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The Innovation Challenge for Peru:Lessons from MIT and Beyond
Professor Scott SternMIT Sloan School and NBER
This presentation draws on collaboration between Scott Stern, Michael Porter, Mercedes Delgado, Christian Ketels, Fiona Murray, and work conducted at the MIT E-Center and the Harvard 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 Scott Stern and Michael E. Porter.
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Inca Rope Suspension Bridgewww.rutahsa.com
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A New Peruvian Innovation Agenda
• Building Innovative Capacity and an Innovator Workforce to Move Peru to the Next Stage of Economic Development
• Transitioning from Microenterprises to Innovation-Based Entrepreneurship
• Harnessing the Power of a Cluster-Driven Economic Strategy
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$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Over the past decade, Peru has experienced exceptional economic performance
– Note: PPP using Geary Khamis calculation methodology. Source: Groningen Growth and Development Centre, Total Economy Database (June 2009)
GDP per Capita(in 1990 PPP US$) CAGR:
+2.07%
CAGR:
+2.07%
CAGR:
+4.81%
CAGR:
+4.81%
CAGR:
0.73%
CAGR:
0.73%
5
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
-0.5% 0.0% 0.5% 1.0% 1.5%
Significant export growth linked to natural resources and endowments
Change in Peru’s world export market share, 1997 to 2009Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics Database and the IMF BOP statistics.
Pe
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09
Change In Peru’s Overall World Export Share: +0.09%
Peru’s Average World Export Share: 0.22%
Exports of US$2 Billion =
Fishing and Fishing Products
AgriculturalProducts
CommunicationsServices
Jewelry and Precious Metals
Metal, Miningand Manufacturing
ApparelFinancialServices
Publishing and Printing
Hospitality and Tourism
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With Some Emerging Strengths in Regional Clusters
La Libertad (El Porvenir, Trujillo)Leather, Footwear
Lima (La Victoria)Apparel
Puno and ArequipaApparel from Alpaca
CuzcoTourism
Cajamarca (Bambamarca)Dairy, Processed Foods
Ancash (Chimbote)Fishing and Fish Products
IcaWine
Lima (Infantas, Los Olivos)Metal Manufacturing, Metal Furniture
PiuraAgricultural Products: Mangoes, Lemons, Brown Sugar Syrup
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Significant reduction in poverty though much work remains…
% of Population Under the
Poverty Line
0%
10%
20%
30%
40%
50%
60%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
– Source: Informacion Socio Demografica, from El Instituto Nacional de Estadistica e Informatica (INEI), 2010
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0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
-30% -20% -10% 0% 10% 20% 30% 40%
Source: USPTO, World Bank
Average U.S. patents per million population,
2005 – 2009
CAGR of US-registered patents, 2005 – 2009
However Peru has not yet established itself as a global innovator
Saudi Arabia
RussiaPortugal
Turkey
India
Poland China
South Africa Greece
170 patents =
Argentina
Brazil
Croatia
Lithuania
PhilippinesEcuador
Chile
ThailandPeruVenezuela
Mexico
Colombia
Ukraine
Estonia
Costa Rica
Uruguay
Kazakhstan
KenyaEgypt
Latvia
United Arab Emirates
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The Peruvian Innovation Challenge
– Peru has experienced exceptional economic performance over the past decade
– Grounded in a shift towards sound macroeconomic policy, openness to international markets and partners, and the establishment of a higher level of basic security
– Leveraging natural resources and endowments
– But Peru has not yet established the foundations for an innovation-driven economy
– Resource-led or cost-based growth has natural limits.
– Peru must start setting the foundations – starting today -- for an innovation-driven, knowledge-based economy.
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HOW CAN WE BUILD A PERUVIAN INNOVATION ECONOMY?
