

Porter .Peru’s Macroeconomic Competitiveness Macroeconomic Policy • Conservative fiscal policy • Sound macroeconomic management • Stabilization fund However • Peru’s macroeconomic position remains overly dependent on commodities and commodity prices 20091130 – Peru.ppt 22 Copyright 2009 © Professor Michael E.

ppt 23 Copyright 2009 © Professor Michael E.Peru’s Macroeconomic Competitiveness Macroeconomic Policy • Conservative fiscal policy • Sound macroeconomic management • Stabilization fund Social Infrastructure and Political Institutions • Continued problems with corruption However • Peru’s macroeconomic position remains overly dependent on commodities and commodity prices 20091130 – Peru. Porter .

2007 versus 2001 Note: Ranks only countries available in both years (91 countries total) Source: Global Corruption Report. Porter .Corruption Perception Index. 2008 20091130 – Peru. Global Corruption Report.ppt 24 Copyright 2009 © Professor Michael E. 2007 Namibia Tunisia Peru Panama Egypt Malawi High corruption Philippines Kazakhstan Zimbabwe 91 Uzbekistan Venezuela -20 -15 -10 -5 0 5 10 15 20 Change in Rank. 2007 1 Worsening Low corruption New Zealand Sweden Switzerland Improving Norway Netherlands UK Hong Kong Austria Germany Japan Ireland United States France Chile Spain Belgium Uruguay Slovenia Portugal Estonia Taiwan Botswana Czech Republic Hungary South Africa Italy Malaysia South Korea Costa Rica Lithuania Slovakia Latvia Jordan Mauritius Greece Poland Croatia Turkey El Salvador Colombia Romania Ghana Senegal Brazil Mexico India China Singapore Argentina Moldova Honduras Cote d’Ivoire Thailand Dominican Republic Guatemala Vietnam Russia Ecuador Nicaragua Cameroon Pakistan Indonesia Nigeria Kenya Bangladesh Ukraine Tanzania Bolivia Uganda Finland Iceland Canada Israel Rank in Global Corruption Index.

despite some improvements • Weak legal system and effectiveness of property rights However • Peru’s macroeconomic position remains overly dependent on commodities and commodity prices • Unstable political processes and institutions • Government institutions are inefficient and held in low esteem by the public 20091130 – Peru.ppt 25 Copyright 2009 © Professor Michael E.Peru’s Macroeconomic Competitiveness Macroeconomic Policy • Conservative fiscal policy • Sound macroeconomic management • Stabilization fund Social Infrastructure and Political Institutions • Continued problems with corruption • Sharp inequality between indigenous groups and other citizens • Weak education system • Inadequate health care system. Porter .

and nutrition are needed • Create equal opportunity for all groups 20091130 – Peru. health.Peru’s Macroeconomic Competitiveness Action Priorities Macroeconomic Policy • Maintain macroeconomic stability • Broaden the tax base and improve collections Social Infrastructure and Political Institutions • Modernize political and governmental institutions to improve policy formulation and execution • Tackle corruption at every level of government • Improve the effectiveness of the legal system • Improve property rights • Improve human development – Rapid improvements in education. Porter .ppt 26 Copyright 2009 © Professor Michael E.

Strict quality. safety. Industries registration.. incentives for capital investment. Porter . transparency) Industries – Scientific and technological infrastructure • Availability of suppliers.g.g.Microeconomic Competitiveness: Quality of the Business Environment Context for Context for Firm Firm Strategy Strategy and Rivalry and Rivalry  Open and vigorous local competition – Openness to foreign competition – Competition laws Factor Factor (Input) (Input) Conditions Conditions • Efficient access to high quality business inputs – – – – • Local rules and incentives that encourage investment and productivity Demand Demand Conditions Conditions Human resources Capital availability Physical infrastructure Supporting Supporting Administrative infrastructure (e. intellectual property • Demanding and sophisticated local protection. related industries. in which the business environment improves to enable increasingly sophisticated ways of competing 20091130 – Peru.ppt 27 Copyright 2009 © Professor Michael E. – Efficient utilization of natural and supporting institutions endowments – e. corporate governance customers and needs standards – e.g. permitting. and environmental standards Related and Related and – Consumer protection laws • Many things matter for competitiveness • Successful economic development is a process of successive upgrading.

