Competitiveness A New Economic Strategy For Peru

Competitiveness:
A New Economic Strategy for Peru
Professor Michael E. Porter

Harvard 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
20091130 – Peru.ppt 1 Copyright 2009 © Professor Michael E. Porter

Prosperity Performance
Selected Lower and Middle Income Countries
PPP-adjusted GDP per
Capita, 2008 ($USD)
$30,000 Slovenia
UAE Greece ($30,650)
Israel
New Zealand
South Korea Czech Republic
$25,000 Cyprus Latin American countries
Bahrain Saudi Arabia Oman Other countries
Portugal
Slovakia
Estonia
$20,000 Hungary
Trinidad & Tobago Lithuania
Poland Latvia
Libya Croatia
Russia
$15,000 Panama
Chile Argentina
Mexico Malaysia
Venezuela
Turkey Bulgaria Belarus
Uruguay
Iran Romania
Costa Rica Kazakhstan
Lebanon South Africa
$10,000 Brazil Dominican Republic
Thailand Colombia Peru
Belize Algeria Bosnia
Ecuador Tunisia Ukraine
Guyana Albania
Guatemala Egypt China
Jordan Paraguay Georgia
$5,000 El Salvador Sri Lanka
Bolivia
Honduras Philippines
Nicaragua Pakistan India Vietnam
$0
0% 2% 4% 6% 8% 10% 12% 14%
Source: Growth of Real GDP per Capita (PPP-adjusted),
EIU (2009), authors calculations
20091130 – Peru.ppt 2 CAGR, 2004 to 2008 Copyright 2009 © Professor Michael E. Porter
Peru’s Prosperity Performance
GDP per Capita
(in 1990 PPP US$)
CAGR: CAGR: CAGR:
$6,000
+2.07% - 0.65% +5.19%
$5,000
$4,000
$3,000
$2,000
$1,000
$0
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2008
Note: PPP using Geary Khamis calculation methodology.
Source: Groningen Growth and Development Centre, Total Economy Database3 (June 2009)
20091130 – Peru.ppt Copyright 2009 © Professor Michael E. Porter
Unemployment Performance
Unemployment
Rate, 2008
Selected Countries
Dominican Republic (15.5%) South Africa (22.9%)
14% Improving Tunisia Deteriorating
Croatia
Algeria Jordan Albania Iran

12% Saudi Arabia
Colombia
Turkey
10% Poland (-8.4%)
China
Indonesia Egypt Brazil Peru Syria
8% Uruguay Slovakia Argentina Chile Hungary
Greece Bolivia Portugal
Venezuela Philippines Ecuador Pakistan
Slovenia Kazakhstan India
Bulgaria Lithuania Russia El Salvador
Israel Ireland
6% Panama T&T Estonia
Czech Rep. Paraguay Nicaragua
Latvia Sri Lanka
Costa Rica Vietnam
Romania
4% Mexico
Cyprus Honduras Malaysia
Korea Ukraine
2% Latin American countries

Thailand
Other countries
0%
-6% -5% -4% -3% -2% -1% 0% 1% 2%
Change of Unemployment Rate in Percentage Points, 2004 to 2008
Source: EIU (2009)

Poverty Rates
% of Population Under Peru, 2001 to 2007
the Poverty Line
60%
50%
40%
30%
20%
10%
0%
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
Export Performance
Exports of Goods and
Selected Countries
Services (% of GDP), 2008
100%
Malaysia (103.5%)
Slovakia
90%
Libya
Latin American Countries
Other countries Ireland Malta Czech Republic Panama Hungary
80% Vietnam
Thailand
Estonia Slovenia Saudi Arabia
70%
Trinidad & Tobago
Belarus Paraguay
60% Bulgaria Belize Lithuania
Cambodia Tunisia
Jordan
Honduras Kazakhstan Algeria
50% Cyprus Macedonia
Croatia Chile
Ukraine (-17.5%) Costa Rica Egypt
Latvia
40% Israel Poland Bolivia
Philippines China Morocco South Africa
Uruguay Ecuador Portugal Nicaragua
Syria Venezuela Russia
Romania Georgia Mexico
30% Indonesia Peru Lebanon
Sri Lanka
Iran El Salvador
India
Argentina Greece
20% Albania Colombia Guatemala
Turkey
Brazil
Pakistan
10% Ethiopia
0%
-15% -10% -5% 0% 5% 10% 15% 20%
Change in Exports of Goods and Services (% of GDP), 2004 to 2008
Source: EIU (2008), authors’ analysis