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Macroeconomic Competitiveness
Microeconomic Competitiveness
Sophistication of
Company Ops
and Strategy
Quality of the National Business
Environment
MacroeconomicPolicies
SocialInfrastructure and PoliticalInstitutions
State of Cluster
Development
The Foundations of Competitiveness
Natural Endowments
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Peruvian Competitiveness Position
A Strong Foundation
Getting the House in Order
Transitioning to a New Stage
EndowmentsEndowments Macroeconomic CompetitivenessMacroeconomic Competitiveness
Microeconomic CompetitivenessMicroeconomic
Competitiveness
• Rich endowments of mineral and natural resources and astonishing biodiversity
• Favorable location to serve as a hub for Latin America and Asian and N. American trade
• World-renowned historical and cultural legacy
• Establishment of sound macroeconomic policy serves as the foundation for the last decade of economic performance
• Strong benefit from openness to international trade and investment
• Continuing concerns about basic security, basic education, and political institutions
• Significant improvement over the past decade in the national business environment
• Business remains focused on extracting resources and cost-based strategies
• Nascent clusters are present, but cluster strategy still at an early stage
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Regional Cluster Strength
Regional Entrepreneurship
Capacity
Regional Innovation Capacity
Building a Regional Innovation Ecosystem
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Regional Innovation Capacity
• The capacity of a region to generate “new to the world” ideas, products and services supported by:.
Regional Innovation Capacity
PEOPLE -Pool of innovators-Education in tech commercialization-Networks
FUNDING -Funding for research-Government programs-Corporate R&D spending
INFRASTRUCTURE -Physical infrastructure-Example: hi speed internet
POLICY -Clear rules around patents-Clear support for STEM education
REWARDS & NORMS -Experimentation culture-Celebration of invention and innovation- Rewards to innovation – tenure process
DEMAND -Nature of companies in region (relates directly to cluster analysis)
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Peru lags neighbors in investments and resources towards basic education at the
primary, secondary and tertiary level
– Source: UNCTAD Science, Technology and Innovation Policy Review, 2011
Innovation Capacity: People
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Peru is starting at a low level, but can make great progress in enhancing its
innovator workforce
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
Finla
nd
Taiw
an
Icel
and
Japan
New Z
eala
nd
Sweden
Denm
ark
Norway
Unite
d Sta
tes
(200
6)
Korea
Austra
lia
France
(200
6)
Belgiu
m
Canad
a (2
005)
Austri
a
Germ
any
Russi
a
Slove
nia
Luxem
bourg
Switzer
land (2
004)
Irela
nd (2
006)
Spain
Slova
kia
Estoni
a
Unite
d Kin
gdom
Portu
gal
Czech
Rep
ublic
Nether
lands
Hungar
y
Greec
e
Polan
d
Italy
(200
6)
Turkey
China
South
Afri
ca
Peru (e
stim
ate)
Source: National Science Council, R.O.C., Indicators of Science and Technology, Taiwan, 2008; OECD Science, Technology, and Industry Scoreboard 2009. Data 2007 except where noted.
Researchers /1,000 Employees
Innovative Capacity: People
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But…
Higher Education remains focused on
education training, law, and administration…
Key STEM areas such as computer science, biotechnology, and
nanotechnology register at very low
levels.
Innovative Capacity: People
and Policy
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Innovation Capacity Agenda
• All stakeholders– business, government, and university – must make a much higher level of commitment to the Peruvian education system at all levels and for all Peruvians
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Peru Has a Low Level of Innovation Effort Innovative Capacity: Funding
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While Peru investment in technology infrastructure has lagged, recent catch up…
Juana Kuramoto and Máximo Torero, 2004
Innovative Capacity:
Infrastructure
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“Mens et Manus”
Mind and Hand….
Innovative Capacity:
Rewards & Norms
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The MIT Inca Bridge Project
Research: John Ochsendorf and colleaguesTeaching: Heather Lechtman, Linn Hobbs and MIT Undergrads!
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Recent initiatives show promise by focusing on university-industry collaboration
But have not yet reached critical
mass…
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Peru has globally unique resources whose potential for innovation has not yet been tapped
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Innovation Capacity Agenda
• Peru stakeholders– business, government, and university – must make a much higher level of commitment to the Peruvian education system at all levels and for all Peruvians
– The next generation must be an innovator workforce
• Both business and government must commit to significantly (and steadily) increase their financial investment in R&D and innovation
– Not government versus industry, but government plus industry
• Peru innovation investments should be focused on the unique advantages of Peru – such as biodiversity, or building fundamental science and engineering foundations in specialized agricultural and mining areas.