Peru’s Business Environment Overall Strengths and Weaknesses STRENGTHS Trade and Investment Liberalization • Openness to foreign investment • Low restrictions on capital flows • Simplification of custom procedures • Low trade barriers • Improvements in investor protections Improving Financial Markets • Soundness of banks • Improving financial market IT Infrastructure • Good quality of telecom infrastructure • Sound IT policies Other • Good management training • Improving sophistication of local buyers • Efforts to strengthen competition policy WEAKNESSES Physical Infrastructure • Low quality of air. Porter 20091130 – Peru.ppt . transport and port infrastructure • Inadequate electricity supply Workforce Development and Training • Poor quality of the higher education system • Low skill level of the labor force • Limited availability of scientists and engineers Competitive Context • Low intensity of local competition • Difficulty in business formation • Burdensome government regulations • Rigidity of employment • Weak intellectual property protection • High informality in the economy Innovation Infrastructure • Limited technological capacity • Weak university-industry research collaboration • Low patenting rates 28 Copyright 2009 © Professor Michael E.

Porter .ppt 29 Copyright 2009 © Professor Michael E.Ease of Doing Business Ranking. Doing Business (2009/10) 20091130 – Peru. 2009 Favorable Unfavorable 120 100 80 Peru’s per capita GDP rank: 72 60 40 20 0 Ease of Doing Business Getting Credit Protecting Registering Investors Property Paying Taxes Trading Across Borders Closing a Employing Starting a Business Workers Business Enforcing Contracts Dealing with Licenses Source: World Bank Report. 2009 (of 183 countries) Peru.

ppt 30 Copyright 2009 © Professor Michael E.Peru’s Business Environment Action Priorities • Improve physical infrastructure • Create an effective system for workforce training • Upgrade higher education • Encourage entrepreneurship and SME business formation – Simplify business formation – Reduce tax burden and labor market rigidities – Address other causes of informality – Strengthen financing for SMEs • Improve environmental standards • Develop innovation infrastructure – Upgrade technology standards in key clusters of the economy 20091130 – Peru. Porter .

Queensland Tourism e.g.Peter Tynan. 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. Duty Free Duty Free Banks. Cairns College of TAFE Cairns College of TAFE Industry Groups Industry Groups e. Souvenirs. Banks. Jean Hayden 20091130 – Peru. James Cook University. sports casinos. and health care. Alexandra West. Foreign Foreign Exchange Exchange Maintenance Maintenance Services Services Airlines. Great Barrier Reef Authority Great Barrier Reef Authority Educational Institutions Educational Institutions e. Cruise Ships Cruise Ships Government agencies Government agencies e. Australian Tourism Commission. Queensland Tourism Industry Council Industry Council Sources: HBS student team research (2003) .g.ppt 31 Copyright 2009 © Professor Michael E. e. James Cook University. Airlines. theme parks. Australian Tourism Commission. e. Porter .g. e.. Chai McConnell.g. Australia Public Relations & Public Relations & Market Research Market Research Services Services Travel agents Travel agents Tour operators Tour operators Local retail. theme parks..g. sports Souvenirs. Local retail.g.g. health care. casinos.g.Microeconomic Competitiveness: Cluster Development Tourism Cluster in Cairns.