Peru’s Exports By Type of Industry
World Export Market
Share (current USD)
0.80% Processed Goods

Semi-processed Goods
0.70% Unprocessed Goods
Services
TOTAL
0.60%
0.50%
0.40%
0.30%
0.20%
0.10%
0.00%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Source: UNComTrade, WTO (2009)

Peru’s Exports By Type of Industry
Peruvian
Export, $US Commodity Price (US$)
12,000 350
Unprocessed Goods Exports (current prices)
300
10,000 Unprocessed Goods Exports (1997 prices)
Price of Copper (current price, $.01/pound) 250

8,000
200
6,000
150
4,000
100
2,000
50
0 0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Inbound Foreign Investment Performance
Stocks and Flows, Selected Countries
Inward FDI Stocks as % of
GDP, Average 2003 - 2007
80% Estonia
Trinidad & Tobago
Latin American countries Jordan (46.5%, 81.8%)
Other countries Lebanon (6.7%)
70%
Panama (48.2%)
Tunisia
Hungary Chile Cyprus
60% Vietnam
Bulgaria (69%)
Czech Republic Slovakia Belize

50% Bolivia Nicaragua Croatia
Kazakhstan
Portugal Cambodia Georgia

40% Morocco Macedonia
Malaysia
Thailand Latvia Honduras
Venezuela Poland Egypt Israel
South Africa Argentina Lithuania Bosnia
30% Colombia Romania
Mexico
Ecuador Costa Rica
Brazil Russia El Salvador
Slovenia Peru
20% Guatemala Ukraine UAE Uruguay
Paraguay Dominican Republic
Turkey
Malaysia
China Saudi Arabia
10% Indonesia Sri Lanka Pakistan
India Libya
Iran
0%
0% 5% 10% 15% 20% 25% 30% 35% 40% 45%
FDI Inflows as % of Gross Fixed Capital Formation, Average 2003 - 2007
Source:
20091130 UNCTAD,
– Peru.ppt World Investment Report (2009) 9 Copyright 2009 © Professor Michael E. Porter
Innovative Capacity
Innovation Output of Selected Countries
Average U.S. patents per 1
million population, 2004-2008
3.5
Czech Republic
3.0
Croatia
2.5
2.0 South Africa
Greece
1.5
Portugal
Russia
1.0 Chile Saudi Arabia

Argentina
Poland
Venezuela Romania Bulgaria
Brazil Thailand
Mexico
0.5 China
India
Philippines Ukraine
Peru Ecuador Colombia Turkey
0.0
-30% -20% -10% 0% 10% 20% 30% 40% 50% 60%
CAGR of US-registered patents, 2004 – 2008 120 patents =
Source: USPTO (2009), EIU (2009)
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
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)
– 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 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
Comparative Labor Productivity
Real GDP per employee
(PPP adjusted US$), 2008
Selected Countries
Austria
Kuwait Australia
$70,000 Greece
Saudi Arabia
Switzerland Germany
Spain Japan Singapore
Oman
$60,000 Israel
Malta Slovenia
$50,000 New Zealand Korea Slovakia

UAE Cyprus Hungary
Czech Republic
Portugal
$40,000 Croatia
Lithuania Estonia Poland
Turkey
Mexico Malaysia
Russia Chile Latvia
$30,000 Argentina
Macedonia
Romania
Iran Belarus
South Africa Bulgaria Azerbaijan
$20,000
Kazakhstan Peru Albania
Brazil Peru (Avg. growth 2001to 2008)
Egypt Armenia
Jordan Ukraine Thailand Bosnia
Georgia
$10,000 Syria Serbia China
Philippines Indonesia
Pakistan India
Vietnam
Cambodia
$0
-3% 0% 3% 6% 9%
Growth of real GDP per employee (PPP-adjusted), 1990 to 2008
Source: authors calculation Groningen Growth and Development Centre (2009), EIU (2009)
Determinants of Competitiveness
Microeconomic Competitiveness
Quality of the Sophistication

National State of Cluster of Company
Business Development Operations and
Environment Strategy
Macroeconomic Competitiveness
Social
Infrastructure Macroeconomic
and Political Policies
Institutions
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

Macroeconomic
Policy
Social
and Political Policies • Fiscal policy: public
Institutions
spending aligned with
revenues over time
Natural Endowments • Monetary policy: low
levels of inflation
• Macroeconomic
management: avoiding
structural imbalances
and cyclical
overheating

Social Business Development Operations and
Infrastructure
and Political
Institutions Macroeconomic Competitiveness
Social
• Human Development: Infrastructure
and Political
Macroeconomic
Policies
basic education and Institutions
health care
• Rule of Law: property Natural Endowments
rights and due process
• Political Institutions:
stable and effective
political and
governmental
processes and
organizations

