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1 Copyright 2009 © Professor Michael E. Porter20090928 – Indonesia President visit (handouts).ppt
Improving Indonesia’s Competitiveness
Presentation to President Susilo Bambang Yudhoyono
Professor Michael E. PorterHarvard Business School
Boston, MassachusettsSeptember 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
2 Copyright 2009 © Professor Michael E. Porter20090928 – Indonesia President visit (handouts).ppt
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
3 Copyright 2009 © Professor Michael E. Porter20090928 – Indonesia President visit (handouts).ppt
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
$18,000
$20,000
3% 5% 7% 9% 11% 13%
PPP-adjusted GDP per Capita, 2008 ($USD)
Growth of Real GDP per Capita (PPP-adjusted), CAGR, 2001 to 2008
Source: EIU (2009), authors calculations
China
Vietnam
South Africa
Latvia
Croatia
Thailand
Russia
Brazil
India
Turkey
Egypt
Hungary
Mexico
Jordan
Argentina
Other countriesAsian countries
Prosperity PerformanceLower and Middle Income Countries
Chile
Poland
Indonesia
CambodiaBangladesh
Laos
Malaysia
Philippines
Sri Lanka
Papua New Guinea (-2.6%)
Bulgaria
PeruColombia
Kazakhstan
RomaniaUruguay
UkraineTunisia
Guatemala
Georgia
TanzaniaKenya
Pakistan
Lithuania
Venezuela
Syria
IranEcuador
Costa Rica
Albania
Morocco
Nigeria
Dominican Republic
4 Copyright 2009 © Professor Michael E. Porter20090928 – Indonesia President visit (handouts).ppt
0%
2%
4%
6%
8%
10%
12%
14%
-10% -8% -6% -4% -2% 0% 2% 4%
Unemployment PerformanceMiddle and Lower Income CountriesUnemployment
Rate, 2008
Change of Unemployment Rate in Percentage Points, 1999-2008Note: In some cases, 1999 data was unavailable, so latest data used.Source: EIU (2009)
Improving Deteriorating
Uruguay
Tunisia
Lithuania
Poland
Estonia
Mexico
Malaysia
HungaryPhilippines
ChinaIndonesia
Spain
Thailand
Brazil
RussiaIndia
Chile
Sri LankaRomania
Bulgaria
Egypt
South Africa (22.9%)
Croatia
VietnamLatvia
PakistanArgentina (-14.6%)
Morocco
Bangladesh
IranOther countriesAsian countries JordanAlbania
Syria
Colombia
UkraineHonduras
Costa RicaPanama
NicaraguaParaguay
KazakhstanEl Salvador
Ecuador Venezuela
Dominican Republic (15.5%)
BoliviaPeru
5 Copyright 2009 © Professor Michael E. Porter20090928 – Indonesia President visit (handouts).ppt
10%
20%
30%
40%
50%
60%
70%
80%
90%
-15% -10% -5% 0% 5% 10% 15% 20%
Export PerformanceMiddle and Lower Income Countries
Exports of Goods and Services (% of GDP), 2008
Change in Exports of Goods and Services (% of GDP), 2004 to 2008
Russia
Thailand
Jordan
ChinaPhilippines South Africa
India
Romania
Morocco
Brazil
Cambodia
Chile
Indonesia
AustraliaTurkey
Mexico
Pakistan
Argentina
Vietnam
Malaysia (103.5%)
Hungary
Croatia
Source: EIU (2008), authors’ analysis
Egypt
Bangladesh
Poland
Nigeria
Albania
Lithuania
Peru
Ukraine (-17.5%)
Bulgaria
Latvia
Syria
Iran
Kazakhstan
Papua New Guinea
Sri Lanka
Other countriesAsian countries
Ecuador
Tanzania Colombia
KenyaGuatemala
Venezuela
Tunisia
Costa Rica
Georgia
Uruguay
6 Copyright 2009 © Professor Michael E. Porter20090928 – Indonesia President visit (handouts).ppt
Indonesia Exports By Type of IndustryExcluding Oil and Gas Industry
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Processed GoodsSemi-processed GoodsUnprocessed GoodsServicesTOTAL
Note: Excluding Oil and Gas cluster
Source: UNComTrade, WTO (2008)
World Export Market Share (current USD)