Lalo Ponce-Brito. Nick Ndiritu. and Tijan Watt. Melesse Tashu. 2007 20091130 – Peru. Microeconomics of Competitiveness Course.Cluster in Developing Countries Kenya’s Cut Flower Cluster Sources: Student team research by Kusi Hornberger. Porter .ppt 32 Copyright 2009 © Professor Michael E.

and export promotions Winemaker’s Federation of Australia established Australian Wine Research Institute founded 1950s Import of European winery technology 1960s Recruiting of experienced foreign investors. market information.g. Porter and Örjan Sölvell. Porter . Harvard Business School Case Study. The Australian Wine Cluster – Supplement.ppt 33 Copyright 2009 © Professor Michael E. 2002 20091130 – Peru.The Australian Wine Cluster History 1930 First oenology course at Roseworthy Agricultural College 1955 1965 Australian Wine Bureau established 1970 Winemaking school at Charles Sturt University founded 1980 Australian Wine and Brandy Corporation established 1990 1991 to 1998 New organizations created for education. Wolf Bass 1970s Continued inflow of foreign capital and management 1980s Creation of large number of new wineries 1990s Surge in exports and international acquisitions Source: Michael E. e. research.

Clusters and Economic Diversification Linkages Across Clusters Fishing & Fishing Products Agricultural Products Processed Food Hospitality & Tourism Entertainment Textiles Prefabricated Enclosures Transportation & Logistics Furniture Building Fixtures.ppt (by number of industries) in both directions. . Equipment & Services Lightning & Electrical Equipment Power Generation Heavy Construction Services Forest Products Construction Materials Jewelry & Precious Metals Distribution Services Business Services Aerospace Vehicles & Information Defense Tech. Porter Apparel Oil & Gas Plastics Footwear Leather & Related Products Note: Clusters with overlapping borders or identical shading have at least 20% overlap 34 20091130 – Peru. Analytical Instruments Medical Devices Education & Knowledge Creation Publishing & Printing Financial Services Biopharmaceuticals Chemical Products Communications Equipment Heavy Machinery Motor Driven Products Production Technology Tobacco Mining & Metal Automotive Aerospace Manufacturing Engines Sporting & Recreation Goods Copyright 2009 © Professor Michael E.

Porter . and research institutions • Brings together firms of all sizes. the private sector.Clusters as a Tool For Economic Policy • A forum for collaboration between government. including SME’s • Creates a mechanism for constructive business-government dialogue • A tool to identify problems and concrete action recommendations • A vehicle for identifying investments that strengthen multiple firms/institutions simultaneously • A framework for implementing government polices towards business • Foster more sophisticated competition rather than distorting the market 20091130 – Peru. trade associations.ppt 35 Copyright 2009 © Professor Michael E. educational institutions.

2% Textiles Financial Services Communication Services 0.6% Change in Peru’s world export market share.2% 0. 2007 1. 36 20091130 – Peru.Peru’s Export Portfolio 1997 to 2007 1. Precious Metals and Collectibles (0.4 Billion = Copyright 2009 © Professor Michael E. Porter . Mining and Manufacturing Peru’s world export market share.0% -0.07% Jewelry.4% Change In Peru’s Overall World Export Share: +0. 1997 to 2007 Source: Prof.0% 0.ppt Exports of US$2.2% 0.4% 0. Project Director. Harvard Business School.6% Agriculture Fishing 0.4% -0.8% 0. Institute for Strategy and Competitiveness.88%. International Cluster Competitiveness Project. Underlying data drawn from the UN Commodity Trade Statistics Database and the IMF BOP statistics.4% Peru’s Average World Export Share: 0.0% 0. Richard Bryden.2% Metal. 1. Michael E. Porter.20% Apparel Hospitality and Tourism Oil & Gas Publishing and Printing Construction Materials 0.69%) 1.

