1 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
Professor Michael E. PorterHarvard 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
Competitiveness: A New Economic Strategy for Peru
2 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
0% 2% 4% 6% 8% 10% 12% 14%
Source: EIU (2009), authors calculations
PPP-adjusted GDP per Capita, 2008 ($USD)
Growth of Real GDP per Capita (PPP-adjusted), CAGR, 2004 to 2008
Bahrain
China
Vietnam
South Africa
Latvia
Oman
Croatia
Czech Republic
Saudi Arabia
Thailand
Estonia
Russia
Costa RicaBrazil
HondurasIndia
Turkey
Egypt
Lithuania
Israel
Slovakia
Hungary
Mexico
Slovenia
Belize
Chile
Other countriesLatin American countries
Prosperity Performance Selected Lower and Middle Income Countries
Argentina
South Korea
Poland
Malaysia
Philippines
Sri Lanka
New Zealand
Bulgaria
Dominican RepublicColombia
Romania Uruguay
Ukraine
GuatemalaGeorgia
Bosnia
Jordan
Peru
Paraguay
Nicaragua
Guyana
Panama
BoliviaEl Salvador
Venezuela
KazakhstanBelarus
UAE Greece ($30,650)
Cyprus
Portugal
Libya
Lebanon
Albania
Trinidad & Tobago
Ecuador TunisiaAlgeria
Iran
Pakistan
3 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
0%
2%
4%
6%
8%
10%
12%
14%
-6% -5% -4% -3% -2% -1% 0% 1% 2%
Unemployment Performance Selected CountriesUnemployment
Rate, 2008
Change of Unemployment Rate in Percentage Points, 2004 to 2008
Source: EIU (2009)
Improving Deteriorating
Greece
Syria
Tunisia
El Salvador
Ukraine
LithuaniaCzech Rep.
Poland (-8.4%)
Estonia
Mexico
Slovenia
Malaysia
Portugal HungaryPhilippines
China
Turkey
Slovakia
Vietnam
Indonesia
Albania
Thailand
Brazil
RussiaIndia
Chile
Romania
Bulgaria
Egypt
South Africa (22.9%)
Croatia
Saudi Arabia
Costa RicaLatvia
PakistanArgentina
IrelandIsrael
Iran
Other countriesLatin American countries
Colombia
PeruBoliviaEcuadorVenezuela
NicaraguaPanama T&TParaguay
Honduras
Dominican Republic (15.5%)
JordanAlgeria
Kazakhstan
Sri Lanka
CyprusKorea
Uruguay
4 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
Poverty Rates Peru, 2001 to 2007% of Population Under
the Poverty Line
0%
10%
20%
30%
40%
50%
60%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Source: Informacion Socio Demografica, from El Instituto Nacional de Estadistica e Informatica (INEI), 2009
5 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
-15% -10% -5% 0% 5% 10% 15% 20%
Export Performance Selected Countries
Exports of Goods and Services (% of GDP), 2008
Change in Exports of Goods and Services (% of GDP), 2004 to 2008
Russia
Thailand
Jordan
Saudi Arabia
China
MacedoniaChile
Philippines South Africa
Ireland
India
Bolivia
Brazil
Cambodia
Indonesia
Czech Republic
Slovakia
Turkey
MexicoSri Lanka
Pakistan
Argentina
Vietnam
Malaysia (103.5%)
Ethiopia
Croatia
Source: EIU (2008), authors’ analysis
Egypt
Poland
Slovenia
Peru
Israel
BulgariaBelarus Belize
Romania
Greece
Estonia
Hungary
Lithuania
LatviaUkraine (-17.5%)
Other countriesLatin American Countries
Nicaragua
Honduras
Costa Rica
Trinidad & TobagoParaguay
Panama
Ecuador
Guatemala
Venezuela Uruguay
El Salvador
ColombiaAlbania
AlgeriaCyprus
Kazakhstan
IranLebanon
LibyaMalta
MoroccoPortugalSyria
Tunisia
Georgia
6 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
Peru’s Exports By Type of Industry
0.00%
0.10%
0.20%
0.30%
0.40%
0.50%
0.60%
0.70%
0.80%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Processed GoodsSemi-processed GoodsUnprocessed GoodsServicesTOTAL
Source: UNComTrade, WTO (2009)
World Export Market Share (current USD)
7 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
0%
10%
20%
30%
40%
50%
60%
70%
80%
0% 5% 10% 15% 20% 25% 30% 35% 40% 45%
Inbound Foreign Investment Performance Stocks and Flows, Selected 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
Iran
Russia
Saudi ArabiaTurkey
Slovenia
HungaryVietnam
SlovakiaCzech Republic
Chile
PolandColombia
Estonia
Malaysia
ThailandSouth Africa
Indonesia
Lithuania
India
Brazil
Pakistan
Croatia
El Salvador
Latvia
Nicaragua
Tunisia
China
Mexico
Portugal
Ecuador
Cambodia
Cyprus
Jordan (46.5%, 81.8%)
Paraguay
Costa RicaRomania
Uruguay
Macedonia
Guatemala
BoliviaKazakhstan
Honduras
Other countriesLatin American countries
Bulgaria (69%)
Egypt