7 Copyright 2009 © Professor Michael E. Porter20090928 – Indonesia President visit (handouts).ppt
0%
10%
20%
30%
40%
50%
60%
70%
-5% 0% 5% 10% 15% 20% 25% 30% 35% 40%
Inbound Foreign Investment PerformanceStocks and Flows, Selected Middle and Lower Income Countries
Source: UNCTAD, World Investment Report (2009)
Inward FDI Stocks as % of GDP, Average 2003 - 2007
FDI Inflows as % of Gross Fixed Capital Formation, Average 2003 - 2007
Russia
Turkey
HungaryVietnam
Chile
PolandColombia
Philippines
ThailandSouth Africa
Indonesia
India
Brazil
Pakistan
MexicoLaos
Cambodia
Malaysia
RomaniaEgypt
China
Ecuador
Sri Lanka
Iran
Other countriesAsian countries
Bangladesh
Bulgaria (69%)
Nigeria (49.5%)
Georgia
UruguayUkrainePeru
CroatiaKazakhstan
Tunisia
Papua New GuineaTanzania
Kenya
Albania
Guatemala
Venezuela
Morocco
Argentina
Dominican Republic
Costa Rica
LatviaLithuania
Jordan (46.5%, 81.8%)
8 Copyright 2009 © Professor Michael E. Porter20090928 – Indonesia President visit (handouts).ppt
Inbound Foreign Investment PerformanceFlows, Selected Countries
Inward FDI Flows, % of GDP
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
2000 2001 2002 2003 2004 2005 2006 2007
Russia
Brazil
China
India
Indonesia
Ranked by Inward FDI Flows (% of
GDP), 2007
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0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
-20% -10% 0% 10% 20% 30% 40% 50% 60%
Source: USPTO (2008), EIU (2008)
Average U.S. patents per 1 million population, 2004-2008
CAGR of US-registered patents, 2004 – 2008
Innovative Output, Selected Countries
Saudi Arabia
RussiaPortugal
Turkey
India
Poland
Kuwait
Czech Republic
China
South Africa
UAE
Greece
Indonesia
Argentina
Brazil
Croatia
Malaysia (4.4)
Bulgaria
PhilippinesEgypt
Chile
Lebanon
ThailandUkraine Romania
Colombia
Mexico
10 Copyright 2009 © Professor Michael E. Porter20090928 – Indonesia President visit (handouts).ppt
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, 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
11 Copyright 2009 © Professor Michael E. Porter20090928 – Indonesia President visit (handouts).ppt
What is Competitiveness?• Competitiveness is the productivity with which a nation uses its human,
capital, and natural resources. – Productivity sets the sustainable standard of living (wages, returns on
capital, returns on natural resources)
– It is not what industries a nation competes in that matters for prosperity, but how productively it competes in those industries
– Productivity in a national economy arises from a combination of domestic and foreign firms
– The productivity of “local” or domestic industries is fundamental to competitiveness, not just that of export industries
• Only competitive businesses can create 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
12 Copyright 2009 © Professor Michael E. Porter20090928 – Indonesia President visit (handouts).ppt
Macroeconomic Competitiveness
Microeconomic Competitiveness
Sophisticationof Company
Operations andStrategy
Quality of the NationalBusiness
Environment
MacroeconomicPolicies
SocialInfrastructure and PoliticalInstitutions
State of Cluster Development
• 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
Determinants of Competitiveness
Natural Endowments
13 Copyright 2009 © Professor Michael E. Porter20090928 – Indonesia President visit (handouts).ppt
Indonesia’s Macroeconomic Competitiveness