37 20091130 – Peru.06% -0. Harvard Business School.Peru’s Export Portfolio 1997 to 2007 0. 2007 0.00% -0. Richard Bryden.02% 0.00% 0.4 Billion = Copyright 2009 © Professor Michael E. Michael E. Porter. International Cluster Competitiveness Project.02% 0. Porter .04% 0.05% Business Services Heavy Machinery Motor Driven Products Forest Products Building Fixtures and Equipment Footwear Biopharmaceuticals Power and Power Generation Equipment Communications Equipment Sport Prefabricated Enclosures and Structures Production Technology 0. Project Director. Underlying data drawn from the UN Commodity Trade Statistics Database and the IMF BOP statistics.20% Peru’s world export market share.06% 0.10% Change in Peru’s world export market share. Institute for Strategy and Competitiveness.15% Oil and Gas Construction Materials Furniture Textiles 0. 1997 to 2007 Source: Prof.08% 0.ppt Exports of US$2.10% Financial Services Transportation and Logistics Chemical Products Processed Foods Leather and Related Products Plastics 0.04% -0.

Project Director. Porter.0% Change in Malaysia’s world export market share.36%) Aerospace Vehicles and Defense Marine Equipment Textiles Sport Financial Services Biopharmaceuticals Heavy Machinery Footwear Hospitality and Tourism Automotive 0. 2007 2.0% -1.5% Forest Products Business Services (-2. 3.5% 1.0% Building Fixtures and Equipment Plastics Agriculture Construction Services Lighting and Electrical Equipment 1.3 Billion = Copyright 2009 © Professor Michael E.5% -1.0% Apparel Power and Power Generation Equipment Fishing & Fish Products Jewelry.09%) Communications Equipment Furniture Information Technology (6. Institute for Strategy and Competitiveness.5% 0. Harvard Business School. 38 20091130 – Peru.19%. Richard Bryden.5% Analytical Instruments Malaysia’s Average World Export Share: 1.46%) Malaysia’s world export market share. Mining and Manufacturing 0.20% Equipment (2.Malaysia’s Export Portfolio 1997 to 2007 2.24% Oil & Gas Construction Materials Motor Driven Products Transportation and Logistics Processed Foods Publishing and Printing Chemical Products Prefabricated Enclosures and Structures Communication Services Production Technology Medical Devices 1. Porter . Underlying data drawn from the UN Commodity Trade Statistics Database and the IMF BOP statistics.5% Change In Malaysia’s Overall Entertainment and Reproduction World Export Share: -0. Precious Metals and Collectibles Metal.0% -0. Michael E. 1997 to 2007 Source: Prof. International Cluster Competitiveness Project.0% 0.ppt Exports of US$9.

0% Fishing & Fishing Products Entertainment Textiles Prefabricated Enclosures Peru. Porter .ppt Copyright 2009 © Professor Michael E. 20091130 – Peru.2% .5% .5% 0. Financial Services Analytical Education & Instruments Knowledge Medical Creation Devices Communications Publishing Equipment & Printing Biopharmaceuticals Chemical Products Oil & Gas Motor Driven Products Tobacco Heavy Machinery Production Technology Automotive Apparel Leather & Related Products Plastics Aerospace Mining & Metal Engines Manufacturing Footwear Sporting & Recreation Goods 39 Marine Equipment Note: Clusters with overlapping borders have at least 20% overlap (by number of industries) in both directions.0.0% > 1. Equipment & Services Lightning & Electrical Equipment Power Generation Construction Materials Heavy Construction Services Forest Products Distribution Services Aerospace Vehicles & Information Defense Tech.1. 2007 Hospitality & Tourism Processed Food Jewelry & Precious Metals Business Services Agricultural Products Transportation & Logistics Furniture Building Fixtures.Share of World Exports by Cluster World Market Share 0.

