ICICSymposium

U.S.
COMPETITIVENESS AND
IMPLICATIONS FOR OUR ECONOMIC
FUTURE
Professor Michael E. Porter
Harvard Business School
2014 Inner City 100 Symposium: Icons of Industry Growth

October 16, 2014
QUESTIONS FOR TODAY
• Does America really have a competitiveness problem?
• How did America get here?
• What should leaders do to restore U.S. competitiveness?
U.S. COMPETITIVENESS PROJECT 2

DOES AMERICA REALLY HAVE A COMPETITIVENESS PROBLEM?
WHAT IS COMPETITIVENESS?
The United States is a competitive location to the extent that firms operating in
the U.S. are able to compete successfully in the global economy while supporting
high and rising wages and living standards for the average American
Competitiveness depends on the long-run productivity of the U.S. as a place to

do business
– The productivity of existing firms and workers
– The ability to achieve high participation of citizens in the workforce
Competitiveness is not:
– Low wages
– A weak currency
– Jobs per se

ROLLING 10-YEAR COMPOUND ANNUAL GROWTH RATE
IN TOTAL NUMBER OF U.S. PRIVATE NONFARM EMPLOYEES
3%
1975-2001
AVERAGE: 2.12%
2%
1%
0%
-1%
1975 1980 1985 1990 1995 2000 2005 2010 2013
Source: Bureau of Labor Statistics, Current Population Survey; author’s calculations.

HOW DID AMERICA GET HERE?
PRIVATE, NONFARM EMPLOYMENT BY TYPE OF INDUSTRY
140
120
Employment (in millions of jobs)
100
INDUSTRIES SERVING
LOCAL MARKETS
80 (CAGR= 0.89%)
60
40
INDUSTRIES EXPOSED TO
INTERNATIONAL COMPETITION
20 (CAGR= 0.02%)
0
1998 2000 2002 2004 2006 2008 2010 2012
Source: Prof. Michael E. Porter, Harvard Business School; U.S. Cluster Mapping 2014 Benchmark Definitions (Delgado-Porter-Stern 2013), Richard Bryden, Project Director.

REAL HOUSEHOLD INCOME BY QUANTILE IN THE INCOME DISTRIBUTION
200
Household income in thousands of 2012 U.S. dollars
180
160 95th PERCENTILE (CAGR = 1.2%)
140
120
100
80th PERCENTILE (CAGR = 0.9%)
80
60
40
20
0
1967 1972 1977 1982 1987 1992 1997 2002 2007 2012
2013
Note: Household income includes wages, self-employment, retirement, interest, dividends, other investment, unemployment, disability, alimony or child support, and other
periodic income.
Source: U.S. Census Bureau, Current Population Survey, Annual Social and Economic Supplements.

U.S. LABOR FORCE PARTICIPATION RATE
78%
1997
74%
1981
70%
POPULATION AGED
16-64 INVOLVED IN
THE WORKFORCE
66%
62%
1948 1957 1965 1973 1982 1990 1998 2007 Q2 2014
Note: Rolling 12-month average in civilian labor force (not seasonally adjusted) over civilian noninstitutional population age 16-64.
Source: Bureau of Labor Statistics, author’s calculations.

U.S. LABOR FORCE PARTICIPATION RATE FOR PRIME WORKING AGE MEN
98%
95%
PERCENTAGE OF PRIME
WORKING AGE MEN
(25-54 YEARS OLD)
INVOLVED IN THE
WORKFORCE
91%
87%
1948 1957 1965 1973 1982 1990 1998 2007 Q3 2014
Note: Rolling 12-month average in male civilian labor force age 25-54 (not seasonally adjusted) over civilian noninstitutional population age 25-54.
Source: Bureau of Labor Statistics, author’s calculations.

REAL HOURLY WAGE GROWTH BY EDUCATIONAL ATTAINMENT,
1979-2000 VS. 2000-2012
1.5%
Compound annual growth rate
1.0%
0.5%
0.0%
-0.5%
-1.0%
-1.5%
Less than high High school Some college College degree Advanced
school degree
1979-2000
Source: Economic Policy Institute, “A Decade of Flat Wages,” August 2013. Based on Current Population Survey. 2000-2012

INDEX OF TOTAL NUMBER OF EMPLOYEES IN FIRMS OF VARIOUS SIZES
Number of
200 employees in
each firm
1,000–9,999
180 100–999
Total number of employees, indexed
10,000 or more
160
(1978 = 100)
10–99
140
1–9
120
100
80
1978 1982 1986 1990 1994 1998 2002 2006 2010
Source: U.S. Census Bureau Business Dynamics Statistics.

U.S. FIRMS CREATED AND DISSOLVED
650
GREAT
RECESSION
550
FIRMS CREATED
Number of firms
(000s)
450
350 FIRMS DISSOLVED
250
1978 1983 1988 1993 1998 2003 2008 2011
Notes: Shaded area indicates the recession of December 2007 to June 2009 as defined by the National Bureau of Economic Research.
Chart adapted from Ian Hathaway and Robert E. Litan, “Declining Business Dynamism in the United States: A Look at States and Metros,” Economic Studies at
Brookings, May 2014.