• Indonesia has made significant progress solidifying and improving political institutions
• Macroeconomic policy is solid, but stable fiscal balances are partly due to the inability to execute planned spending, especially at the provincial level
• Decentralization of authority to the provinces is an important step in a large, spread out country such as Indonesia, but better policy coordination and implementation is needed
• There has been some progress in reducing corruption, but this remains a central obstacle to further improvements in competitiveness
• Indonesia performs relatively well in some aspects of basic human development, but has not improved its position significantly over time
14 Copyright 2009 © Professor Michael E. Porter20090928 – Indonesia President visit (handouts).ppt
-20 -15 -10 -5 0 5 10 15 20
Corruption Perception Index, 2007
Note: Ranks only countries available in both years (91 countries total)Source: Global Corruption Report, 2008
Change in Rank, Global Corruption Report, 2007 versus 2001
Rank in Global
CorruptionIndex,2007
91
1
ImprovingDeteriorating
Highcorruption
Lowcorruption
Finland
Canada
Bangladesh
Indonesia
Ireland
Portugal
Egypt
Iceland
Czech Republic
SlovakiaSouth Korea
Latvia
India
Slovenia
Thailand
Switzerland
France
Romania
Turkey
Estonia
Austria GermanyJapan
Vietnam
China
NorwayUK
MalaysiaLithuania
Colombia
HungaryTaiwan
Spain
Hong Kong
ChileUnited States
South Africa
Mexico
Croatia
Italy
Poland
Brazil
Argentina
Israel
Venezuela
Russia
Uruguay
New ZealandSweden
Tunisia
Peru
Tanzania
Uganda
Senegal
Philippines
Zimbabwe Cote d’Ivoire NigeriaPakistan
GreeceJordan
Ukraine
Panama
CameroonNicaragua
KenyaKazakhstan
Honduras
Moldova Guatemala
GhanaEl Salvador
Costa Rica
Botswana
15 Copyright 2009 © Professor Michael E. Porter20090928 – Indonesia President visit (handouts).ppt
Indonesia’s Macroeconomic CompetitivenessAction 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, while enabling more effective execution of public sector investments
• Create and implement a clear strategy for improving education and health care, especially the quality of delivery
• Improve the effectiveness of policies to ameliorate poverty, for example, through a social safety net instead of broad consumption subsidies
• Continue strengthening the legal system
16 Copyright 2009 © Professor Michael E. Porter20090928 – Indonesia President visit (handouts).ppt
Microeconomic Competitiveness: Improving the Business Environment
Context for Firm
Strategy and Rivalry
Context for Firm
Strategy and Rivalry
Related and Supporting Industries
Related and Supporting Industries
Factor(Input)
Conditions
Factor(Input)
ConditionsDemand
ConditionsDemand
Conditions
Demanding and sophisticated local customers and needs
– e.g., Strict quality, safety, and environmental standards
– Consumer protection laws
• Many things matter for competitiveness• Successful economic development is a process of successive upgrading, in which the
business environment improves to enable increasingly sophisticated ways of competing
Vigorous local competition– Openness to foreign competition– Competition laws
Local rules and incentivesencouraging productivity and investment
– e.g. incentives for investment, intellectual property protection, corporate governance standards
Access to high quality business inputs
– Human resources– Capital availability– Physical infrastructure– Administrative infrastructure (e.g.