75% . Porter . Equipment & Services Lightning & Electrical Equipment Power Generation Construction Materials Heavy Construction Services Forest Products Distribution Services Aerospace Vehicles & Information Defense Tech. Financial Services Analytical Education & Instruments Knowledge Medical Creation Devices Communications Publishing Equipment & Printing Biopharmaceuticals Chemical Products Oil & Gas Motor Driven Products Tobacco Heavy Machinery Production Technology Automotive Apparel Leather & Related Products Plastics Aerospace Mining & Metal Engines Manufacturing Footwear Sporting & Recreation Goods 40 Marine Equipment Note: Clusters with overlapping borders have at least 20% overlap (by number of industries) in both directions.2.25% > 2.1.Share of World Exports by Cluster World Market Share 1.ppt Copyright 2009 © Professor Michael E.24% . 20091130 – Peru.25% Fishing & Fishing Products Entertainment Textiles Prefabricated Enclosures Malaysia.75% 1. 2007 Hospitality & Tourism Processed Food Jewelry & Precious Metals Business Services Agricultural Products Transportation & Logistics Furniture Building Fixtures.

fishing. Porter . agribusiness.State of Cluster Development in Peru • Peru has strengths in several clusters. with limited further upgrading • Peru’s clusters are shallow. with weak supplier bases and supporting institutions • The limited cluster development efforts underway in Peru suffer from poor coordination between the private and public sectors • Clusters are so far an unexploited dimension of economic policy at the national and regional levels 20091130 – Peru. including mining.ppt 41 Copyright 2009 © Professor Michael E. tourism. jewelry and apparel • Peru’s clusters are based heavily on natural endowments.

Porter .Cluster Development in Peru Action Priorities • Adopt cluster development as a central tool for organizing business development and implementation of economic policies supporting businesses • Use cluster development to encourage value-add upgrading within existing clusters – Promote spillovers and synergies to upgrade local economies • Apply a cluster based approach to economic diversification 20091130 – Peru.ppt 42 Copyright 2009 © Professor Michael E.

Porter .ppt 43 Copyright 2009 © Professor Michael E.Clusters and Economic Diversification Upgrade Existing Export Upgrade Existing Export Products and Services Products and Services Turn Products Into Clusters Turn Products Into Clusters • Local firms • MNCs Deepen Existing Clusters Deepen Existing Clusters Develop Related Clusters Develop Related Clusters 20091130 – Peru.

Cluster Development in Peru Action Priorities • Adopt cluster development as a central tool for organizing business development and implementation of economic policies supporting businesses • Use cluster development to encourage value-add upgrading within existing clusters – Promote spillovers and synergies to upgrade local economies • Apply a cluster based approach to economic diversification • Leverage clusters to attract FDI and facilitate integration with the global economy • Use cluster initiatives to engage the private sector in more effective collaboration with government at the national and regional levels – Cluster development is an effective approach to promote private sector-led growth – Create Institutions for Collaboration (e.ppt 44 Copyright 2009 © Professor Michael E. trade associations) to organize cluster participants 20091130 – Peru.g. Porter ..

ppt 45 Copyright 2009 © Professor Michael E. Porter .Geographic Influences on Competitiveness Nation Nation Regions and Cities Regions and Cities 20091130 – Peru.

states. Porter . metropolitan areas) • Many essential levers of competitiveness reside at the regional level • Region’s specialize in different sets of clusters 20091130 – Peru.. provinces.Regions and Competitiveness • Economic performance varies significantly across sub-national regions (e.g.ppt 46 Copyright 2009 © Professor Michael E.

