The Competitive Advantage of Nations, States and Regions

Professor Michael E. Porter Harvard Business School Advanced Management Program April 15, 2009
This presentation draws on ideas from Professor Porters articles and books, in particular, The Competitive Advantage of Nations (The Free Press, 1990), Building the Microeconomic Foundations of Competitiveness, 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 on clusters 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 Porters work and the Institute for Strategy and Competitiveness is available at www.isc.hbs.edu Version: April 15, 12pm
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Copyright 2009 Professor Michael E. Porter

Competitive Advantage and Competitiveness

Internal

External

Competitive advantage resides inside the company Competitive success depends on company choices

Competitive advantage resides in the locations in which the company is based Cluster participation is an important contributor to competitiveness

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The Changing Nature of Domestic and International Competition

Falling barriers to trade and investment Globalization of markets Globalization of capital investment Globalization of company value chains Rapidly increasing stock and diffusion of knowledge Increasing knowledge and skill intensity of competition Value is increasingly concentrated in service functions, not manufacturing activities themselves Shift from vertical integration to relying on outside suppliers, partners, and institutions Rising logistical costs due to costs of energy and emissions Costs in China and India are rising rapidly Competitive upgrading is occurring in many countries

Improving competitiveness is increasingly essential to a countrys prosperity

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Prosperity Performance
Selected Countries
PPP-adjusted GDP per Capita, 2007 ($USD)

$50,000 $45,000 $40,000 $35,000 $30,000 $25,000 $20,000

Qatar ($58,000, 0.92%) United States Ireland Kuwait Canada

Norway ($56,650) Hong Kong Singapore

Australia Taiwan

Italy

Sweden UK Finland Japan Germany France Spain Israel New Zealand UAE

Greece South Korea

Slovenia Czech Republic Slovakia Hungary Estonia Lithuania Russia Latvia (12.6%)

Bahrain

Saudi Arabia

Oman

Libya

Poland Argentina Brazil Chile Malaysia Turkey

Croatia

$15,000 $10,000 $5,000

Mexico Lebanon

Iran South Africa Thailand Egypt Syria Jordan Pakistan Philippines China (13.0%) Laos India Vietnam Cambodia

Yemen

$0 2% 4% 6% 8% 10% 12%
Growth of Real GDP per Capita (PPP-adjusted), CAGR, 2000 to 2007
Note: highlighted countries are part of the East African Community (EAC). Source: EIU (2009), authors calculations
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What is Competitiveness?
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) that a country can sustain 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

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
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Innovative Capacity
Innovation Output of Top 25 Patent Producing Countries
Average U.S. patents per 1 million population, 2003-2007

350

300

United States Japan

250

Taiwan

200
Switzerland Swede n Germany Israel Finland

150

100
Denmark Austria France Italy

Canada Singapore UK Belgium Spain Netherlands Norway Ireland Russia Hong Kong

Korea

50

Australi a India China (26.97%)

0 -10%
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Brazil

-5%

0%
6

5%

10%

15%
10,000 patents =
Copyright 2009 Professor Michael E. Porter

CAGR of US-registered patents, 2003 2007

Source: USPTO (2008), EIU (2008)

Determinants of Competitiveness
Microeconomic Competitiveness
Quality of the National Business Environment State of Cluster Development Sophistication of Company Operations and Strategy

Macroeconomic Competitiveness
Social Infrastructure and Political Institutions Macroeconomic Policies

Natural Endowments

Macroeconomic competitiveness creates the potential for high productivity, but is not sufficient Productivity ultimately depends on improving the microeconomic capability of the economy and the sophistication of local competition
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Microeconomic Competitiveness: Quality of the Business Environment

Context for Firm Strategy and Rivalry

Local rules and incentives that encourage investment and productivity

e.g. salaries, incentives for capital investments, intellectual property protection, corporate governance standards

Factor (Input) Conditions

Demand Conditions

Vigorous local competition

Openness to foreign competition Competition laws

Access to high quality business inputs

Natural endowments Human resources Capital availability Physical infrastructure Administrative and information infrastructure (e.g. registration, permitting, transparency) Scientific and technological infrastructure

Sophistication of local customers and needs

e.g., Strict quality, safety, and environmental standards Consumer protection laws

Related and Supporting Industries

Availability of suppliers and supporting industries

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
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Microeconomic Competitiveness: State of Cluster Development

