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1 Copyright 2007 © Professor Michael E. Porter20071022 Czech Republic - DRAFT.ppt
Competitiveness: Implications for Central and Europe and the Czech Republic
Professor Michael E. PorterHarvard Business School
Prague, Czech Republic22 October 2007
This presentation draws on ideas from Professor Porter’s 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 2006 (World Economic Forum, 2006), “Clusters and the New Competitive Agenda for Companies and Governments” in On Competition (Harvard Business School Press, 1998), 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 Porter’s work and the Institute for Strategy and Competitiveness is available at www.isc.hbs.edu
2 Copyright 2007 © Professor Michael E. Porter20071022 Czech Republic - DRAFT.ppt
Perspectives on Firm Success
InternalInternal ExternalExternal
• Competitive advantage resides solely inside a company or in its industry
• Competitive success depends primarily on company choices
• Competitive advantage (or disadvantage) resides partly in the locations at which a company’s business units are based
• Cluster participation is an important contributor to competitiveness
3 Copyright 2007 © Professor Michael E. Porter20071022 Czech Republic - DRAFT.ppt
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Prosperity PerformanceSelected Countries
PPP-adjusted GDP per Capita, 2006
Growth of Real GDP per Capita (PPP-adjusted), CAGR, 1998-2006Source: EIU (2007), authors calculations
Ireland
USA
Hungary
Armenia (10.9%)Albania
PolandLithuania
Greece
Turkey
Portugal
Switzerland
Norway
Czech Republic
Slovakia
Germany
FinlandIceland
Sweden
Spain
UK
Netherlands
Austria
Denmark
France
Russia
Serbia & Montenegro
Turkey
CroatiaLatvia
Estonia
BulgariaBosnia &
HerzegovinaUkraine
Slovenia
Macedonia
Moldova
4 Copyright 2007 © Professor Michael E. Porter20071022 Czech Republic - DRAFT.ppt
Central and Eastern European Economies in 2007Common Themes
• Strong economic growth and fast rate of prosperity catch-up• Opening to foreign investment and European integration have
driven growth
However
• Rapid wage growth is threatening a key traditional source of the region’s attractiveness
• Concerns about macroeconomic overheating are rising
• The region needs to prepare for the next stage of economicdevelopment in a more challenging global economic environment
5 Copyright 2007 © Professor Michael E. Porter20071022 Czech Republic - DRAFT.ppt
• Competitiveness is determined by the productivity with which a nation uses its human, capital, and natural resources.
– Sets the standard of living (wages, returns on capital, returns on natural resources) that a country can sustain
– Productivity depends on the prices per unit that a nation’s products and services can command (due to uniqueness and quality), not just on efficiency
– It is not what industries a nation competes in that matters for prosperity, but how it competes in those industries
– Productivity requires a combination of domestic and foreign firms operating in the nation
– The productivity of “local” or domestic industries is fundamental to competitiveness, not just that of traded industries
What is Competitiveness?
• Nations compete in offering the most productive environment for business
• The public and private sectors play different but interrelated roles in creating a productive economy
6 Copyright 2007 © Professor Michael E. Porter20071022 Czech Republic - DRAFT.ppt
What Creates Sustainable Prosperity?