ANNUAL U.S. GDP GROWTH RATE, 5-YEAR ROLLING AVERAGE (1961-2013)
7%
Annual growth rate (%, 5 year rolling average)
6%
5%
4%
3%
2%
1%
0%
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Source: The World Bank.

IS THE DIVERGENCE SUSTAINABLE?
• Shortages of productive workers
• Weak consumer demand
• Disgruntled voters
• Less support for pro-business policies
• Skirmishes around minimum wage laws, tax inversions

QUESTIONS FOR TODAY

ASSESSMENTS OF ELEMENTS OF THE U.S. BUSINESS ENVIRONMENT
60%
Weakness but Improving Strength and Improving
U.S. trajectory compared to other advanced economies
40%
20%
0%
-20%
-40%
-60%
-80%
Weakness and Deteriorating Strength but Deteriorating

-100%
-60% -40% -20% 0% 20% 40% 60% 80% 100%
Current U.S. position compared to other advanced economies

Source: Harvard Business School 2013–14 Survey on U.S. Competitiveness.
60%
ENTREPRENEURSHIP
UNIVERSITIES
40%
FIRM MANAGEMENT
CAPITAL
CLUSTERS MARKETS
20% PROPERTY RIGHTS INNOVATION
COMMUNICATIONS HIRING AND
INFRASTRUCTURE FIRING
0%
-20%
-40%
-60%
-80%

-100%
-60% -40% -20% 0% 20% 40% 60% 80% 100%

60%
ENTREPRENEURSHIP
UNIVERSITIES
40%
FIRM MANAGEMENT
CAPITAL
CLUSTERS MARKETS
0%
LEGAL
-20% FRAMEWORK
SKILLED
MACRO LABOR
POLICY
-40%
REGULATION
LOGISTICS
-60% INFRASTRUCTURE
-80%

-100%
-60% -40% -20% 0% 20% 40% 60% 80% 100%

60%
ENTREPRENEURSHIP
UNIVERSITIES
40%
FIRM MANAGEMENT
CAPITAL
CLUSTERS MARKETS
0%
LEGAL
-20% FRAMEWORK
SKILLED
MACRO LABOR
POLICY
-40%
HEALTH CARE REGULATION
LOGISTICS
TAX CODE
-60% INFRASTRUCTURE
K-12 EDUCATION
SYSTEM
POLITICAL
-80%
SYSTEM

-100%
-60% -40% -20% 0% 20% 40% 60% 80% 100%

ADULT LITERACY COMPETENCY BY AGE COHORT
70
60
Percent of adults in top two
proficiency categories
50
U.S.
40
30
20
10
0
55-65 45-54 35-44 25-34
Source: Goodman, M., Finnegan, R., Mohadjer, L., Krenzke, T., and Hogan, J. (2013). Literacy, Numeracy, and Problem Solving in Technology-Rich Environments Among U.S.
Adults: Results from the Program for the International Assessment of Adult Competencies 2012: First Look (NCES 2014-008). U.S. Department of Education. Washington, DC:
National Center for Education Statistics.
70 Int’l
average
60
50
U.S.
40
30
20
10
0
55-65 45-54 35-44 25-34
70 Int’l 10
average
60
5
50
U.S. advantage (%)

U.S.
40
0
30
20
-5
10
0 -10
55-65 45-54 35-44 25-34 55-65 45-54 35-44 25-34
ADULT COMPETENCIES BY AGE COHORT
Literacy Problem-solving Numeracy

U.S. advantage
10
55-65
55-65
45-54
0
45-54 55-65
-5
U.S. disadvantage
35-44
35-44
25-34
-10 16-24 45-54
25-34
16-24
35-44
-15 25-34
16-24
-20
Definition of Y axis (performance) = % of U.S. adults in top two proficiency categories - % of all int’l. adults in top two proficiency categories.
RELATIVE ASSESSMENTS OF ELEMENTS OF THE U.S. BUSINESS
BY RESPONDENT’S FIRM SIZE
Number of employees
1,000- 10,000
1-9 10-99 100-999 9,999 or more
K-12 education --- + +++ +++ --
Communications infrastructure -- - ++ + -
Macroeconomic policy -- - ++ +++ +++
Regulation -- - +++ ++ +
Health care -- + + ++ ---
Innovation -- + ++ + +
Logistics infrastructure -- + ++ +++ --
Tax code -- ++ ++ +++ -
Universities - - ++ ++ +
Political system - - +++ +++ -
Entrepreneurship - + + + +
Capital markets - + + + +
Clusters - + ++ + -
Hiring and firing - ++ -- ++ ++
Legal framework - ++ ++ ++ -
Property rights - ++ ++ ++ ++
Skilled labor - +++ ++ ++ +
Firm management + + - - +
Compared to the average respondent in 2013-14, respondents in this firm-size class placed this element:
--- -- - + ++ +++
5 to 10 0 to 5 0 to 5 5 to 10 10 or more
10 or more points to points to points to points to points to
to the left the left the left the right the right the right
QUESTIONS FOR TODAY