Dominican Republic
Belize
Peru
ArgentinaVenezuela
Panama (48.2%)
Trinidad & Tobago
Israel
Libya
Morocco
UAE
Lebanon (6.7%)
Sri Lanka
Georgia
Ukraine
Bosnia
Malaysia
8 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
-30% -20% -10% 0% 10% 20% 30% 40% 50% 60%
Source: USPTO (2009), EIU (2009)
Average U.S. patents per 1 million population, 2004-2008
CAGR of US-registered patents, 2004 – 2008
Innovative Capacity Innovation Output of Selected Countries
Saudi Arabia
RussiaPortugal
Turkey
India
Poland
Czech Republic
China
South Africa
Greece
120 patents =
Argentina
Brazil
Croatia
Bulgaria
PhilippinesEcuador
Chile
ThailandRomania
Peru
VenezuelaMexico
ColombiaUkraine
9 Copyright 2009 © Professor Michael E. Porter20091130 – 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
10 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
What is Competitiveness?
• 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
• Competitiveness depends on 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
11 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
-3% 0% 3% 6% 9%
Comparative Labor Productivity Selected Countries
Growth of real GDP per employee (PPP-adjusted), 1990 to 2008
Real GDP per employee (PPP adjusted US$), 2008
Source: authors calculation Groningen Growth and Development Centre (2009), EIU (2009)
Peru (Avg. growth 2001to 2008)
Mexico
New Zealand
Australia
Iran
Slovakia
Pakistan
Brazil
Malaysia
Germany
Poland
Slovenia
Argentina
ChinaPhilippines
Russia
Indonesia
Bosnia
Korea
India
Thailand
Japan
Egypt
Belarus
Czech Republic
Georgia
Romania
Saudi Arabia
South Africa
Syria
Spain
Croatia
Chile
Oman
Cambodia
Kazakhstan
UAE
Ukraine
PortugalLithuania
Kuwait
Israel
Jordan
Greece
Hungary
Azerbaijan
Cyprus
Armenia
Albania
Macedonia
Austria
Malta
Estonia
Singapore
Bulgaria
Switzerland
Latvia
Vietnam
Serbia
Turkey
Peru
12 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
Macroeconomic Competitiveness
Microeconomic Competitiveness
Sophisticationof Company
Operations andStrategy
Quality of the NationalBusiness
Environment
Macroeconomic Policies
Social Infrastructure and Political Institutions
State of Cluster Development
• Macroeconomic competitiveness creates the potential for high productivity, but is not sufficient
• 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. Porter20091130 – Peru.ppt
Macroeconomic Competitiveness
Microeconomic CompetitivenessSophisticationof Company
Operations andStrategy
Quality of the NationalBusiness
Environment
Social Infrastructure and Political Institutions
State of Cluster Development
Natural Endowments
Macroeconomic Policies
Determinants of Competitiveness
• Fiscal policy: public spending aligned with revenues over time
• Monetary policy: low levels of inflation
• Macroeconomic management: avoiding structural imbalances and cyclical overheating
MacroeconomicPolicy
14 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
Determinants of Competitiveness
Macroeconomic Competitiveness
Microeconomic CompetitivenessSophisticationof Company
Operations andStrategy
Quality of the NationalBusiness
Environment
Social Infrastructure and Political Institutions
State of Cluster Development
Natural Endowments
• 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
Social Infrastructure and Political Institutions
Macroeconomic Policies
15 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
Macroeconomic Competitiveness
Microeconomic CompetitivenessSophisticationof Company
Operations andStrategy
Quality of the NationalBusiness
Environment
Social Infrastructure and Political Institutions
State of Cluster Development
Natural Endowments
Macroeconomic Policies
Determinants of Competitiveness
• The internal company skills, capabilities, and management practices needed to attain the highest level of productivity and innovation possible
Sophisticationof Company
Operations andStrategy
16 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
Determinants of Competitiveness
• The external business environment conditions that allow companies to reach high levels of productivity and innovation
Quality of the National Business
Environment Macroeconomic Competitiveness