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Action Item
What are you going to do – before the end of CADE – to begin enhancing the
Peruvian innovation environment?
Commit your firm to a new innovation partnership?
Fund a new generation of scientists and engineers?
Convene a meeting of how your firm can leverage the incredible biodiversity of Peru and contribute to its
preservation?
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Regional Entrepreneurship Capacity
• The capacity of a region to generate new start-up companies supported by: Regional
Entrepreneurship Capacity PEOPLE -
ENTREPRENEURS-Entrepreneurship Education & Training-Mentorship programs-Groups to share info
FUNDING -Government early stage funding-Angel funding-Private & public risk capital
INFRASTRUCTURE -Real estate-Voice & Data Communications-Services for start ups (legal, acctng, HR)
POLICY -Bankruptcy laws-Ease of incorporation- Ease of doing business
CULTURE REWARDS & NORMS
-Recognition in press for success-Rewarded for trying-Societal stigma or halo
DEMAND -Procurement policies of government-Procurement policies of companies-Transportation infrastructure
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Peru has a very large level of entrepreneurship, with a strong majority of all employment linked to microenterprises
and small enterprises
UNCTAD, 2011
Entrepreneurial Capacity: People
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While microenterprises are an important source of poverty reduction and employment,
these enterprises lack growth capital (and in many cases, lack access to even
microfinance loans)
Entrepreneurial Capacity: Funding
But suggest the potential for growth-oriented entrepreneurship
in Peru…
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Peru mobilizes a medium level of overall risk capital, and is dominated by large private
equity investments rather than angel funding or venture capital
Peru
Entrepreneurial Capacity: Funding
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Peru: 36Peru: 36
Colombia: 39
Ecuador: 130
Venezuela: 172
Uruguay: 124
Brazil: 127
– Argentina: 115
Chile: 43
Bolivia: 149
Paraguay: 106
Guyana: 100Suriname: 161
Building on a record of economic reform, Peru has established itself as an overall regional leader
in terms of “Doing Business”
– Source: The World Bank, Doing Business (2011), 183 countries
Entrepreneurial Capacity: Policy
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0
20
40
60
80
100
120
Ease of DoingBusiness
Getting Credit ProtectingInvestors
RegisteringProperty
TradingAcrossBorders
Starting aBusiness
Paying Taxes Closing aBusiness
Dealing withConstruction
Permits
EnforcingContracts
Strength in investor protections and openness, but continued challenges in terms
of contract enforcement and permitting
– Ranking, 2011(of 183
countries)
– Source: The World Bank, Doing Business (2011), GDP rank on GDP per capita, ppp-adjusted
– Favorable – Unfavorable
– Peru’s per capita GDP rank: 81
Entrepreneurial Capacity: Policy
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0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
-0.5% 0.0% 0.5% 1.0% 1.5%
However, growth engine has been in traditional industries, often dominated by larger firms (including government spin-offs)
Change in Peru’s world export market share, 1997 to 2009Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics Database and the IMF BOP statistics.
Pe
ru’s
w
orl
d e
xp
ort
ma
rke
t s
ha
re,
20
09
Change In Peru’s Overall World Export Share: +0.09%
Peru’s Average World Export Share: 0.22%
Exports of US$2 Billion =
Fishing and Fishing Products
AgriculturalProducts
CommunicationsServices
Jewelry and Precious Metals
Metal, Miningand Manufacturing
ApparelFinancialServices
Publishing and Printing
Hospitality and Tourism
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Business Growth Remains Limited by Physical Infrastructure Requirements,
including roads and water
UNCTAD, 2011
Entrepreneurial Capacity: Policy
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HOW CAN PERU TRANSITION TO INNOVATION-BASED
ENTREPRENEURSHIP?