registration, permitting, transparency)
– Scientific and technological infrastructure
Availability of suppliers and supporting industries
17 Copyright 2009 © Professor Michael E. Porter20090928 – Indonesia President visit (handouts).ppt
0
20
40
60
80
100
120
140
160
180
Ease ofDoing
Business
ProtectingInvestors
TradingAcrossBorders
Dealingwith
Licenses
RegisteringProperty
GettingCredit
PayingTaxes
Closing aBusiness
EnforcingContracts
EmployingWorkers
Starting aBusiness
Ease of Doing BusinessIndonesia, 2009
Ranking, 2009 (of 183 countries)
Source: World Bank Report, Doing Business (2009)
Favorable Unfavorable
Median Ranking, Asia and Pacific Region
Indonesia’s per capita GDP rank: 101
18 Copyright 2009 © Professor Michael E. Porter20090928 – Indonesia President visit (handouts).ppt
WEAKNESSESSTRENGTHS
Indonesia’s Business EnvironmentCritical Strengths and Weaknesses
• 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
• Solid financial system• Greater formal opening of the economy
to trade and investment– New Investment Law passed in 2007
• Wide array of potential clusters, especially in natural resources-related fields
• 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
19 Copyright 2009 © Professor Michael E. Porter20090928 – Indonesia President visit (handouts).ppt
Indonesian Business EnvironmentAction 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, including limits on dominant domestic market positions
• Create stronger institutions to disseminate management best practices and support the adoption of new technologies
20 Copyright 2009 © Professor Michael E. Porter20090928 – Indonesia President visit (handouts).ppt
Sources: HBS student team research (2003) - Peter Tynan, Chai McConnell, Alexandra West, Jean Hayden
HotelsHotels
Attractions andActivities
e.g., theme parks, casinos, sports
Attractions andActivities
e.g., theme parks, casinos, sports
Airlines, Cruise Ships
Airlines, Cruise Ships
Travel agentsTravel agents Tour operatorsTour operators
RestaurantsRestaurants
PropertyServicesPropertyServices
MaintenanceServices
MaintenanceServices
Government agenciese.g. Australian Tourism Commission,
Great Barrier Reef Authority
Government agenciese.g. Australian Tourism Commission,
Great Barrier Reef Authority
Educational Institutionse.g. James Cook University,
Cairns College of TAFE
Educational Institutionse.g. James Cook University,
Cairns College of TAFE
Industry Groupse.g. Queensland Tourism
Industry Council
Industry Groupse.g. Queensland Tourism
Industry Council
FoodSuppliers
FoodSuppliers
Public Relations & Market Research
Services
Public Relations & Market Research
Services
Local retail, health care, andother services
Local retail, health care, andother services
Souvenirs, Duty Free
Souvenirs, Duty Free
Banks,Foreign
Exchange
Banks,Foreign
Exchange
Local Transportation
Local Transportation
Microeconomic Competitiveness: Cluster DevelopmentTourism Cluster in Cairns, Australia
21 Copyright 2009 © Professor Michael E. Porter20090928 – Indonesia President visit (handouts).ppt
Chilean Wine Cluster
Sources: Based on diagram by Alexander, Arney, Black, Frost, Shivananda, taken from ‘On Competition’, Michael Porter, 2003
Related and Supported Industries
Related and Supported Industries
GrapestockGrapestock
Fertilizer, pesticides, herbicides
Fertilizer, pesticides, herbicides
Plastics / TetrapacksPlastics /
Tetrapacks
CorksCorks
LabelsLabels
Public relations and advertising
Public relations and advertising
Specialized publicationsSpecialized publications
Growers / vineyards
Growers / vineyards
Government(trade promotion offices,
implementation of standards, export/import/FDI policies)
Government(trade promotion offices,
implementation of standards, export/import/FDI policies)
Educational, research, and trade organization
Educational, research, and trade organization
Wineries / processingfacilities
Wineries / processingfacilities
BarrelsBarrels
Grape harvesting equipment
Grape harvesting equipment
Irrigation technologyIrrigation
technology
Tourism ClusterTourism Cluster
Pisco ClusterPisco Cluster
Food ClusterFood Cluster
Agriculture ClusterAgriculture Cluster
Specialized financing
Specialized financing
Export promotionExport
promotion
BottlesBottles
= Strong domestic capacity
= Moderate domestic capacity
= Weak domestic capacity
Source: Research by HBS student team (Asier Alea, Judd Belstock, Don Lambert, Jacqueline O’Neill, Noah Sawyer), 2005
22 Copyright 2009 © Professor Michael E. Porter20090928 – Indonesia President visit (handouts).ppt
Clusters as a Tool For Economic Policy
• A forum for collaboration between the private sector, trade associations, government, educational, and research institutions
• Brings together firms of all sizes, 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
23 Copyright 2009 © Professor Michael E. Porter20090928 – Indonesia President visit (handouts).ppt
Clusters and Policy Implementation
ClustersClusters
Physical Infrastructure
Natural Resource Protection
Environmental Stewardship
Science and TechnologyInvestments (e.g., centers, university departments, technology transfer)
Education and Workforce Training
Business Attraction
Export Promotion
• Clusters provide a framework for implementing public policy and organizing public-private collaboration to enhance competitiveness
Standard setting and quality initiatives
Market Information and Disclosure
Management Training
24 Copyright 2009 © Professor Michael E. Porter20090928 – Indonesia President visit (handouts).ppt
Indonesian Clusters
• Indonesia has potential strengths in a wide array of clusters, including agriculture, tourism, forest products, coal, oil and gas, and forms of mining
25 Copyright 2009 © Professor Michael E. Porter20090928 – Indonesia President visit (handouts).ppt
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
-2.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5%
Indonesia’s National Cluster Export Portfolio1997 to 2007
Change in Indonesia’s world export market share, 1997 to 2007Source: 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.