Microeconomic CompetitivenessSophisticationof Company
Operations andStrategy
Quality of the NationalBusiness
Environment
Social Infrastructure and Political Institutions
State of Cluster Development
Natural Endowments
Macroeconomic Policies
17 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
Determinants of Competitiveness
• A critical mass of firms in particular fields, together with specialized skills, infrastructure, and supporting institutions, to support high productivity through efficiencies and synergies
State of Cluster Development
Macroeconomic Competitiveness
Microeconomic CompetitivenessSophisticationof Company
Operations andStrategy
Quality of the NationalBusiness
Environment
Social Infrastructure and Political Institutions
State of Cluster Development
Natural Endowments
Macroeconomic Policies
18 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
Competitiveness and Poverty Reduction
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
Economic Development
19 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
Peru’s Competitiveness Profile, 2009 ISC Country Competitiveness Model
Macroeconomic Competitiveness (82)
Microeconomic Competitiveness (73)
Social Infra- structure and Pol. Institutions (90)
Macroeconomic Policy (69)
Business Environment Quality
(74)
Company Sophistication
(70)
Note: Rank versus 133 countries; overall, Peru ranks 71st in 2008 PPP adjusted GDP per capita and 75th in 2009 Global Competitiveness Source: Country Competitiveness Model (CCM), Institute for Strategy and Competitiveness, Harvard University (2009)
Peru’s GDP per capita rank is 71st versus 133 countries
20 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
Peru’s Macroeconomic Competitiveness
Macroeconomic Policy
• Conservative fiscal policy
21 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
Government Budget Balances Selected Countries
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
1996 1998 2000 2002 2004 2006 2008
Chile
Peru
Argentina
Colombia
Mexico
Brazil
Source: EIU, 2009
Budget Balance(% of GDP)
Ranked by Surplus, 2008
22 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
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
23 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
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
Social Infrastructure and Political Institutions
• Continued problems with corruption
24 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.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
Corruption Index, 2007
91
1 Finland
Canada
Bangladesh
Indonesia
Ireland
Portugal
Egypt
Iceland
Czech Republic
SlovakiaSouth Korea
Latvia
India
Slovenia
Thailand
Switzerland
France
RomaniaTurkey
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
Worsening Improving
High corruption
Low corruption
Belgium
Singapore
Netherlands
Botswana
Mauritius
El SalvadorGhana
Dominican RepublicGuatemala
Uzbekistan
Kazakhstan
Honduras
Malawi
Namibia
Kenya
CameroonNicaragua
Moldova
Ecuador
Costa Rica
Bolivia
25 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
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
Social Infrastructure and Political Institutions
• Continued problems with corruption
• Sharp inequality between indigenous groups and other citizens
• Weak education system
• Inadequate health care system, despite some improvements
• Weak legal system and effectiveness of property rights
• Unstable political processes and institutions
• Government institutions are inefficient and held in low esteem by the public
26 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
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,
health, and nutrition are needed
• Create equal opportunity for all groups
Peru’s Macroeconomic Competitiveness Action Priorities
27 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
Microeconomic Competitiveness: Quality of 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
Conditions Demand
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
• Efficient access to high quality business inputs
– Human resources– Capital availability– Physical infrastructure– Administrative infrastructure (e.g.