Tourism Cluster in Cairns, Australia
Public Relations & Market Research Services

Travel agents

Tour operators

Local retail, health care, and other services Local Transportation

Food Suppliers Restaurants Property Services Hotels

Attractions and Activities

e.g., theme parks, casinos, sports

Souvenirs, Duty Free Airlines, Cruise Ships Banks, Foreign Exchange

Maintenance Services

Government agencies
e.g. Australian Tourism Commission, Great Barrier Reef Authority

Educational Institutions
e.g. James Cook University, Cairns College of TAFE

Industry Groups
e.g. Queensland Tourism Industry Council

Sources: HBS student team research (2003) - Peter Tynan, Chai McConnell, Alexandra West, Jean Hayden
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State of Cluster Development

Massachusetts, Life Sciences
Health and Beauty Products

Cluster Organizations Teaching and Specialized Hospitals

MassMedic, MassBio, others

Surgical Instruments and Suppliers

Medical Equipment

Dental Instruments and Suppliers

Biological Products

Biopharmaceutical Products

Specialized Business Services

Banking, Accounting, Legal

Specialized Risk Capital

Ophthalmic Goods VC Firms, Angel Networks

Diagnostic Substances

Research Organizations
Containers

Specialized Research Service Providers

Laboratory, Clinical Testing

Analytical Instruments

Educational Institutions
Harvard University, MIT, Tufts University, Boston University, UMass
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Globalization and Cluster Specialization

Footwear
Portugal Production Focus on shortproduction runs in the medium price range Romania Production subsidiaries of Italian companies Focus on lower to medium price range China OEM Production Focus on low cost segment mainly for the US market

United States Design and marketing Focus on specific market segments like sport and recreational shoes and boots Manufacturing only in selected lines such as hand-sewn casual shoes and boots

Italy Design, marketing, and production of premium shoes Export widely to the world market

Brazil Low to medium quality finished shoes, inputs, leather tanning Shift toward higher quality products in response to Chinese price competition

Vietnam/Indonesia OEM Production Focus on the low cost segment mainly for the European market

Source: Research by HBS student teams in 2002 Van Thi Huynh, Evan Lee, Kevin Newman, Nils Ole Oermann
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Copyright 2009 Professor Michael E. Porter

National Cluster Export Portfolio

Germany, 1997 to 2007
20%
Change In Germanys Overall World Export Share: +0.43% Production Technology Prefabricated Enclosures and Structures Lighting and Electrical Equipment Automotive Construction Services

Germanys world export market share, 2007

15%
Plastics Chemical Products

Heavy Machinery Medical Devices Processed Foods

Building Fixtures and Equipment

Publishing and Printing Biopharmaceuticals Analytical Instruments Tobacco (8.55%) Aerospace Vehicles and Defense

Motor Driven Products

Forest Products Power and Power Generation Equipment Germanys Average World Export Share: +9.22% Sporting, Recreational and Children's Goods

Construction Materials

10%

Metal Mining and Manufacturing Textiles Communications Equipment

Business Services Commercial Services Aerospace Engines Furniture Transportation and Logistics Marine Equipment Information Technology

5%

Apparel Entertainment Financial Services Leather and Related Products Hospitality and Tourism Agricultural Products Oil and Gas Coal

Footwear Jewelry, Precious Metals and Collectibles

Fishing and Fishing Related Products

0% -3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%
Exports of US$44 Billion =

5.0%

Change in Germanys world export market share, 1997 to 2007

Source: 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. 12 20090515 AMP final.ppt
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National Cluster Export Portfolio

Indonesia, 1997 to 2007
2.5%
Fishing and Fishing Related Products Change In Indonesias Overall World Export Share: -0.03% Coal (5.3%, 12.3%)

Footwear

Agricultural Products Forest Products

2.0%

Indonesias world export market share, 2007

Furniture
Building Fixtures and Equipment (-3.75%)

Apparel Textiles Tobacco Plastics

1.5%

Oil and Gas Metal Mining and Manufacturing

1.0%
Indonesias Average World Export Share: +0.82%

Entertainment Motor Driven Products Construction Materials Chemical Products Publishing and Printing Sporting Goods Leather and Related Products Transportation and Logistics Communication Services Lighting and Electrical Equipment Marine Processed Food Equipment Power and Power Generation Equipment Heavy Machinery Production Technology Automotive Aerospace Engines

Hospitality and Tourism

0.5%

Prefabricated Enclosures and Structures Jewelry, Precious Metals and Collectibles Business Services Information Technology Medical Devices Biopharmaceuticals

0.0% -2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%
Exports of US$4.2 Billion =

2.0%

Change in Indonesias world export market share, 1997 to 2007

Source: 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. 13 20090515 AMP final.ppt
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Institutions for Collaboration