Indo
nesi
a’s
wor
ld e
xpor
t mar
ket s
hare
, 200
7
Change In Overall World Export Share: +0.034%
Average World Export Share: 0.79%
Exports of US$4.2 Billion =
Coal and Briquettes (5.35%, 12.36%)
Automotive
Processed Foods
Business Services
Transportation and Logistics
Biopharmaceuticals
Production Technology
Motor Driven Products
Oil and Gas
Marine Equipment
IT
Aerospace Vehicles and Defense
PlasticsTextiles
Construction Services
Agriculture Products
Construction Materials
Financial Services
Lighting and Electrical Equipment
Heavy MachineryPrefabricated Enclosures and Structures
Entertainment
Jewelry, Precious Metals and Collectibles
Communications Equipment
Metal, Mining and Manufacturing
ApparelFurniture
Footwear
Leather and Related Products
Building Fixtures and Equipment (-3.76%)Tobacco
Sporting, Recreational and Children's Goods
Analytical Instruments
Chemical Products
Communication ServicesPublishing and Printing
Forest Products
Fishing and Fishing Products
26 Copyright 2009 © Professor Michael E. Porter20090928 – Indonesia President visit (handouts).ppt
Indonesian Clusters
• Indonesia has potential strengths in a wide array of clusters, including agriculture, tourism, forest products, coal, oil and gas, and forms of mining
• Indonesia’s emerging clusters are heavily based on the country’s abundant natural endowments, with few activities in related and supporting industries
• The National Industrial Policy approved in 2008 identifies priority sectors, but there is no effective cluster development effort
• Existing cluster related efforts suffer from weak coordination across ministries and agencies
27 Copyright 2009 © Professor Michael E. Porter20090928 – Indonesia President visit (handouts).ppt
FurnitureBuilding Fixtures,
Equipment & Services
Fishing & Fishing Products Hospitality
& TourismAgricultural
ProductsTransportation
& Logistics
Share of World Exports by ClusterIndonesia, 2007
Plastics
Oil & Gas
Chemical Products
Biopharma-ceuticals
Power Generation
Aerospace Vehicles &
Defense
Lightning & ElectricalEquipment
Financial Services Publishing
& Printing
Entertainment
Information Tech.
Communi-cations
Equipment
Business Services
DistributionServices
Forest Products
Heavy Construction
Services
ConstructionMaterials
Prefabricated Enclosures
Apparel
Leather & Related Products
Jewelry & Precious Metals
Textiles
Footwear
Processed Food
Tobacco
Medical Devices
Analytical InstrumentsEducation &
Knowledge Creation
Note: Clusters with overlapping borders have at least 20% overlap (by number of industries) in both directions.