registration, permitting, transparency)– Scientific and technological
infrastructure– Efficient utilization of natural
endowments
• Availability of suppliers, related industries, and supporting institutions
Open and vigorous local competition
– Openness to foreign competition– Competition laws
• Local rules and incentives that encourage investment and productivity
– e.g. incentives for capital investment, intellectual property protection, corporate governance standards
28 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
WEAKNESSESSTRENGTHS
Peru’s Business Environment Overall Strengths and Weaknesses
Trade and Investment Liberalization• Openness to foreign investment• Low restrictions on capital flows• Simplification of custom procedures• Low trade barriers• Improvements in investor protectionsImproving Financial Markets• Soundness of banks• Improving financial marketIT Infrastructure• Good quality of telecom infrastructure• Sound IT policiesOther• Good management training• Improving sophistication of local buyers• Efforts to strengthen competition policy
Physical Infrastructure• Low quality of air, transport and port
infrastructure• Inadequate electricity supplyWorkforce 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 economyInnovation Infrastructure• Limited technological capacity• Weak university-industry research
collaboration• Low patenting rates
29 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
0
20
40
60
80
100
120
Ease ofDoing
Business
GettingCredit
ProtectingInvestors
RegisteringProperty
PayingTaxes
TradingAcrossBorders
Closing aBusiness
EmployingWorkers
Starting aBusiness
EnforcingContracts
Dealingwith
Licenses
Ease of Doing Business Peru, 2009
Ranking, 2009 (of 183 countries)
Source: World Bank Report, Doing Business (2009/10)
Favorable Unfavorable
Peru’s per capita GDP rank: 72
30 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
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
31 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.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
Property Services Property Services
Maintenance Services
Maintenance Services
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
Food Suppliers
Food Suppliers
Public Relations & Market Research
Services
Public Relations & Market Research
Services
Local retail, health care, and other services
Local retail, health care, and other services
Souvenirs, Duty Free
Souvenirs, Duty Free
Banks,Foreign
Exchange
Banks,Foreign
Exchange
Local Transportation
Local Transportation
Microeconomic Competitiveness: Cluster Development Tourism Cluster in Cairns, Australia
32 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
Cluster in Developing Countries Kenya’s Cut Flower Cluster
Sources: Student team research by Kusi Hornberger, Nick Ndiritu, Lalo Ponce-Brito, Melesse Tashu, and Tijan Watt, Microeconomics of Competitiveness Course, 2007
33 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
The Australian Wine Cluster History
1955
Australian Wine Research Institute founded
1970
Winemaking school at Charles Sturt University founded
1980
Australian Wine and Brandy Corporation established
1965
Australian Wine Bureau established
1930
First oenology course at Roseworthy Agricultural College
1950s
Import of European winery technology
1960s
Recruiting of experienced foreign investors, e.g. Wolf Bass
1990s
Surge in exports and international acquisitions
1980s
Creation of large number of new wineries
1970s
Continued inflow of foreign capital and management
1990
Winemaker’s Federation of Australia established
1991 to 1998
New organizations created for education, research, market information, and export promotions
Source: Michael E. Porter and Örjan Sölvell, The Australian Wine Cluster – Supplement, Harvard Business School Case Study, 2002
34 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
FurnitureBuilding Fixtures,
Equipment & Services
Fishing & Fishing Products
Hospitality & TourismAgricultural
Products
Transportation & Logistics
Clusters and Economic Diversification Linkages Across Clusters
Plastics
Oil & Gas
Chemical Products
Biopharma-ceuticals
Power Generation
Aerospace Vehicles &
Defense
Lightning & ElectricalEquipment
Financial Services
Publishing & Printing
Entertainment
Information Tech.
Communi-cations
Equipment
Aerospace Engines
Business Services
Distribution Services
Forest Products
Heavy Construction
Services
Construction Materials
Prefabricated Enclosures
Heavy Machinery
Sporting & Recreation
Goods
Automotive
Production Technology
Motor Driven Products
Mining & Metal Manufacturing
Apparel
Leather & Related Products
Jewelry & Precious Metals
Textiles
Footwear
Processed Food
Tobacco
Medical Devices
Analytical InstrumentsEducation &
Knowledge Creation
Note: Clusters with overlapping borders or identical shading have at least 20% overlap(by number of industries) in both directions.
35 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
Clusters as a Tool For Economic Policy
• A forum for collaboration between government, the private sector, trade associations, educational institutions, and research institutions
• Brings together firms of all sizes, 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
36 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
-0.4% -0.2% 0.0% 0.2% 0.4% 0.6%
Peru’s Export Portfolio 1997 to 2007
Change in Peru’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.