WHAT SHOULD LEADERS DO TO RESTORE U.S. COMPETITIVENESS?
IMMEDIATE FEDERAL POLICY PRIORITIES
1. Simplify the corporate tax code with lower statutory rates and no loopholes
2. Tax overseas profits earned by American multinational companies only where they are earned
3. Ease the immigration of highly skilled individuals
4. Aggressively address distortions and abuses in the international trading system
5. Improve logistics, communications and energy infrastructure
6. Simplify and streamline regulation
7. Create a sustainable federal budget, including revenue increases and cost control
8. Responsibly develop America’s shale-gas and oil reserves
Source: Porter, Michael, and Jan Rivkin. "An eight-point plan to restore American competitiveness." The Economist: The World in
2013. (Nov 2012).

APPROVAL RATES FOR PROPOSED FEDERAL POLICIES
U.S. business leaders General public
All Liberal Conservative All Liberal Conservative
Corporate tax reform 91% 91% 92% 72% 75% 73%
Sustainable federal budget 90% 92% 85% 60% 62% 63%
High‐skill immigration 89% 90% 88% 42% 55% 38%
Streamlined regulations 86% 71% 95% 52% 43% 62%
Infrastructure investments 85% 92% 75% 68% 74% 70%
International trading system 80% 81% 79% 60% 67% 58%

Repsonsible energy
79% 75% 80% 64% 65% 64%
extraction
Territorial tax code 58% 34% 75% 25% 19% 30%
Source: Harvard Business School 2012 Survey on U.S. Competitiveness.

ROLE OF BUSINESS LEADERS
1. Vigorously pursue productivity and profitability within the business

a. Position the company to draw on U.S. strengths
b. Move back to the U.S. business activities that can be productive here
2. Tap the many opportunities to build the commons and benefit the business
a. Enhance cluster strength and regional economic strategy
b. Improve skills, through apprenticeships, training programs, and partnering with
educational institutions
c. Upgrade and tap the U.S. supply chain
d. Support innovation and entrepreneurship in the company’s field
3. Stop narrowly self-interested actions that undermine the commons,

especially in government relations
Source: Porter, Michael, and Jan Rivkin. "What Business Should Do to Restore U.S. Competitiveness." FORTUNE. (Oct 2012).

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U.S.

2014 Inner City 100 Symposium: Icons of Industry Growth

• Does America really have a competitiveness problem?

• How did America get here?

• What should leaders do to restore U.S. competitiveness?

U.S. COMPETITIVENESS PROJECT 2

Competitiveness depends on the long-run productivity of the U.S. as a place to

U.S. COMPETITIVENESS PROJECT 3

U.S. COMPETITIVENESS PROJECT 4

U.S. COMPETITIVENESS PROJECT 5

160 95th PERCENTILE (CAGR = 1.2%)

U.S. COMPETITIVENESS PROJECT 6

U.S. COMPETITIVENESS PROJECT 7

U.S. COMPETITIVENESS PROJECT 8

U.S. COMPETITIVENESS PROJECT 9

Source: U.S. Census Bureau Business Dynamics Statistics.

350 FIRMS DISSOLVED

U.S. COMPETITIVENESS PROJECT 11

Source: The World Bank.

U.S. COMPETITIVENESS PROJECT 12

• Shortages of productive workers

• Weak consumer demand

• Less support for pro-business policies

• Skirmishes around minimum wage laws, tax inversions

U.S. COMPETITIVENESS PROJECT 13

• Does America really have a competitiveness problem?

• How did America get here?

• What should leaders do to restore U.S. competitiveness?

U.S. COMPETITIVENESS PROJECT 14

Weakness and Deteriorating Strength but Deteriorating

Current U.S. position compared to other advanced economies

Weakness and Deteriorating Strength but Deteriorating

Current U.S. position compared to other advanced economies

Weakness and Deteriorating Strength but Deteriorating

Current U.S. position compared to other advanced economies

Weakness and Deteriorating Strength but Deteriorating

Current U.S. position compared to other advanced economies

U.S. advantage (%)

Literacy Problem-solving Numeracy

• Does America really have a competitiveness problem?

• How did America get here?

• What should leaders do to restore U.S. competitiveness?

U.S. COMPETITIVENESS PROJECT 24

U.S. COMPETITIVENESS PROJECT 25

U.S. business leaders General public

All Liberal Conservative All Liberal Conservative

Corporate tax reform 91% 91% 92% 72% 75% 73%

Sustainable federal budget 90% 92% 85% 60% 62% 63%

High‐skill immigration 89% 90% 88% 42% 55% 38%

Streamlined regulations 86% 71% 95% 52% 43% 62%

Infrastructure investments 85% 92% 75% 68% 74% 70%

International trading system 80% 81% 79% 60% 67% 58%

Source: Harvard Business School 2012 Survey on U.S. Competitiveness.

U.S. COMPETITIVENESS PROJECT 26

1. Vigorously pursue productivity and profitability within the business

3. Stop narrowly self-interested actions that undermine the commons,

U.S. COMPETITIVENESS PROJECT 27

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