ProductivityProductivity
Innovative CapacityInnovative CapacityInnovative Capacity
Competitiveness
ProsperityProsperityProsperity
7 Copyright 2007 © Professor Michael E. Porter20071022 Czech Republic - DRAFT.ppt
Decomposing Prosperity
Per Capita IncomePer Capita IncomePer Capita Income
Labor Productivity
Labor Productivity
Labor Utilization
Labor Utilization
Domestic Purchasing
Power
Domestic Purchasing
Power• Consumption taxes• Local prices
– Efficiency of local industries
– Level of local market competition
ProsperityProsperityProsperity
• Skills• Capital stock• Total factor productivity
• Working hours• Unemployment• Workforce participation rate
– Population age profile
• Standard of living• Inequality
8 Copyright 2007 © Professor Michael E. Porter20071022 Czech Republic - DRAFT.ppt
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Comparative Labor Productivity PerformanceSelected Developing Countries
Compound annual growth rate (CAGR) of real GDP per employee (PPP-adjusted), 2001-2006
GDP per employee
(PPP adjusted) in US-$, 2006
Source: EIU (2007)
Turkey
Spain
Czech Republic
Switzerland
Norway
Slovakia
Ukraine
Austria
UK
Portugal
France
Germany
Greece
Netherlands
Poland
Sweden
Latvia
Slovenia
Hungary
Untied States
Denmark
MacedoniaBulgaria
Croatia Estonia
Romania
Iceland
Ireland
Lithuania
9 Copyright 2007 © Professor Michael E. Porter20071022 Czech Republic - DRAFT.ppt
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ICELA
NDDENMARKPORTU
GALNORWAYGERMANY
CZECH R
EPUBLICESTONIA
SWITZERLAND
UNITED KIN
GDOM
UNITED STA
TESSWEDENIR
ELAND
LATV
IACYPRUS
SLOVAKIASPAIN
LITHUANIA
UKRAINE
FRANCE
NETHERLANDS
BULGARIA
SLOVENIA
GREECEPOLA
NDROMANIA
MACEDONIAAUSTRIAHUNGARYMOLD
OVACROATIA
TURKEY
Labor Force MobilizationSelected Countries
Employees as % of Population, 2006
Source: EIU, 2007
10 Copyright 2007 © Professor Michael E. Porter20071022 Czech Republic - DRAFT.ppt
Labor MobilizationHours Worked Per Employee
1,500
1,600
1,700
1,800
1,900
2,000
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Source: Groningen Growth and Development Center (2007)
United States
EU-8
EU-15
11 Copyright 2007 © Professor Michael E. Porter20071022 Czech Republic - DRAFT.ppt
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
-6% -5% -4% -3% -2% -1% 0% 1% 2% 3% 4%
Unemployment PerformanceSelected CountriesUnemployment
Rate, 2006
Change of Unemployment Rate in Percentage Points,1998 - 2006
Source: EIU (2007)
TurkeySpain
(-10.1%)Slovenia
Czech Republic
Switzerland Norway
Slovakia
Latvia
Estonia
AustriaUK
Portugal
France
Germany
Greece
Netherlands
Poland(6.2%)
Sweden
Iceland
Romania
Croatia
Bulgaria
Hungary
Untied StatesDenmarkIreland
Macedonia(35%)
LithuaniaUkraine
Improving Deteriorating
12 Copyright 2007 © Professor Michael E. Porter20071022 Czech Republic - DRAFT.ppt
Productivity
Competitiveness Environment
ExportsInbound
Foreign Direct Investment
OutboundForeign Direct
Investment
DomesticInnovation
Domestic InvestmentImports
Enablers and Indicators of Competitiveness
13 Copyright 2007 © Professor Michael E. Porter20071022 Czech Republic - DRAFT.ppt
-5% -3% -1% 1% 3% 5% 7% 9%
Export IntensitySelected CountriesExports as %
GDP (2006)
Compound Annual Growth Exports (as % of GDP), 2001 - 2006
Spain
Czech Republic
SwitzerlandNorway
Slovakia
MacedoniaAustria
UK
Portugal
France
Germany
Bulgaria
Netherlands
Poland(11.1%)
Sweden
Latvia
Slovenia
Hungary
US
Iceland
Denmark
Estonia
Bosnia & Herzegovina
Finland
Lithuania
Greece
Russia
Romania
Ireland (-8.9%)
Cyprus (-8.9%)
Ukraine
Belarus
Moldova
Croatia
USD 100M =
80%
70%
60%
50%
40%
30%
20%
10%
0%
Source: EUI (2007), authors’ analysis
14 Copyright 2007 © Professor Michael E. Porter20071022 Czech Republic - DRAFT.ppt
Inbound Foreign Investment PerformanceStocks and Flows, Selected Countries
Source: UNCTAD (2007), EIU (2007)
0%
10%
20%
30%
40%
50%
60%
70%
80%
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
FDI Stocks as % of GDP, Average 2002 - 2006
FDI Inflows as % of Gross Fixed Capital Formation, Average 2002 - 2006
Romania
Ukraine
Bulgaria
Turkey
Slovenia
Finland
Hungary
DenmarkSweden
Netherlands
Cyprus
Croatia
Lithuania
Switzerland
Ireland(112.4%))
Latvia Poland
GreeceUnited States
Norway
Estonia
Spain
France
Austria
Czech Republic
United KingdomPortugal
Germany
Slovakia
15 Copyright 2007 © Professor Michael E. Porter20071022 Czech Republic - DRAFT.ppt
15%
17%
19%
21%
23%
25%
27%
29%
31%
33%
35%
-6% -4% -2% 0% 2% 4% 6% 8% 10% 12%
Fixed Investment RatesSelected CountriesGross Fixed Investment
as % of GDP (2006)
Source: EIU, 2007.