Peru
’s w
orld
exp
ort m
arke
t sha
re, 2
007
Change In Peru’s Overall World Export Share: +0.07%
Peru’s Average World Export Share: 0.20%
Exports of US$2.4 Billion =
Hospitality and Tourism
Fishing
Agriculture
Construction MaterialsFinancial Services
Publishing and Printing
Jewelry, Precious Metals and Collectibles (0.88%, 1.69%)
Metal, Mining and Manufacturing
Apparel
Textiles
Communication Services
Oil & Gas
37 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
0.00%
0.05%
0.10%
0.15%
0.20%
-0.06% -0.04% -0.02% 0.00% 0.02% 0.04% 0.06% 0.08% 0.10%
Peru’s Export Portfolio 1997 to 2007
Change in Peru’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.
Peru
’s w
orld
exp
ort m
arke
t sha
re, 2
007
Construction Materials
Transportation and Logistics
Biopharmaceuticals
Production Technology
Chemical Products
Oil and Gas
Prefabricated Enclosures and StructuresSport
Business Services
Financial Services
Heavy MachineryMotor Driven Products
Communications Equipment
Furniture
Footwear
Leather and Related Products
Forest ProductsBuilding Fixtures and Equipment
Plastics
Processed Foods
Textiles
Exports of US$2.4 Billion =
Power and Power Generation Equipment
38 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
-1.5% -1.0% -0.5% 0.0% 0.5% 1.0%
Malaysia’s Export Portfolio 1997 to 2007
Change in Malaysia’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.
Mal
aysi
a’s
wor
ld e
xpor
t mar
ket s
hare
, 200
7
Change In Malaysia’s Overall World Export Share: -0.20%
Malaysia’s Average World Export Share: 1.24%
Exports of US$9.3 Billion =
Hospitality and Tourism
Fishing & Fish Products
Agriculture
Construction Materials
Publishing and Printing
Jewelry, Precious Metals and CollectiblesMetal, Mining and Manufacturing
Apparel
Textiles
Communication Services
Oil & Gas
Transportation and Logistics
Biopharmaceuticals
Production Technology
Chemical Products
Prefabricated Enclosures and Structures
SportBusiness Services (-2.36%)
Financial Services
Heavy Machinery
Motor Driven Products
Communications Equipment
Furniture
Footwear
Forest Products
Building Fixtures and Equipment
Plastics
Processed Foods
Power and Power Generation Equipment
Information Technology (6.46%)
Analytical Instruments
Lighting and Electrical Equipment
Entertainment and Reproduction Equipment (2.19%, 3.09%)
Construction Services
Medical Devices
Marine Equipment
Aerospace Vehicles and Defense
Automotive
39 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
FurnitureBuilding Fixtures,
Equipment & Services
Fishing & Fishing Products Hospitality
& TourismAgricultural
ProductsTransportation
& Logistics
Share of World Exports by Cluster Peru, 2007
Plastics
Oil & Gas
Chemical Products
Biopharma-ceuticals
Power Generation
Aerospace Vehicles &
Defense
Lightning & ElectricalEquipment
Financial Services
Publishing & Printing
Information Tech.
Communi-cations
Equipment
Business Services
Distribution Services
Forest Products
Heavy Construction
Services
Construction Materials
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
0.2% - 0.5%
0.5% - 1.0%
> 1.0%
Enter-tainment
World Market Share
40 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
FurnitureBuilding Fixtures,
Equipment & Services
Fishing & Fishing Products Hospitality
& TourismAgricultural
ProductsTransportation
& Logistics
Share of World Exports by Cluster Malaysia, 2007
Plastics
Oil & Gas
Chemical Products
Biopharma-ceuticals
Power Generation
Aerospace Vehicles &
Defense
Lightning & ElectricalEquipment
Financial Services
Publishing & Printing
Information Tech.