Sophistication
Environment Strategy of Company
Operations and
Macroeconomic Competitiveness Strategy
Social
Infrastructure
and Political
Macroeconomic
Policies
• The internal company
Institutions skills, capabilities,
and management
practices needed to
Natural Endowments
attain the highest level
of productivity and
innovation possible

Quality of the Environment Strategy
National Business
Environment Macroeconomic Competitiveness
Social
• The external business Infrastructure
and Political
Macroeconomic
Policies
environment Institutions
conditions that allow

companies to reach
Natural Endowments
high levels of
productivity and
innovation

Social
State of Cluster and Political Policies
Development Institutions
• A critical mass of firms Natural Endowments

in particular fields,
together with specialized
skills, infrastructure, and
supporting institutions, to
support high productivity
through efficiencies and
synergies

Competitiveness and Poverty Reduction
Economic Social
Development Development
• There is a strong connection between economic and social

development
• Improving competitiveness and decreasing poverty requires
improving the economic and social context simultaneously

Peru’s Competitiveness Profile, 2009
ISC Country Competitiveness Model
Macroeconomic Microeconomic
Competitiveness (82) Competitiveness (73)
Social Infra- Business Company

Macroeconomic
structure and Pol. Environment Quality Sophistication
Policy (69)
Institutions (90) (74) (70)
Peru’s GDP per capita rank is

71st versus 133 countries
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 Macroeconomic Competitiveness
Macroeconomic Policy
• Conservative fiscal policy

Government Budget Balances
Selected Countries
Budget Balance Ranked by
(% of GDP) Surplus, 2008
10%
Chile
Peru
8%
Argentina
6% Colombia
Mexico
4%
Brazil
2%
0%
-2%
-4%
-6%
-8%
-10%
1996 1998 2000 2002 2004 2006 2008
Source: EIU, 2009

Macroeconomic Policy
• Conservative fiscal policy

• Sound macroeconomic
management
• Stabilization fund
However
• Peru’s macroeconomic position

remains overly dependent on
commodities and commodity prices

Macroeconomic Policy Social Infrastructure and

Political Institutions
• Conservative fiscal policy • Continued problems with corruption
• Sound macroeconomic
management
• Stabilization fund
However
• Peru’s macroeconomic position

remains overly dependent on

Corruption Perception Index, 2007
1 Finland New Zealand
Singapore Sweden
Iceland
Worsening Switzerland Improving
Canada Norway Netherlands
Low UK
corruption Hong Kong Austria Germany
Ireland Japan
United States France
Chile Spain Belgium Uruguay
Portugal Estonia Slovenia
Israel Botswana Taiwan
Hungary South Africa Czech Republic
Italy Malaysia South Korea
Lithuania Costa Rica Slovakia
Rank in Latvia
Jordan Mauritius
Global Namibia Greece
Tunisia Poland
Corruption Croatia Turkey
Index, Colombia El Salvador
Peru Ghana Romania
2007 Brazil Mexico Senegal
China Indi
Thailand a
Panama Tanzania
Egypt Argentina Dominican Republic Bolivia
Moldova Guatemala Uganda
Malawi Ukraine
High Vietnam Nicaragua
corruption Philippines Honduras Cameroon
Pakistan
Kazakhstan Russia Indonesia
Zimbabwe Cote d’Ivoire Ecuador Kenya Nigeria
Venezuela Bangladesh
91 Uzbekistan
-20 -15 -10 -5 0 5 10 15 20
Change in Rank, Global Corruption Report, 2007 versus 2001
Note: Ranks only countries available in both years (91 countries total)
Source: Global Corruption Report, 2008

• Conservative fiscal policy • Continued problems with corruption
• Sound macroeconomic • Sharp inequality between indigenous
management groups and other citizens
• Stabilization fund • Weak education system
• Inadequate health care system,
despite some improvements
However
• Weak legal system and effectiveness
of property rights
• Peru’s macroeconomic position • Unstable political processes and
remains overly dependent on institutions
• Government institutions are
inefficient and held in low esteem by
the public