Marine Equipment
Aerospace Engines
Heavy Machinery
Sporting & Recreation
Goods
Automotive
Production Technology
Motor Driven Products
Mining & Metal Manufacturing
Strong
Stronger
Strongest
28 Copyright 2009 © Professor Michael E. Porter20090928 – Indonesia President visit (handouts).ppt
Indonesian ClustersAction 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
29 Copyright 2009 © Professor Michael E. Porter20090928 – Indonesia President visit (handouts).ppt
Geographic Influences on Competitiveness
Neighboring CountriesNeighboring Countries
Regions and CitiesRegions and Cities
NationNation
30 Copyright 2009 © Professor Michael E. Porter20090928 – Indonesia President visit (handouts).ppt
Specialization by Traded ClustersU.S. States, 2006
MaineForest ProductsAerospace EnginesCommunications EquipmentHospitality and Tourism
MaineForest ProductsAerospace EnginesCommunications EquipmentHospitality and Tourism
MississippiFurnitureFishing and Fishing ProductsPower Generation and TransmissionMotor Driven Products
MississippiFurnitureFishing and Fishing ProductsPower Generation and TransmissionMotor Driven Products
OregonAgricultural ProductsPrefabricated EnclosuresForest ProductsAnalytical Instruments
OregonAgricultural ProductsPrefabricated EnclosuresForest ProductsAnalytical Instruments
ColoradoOil and Gas Products and ServicesMedical DevicesAerospace Vehicles and DefenseEntertainment
ColoradoOil and Gas Products and ServicesMedical DevicesAerospace Vehicles and DefenseEntertainment
IllinoisBiopharmaceuticalsLighting and Electrical EquipmentHeavy MachineryMetal Manufacturing
IllinoisBiopharmaceuticalsLighting and Electrical EquipmentHeavy MachineryMetal Manufacturing
KentuckyAutomotivePlasticsConstruction MaterialsTransportation and Logistics
KentuckyAutomotivePlasticsConstruction MaterialsTransportation and Logistics
South CarolinaTextilesForest ProductsAutomotiveProduction Technology
South CarolinaTextilesForest ProductsAutomotiveProduction Technology
South DakotaHeavy MachinerySporting, Recreational
and Children's GoodsFinancial ServicesProcessed Food
South DakotaHeavy MachinerySporting, Recreational
and Children's GoodsFinancial ServicesProcessed Food
NevadaLeather and Related ProductsHeavy Construction ServicesHospitality and TourismTransportation and Logistics
NevadaLeather and Related ProductsHeavy Construction ServicesHospitality and TourismTransportation and Logistics
IdahoAgricultural ProductsInformation TechnologyPrefabricated EnclosuresFurnitureForest Products
IdahoAgricultural ProductsInformation TechnologyPrefabricated EnclosuresFurnitureForest Products
Source: Prof. Michael E. Porter, Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director.
AlaskaFishing and Fishing ProductsPower Generation and TransmissionHeavy Construction ServicesHospitality and Tourism
AlaskaFishing and Fishing ProductsPower Generation and TransmissionHeavy Construction ServicesHospitality and Tourism
31 Copyright 2009 © Professor Michael E. Porter20090928 – Indonesia President visit (handouts).ppt
Indonesia’s Provinces
Source: Wikipedia, 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
32 Copyright 2009 © Professor Michael E. Porter20090928 – Indonesia President visit (handouts).ppt
Rp0
Rp5
Rp10
Rp15
Rp20
3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0%
Indonesia’s ProvincesDivergent Performance
Weighted Indonesian Average: 4.82%
Note: Since population only available for 2000, population held constant when calculating per capita levels.