Porter . 2009 20091130 – Peru. Turkish Regions 2007 Istanbul Istanbul Textiles Textiles Leather and Apparel Leather and Apparel Distribution Services Distribution Services Jewelry Jewelry Bati Marmara Bati Marmara Apparel Apparel Textiles Textiles Chemicals Chemicals Construction Materials Construction Materials Bati Karadeniz Bati Karadeniz Tobacco Tobacco Apparel Apparel Metal Mining and Manufacturing Metal Mining and Manufacturing Forest Products Forest Products Orta Anadolu Orta Anadolu Furniture Furniture Textiles Textiles Agricultural Products Agricultural Products Metal Mining and Manufacturing Metal Mining and Manufacturing Dogu Karadeniz Dogu Karadeniz Food Processing Food Processing Distribution Services Distribution Services Furniture Furniture Forest Products Forest Products Dogu Marmara Dogu Marmara Textiles Textiles Automotive Automotive Apparel Apparel Furniture Furniture Kuzeydogu Anadolu Kuzeydogu Anadolu Agricultural Products Agricultural Products Footwear Footwear Distribution Services Distribution Services Hospitality and Tourism Hospitality and Tourism Ege Ege Tobacco Tobacco Textiles Textiles Construction Materials Construction Materials Apparel Apparel Guneydogu Anadolu Guneydogu Anadolu Textiles Textiles Tobacco Tobacco Oil and Gas Oil and Gas Food Processing Food Processing Bati Anadolu Bati Anadolu Furniture Furniture Construction Materials Construction Materials Distribution Services Distribution Services Aerospace Aerospace Akdenziz Akdenziz Textiles Textiles Hospitality and Tourism Hospitality and Tourism Apparel Apparel Distribution Services Distribution Services Ortadogu Anadolu Ortadogu Anadolu Textiles Textiles Agricultural Products Agricultural Products Apparel Apparel Distribution Services Distribution Services Note: Source: European Cluster Observatory.Specialization by Cluster.ppt 47 Copyright 2009 © Professor Michael E.

g. states. provinces. internal competition. and greater government accountability 20091130 – Peru.Regions and Competitiveness • Economic performance varies significantly across sub-national regions (e.. metropolitan areas) • Many essential levers of competitiveness reside at the regional level • Region’s specialize in different sets of clusters • Cluster strength directly impacts regional performance • Each region requires its own distinctive competitiveness agenda • Improving competitiveness requires effective policy collaboration between regions and the national government • Decentralization of economic policy is especially important in larger countries to foster regional specialization. Porter .ppt 48 Copyright 2009 © Professor Michael E.

ppt 49 Copyright 2009 © Professor Michael E. and economic performance 20091130 – Peru.Competitiveness of Peru’s Regions • Strong disparities exist across Peruvian regions in business environment. innovative capacity. Porter .

2008 (1994 New Peruvian Soles) 16.Dirección Nacional de Cuentas Nacionales 20091130 – Peru.Prosperity Performance Peru’s Regions GDP per Capita.ppt 50 Copyright 2009 © Professor Michael E. 2001 to 2008 Source: Fuente: Instituto Nacional de Estadistica e Informatica .513 Ica Pasco Madre de Dios Junin Ancash La Libertad Lambayeque Tumbes 4.000 Moquegua Peru’s Weighted Average: 6.000 6.000 Huancavelica Cajamarca Huanuco Ucayali Loreto Piura Puno San Martin Apurimac Cusco Amazonas Ayachucho 2.0% 14.000 0 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% Growth in GDP per Capital (CAGR).000 Tacna Peru’s Weighted Average: 6. Porter .000 Lima 10.000 12.000 Areguipa 8.

ppt 51 Copyright 2009 © Professor Michael E. Porter . design. and economic performance • Decentralization remains incomplete and has produced some social tension and unrest • There is weak planning. innovative capacity. and implementation capacity at the local level • Sub-national governments are highly dependent on transfers from the central government 20091130 – Peru.Competitiveness of Peru’s Regions • Strong disparities exist across Peruvian regions in business environment.

ppt 52 Copyright 2009 © Professor Michael E.Peru’s Regions Action Priorities • Continue decentralization of responsibilities and resources to sub-national governments • Improve the capacity of local governments to plan. coastal and Amazon regions – Strengthen human development in the poorer highland regions 20091130 – Peru. design and implement development polices • Improve national-regional collaboration to implement regional programs • Adopt specific steps to reduce corruption at the regional level • Improve physical connections among regions to support economic and social integration • Promote greater linkages between resource clusters and regional economies • Address the underlying causes of inequality between the highland. Porter .

Porter .ppt 53 Copyright 2009 © Professor Michael E.Geographic Influences on Competitiveness Neighboring Countries Neighboring Countries Nation Nation Regions and Cities Regions and Cities 20091130 – Peru.