Action Priorities
• Maintain macroeconomic • Modernize political and
stability governmental institutions to improve
policy formulation and execution
• Broaden the tax base and
improve collections • 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
Microeconomic Competitiveness: Quality of the Business
Environment
Context for
Firm
Strategy
and Rivalry
 Open and vigorous local

competition
– Openness to foreign competition
Factor – Competition laws
• Local rules and incentives that Demand
(Input)
encourage investment and Conditions
Conditions
productivity
– e.g. incentives for capital
• Efficient access to high quality investment, intellectual property
• Demanding and sophisticated local
business inputs protection, corporate governance
customers and needs
standards
– Human resources – e.g., Strict quality, safety, and
– Capital availability environmental standards
– Physical infrastructure Related and – Consumer protection laws
– Administrative infrastructure (e.g. Supporting
registration, permitting, transparency) Industries
– Scientific and technological
infrastructure • Availability of suppliers, related industries,
– Efficient utilization of natural and supporting institutions
endowments
• 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
Peru’s Business Environment
Overall Strengths and Weaknesses
STRENGTHS WEAKNESSES
Trade and Investment Liberalization Physical Infrastructure
• Openness to foreign investment • Low quality of air, transport and port
infrastructure
• Low restrictions on capital flows
• Inadequate electricity supply
• Simplification of custom procedures Workforce Development and Training
• Low trade barriers • Poor quality of the higher education system
• Improvements in investor protections • Low skill level of the labor force
Improving Financial Markets • Limited availability of scientists and
engineers
• Soundness of banks
Competitive Context
• Improving financial market
• Low intensity of local competition
IT Infrastructure • Difficulty in business formation
• Good quality of telecom infrastructure • Burdensome government regulations
• Sound IT policies • Rigidity of employment
Other • Weak intellectual property protection
• Good management training • High informality in the economy
Innovation Infrastructure
• Improving sophistication of local buyers
• Limited technological capacity
• Efforts to strengthen competition policy
• Weak university-industry research
collaboration
• Low patenting rates
Ease of Doing Business
Peru, 2009
Ranking, 2009
(of 183 countries)
Favorable Unfavorable
120
100
80
Peru’s per capita GDP rank: 72
60
40
20
0
Ease of Getting Protecting Registering Paying Trading Closing a Employing Starting a Enforcing Dealing
Doing Credit Investors Property Taxes Across Business Workers Business Contracts with
Business Borders Licenses
Source: World Bank Report, Doing Business (2009/10)

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

Microeconomic Competitiveness: Cluster Development
Tourism Cluster in Cairns, Australia
Public Relations & Local retail,
Market Research Travel agents Tour operators health care, and
Services other services
Food Local
Suppliers Attractions and Transportation
Restaurants Activities
e.g., theme parks,
casinos, sports
Property Souvenirs,
Services Duty Free
Airlines,
Hotels Banks,
Maintenance Cruise Ships
Foreign
Services
Exchange
Government agencies Educational Institutions Industry Groups

e.g. Australian Tourism Commission, e.g. James Cook University, e.g. Queensland Tourism
Great Barrier Reef Authority Cairns College of TAFE Industry Council
Sources: HBS student team research (2003) - Peter Tynan, Chai McConnell, Alexandra West, Jean Hayden
Cluster in Developing Countries
Kenya’s Cut Flower Cluster
Government Agencies, NGOs & Industry Associations
Horticultural Crops Development Authority (HCDA)

Government Export Policies targeting Horticulture
Government Policy for Revitalizing Agriculture; National Export Strategy; Export
Promotion Council (EPC)
Non-Governmental Organizations
The Rural Enterprise Agri-Business Promotion Project (USAID, CARE, IFAD)
Horticultural Produce Handling Facilities Project (JBIC)
Post-Harvest
Plantstock Cooling
Trade & Industry Associations Technology
Kenya Flower Council (KFC)
Fresh Produce Exporters Association of Kenya (FPEAK)
Regional Growers Associations e.g., North & South Kinangop; Lake Naivasha, etc
Greenhouse;
Grading /
Shading
Packaging Sheds
Structures
Packaging &
Irrigation
Labeling
technology
Post-Harvest Materials
Flower Handling;
Farming Transport to
Pre-Cooling Refrigerated
Technology
Market Trucks
Fertilizers,
Freight
pesticides,
Forwarders
herbicides
Education, Research & Quality Standards Organizations
Research Institutions: Clearing and

Agricultural Kenya Agricultural Research Institute (KARI) Forwarding
Cluster International Center for Insect Physiology and Ecology (ICIPE) Agents
Public universities with post graduate degrees in Air Carriers

Horticultural horticulture: (Commercial /
Cluster University of Nairobi; Jomo Kenyatta University of Agriculture & Technology Charters)
(Fruits & Vegetables)
Quality & Standards:

EUREGAP Standard (UK & Dutch Supermarkets) Tourism
Kenya Plant Health Inspectorate Services (KEPHIS) Cluster
Sources: Student team research by Kusi Hornberger, Nick Ndiritu, Lalo Ponce-Brito, Melesse Tashu, and Tijan Watt,
Microeconomics of Competitiveness Course, 2007
The Australian Wine Cluster
History
1930 1965 1980 1991 to 1998
First oenology Australian Wine Australian Wine New organizations
course at Bureau and Brandy created for education,
Roseworthy established Corporation research, market
Agricultural established 1990 information, and
College 1955 1970 export promotions
Winemaker’s
Australian Wine Winemaking Federation of
Research school at Charles Australia
Institute founded Sturt University established
founded
1950s 1960s 1970s 1980s 1990s

Import of Recruiting of Continued inflow Creation of Surge in exports
European winery experienced of foreign capital large number of and international
technology foreign investors, and new wineries acquisitions
e.g. Wolf Bass management
Source: Michael E. Porter and Örjan Sölvell, The Australian Wine Cluster – Supplement, Harvard Business School Case Study, 2002
The Evolution of Regional Economies
San Diego
Hospitality and
Climate Tourism
and Sporting Goods
Geography
Transportation
and Logistics
Power Generation
Communications
Aerospace Vehicles Equipment
and Defense
U.S.
Information Technology
Military Analytical Instruments
Education and
Knowledge Creation
Medical Devices
Bioscience Biotech / Pharmaceuticals

Research
Centers
1910 1930 1950 1970 1990

Clusters and Economic Diversification
Linkages Across Clusters
Fishing &
Fishing
Products Textiles
Entertainment
Prefabricated
Hospitality
Agricultural Enclosures
& Tourism
Products
Processed
Food Transportation Furniture
& Logistics Building
Aerospace Fixtures, Construction
Vehicles & Equipment & Materials
Distribution Information Defense Services
Jewelry & Tech.
Precious Services Heavy
Lightning &
Metals Electrical Construction
Business Analytical
Equipment Services
Services Education & Instruments
Knowledge Power Forest
Medical Products
Creation Generation
Devices Communi-
Publishing cations
Financial & Printing Biopharma- Equipment
Services Heavy
ceuticals Machinery
Motor Driven Production
Chemical Products Technology
Products Tobacco
Oil &
Apparel Gas Mining & Metal
Automotive
Plastics Aerospace Manufacturing
Engines
Footwear Leather &
Related Sporting
Products & Recreation
Goods
Note: Clusters with overlapping borders or identical shading have at least 20% overlap
20091130 – Peru.ppt
(by number of industries) in both directions. 37 Copyright 2009 © Professor Michael E. Porter
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

Peru’s Export Portfolio
1997 to 2007
1.4%
Change In Peru’s Overall Jewelry, Precious Metals and Collectibles (0.88%, 1.69%)
World Export Share: +0.07%
1.2%
Metal, Mining and Manufacturing
Peru’s world export market share, 2007
1.0%
0.8%
0.6%
Fishing
Agriculture
0.4% Apparel
Hospitality and Tourism

Peru’s Average World Oil & Gas
Export Share: 0.20%
0.2%
Publishing and Printing
Textiles Construction Materials
Financial Services
Communication Services
0.0%
-0.4% -0.2% 0.0% 0.2% 0.4% 0.6%
Change in Peru’s world export market share, 1997 to 2007 Exports of US$2.4 Billion =
Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business
School;
20091130Richard
– Peru.pptBryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics
39 Database and the IMF BOP statistics. Copyright 2009 © Professor Michael E. Porter
Peru’s Export Portfolio
1997 to 2007
0.20%
Peru’s world export market share, 2007
0.15%
Oil and Gas Construction Materials

Furniture
Textiles
0.10%
Transportation and Logistics
Financial Services
Chemical
Products Processed Foods
Leather and Related Products