CAGR Gross Fixed Investment (as % of GDP), 2001 - 2006
Turkey
Spain
Czech Republic
Switzerland
Norway
Slovakia
Macedonia
Austria
UK
PortugalFrance
Germany
Bulgaria
Netherlands Poland
Sweden
Latvia
Slovenia
Hungary
US
Armenia(13.5%)
Denmark
Croatia
Estonia
Finland
Lithuania
Cyprus
Albania
Russia
Romania
Ireland Greece
Ukraine
Belarus
Iceland
Moldova
16 Copyright 2007 © Professor Michael E. Porter20071022 Czech Republic - DRAFT.ppt
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
-5% 0% 5% 10% 15% 20% 25% 30% 35%
International Patenting OutputSelected Countries
Source: USPTO (2006)
Annual U.S. patents per 1 million population, 2006
CAGR of US-registered patents, 1998 – 2006
RussiaHungary
China
Greece Czech Republic
Croatia
LithuaniaBrazil
UkrainePoland
Turkey
Slovenia
Slovakia
Romania
Philippines
India
Latvia
Ireland
Norway Hong Kong
Belgium
17 Copyright 2007 © Professor Michael E. Porter20071022 Czech Republic - DRAFT.ppt
Macroeconomic, Political, Legal, and Social Context
Microeconomic Competitiveness
The Quality of the Microeconomic
BusinessEnvironment
The Quality of the Microeconomic
BusinessEnvironment
The Sophisticationof Company
Operations andStrategy
The Sophisticationof Company
Operations andStrategy
State of Cluster Development
State of Cluster State of Cluster DevelopmentDevelopment
Determinants of Competitiveness
• A strong context creates the potential for competitiveness, but is not sufficient
• Competitiveness ultimately depends on improving the microeconomic competitiveness of the economy
18 Copyright 2007 © Professor Michael E. Porter20071022 Czech Republic - DRAFT.ppt
• Sound fiscal and monetary policies create stability and encourage business investment and upgrading
• Sound and stable macroeconomic conditions hold down interest rates and provide accurate price signals for market transactions
Macroeconomic policies
• An independent, timely, effective and trusted legal system solidifies the rule of law and provides a fair environment forbusiness, encouraging investment
• Strict monitoring and prosecution of corruption rewards productivity instead of favoritism
Legal system
Macroeconomic, Political, Legal, and Social Context
• Improving social conditions in basic education, housing, health, and absence of discrimination enhance productivity
• A functioning social safety net gives citizens the confidence to accept and deal with change in the economy
• Improvements of social conditions signal the benefits of reforms and increase thepolitical support for policies to enhance competitiveness
Social conditions
• Due process in political decisions and orderly transfers of power create a stable planning horizon for business
• Checks and balances in the political system mitigate instability and the abuse of power
Political governance
19 Copyright 2007 © Professor Michael E. Porter20071022 Czech Republic - DRAFT.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, 2007
Change in Rank, Global Corruption Report, 2007 versus 2001
Rank in Global
CorruptionIndex,2007
91
1ImprovingDeteriorating
Highcorruption
Lowcorruption
FinlandDenmark
Canada
Bangladesh
Indonesia
Ireland
Portugal
Bulgaria
Iceland
Czech RepublicSlovakia
South Korea
Latvia
India
Slovenia
Thailand
Switzerland
France
Romania
Turkey
Estonia
AustriaGermanyJapan
Vietnam
China
NorwayUK
MalaysiaLithuania
Colombia
Hungary
TaiwanSpain
Hong Kong
Netherlands
ChileUnited States
South Africa
Mexico
Croatia
Italy
Poland
Brazil
Argentina
Israel
VenezuelaRussia
20 Copyright 2007 © Professor Michael E. Porter20071022 Czech Republic - DRAFT.ppt