Communi-cations
Equipment
Business Services
Distribution Services
Forest Products
Heavy Construction
Services
Construction Materials
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
1.24% - 1.75%
1.75% - 2.25%
> 2.25%
Enter-tainment
World Market Share
41 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
State of Cluster Development in Peru
• Peru has strengths in several clusters, including mining, fishing, agribusiness, tourism, jewelry and apparel
• Peru’s clusters are based heavily on natural endowments, 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
42 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
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
43 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
Develop Related ClustersDevelop Related Clusters
Upgrade Existing Export Products and Services
Upgrade Existing Export Products and Services
Clusters and Economic Diversification
Deepen Existing ClustersDeepen Existing Clusters
Turn Products Into ClustersTurn Products Into Clusters• Local firms• MNCs
44 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
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.g., trade associations) to organize cluster participants
45 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
Geographic Influences on Competitiveness
Regions and CitiesRegions and Cities
NationNation
46 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
Regions and Competitiveness
• Economic performance varies significantly across sub-national regions (e.g., provinces, states, metropolitan areas)
• Many essential levers of competitiveness reside at the regional level• Region’s specialize in different sets of clusters
47 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
Specialization by Cluster, Turkish Regions 2007
Note: Source: European Cluster Observatory, 2009
IstanbulTextilesLeather and ApparelDistribution ServicesJewelry
IstanbulTextilesLeather and ApparelDistribution ServicesJewelry
Bati AnadoluFurnitureConstruction MaterialsDistribution ServicesAerospace
Bati AnadoluFurnitureConstruction MaterialsDistribution ServicesAerospace
AkdenzizTextilesHospitality and TourismApparelDistribution Services
AkdenzizTextilesHospitality and TourismApparelDistribution Services
Orta AnadoluFurnitureTextilesAgricultural ProductsMetal Mining and Manufacturing
Orta AnadoluFurnitureTextilesAgricultural ProductsMetal Mining and Manufacturing
Bati KaradenizTobaccoApparelMetal Mining and ManufacturingForest Products
Bati KaradenizTobaccoApparelMetal Mining and ManufacturingForest Products
Dogu KaradenizFood ProcessingDistribution ServicesFurnitureForest Products
Dogu KaradenizFood ProcessingDistribution ServicesFurnitureForest Products
Ortadogu AnadoluTextilesAgricultural ProductsApparelDistribution Services
Ortadogu AnadoluTextilesAgricultural ProductsApparelDistribution Services
Guneydogu AnadoluTextilesTobaccoOil and GasFood Processing
Guneydogu AnadoluTextilesTobaccoOil and GasFood Processing
Bati MarmaraApparelTextilesChemicalsConstruction Materials
Bati MarmaraApparelTextilesChemicalsConstruction Materials
Dogu MarmaraTextilesAutomotiveApparelFurniture
Dogu MarmaraTextilesAutomotiveApparelFurniture
EgeTobaccoTextilesConstruction MaterialsApparel
EgeTobaccoTextilesConstruction MaterialsApparel
Kuzeydogu AnadoluAgricultural ProductsFootwearDistribution ServicesHospitality and Tourism
Kuzeydogu AnadoluAgricultural ProductsFootwearDistribution ServicesHospitality and Tourism
48 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
Regions and Competitiveness
• Economic performance varies significantly across sub-national regions (e.g., provinces, states, 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, internal competition, and greater government accountability
49 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
Competitiveness of Peru’s Regions
• Strong disparities exist across Peruvian regions in business environment, innovative capacity, and economic performance
50 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
Prosperity Performance Peru’s Regions
GDP per Capita, 2008 (1994 New Peruvian Soles)
Growth in GDP per Capital (CAGR), 2001 to 2008
Peru’s Weighted Average: 6.0%
Source: Fuente: Instituto Nacional de Estadistica e Informatica - Dirección Nacional de Cuentas Nacionales
Peru’s Weighted Average: 6,513
Ayachucho
Areguipa
HuancavelicaCusco
La Libertad
Lima
Moquegua
Ica
PiuraAmazonas
Apurimac
Ancash
San Martin
TumbesLambayeque
Madre de Dios
Ucayali
Puno
Tacna
Pasco
Loreto
Huanuco
Cajamarca
Junin
51 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
Competitiveness of Peru’s Regions
• Strong disparities exist across Peruvian regions in business environment, innovative capacity, and economic performance
• Decentralization remains incomplete and has produced some social tension and unrest
• There is weak planning, design, and implementation capacity at the local level
• Sub-national governments are highly dependent on transfers from the central government
52 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
Peru’s Regions Action Priorities
• Continue decentralization of responsibilities and resources to sub-national governments
• Improve the capacity of local governments to plan, 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, coastal and Amazon regions– Strengthen human development in the poorer highland regions
53 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
Geographic Influences on Competitiveness
Neighboring CountriesNeighboring Countries
Regions and CitiesRegions and Cities
NationNation
54 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
Economic Coordination with Neighboring Countries
55 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
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
56 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