Economic Coordination with Neighboring Countries

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Competitiveness and the Neighborhood
• Opening trade and investment among neighbors fuels growth and specialization
– A country’s neighbors are its most natural trading and investment partners – The most natural path for internationalization by local firms is the neighborhood – Open trade and investment make each country a more attractive location for foreign investment

• Economic coordination with neighbors drives improvements in the business environment
– Capturing synergies in policy and infrastructure – Gaining greater clout in international negotiations

• External agreements help overcome domestic political barriers to reform
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Economic Integration Among Neighbors
Capturing Synergies
Factor Factor Conditions Conditions
• Improving the efficiency of the regional transportation network • Creating an efficient energy network • Enhancing regional communications and connectivity • Harmonizing administrative requirements for businesses • Linking financial markets • Facilitating the movement of students for higher education

Context for Context for Strategy Strategy and Rivalry and Rivalry
• Eliminating trade and investment barriers within the region • Simplifying and harmonizing cross-border regulations and paperwork
• Coordinating anti-monopoly and fair competition policies

Demand Demand Conditions Conditions
• Opening government procurement within the region Harmonizing environmental standards • Harmonizing product safety standards • Establishing reciprocal consumer protection laws

Related and Related and Supporting Supporting Industries Industries
• Facilitating crossborder cluster development – e.g., Supplier networks – Transport & Logistics – Quality standards

Macroeconomic Macroeconomic Competitiveness Competitiveness

• Coordinating macroeconomic policies • Coordinating programs to improve security and public safety

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including with the U.ppt 57 Copyright 2009 © Professor Michael E. has created significant opportunities for new economic linkages with neighbors Action Agenda • Economic coordination with neighboring countries is an important tool in economic development • Peru can take a proactive leadership role in promoting trade liberalization efforts with particular neighbors and the region • Peru can be a platform for South American firms seeking to access the U. and Asian markets • Leverage inbound and outbound FDI with neighbors to upgrade local competitiveness 20091130 – Peru. Porter .Peru and the Neighborhood Assessment • Peru remains a relatively isolated country for geographic reasons • Peru has weak relations with some of its neighbors • Peru has taken some positive steps to improve relations with some neighbors • Peru’s recent trade liberalization program.S.S. and China.

The Need for an Economic Strategy Policy Improvement Economic Strategy • Implementing best practices in each policy area • A prioritized agenda to create a unique competitive position for a country or region • There are a huge number of policy areas that matter • No country can or should try to make progress in all areas simultaneously 20091130 – Peru. Porter .ppt 58 Copyright 2009 © Professor Michael E.

legacy. existing strengths. and potential strengths? – What unique value as a business location? – In what types of fields / clusters? – What roles with neighbors.ppt 59 Copyright 2009 © Professor Michael E. rate of progress. Porter .The Need for an Economic Strategy National Value Proposition National Value Proposition • What are the distinctive competitive assets of the nation’s economy given its location. and the wider world? Refining Unique Strengths Refining Unique Strengths • What elements of the business environment and institutional context can be unique strengths relative to peers/neighbors? • What existing and emerging clusters can be developed? Addressing Crucial Constraints Addressing Crucial Constraints • What are the crucial weaknesses and constraints that must be addressed to achieve parity with peer countries and allow the country to move to the next level? • Priorities and sequencing are a necessity in economic development 20091130 – Peru. the broader region.

hard working population Rich culture and history Legacy of domestic collaboration to overcome obstacles Open to FDI and capital flows Privileged access to major foreign markets (United States. Porter . China.) Implications Upgrade Ground.Toward a Peruvian Economic Strategy Unique Strengths • • • • • • Abundant natural endowments Vast biodiversity and ecosystems Central location in South America Young. etc.ppt • Upgrade Peru’s competitive assets to achieve high rates of sustainable economic growth while improving welfare of the poor 60 Copyright 2009 © Professor Michael E. More Stable Effective Political Institutions Implement Next Stage Regulatory Reforms to Improve the Business Environment Improve the Quality of Education and Workforce Training • • 20091130 – Peru. Air and Port Transportation Infrastructure to Connect Peruvian Regions with Neighbors and the World Foster Cluster Development Around Resource Strengths Reduce and Eliminate Corruption Create New.