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MIT serves as the fulcrum for the Cambridge biosciences cluster…
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MIT is not simply a center for innovation but a driving force in entrepreneurship
JobsPercent of Companies
Median Employees
Median Sales ($Millions)
Estimated Total
EmployeesEstimated Total Sales ($Millions)
More than 10,000 0.3% 15,000 1,523 1,339,361 1,389,0751,000-10,000 1.8% 1,927 308 1,043,932 235,532
Less than 1,000
97.9% 39 <1 900,001 226,671
Total100.0% 155 <1 3,283,294 1,851,278
Currently Living MIT Alumni Founders are Responsible for more than 25,000 firms, more than 3 million jobs, and $3M in sales
Roberts and Eesley, Entrepreneurial Impact: The role of MIT, 2011
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Entrepreneurial Capacity Agenda
• Peru must develop a much higher capacity for growth-oriented entrepreneurship.
– Enhancing the attractiveness of entrepreneurship for educated professionals (beyond microenterprise)
– Investing in a significant expansion of risk capital
– Ensuring the overall health of business environment
• The public and private sector must collaborate to establish specific institutions and programs – tailored to the strengths of each region – to enhance the potential for an innovator workforce and commercializing new technologies and business processes
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Action Item
What are you going to do – before the end of CADE -- to catalyze innovation-
based entrepreneurship in Peru?
Mentor? Start a University Partnership?
Commit your firm to be a risk capital partners in Peru moon shot fund?
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Regional Cluster Strength
Regional Entrepreneurship
Capacity
Regional Innovation Capacity
Cluster-led economic strategy enhances the payoffs to innovation-based entrepreneurship
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The Peru Cluster Environment
La Libertad (El Porvenir, Trujillo)Leather, Footwear
Lima (La Victoria)Apparel
Puno and ArequipaApparel from Alpaca
CuzcoTourism
Cajamarca (Bambamarca)Dairy, Processed Foods
Ancash (Chimbote)Fishing and Fish Products
IcaWine
Lima (Infantas, Los Olivos)Metal Manufacturing, Metal Furniture
PiuraAgricultural Products: Mangoes, Lemons, Brown Sugar Syrup
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Peruvian Clusters and Peruvian Universities
– Peru’s current clusters are based heavily on natural endowments, and have much room for further upgrading
– Even in areas with significant clusters – such as Cajamarca, Arequipa, and Moquegua in mining – there have historically been significant technological bottlenecks
– Though there are some strong universities universities have historically played a limited role in supporting the development of entrepreneurial firms that catalyze local clusters.
– There is a limited tradition of collaboration among actors for regional development
– There is a weak institutional capacity – which could be addressed by leading Peruvian universities -- hampering the development of clusters.
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Innovating the Economic Strategy
The Old View:Sectors and Industries
The New View:Clusters
• Manufacturing vs. services
• High tech vs. low tech
• One path to prosperity
• Critical is what you do
• Clusters of related industries
• All clusters are good
• Many paths to prosperity
• Critical is how you do what you do
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What is Different about Cluster-Based Economic Policy?
– Cluster vs.Narrow
Industries
– RegionalPerspective
– Build on Regional Strengths
– Demand-drivenPolicy
Priorities
– Public-PrivateCollaboration
Focus on upgrading
productivity
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The Australian Wine ClusterLocations
Western Australia
South Australia
New South Wales
Victoria
Queensland
Northern Territory
TasmaniaNote: Colored areas indicate wine growing regionsSource: Australian Wine & Brandy Corporation
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The Australian Wine ClusterRecently founded Institutions for Collaboration
Wine Industry National Education and Training Council
Wine Industry National Education and Training Council
Established in 1995
Focus: Coordination, integration, and standard maintenance for vocational training and education
Funding: Government; other cluster organizations
Established in 1995
Focus: Coordination, integration, and standard maintenance for vocational training and education
Funding: Government; other cluster organizations
Cooperative Centre for ViticultureCooperative Centre for Viticulture
Established in 1991
Focus: Coordination of research and education policy in viticulture
Funding: other cluster organizations
Established in 1991
Focus: Coordination of research and education policy in viticulture
Funding: other cluster organizations
Australian Wine Export CouncilAustralian Wine Export Council
Established in 1992
Focus: Wine export promotion through international offices in London and San Francisco
Funding: Government; cluster organizations
Established in 1992