• Eliminating trade and investment barriers within the region
• Simplifying and harmonizing cross-border regulations and paperwork
• Coordinating anti-monopoly and fair competition policies
• Opening government procurement within the region Harmonizing environmental standards
• Harmonizing product safety standards
• Establishing reciprocal consumer protection laws
• 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
• Facilitating cross- border cluster development
– e.g., Supplier networks
– Transport & Logistics
– Quality standards
Factor ConditionsFactor Factor
ConditionsConditionsContext 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 Integration Among Neighbors Capturing Synergies
Macroeconomic Competitiveness
Macroeconomic Competitiveness
• Coordinating macroeconomic policies
• Coordinating programs to improve security and public safety
57 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
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, including with the U.S. and
China, 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.S. and Asian markets• Leverage inbound and outbound FDI with neighbors to upgrade
local competitiveness
58 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
• A prioritized agenda to create a unique competitive position for a country or region
• Implementing best practices in each policy area
• There are a huge number of policy areas that matter
• No country can or should try to make progress in all areas simultaneously
PolicyPolicyImprovementImprovement
EconomicEconomicStrategyStrategy
The Need for an Economic Strategy
59 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
National Value PropositionNational Value Proposition
The Need for an Economic Strategy
Refining Unique StrengthsRefining Unique Strengths Addressing Crucial ConstraintsAddressing Crucial Constraints
• 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?
• 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?
• What are the distinctive competitive assets of the nation’s economy given its location, legacy, rate of progress, existing strengths, and potential strengths?
– What unique value as a business location?– In what types of fields / clusters?– What roles with neighbors, the broader region, and the wider world?
• Priorities and sequencing are a necessity in economic development
60 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
Toward a Peruvian Economic StrategyImplications
Reduce and Eliminate Corruption
Implement Next Stage Regulatory Reforms to Improve the Business Environment
Improve the Quality of Education and Workforce Training
Unique Strengths
• Abundant natural endowments
• Vast biodiversity and ecosystems
• Central location in South America
• Young, 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, China, etc.)
Foster Cluster Development Around Resource Strengths
Upgrade Ground, Air and Port Transportation Infrastructure to Connect Peruvian Regions with Neighbors and the World
Create New, More Stable Effective Political Institutions
• Upgrade Peru’s competitive assets to achieve high rates of sustainable economic growth while improving welfare of the poor
61 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
Accelerating Poverty Reduction in Peru
Increase CompetitivenessReduce Poverty
62 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
The Process of Economic Development Shifting Roles and Responsibilities
Old ModelOld Model
• The central government drives economic development through policy decisions, spending and incentives
• The central government drives economic development through policy decisions, spending and incentives
New ModelNew Model
• Economic development is a collaborative process involving government at multiple levels, companies, educational and research institutions, and private sector organizations
• Economic development is a collaborative process involving government at multiple levels, companies, educational and research institutions, and private sector organizations
• Competitiveness must be a bottom-up process in which many individuals, companies, and institutions take responsibility and act
63 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
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, a positive step, 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
64 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
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, public and academic sectors as well as federal government participation
• The private sector must assume a catalytic role in economic strategy formulation and implementation
65 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
• 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, support high wages, build wealth, buy local goods, and pay taxes
• There is a long-term synergy between economic and social objectives
Integrating Business and the Society
Social Objectives
Economic Objectives
66 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
Competitiveness and Social Issues
Company Productivity
Energy Use
Water Use
Employee Health
Gender Equity
Worker Safety
Worker Education and
SkillsPoverty in the Company’sCommunities
EnvironmentalImpact
67 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
Corporate Role in Competitiveness The Concept of Shared Value
• Find the points of convergence between economic and social objectives, not assumed tradeoffs or the need for redistribution
– These points of convergence are growing
• Achieving shared value requires new thinking, new technologies, and new approaches to management
• Shared value opportunities are even greater in developing countries
• Shared value thinking applies equally to NGOs and governments
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
68 Copyright 2009 © Professor Michael E. Porter20091130 – Peru.ppt
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