Improving the Business Environment: The Diamond
Context for Firm
Strategy and Rivalry
Context for Firm
Strategy and Rivalry
Related and Supporting Industries
Related and Supporting Industries
High quality, efficient and specialized inputs to business
– Natural endowments– Human resources– Capital availability– Physical infrastructure– Administrative infrastructure
(e.g. registration, permitting)– Scientific and technological
infrastructure
Capable, locally based suppliers and supporting industriesThe presence of clusters instead of isolated firms
Demanding and sophisticated local customers and needs
–Challenging quality, safety, and environmental standards
• Successful economic development is a process of successive upgrading, in which the business environment improves to enable increasingly sophisticated ways of competing
Local rules and incentivesthat encourage investment and productivity
– e.g., incentives for capital investments, intellectual property protection
Vigorous local competition– Openness to foreign and
local competition
Factor(Input)
Conditions
Factor(Input)
ConditionsDemand
ConditionsDemand
Conditions
21 Copyright 2007 © Professor Michael E. Porter20071022 Czech Republic - DRAFT.ppt
Quality of the Business EnvironmentCzech Republic
Control of international distribution 59
Neutrality in decisions of government 56 officials
Local equity market access 53
Reliability of police services 51
Efficiency of legal framework 51
Venture capital availability 49
Ease of access to loans 48
Quality of port infrastructure 45
Extent of incentive compensation 43
Business costs of corruption 43
Nature of competitive advantage 42
Financial market sophistication 42
Degree of customer orientation 41
Judicial independence 41
Competitive Disadvantages Relative to GDP per Capita
Competitive Advantages Relative to GDP per Capita
Source: Global Competitiveness Report 2007.
Cellular Telephones per 100 inhabitants 4
Availability of scientists and engineers 5
Quality of math and science education 8
Quality of primary education 10
Absence of trade barriers 10
Intensity of local competition 11
Decentralization of economic policymaking 13
Extent of regional sales 16
Stringency of environmental regulations 16
Local supplier quantity 16
Quality of electricity supply 22
Presence of demanding regulatory 22 standards
Local supplier quality 23
Change up/down of more than 5 ranks since 2002
22 Copyright 2007 © Professor Michael E. Porter20071022 Czech Republic - DRAFT.ppt
0
20
40
60
80
100
120
DoingBusiness
GettingCredit
TradingAcrossBorders
RegisteringProperty
EmployingWorkers
Dealingwith
Licenses
ProtectingInvestors
Starting aBusiness
EnforcingContracts
Closing aBusiness
PayingTaxes
Ease of Doing BusinessCzech Republic
Ranking, 2006 (of 175 countries)
Source: World Bank Doing Business (2007)
Favorable Unfavorable
Median Ranking, EU8 countries
Czech Republic per capita GDP rank: 33
23 Copyright 2007 © Professor Michael E. Porter20071022 Czech Republic - DRAFT.ppt
Sources: HBS student team research (2003) - Peter Tynan, Chai McConnell, Alexandra West, Jean Hayden
HotelsHotels
Attractions andActivities
e.g., theme parks, casinos, sports
Attractions andActivities
e.g., theme parks, casinos, sports
Airlines, Cruise Ships
Airlines, Cruise Ships
Travel agentsTravel agents Tour operatorsTour operators
RestaurantsRestaurants
PropertyServicesPropertyServices
MaintenanceServices
MaintenanceServices
Government agenciese.g. Australian Tourism Commission,