Plastics
0.05%
Business Services Heavy Machinery

Motor Driven Products Forest Products
Building Fixtures and Equipment Footwear
Biopharmaceuticals Power and Power Generation Equipment
Sport Communications Equipment
Production Technology Prefabricated Enclosures and Structures
0.00%
-0.06% -0.04% -0.02% 0.00% 0.02% 0.04% 0.06% 0.08% 0.10%
Change in Peru’s world export market share, 1997 to 2007 Exports of US$2.4 Billion =
School;
20091130Richard
Malaysia’s Export Portfolio
1997 to 2007
2.5%
Change In Malaysia’s Overall
Entertainment and Reproduction
World Export Share: -0.20% Information Technology (6.46%)
Equipment (2.19%, 3.09%)
Communications Equipment
Furniture
Malaysia’s world export market share, 2007
2.0% Agriculture
Building Fixtures and Equipment Construction Services
Plastics
Lighting and Electrical Equipment
1.5% Construction Materials
Analytical Instruments Oil & Gas
Malaysia’s Average World
Export Share: 1.24%
Motor Driven Products Processed Foods
Transportation and Logistics Publishing and Printing
1.0%
Apparel
Chemical
Power and Power Generation Equipment Fishing & Fish Products Products
Jewelry, Precious Metals and Collectibles Prefabricated Enclosures and Structures
Metal, Mining and Manufacturing Communication Services
Forest Products Textiles Production Technology
Business Services (-2.36%)
0.5%
Aerospace Vehicles and Defense Sport Medical Devices
Marine Equipment Heavy Machinery

Footwear
Financial Services Hospitality and Tourism
Biopharmaceuticals Automotive
0.0%
-1.5% -1.0% -0.5% 0.0% 0.5% 1.0%
Change in Malaysia’s world export market share, 1997 to 2007 Exports of US$9.3 Billion =
School;
20091130Richard
Share of World Exports by Cluster
World Market Share Peru, 2007
0.2% - 0.5%
0.5% - 1.0% Fishing & Enter- Textiles

Fishing tainment Prefabricated
> 1.0% Products Hospitality
Enclosures
& Tourism
Agricultural
Products
Transportation Furniture
Processed & Logistics Building
Food Aerospace Fixtures, Construction
Jewelry &
Services Tech.
Precious Lightning & Heavy
Business Analytical Services
Education & Instruments Equipment
Services Power Forest
Knowledge
Medical Products
Creation Generation
Devices Communi-
Publishing cations
& Printing Biopharma- Equipment
Financial Heavy
ceuticals Machinery
Services
Products Tobacco
Oil & Automotive
Gas Aerospace Mining & Metal
Plastics Engines Manufacturing
Apparel
Leather &
Footwear Related Sporting Marine
Products & Recreation Equipment
Goods
Note: Clusters with overlapping borders have at least 20% overlap (by number of industries) in both directions.
Share of World Exports by Cluster
World Market Share Malaysia, 2007
1.24% - 1.75%
1.75% - 2.25% Fishing & Enter- Textiles

Fishing tainment Prefabricated
> 2.25% Products Hospitality
Enclosures
& Tourism
Agricultural
Products
Transportation Furniture
Processed & Logistics Building
Food Aerospace Fixtures, Construction
Jewelry &
Services Tech.
Precious Lightning & Heavy
Business Analytical Services
Education & Instruments Equipment
Services Power Forest
Knowledge
Medical Products
Creation Generation
Devices Communi-
Publishing cations
& Printing Biopharma- Equipment
Financial Heavy
ceuticals Machinery
Services
Products Tobacco
Oil & Automotive
Gas Aerospace Mining & Metal
Plastics Engines Manufacturing
Apparel
Leather &
Footwear Related Sporting Marine
Products & Recreation Equipment
Goods
Note: Clusters with overlapping borders have at least 20% overlap (by number of industries) in both directions.
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
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

Clusters and Economic Diversification
Upgrade Existing Export

Products and Services
• Local firms
Turn Products Into Clusters
• MNCs
Deepen Existing Clusters
Develop Related Clusters

Peru’s Agriculture Cluster, 1997 – 2007
Exports by Subcluster
1.6%
Overall change in Subcluster World Miscellaneous Vegetable
Export Share : - 0.06%
Materials (4.54%, 1.91%)
1.4%
Coffee, Tea, Cocoa and Spices
1.2%
Subcluster’s share of World exports, 2007
1.0%
Meat and Related Products
0.8%
Vegetables and Fruits
0.6% Subcluster Overall

Export Share: 0.50%
0.4%
Specialty Agricultural Products
Oils and Fats
0.2%
Crude Fertilizers Feeding Materials
Sugars, Molasses and Honey
Plants and Flowers Fertilizers
Grains
0.0%
-0.8% -0.6% -0.4% -0.2% 0.0% 0.2% 0.4% 0.6% 0.8%
Change in Subcluster’s share of World Exports, 1997 – 2007
Exports of US$200 million =
Source: Prof. Michael E. Porter, Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director.
Peru’s Metal Mining and Manufacturing Cluster, 1997 – 2007
Exports by Subcluster
8.0%
Overall change in Subcluster World
Export Share : + 0.49%
7.0%
Copper
6.0%
Subcluster’s share of World exports, 2007
5.0%
4.0%
3.0%
Other Metals
2.0%
Iron and Steel Mill and
Subcluster Overall
Foundry Products Fabricated Metal Products Export Share: 1.13%
1.0%
Wire and Springs
Iron and Steel Nonferrous Metal Processing