Weighted Indonesian Average: Rp9.41
DKI Jakarta Rp39.69) Kepulauan Riau (Rp28.96)Kalimantan Timur (2.25%, Rp39.84)
Riau
GDP per Capita, 2007 (Constant Market Prices,
2000, Million Rupiah)
Growth of GDP per Capita (Constant Market Prices, 2000), CAGR 2003 to 2007
Kalimantan Selatan
Sulawesi Selatan
Sumatera UtaraSumatera Selatan
Papau (-2.27%)
Gorontalo
Dl. Yogyakarta
Bali
Kepulauan Bangka Belitung
Nusa Tenggara Barat Bengkulu
JambaiJawa Tengah
Maluku
Papua Barat
Banten
Sulawesi Barat
Naggroe Aceh Darussalam (-5.23%)
Sulawesi TengahSulawesi Tenggara
Nusa Tenggara Timur Maluku Utara
Lampung
Kalimantan TengahJawa Timur
Sumatera Barat
Jawa Barat
Sulawesi UtaraKalimantan Barat
33 Copyright 2009 © Professor Michael E. Porter20090928 – Indonesia President visit (handouts).ppt
Indonesian ProvincesAction Priorities
• Strengthen logistical and communications infrastructure linking the provinces to expand trade, encourage economic specialization, 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, 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
34 Copyright 2009 © Professor Michael E. Porter20090928 – Indonesia President visit (handouts).ppt
Geographic Influences on Competitiveness
Neighboring CountriesNeighboring Countries
Regions and CitiesRegions and Cities
NationNation
35 Copyright 2009 © Professor Michael E. Porter20090928 – Indonesia President visit (handouts).ppt
Economic Integration with Neighboring CountriesSouth East Asia
• Economic coordination among neighboring countries can significantly enhance competitiveness
36 Copyright 2009 © Professor Michael E. Porter20090928 – Indonesia President visit (handouts).ppt
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
37 Copyright 2009 © Professor Michael E. Porter20090928 – Indonesia President visit (handouts).ppt
• Eliminating trade and investment barriers within the region
• Simplifying and harmonizing cross-borderregulations and paperwork
• Coordinatinganti-monopoly and fair competition policies
• Harmonizing environmental standards
• Harmonizing product safetystandards
• Establishing reciprocal consumerprotection laws
• Opening governmentprocurementwithin the region
• Improving regional transportationinfrastructure
• Enhancing regional communicationsand connectivity
• Creating an efficient energy network
• Linking financialmarkets
• Harmonizing administrativerequirements for businesses
• Opening the movement of students for higher education
• Facilitating cross-border cluster upgrading, e.g.
– Tourism
– Agribusiness
– Transport & Logistics
– Business services
• Creating a regional strategy and marketingprogram
• Sharing bestpractices in government operations
• Creating regional institutions
– Dispute resolution mechanisms
– Regional development bank
• Developing a regional position with international organizations
Factor (Input)
Conditions
Factor Factor (Input)(Input)
ConditionsConditions
Regional Strategy & Governance
Regional Strategy & Governance
Context for Strategy
and Rivalry
Context for Context for Strategy Strategy
and Rivalryand Rivalry
Related and Supporting Industries
Related and Supporting Industries
Demand ConditionsDemand Demand
ConditionsConditions
Economic Coordination Among NeighborsCapturing Synergies
Macroeconomic Competitiveness
Macroeconomic Competitiveness
• Coordinating programs to improve publicsafety
• Coordinating macro-economicpolicies
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Indonesia and ASEAN
• ASEAN has set ambitious policy goals but there is limited implementation
• ASEAN’s agenda is focused on a reciprocal trade liberalization, 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
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National Value PropositionNational Value Proposition
Developing an Indonesian Economic Strategy
Developing Unique StrengthsDeveloping Unique Strengths Addressing Crucial ConstraintsAddressing Crucial Constraints
• What are the key strengths that Indonesia must build upon?
• What weaknesses must be addressed to achieve parity with peer countries?
• What is the unique competitive position of Indonesia given its location, legacy, 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?
• An economic strategy requires rigorous prioritization and sequencing
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Toward an Indonesian Economic Strategy
Implications
Political and Legal Stability
Human Development
Infrastructure
Regulatory Reforms
Trade, investment and Regional integration
Cluster Development
Government Effectiveness and Organization
Unique Strengths
• Significant natural resources• Pluralistic, 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, with
proximity to numerous foreign markets
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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, policy coordination within government with the private sector remains a challenge
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Organizing for CompetitivenessAction 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, involving representatives from both public and private sector and participation by the nationalgovernment
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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