Great Barrier Reef Authority
Government agenciese.g. Australian Tourism Commission,
Great Barrier Reef Authority
Educational Institutionse.g. James Cook University,
Cairns College of TAFE
Educational Institutionse.g. James Cook University,
Cairns College of TAFE
Industry Groupse.g. Queensland Tourism
Industry Council
Industry Groupse.g. Queensland Tourism
Industry Council
FoodSuppliers
FoodSuppliers
Public Relations & Market Research
Services
Public Relations & Market Research
Services
Local retail, health care, andother services
Local retail, health care, andother services
Souvenirs, Duty Free
Souvenirs, Duty Free
Banks,Foreign
Exchange
Banks,Foreign
Exchange
Local Transportation
Local Transportation
Enhancing Cluster DevelopmentTourism Cluster in Cairns, Australia
24 Copyright 2007 © Professor Michael E. Porter20071022 Czech Republic - DRAFT.ppt
Research OrganizationsResearch OrganizationsResearch Organizations
Biological Products
Biological Biological ProductsProducts
Specialized Risk CapitalVC Firms, Angel Networks
Specialized Risk CapitalVC Firms, Angel Networks
Biopharma-ceutical
Products
BiopharmaBiopharma--ceutical ceutical
ProductsProducts
Specialized BusinessServices
Banking, Accounting, Legal
Specialized BusinessServices
Banking, Accounting, Legal
Specialized ResearchService Providers
Laboratory, Clinical Testing
Specialized ResearchService Providers
Laboratory, Clinical Testing
Dental Instrumentsand Suppliers
Dental Instrumentsand Suppliers
Surgical Instruments and Suppliers
Surgical Instruments and Suppliers
Diagnostic SubstancesDiagnostic Substances
ContainersContainersContainers
Medical EquipmentMedical Equipment
Ophthalmic GoodsOphthalmic Goods
Health and Beauty Products
Health and Beauty Health and Beauty ProductsProducts Teaching and Specialized HospitalsTeaching and Specialized Hospitals
Educational InstitutionsHarvard University, MIT, Tufts University,
Boston University, UMass
Educational InstitutionsHarvard University, MIT, Tufts University,
Boston University, UMass
Cluster OrganizationsMassMedic, MassBio, othersCluster Organizations
MassMedic, MassBio, others
Analytical InstrumentsAnalytical InstrumentsAnalytical Instruments
State of Cluster DevelopmentMassachusetts, Life Sciences
25 Copyright 2007 © Professor Michael E. Porter20071022 Czech Republic - DRAFT.ppt
Institutions for CollaborationSelected Massachusetts Organizations, Life Sciences
Economic Development InitiativesEconomic Development Initiatives
Massachusetts Technology CollaborativeMass Biomedical InitiativesMass DevelopmentMassachusetts Alliance for Economic Development
Massachusetts Technology CollaborativeMass Biomedical InitiativesMass DevelopmentMassachusetts Alliance for Economic Development
Life Sciences Industry AssociationsLife Sciences Industry Associations
Massachusetts Biotechnology CouncilMassachusetts Medical Device Industry CouncilMassachusetts Hospital Association
Massachusetts Biotechnology CouncilMassachusetts Medical Device Industry CouncilMassachusetts Hospital Association
General Industry AssociationsGeneral Industry Associations
Associated Industries of MassachusettsGreater Boston Chamber of CommerceHigh Tech Council of Massachusetts
Associated Industries of MassachusettsGreater Boston Chamber of CommerceHigh Tech Council of Massachusetts
University InitiativesUniversity Initiatives
Harvard Biomedical CommunityMIT Enterprise ForumBiotech Club at Harvard Medical SchoolTechnology Transfer offices
Harvard Biomedical CommunityMIT Enterprise ForumBiotech Club at Harvard Medical SchoolTechnology Transfer offices