0.0%
-0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5%
Change in Subcluster’s share of World Exports, 1997 – 2007
Exports of US$1.5 billion =
Source: Prof. Michael E. Porter, Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director.
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

Geographic Influences on Competitiveness
Nation
Regions and Cities

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

Specialization by Cluster, Turkish Regions 2007
Istanbul
Textiles
Leather and Apparel Bati Marmara Bati Karadeniz Orta Anadolu Dogu Karadeniz
Distribution Services Apparel Tobacco Furniture Food Processing
Jewelry Textiles Apparel Textiles Distribution Services
Chemicals Metal Mining and Manufacturing Agricultural Products Furniture
Construction Materials Forest Products Metal Mining and Manufacturing Forest Products
Dogu Marmara
Textiles Kuzeydogu Anadolu
Automotive Agricultural Products
Apparel Footwear
Furniture Distribution Services
Hospitality and Tourism
Guneydogu Anadolu
Ege Textiles
Tobacco Tobacco
Textiles Oil and Gas
Construction Materials Food Processing
Apparel Bati Anadolu
Furniture Akdenziz Ortadogu Anadolu
Construction Materials Textiles Textiles
Distribution Services Hospitality and Tourism Agricultural Products
Aerospace Apparel Apparel
Distribution Services Distribution Services
Note: Source: European Cluster Observatory, 2009

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

Competitiveness of Peru’s Regions
• Strong disparities exist
across Peruvian regions in
business environment,
innovative capacity, and
economic performance

Prosperity Performance
Peru’s Regions
GDP per Capita, 2008 (1994
New Peruvian Soles)
16,000
Peru’s Weighted
Moquegua Average: 6.0%
14,000
12,000
Lima
10,000
Areguipa
8,000 Tacna
Peru’s Weighted Ica
Average: 6,513 Pasco
Madre de Dios Ancash
6,000
La Libertad
Junin Lambayeque
Ucayali Piura
4,000 Loreto Tumbes Cusco
Cajamarca Amazonas
Huancavelica Puno San Martin Ayachucho
Huanuco
2,000 Apurimac
0
0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
Growth in GDP per Capital (CAGR), 2001 to 2008
Source: Fuente: Instituto Nacional de Estadistica e Informatica - Dirección Nacional de Cuentas Nacionales
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
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

Geographic Influences on Competitiveness
Neighboring Countries
Nation
Regions and Cities

Economic Coordination with Neighboring Countries

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

Economic Integration Among Neighbors
Capturing Synergies
Context for Related and

Factor Demand Macroeconomic
Strategy Supporting
Conditions Conditions Competitiveness
and Rivalry Industries
• Improving the • Eliminating • Opening • Facilitating cross- • Coordinating

efficiency of the trade and government border cluster macroeconomic
regional investment procurement development policies
transportation barriers within within the region
– e.g., Supplier • Coordinating
network the region Harmonizing
networks programs to
environmental
• Creating an efficient • Simplifying and improve security
standards – Transport &
energy network harmonizing and public safety
Logistics
cross-border • Harmonizing
• Enhancing regional
regulations and product safety – Quality
communications
paperwork standards standards
and connectivity
• Coordinating • Establishing
• Harmonizing anti-monopoly reciprocal
administrative and fair consumer
requirements for competition protection laws
businesses policies
• Linking financial
markets
• Facilitating the
movement of
students for higher
education

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
The Need for an Economic Strategy
Policy Economic
Improvement Strategy
• Implementing best • A prioritized agenda to

practices in each policy create a unique
area competitive position for a
country or region
• There are a huge number

of policy areas that matter
• No country can or should try
to make progress in all
areas simultaneously
The Need for an Economic Strategy
National Value Proposition
• 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?
Refining Unique Strengths Addressing Crucial Constraints
• What elements of the business • What are the crucial weaknesses and
environment and institutional context constraints that must be addressed to
can be unique strengths relative to achieve parity with peer countries and
peers/neighbors? allow the country to move to the next
• What existing and emerging clusters level?
can be developed?
• Priorities and sequencing are a necessity in economic development