Porter .ppt 61 Copyright 2009 © Professor Michael E.Accelerating Poverty Reduction in Peru Reduce Poverty Increase Competitiveness 20091130 – Peru.

and private sector organizations sector organizations • Competitiveness must be a bottom-up process in which many individuals. educational and companies.ppt 62 Copyright 2009 © Professor Michael E. and institutions take responsibility and act 20091130 – Peru. companies. and private research institutions. spending and policy decisions. government at multiple levels. spending and incentives incentives •• Economic development is a Economic development is a collaborative process involving collaborative process involving government at multiple levels. companies. educational and research institutions. Porter .The Process of Economic Development Shifting Roles and Responsibilities Old Model Old Model New Model New Model •• The central government drives The central government drives economic development through economic development through policy decisions.

ppt 63 Copyright 2009 © Professor Michael E.Organizing for Competitiveness in Peru Assessment • Peru has weak coordination among government ministries and agencies responsible for improving competitiveness – Across different ministries to align policies – Across geographic levels of government • The National Council on Competitiveness was created in 2002. Porter . but it has had limited impact • There are few competitiveness initiatives at the regional level to mobilize strategic thinking and drive action • The private sector has limited engagement in competitiveness development 20091130 – Peru. a positive step.

ppt 64 Copyright 2009 © Professor Michael E. public and academic sectors as well as federal government participation • The private sector must assume a catalytic role in economic strategy formulation and implementation 20091130 – Peru. Porter .Revitalizing Peru’s Organization to Drive Competitiveness Action Agenda • Create an effective coordination structure within government across ministries and agencies • Restart the National Council on Competitiveness to build consensus on an overall economic strategy and track implementation – The council will require strong private sector leadership • Create Regional Competitiveness Councils to drive consensus on state plans and monitor implementation – Involve representatives from the private.

support high wages. Porter . buy local goods.Integrating Business and the Society Economic Objectives Social Objectives • There is an inevitable link between business and society • A healthy business depends on a healthy community to create demand for its products and provide a supportive business environment • A healthy society depends on competitive companies that can create jobs.ppt 65 Copyright 2009 © Professor Michael E. and pay taxes • There is a long-term synergy between economic and social objectives 20091130 – Peru. build wealth.

Porter .ppt 66 Copyright 2009 © Professor Michael E.Competitiveness and Social Issues Worker Education and Skills Worker Safety Poverty in the Company’s Communities Environmental Impact Company Productivity Gender Equity Energy Use Employee Health Water Use 20091130 – Peru.

Corporate Role in Competitiveness The Concept of Shared Value Shared Value: Policies and practices that enhance the competitiveness of a company while simultaneously advancing economic and social conditions in the communities in which it operates • Find the points of convergence between economic and social objectives.ppt 67 Copyright 2009 © Professor Michael E. not assumed tradeoffs or the need for redistribution – These points of convergence are growing • Achieving shared value requires new thinking. and new approaches to management • Shared value opportunities are even greater in developing countries • Shared value thinking applies equally to NGOs and governments 20091130 – Peru. Porter . new technologies.

Porter .Corporate Role in Competitiveness Action Agenda • Organize the private sector to have a collective voice in competitiveness • Participate actively in national and regional competitiveness initiatives • Inform government on business needs and constraints bearing on company and cluster development • Nurture local suppliers and attract foreign suppliers • Work closely with local educational and research institutions to improve their quality and create specialized programs addressing the cluster’s needs • Collaborate with other companies to enhance competitiveness through trade associations and other mechanisms • Focus corporate social responsibility initiatives on enhancing the business environment 20091130 – Peru.ppt 68 Copyright 2009 © Professor Michael E.

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