Informal networksInformal networks
Company alumni groupsVenture capital communityUniversity alumni groups
Company alumni groupsVenture capital communityUniversity alumni groups
Joint Research InitiativesJoint Research Initiatives
New England Healthcare InstituteWhitehead Institute For Biomedical ResearchCenter for Integration of Medicine and Innovative Technology (CIMIT)
New England Healthcare InstituteWhitehead Institute For Biomedical ResearchCenter for Integration of Medicine and Innovative Technology (CIMIT)
26 Copyright 2007 © Professor Michael E. Porter20071022 Czech Republic - DRAFT.ppt
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
-1.0% -0.5% 0.0% 0.5% 1.0% 1.5%
Czech National Cluster Export Portfolio1997-2005
Change in Czech Republic's world export market share, 1997 – 2005Source: 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.
Cze
ch R
epub
lic's
wor
ld e
xpor
t mar
ket s
hare
, 200
5
Change In Czech Republic's Overall World Export Share: +0.295%
Czech Republic's Overall World Export Share: 0.790%
Exports of US$3 Billion =
Metal Mining and Manufacturing
Automotive
Information Technology
Hospitality and Tourism
Motor Driven Products
Production Technology
Building Fixtures and Equipment
Transportation and Logistics
Communications Equipment
Lighting and Electrical Equipment
Textiles
Plastics
Chemical Products
Entertainment and Reproduction EquipmentProcessed Food
Heavy Machinery
Business Services Agricultural Products
Power and Power Generation Equipment
Furniture
Forest Products
ApparelAnalytical Instruments
Prefabricated Enclosures and Structures
Construction Materials
Publishing and Printing
Oil and Gas Products
Coal and Briquettes
Construction ServicesFootwear
27 Copyright 2007 © Professor Michael E. Porter20071022 Czech Republic - DRAFT.ppt
The Process of Economic DevelopmentShifting Roles and Responsibilities
Old ModelOld Model
• Government drives economic development through policy decisions and incentives
• Government drives economic development through policy decisions and incentives
New ModelNew Model
• Economic development is a collaborative process involving government at multiple levels, companies, teaching and research institutions, and institutions for collaboration
• Economic development is a collaborative process involving government at multiple levels, companies, teaching and research institutions, and institutions for collaboration
• Competitiveness must become a bottoms-up process in which many individuals, companies, and institutions take responsibility
• Every community and cluster can take steps to enhance competitiveness
28 Copyright 2007 © Professor Michael E. Porter20071022 Czech Republic - DRAFT.ppt
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000 United States
Switzerland
Italy
DenmarkIreland
India
Business Competitiveness Index
2006 GDP per Capita (PPP- adjusted)
Malaysia
Source: Global Competitiveness Report 2007
SwedenKuwait Finland
Germany
Qatar
Norway
HighLow
Greece
Argentina
SpainBahrain
Libya
IndonesiaKenya
Tunisia
Korea
ColombiaVariation in BCI score explains 82%
of variation in GDP per capita
Ranking Microeconomic CompetitivenessBusiness Competitiveness Index, 2007
IcelandHong Kong
New Zealand
Estonia
Japan
Chile
ThailandCosta Rica
Jordan
Russia
Venezuela
Hungary
Cyprus
SloveniaPortugal
Israel
TaiwanFrance
Australia
LatviaPoland
Slovakia
Lithuania
Czech Republic
29 Copyright 2007 © Professor Michael E. Porter20071022 Czech Republic - DRAFT.ppt
0
5
10
15
20
25