Toward a Peruvian Economic Strategy
Unique Strengths Implications
Upgrade Ground, Air and Port
• Abundant natural Transportation Infrastructure to Connect
endowments Peruvian Regions with Neighbors and
• Vast biodiversity and the World
ecosystems
• Central location in South Foster Cluster Development Around
America Resource Strengths
• Young, hard working
population Reduce and Eliminate Corruption
• Rich culture and history
• Legacy of domestic Create New, More Stable Effective
collaboration to overcome
obstacles
Implement Next Stage Regulatory
• Open to FDI and capital
Reforms to Improve the Business
flows Environment
• Privileged access to major
foreign markets (United Improve the Quality of Education and
States, China, etc.) Workforce Training
• Upgrade Peru’s competitive assets to achieve high rates of sustainable

20091130 – Peru.ppt
economic growth while improving
65
welfare of the poor Copyright 2009 © Professor Michael E. Porter
Accelerating Poverty Reduction in Peru
Increase
Reduce Poverty
Competitiveness

The Process of Economic Development
Shifting Roles and Responsibilities
Old Model New Model
• The central government drives • Economic development is a

economic development through collaborative process involving
policy decisions, spending and government at multiple levels,
incentives 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

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

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

Integrating Business and the Society
Economic Social
Objectives Objectives
• 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

Competitiveness and Social Issues
Worker
Education and
Poverty in Skills
the Company’s Worker Safety
Communities
Environmental Company Gender Equity

Impact Productivity
Employee
Energy Use
Health
Water Use

Corporate Role in Competitiveness
The Concept of Shared Value
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
• 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

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

Competitiveness A New Economic Strategy For Peru

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Competitiveness:

A New Economic Strategy for Peru

Professor Michael E. Porter

20091130 – Peru.ppt 1 Copyright 2009 © Professor Michael E. Porter

Algeria Jordan Albania Iran

2% Latin American countries

Source: EIU (2009)

Source: EIU (2008), authors’ analysis

0.80% Processed Goods

Source: UNComTrade, WTO (2009)

Price of Copper (current price, $.01/pound) 250

20091130 – Peru.ppt 8 Copyright 2009 © Professor Michael E. Porter

Czech Republic Slovakia Belize

Portugal Cambodia Georgia

2.0 South Africa

1.0 Chile Saudi Arabia

• Returning to 8 to 9% growth is possible only if Peru can substantially improve

• Only competitive businesses can create wealth and jobs

$50,000 New Zealand Korea Slovakia

Quality of the Sophistication

20091130 – Peru.ppt 14 Copyright 2009 © Professor Michael E. Porter

20091130 – Peru.ppt 15 Copyright 2009 © Professor Michael E. Porter

20091130 – Peru.ppt 16 Copyright 2009 © Professor Michael E. Porter

20091130 – Peru.ppt 17 Copyright 2009 © Professor Michael E. Porter

conditions that allow

20091130 – Peru.ppt 18 Copyright 2009 © Professor Michael E. Porter

• A critical mass of firms Natural Endowments

20091130 – Peru.ppt 19 Copyright 2009 © Professor Michael E. Porter

• There is a strong connection between economic and social

20091130 – Peru.ppt 20 Copyright 2009 © Professor Michael E. Porter

Social Infra- Business Company

Peru’s GDP per capita rank is

• Conservative fiscal policy

20091130 – Peru.ppt 22 Copyright 2009 © Professor Michael E. Porter

Source: EIU, 2009

• Conservative fiscal policy

• Peru’s macroeconomic position

20091130 – Peru.ppt 24 Copyright 2009 © Professor Michael E. Porter

Macroeconomic Policy Social Infrastructure and

• Peru’s macroeconomic position

20091130 – Peru.ppt 25 Copyright 2009 © Professor Michael E. Porter

Macroeconomic Policy Social Infrastructure and

20091130 – Peru.ppt 27 Copyright 2009 © Professor Michael E. Porter

 Open and vigorous local

• Many things matter for competitiveness

Source: World Bank Report, Doing Business (2009/10)

• Improve physical infrastructure

• Improve environmental standards

20091130 – Peru.ppt 32 Copyright 2009 © Professor Michael E. Porter

Government agencies Educational Institutions Industry Groups

Horticultural Crops Development Authority (HCDA)

Research Institutions: Clearing and

Public universities with post graduate degrees in Air Carriers

Quality & Standards:

1950s 1960s 1970s 1980s 1990s

Bioscience Biotech / Pharmaceuticals

1910 1930 1950 1970 1990

• A forum for collaboration between government, the private sector,

• Foster more sophisticated competition rather than distorting the

20091130 – Peru.ppt 38 Copyright 2009 © Professor Michael E. Porter

Hospitality and Tourism

Oil and Gas Construction Materials