Selected Massachusetts Organizations, Life Sciences
Life Sciences Industry Associations

University Initiatives

Massachusetts Biotechnology Council Massachusetts Medical Device Industry Council Massachusetts Hospital Association

Harvard Biomedical Community MIT Enterprise Forum Biotech Club at Harvard Medical School Technology Transfer offices

General Industry Associations

Informal networks

Associated Industries of Massachusetts Greater Boston Chamber of Commerce High Tech Council of Massachusetts

Company alumni groups Venture capital community University alumni groups

Economic Development Initiatives

Joint Research Initiatives

Massachusetts Technology Collaborative Mass Biomedical Initiatives Mass Development Massachusetts Alliance for Economic Development
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New England Healthcare Institute Whitehead Institute For Biomedical Research Center for Integration of Medicine and Innovative Technology (CIMIT)
Copyright 2009 Professor Michael E. Porter

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Regional Economic Performance

$60,000

U.S. States
Delaware

Highly productive and productivity rising versus U.S.

$55,000
Connecticut

Gross State Product per Capita, 2007

$50,000

New York

Massachusetts
$45,000
Alaska New Jersey

$40,000

$35,000

$30,000

California Virginia Colorado Minnesota Wyoming Washington Maryland Hawaii U.S. GDP per Capita: $38,020 Texas Oregon New Hampshire Nebraska Rhode Island South Dakota North Carolina Kansas Iowa Georgia Pennsylvania Wisconsin Louisiana North Dakota Ohio Tennessee Vermont Arizona Florida Michigan Utah Indiana Missouri New Mexico Kentucky Maine Idaho Alabama Oklahoma South Carolina Montana Arkansas Nevada Illinois Mississippi West Virginia

$25,000

$20,000
0.0% 0.5% 1.0% 1.5%

U.S. GDP per Capita Growth: 1.71%

2.0%

2.5%

3.0%

3.5%

Gross State Product per Capita Growth Rate, 1998-2007

Source: Bureau of Economic Analysis. Growth calculated using compound annual growth rates. Gross state product figures in 2000 chained US dollars. growth rate (CAGR). Notes: of Columbia: $124,363, %3.09. Growth rate calculated as compound annual 15 20090515 District AMP final.ppt Copyright 2009 Professor Michael E. Porter

Specialization of Regional Economies

Selected U.S. Geographic Areas
Denver, CO Leather and Sporting Goods Oil and Gas Aerospace Vehicles and Defense Wichita, KS Aerospace Vehicles and Defense Heavy Machinery Oil and Gas Chicago Communications Equipment Processed Food Heavy Machinery Pittsburgh, PA Construction Materials Metal Manufacturing Education and Knowledge Creation Boston Analytical Instruments Education and Knowledge Creation Communications Equipment

Seattle-BellevueEverett, WA Aerospace Vehicles and Defense Fishing and Fishing Products Analytical Instruments

San FranciscoOakland-San Jose Bay Area Communications Equipment Agricultural Products Information Technology

Raleigh-Durham, NC Communications Equipment Information Technology Education and Knowledge Creation

Los Angeles Area Apparel Building Fixtures, Equipment and Services Entertainment

San Diego Leather and Sporting Goods Power Generation Education and Knowledge Creation

Houston Oil and Gas Products and Services Chemical Products Heavy Construction Services

Atlanta, GA Construction Materials Transportation and Logistics Business Services

Note: Clusters listed are the three highest ranking clusters in terms of share of national employment. Source: Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School, 11/2006.
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Cluster Strength in Europe versus the United States

Share of Employment in Strong Clusters

30%

25%

20%
Europe United States

15%

10%

5%

0% Median Region
Source: European Cluster Observatory
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The Australian Wine Cluster

Trade Performance
Australian Wine Exports in thousand US $ Australian Wine World Export Market Share

$2,700,000 $2,400,000 $2,100,000 8.0% $1,800,000 $1,500,000 $1,200,000 $900,000 $600,000 2.0% $300,000 $0 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 0.0% 4.0% 6.0% Value Market Share 10.0%

Source: 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.
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Copyright 2009 Professor Michael E. Porter

The Australian Wine Cluster

History
1930 First oenology course at Roseworthy Agricultural College 1955 1965 Australian Wine Bureau established 1970 Winemaking school at Charles Sturt University founded 1980 Australian Wine and Brandy Corporation established 1990 1991 to 1998 New organizations created for education, research, market information, and export promotions Winemakers Federation of Australia established