Focus: Wine export promotion through international offices in London and San Francisco
Funding: Government; cluster organizations
Winemakers’ Federation of AustraliaWinemakers’ Federation of Australia
Established in 1990
Focus: Public policy representation of companies in the wine cluster
Funding: Member companies
Established in 1990
Focus: Public policy representation of companies in the wine cluster
Funding: Member companies
Grape and Wine R&D CorporationGrape and Wine R&D Corporation
Established in 1991 as statutory body
Focus: Funding of research and development activities
Funding: Government; statutory levy
Established in 1991 as statutory body
Focus: Funding of research and development activities
Funding: Government; statutory levy
Wine Industry Information ServiceWine Industry Information Service
Established in 1998
Focus: Information collection, organization, and dissemination
Funding: Cluster organizations
Established in 1998
Focus: Information collection, organization, and dissemination
Funding: Cluster organizations
Source: Michael E. Porter and Örjan Sölvell, The Australian Wine Cluster – Supplement, Harvard Business School Case Study, 2002
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The Emergence of the Australian Wine Industry is Rooted in the Evolution of Australian Competitive Advantage
Abundant Productive
Land
WineProduce
Logistics / Trade
Information Technology
1980 1990 2002 +
Bioscience Research Centers
Mining and Natural
Resources
Gold
Medical Devices
Biotech / Pharmaceuticals
Education andKnowledge Creation
Travel and TourismIron / Aluminum Bauxite
Beef
Grains
Ag Research Centers
Wool
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$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
$1,000
1995 1996 1997 1998 1999 2000
0%
1%
2%
3%
4%
5%
6%
7%
8%
Value
Market Share
The Australian Wine ClusterTrade Performance
Source: UN Trade Statistics
Australian Wine Exports in million US Dollars
Australian Wine World Export Market Share
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Over the 1990s, growth in Australian exports was driven by improvement in Australia’s wine cluster
0%
5%
10%
15%
20%
25%
30%
35%
-8% -6% -4% -2% 0% 2% 4%
Materials/Metals
Food/Beverages*
Textiles/Apparel
Note: Wine export growth accounts for >45% of the increase in the export share of food/beveragesSource: UN Trade Statistics
Transportation Equipment
Health Care
Oil/Chemicals
Multiple Business
Share of Australian Exports, 2000
Change in Share of Australian Exports, 1995-2000
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And has continued to grow…
Source: UN Trade Statistics
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CITEvid – Enhancing the Pisco Industry
Source: Juana Koromoto, GRADE
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Facilitating a rapid rise in production and exports….
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The Economic Case for Cluster Policy
– Path dependency
– Information
asymmetries
– Coordination failures
Local Externalities
Create Platforms for Joint Action
Organize Public Policy around
Clusters
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Organize Public Policy around Clusters
ClustersClusters
Specialized Physical Infrastructure
Natural Resource Protection
Environmental Stewardship
Science and TechnologyInfrastructure (e.g., centers, university departments, technology transfer)
Education and Workforce TrainingBusiness Attraction
Export Promotion
• Clusters provide a framework for organizing the implementation of many public policies and public investments directed at economic development
Setting standardsMarket Information and Disclosure
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Clusters, Innovation and Economic Strategy
BusinessEnvironment
ClusterPortfolio
Positioning
• Identifies, communicates, and strengthens the specific value proposition of the location
• Accelerates growth in those fields where the country has some strengths
• New clusters emerge from established clusters
• Improved economic platform for all clusters and companies
• Enhances innovation opportunities
• Leveraging innovative and entrepreneurial capacity
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The Role of Government in Cluster Initiatives
• Initiate/ Convene
• Co-Finance
• Support all existing and emerging clusters
• Participate• Enable data
collection and dissemination at the cluster level
• Be ready to implement recommendations
• Pick favored clusters
• Pick favored companies
• Subsidize or distort competition
• Define cluster actionpriorities
Governmentshould
Governmentmay
Government should not
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A New Peruvian Innovation Agenda
• Building Innovative Capacity and an Innovator Workforce to Move Peru to the Next Stage of Economic Development
• Transitioning from Microenterprises to Innovation-Based Entrepreneurship
• Harnessing the Power of a Cluster-Driven Economic Strategy
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Action Item
What are you going to do?
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How Can We Build a Bridge to a Peru Innovation Nation?