Australian Wine Research Institute founded

1950s Import of European winery technology

1960s Recruiting of experienced foreign investors, e.g. Wolf Bass

1970s Continued inflow of foreign capital and management

1980s Creation of large number of new wineries

1990s Surge in exports and international acquisitions

Source: Michael E. Porter and rjan Slvell, The Australian Wine Cluster Supplement, Harvard Business School Case Study, 2002
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Copyright 2009 Professor Michael E. Porter

The Evolution of Regional Economies

San Diego
Hospitality and Tourism

Climate and Geography

Transportation and Logistics Power Generation Aerospace Vehicles and Defense

Sporting and Leather Goods

Communications Equipment Information Technology

U.S. Military

Analytical Instruments Education and Knowledge Creation Medical Devices

Bioscience Research Centers

Biotech / Pharmaceuticals

1910
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1930

1950
20

1970

1990
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Competitiveness and the Composition of the Economy

Linkages Across Clusters
Fishing & Fishing Products Agricultural Products Distribution Services Jewelry & Precious Metals
Transportation & Logistics

Entertainment Hospitality & Tourism

Textiles Prefabricated Enclosures

Furniture Building Fixtures, Equipment & Services Lightning & Electrical Equipment Power Generation Heavy Construction Services Forest Products Construction Materials Processed Food

Aerospace Vehicles & Information Defense Tech. Analytical Instruments Medical Devices

Business Services Financial Services Publishing & Printing Education & Knowledge Creation

Biopharmaceuticals Chemical Products

Communications Equipment

Heavy Machinery Motor Driven Products Production Technology

Apparel Leather & Related Products Oil & Gas

Tobacco Metal Automotive Manufacturing

Plastics

Aerospace Engines

Footwear

Note: Clusters with overlapping borders or identical shading have at least 20% overlap (by number of industries) in both directions.
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Sporting & Recreation Goods

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Geographic Influences on Competitiveness

World Economy

Broad Economic Areas

Groups of Neighboring Nations

The Neighborhood

Nation

States, Provinces

Metropolitan Areas

Urban and Rural Areas

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The Neighborhood
Southeast Asia

Economic coordination among neighboring countries can significantly enhance competitiveness Integration offers greater opportunities than participation in broader economic forums (e.g., APEC)
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Copyright 2009 Professor Michael E. Porter

The Process of Economic Development

Shifting Roles and Responsibilities

Old Model

New Model

Government drives economic development through policy decisions and incentives

Economic development is a collaborative process involving government at multiple levels, companies, teaching and research institutions, and private sector organizations

Competitiveness must become a bottoms-up process in which many individuals, companies, and institutions take responsibilities Every community and cluster can take steps to enhance competitiveness The rapid sector must become more engaged in competitiveness to improve rapidly
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Copyright 2009 Professor Michael E. Porter

Role of the Private Sector in Economic Development

A companys competitive advantage depends partly on the quality of the business environment A company gains advantages from being part of a cluster

Take an active role in upgrading local infrastructure Nurture local suppliers and attract foreign suppliers Work closely with local educational and research institutions, to upgrade their quality and create specialized programs addressing the clusters needs Inform government on regulatory issues and constraints bearing on cluster development Focus corporate philanthropy on enhancing the local business environment Leverage trade associations for competitiveness
Greater influence if many companies are united Cost sharing between members

Businesses must drive the process of competitiveness improvement at the national and regional level
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Defining an Economic Strategy

National Value Proposition
What is the unique competitive position of the nation or region given its location, legacy, and existing and potential strengths?
What role can it play with neighbors, the region, and the world economy? What unique value as a business location? For what types of activities and clusters?

Developing Unique Strengths

Achieving and Maintaining Parity with Peers

Priorities and sequencing are necessity in economic development

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Strategic Issues For the United States

Core Strengths Weaknesses Human resources challenges
Need to restructure public education Access to higher education Training Americans vs. low skilled immigration

Innovation
Science, technology, R&D

Entrepreneurship Free and open competition Capital markets (current uncertainty) Economic decentralization

Distortions in the international trading system

Intellectual Property protection Foreign market access for advanced services Distortions/currency/subsidies

Falling U.S. leadership in international economic development

U.S. influence, authority, and focus has diminished Retraining system Pension security Health insurance access and mobility Burdensome regulations Litigation costs High-cost / high complexity tax system Energy inefficiency High healthcare costs
Copyright 2009 Professor Michael E. Porter

Weak transitional Security Blanket

Unnecessary cost of doing business

Dynamism and flexibility

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