30
35
40
45
Hourly Wage in Manufacturing (USD),
2005
Brazil
Finland
Denmark
Canada
Hungary
Italy
Mexico
Korea
Norway
Germany
Hong Kong Taiwan Singapore
Source: Global Competitiveness Report 2005-2006 and US Bureau of Labor Statistics
Competitiveness versus Wage Level Across Countries
Business Competitiveness Index 2005 HighLow
Australia
AustriaBelgium
France
Greece
Czech Republic
Ireland
Israel
Japan
Poland
Netherlands
New Zealand
Portugal
Spain
Sweden Switzerland
UKUSA
Sri Lanka
30 Copyright 2007 © Professor Michael E. Porter20071022 Czech Republic - DRAFT.ppt
BCI Value, 2007
Dynamism Score, 2002 - 2007
Rate of Competitiveness Improvement2002 - 2007
High
Low
Below average Above averageAverage
High-incomeMiddle-incomeLow-income
ItalyHungary
Trinidad and Tobago
Zambia
Brazil
Finland
Dominican Republic
Australia
Zimbabwe
United Kingdom
Spain
France
United States
Netherlands
New Zealand
Sweden
Canada
China
Uganda
Poland
Tanzania
Latvia
Jamaica
Czech Republic
Guatemala
Honduras
Malaysia
Indonesia
Korea
TurkeySri Lanka
Peru
Ecuador
Lithuania
Romania
Mali
Kenya
Chad
Thailand
Norway
Estonia
Pakistan
Costa RicaPanama
Nicaragua
India
Bangladesh
JapanHong Kong
SloveniaSlovakia
31 Copyright 2007 © Professor Michael E. Porter20071022 Czech Republic - DRAFT.ppt
Historical Economic Growth Model Czech Republic
• Strong manufacturing legacy
• Skill base at attractive wage levels
• Proximity to Germany and other Western European economies
• Strong focus on FDI attraction
• Export-led growth
32 Copyright 2007 © Professor Michael E. Porter20071022 Czech Republic - DRAFT.ppt
Improving Czech Competitiveness
• Improve business regulation and governance
• Upgrade financial markets
• Drive cluster development, including the strengthening of local supplier networks around foreign investments
• Improve innovative capacity
• Strengthen collaboration with neighbors
33 Copyright 2007 © Professor Michael E. Porter20071022 Czech Republic - DRAFT.ppt
The Australian Wine ClusterHistory
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 RoseworthyAgricultural 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 2007 © Professor Michael E. Porter20071022 Czech Republic - DRAFT.ppt
Clusters and Economic Policy
ClustersClusters
Specialized Physical Infrastructure
Natural Resource Protection
Environmental Stewardship
Science and TechnologyInvestments (e.g., centers, university departments, technology transfer)
Education and Workforce TrainingBusiness Attraction
Export Promotion
• Clusters provide a framework for organizing the implementation of public policy and public investments towards economic development
Standard settingMarket Information and Disclosure
35 Copyright 2007 © Professor Michael E. Porter20071022 Czech Republic - DRAFT.ppt
The Evolution of National and Regional EconomiesSan Diego
U.S. Military
U.S. Military
CommunicationsEquipment
Sporting andLeather Goods
Analytical Instruments
Power GenerationAerospace Vehicles
and Defense
Transportationand Logistics
Information Technology
19101910 19301930 19501950 1990199019701970
Bioscience Research Centers
Bioscience Bioscience Research Research CentersCenters
Climate and
Geography
Climate and
Geography
Hospitality and Tourism
Medical Devices
Biotech / Pharmaceuticals
Education andKnowledge Creation
36 Copyright 2007 © Professor Michael E. Porter20071022 Czech Republic - DRAFT.ppt
FurnitureBuilding Fixtures,
Equipment & Services
Fishing & Fishing Products Hospitality
& TourismAgricultural
ProductsTransportation
& Logistics
Diversifying the EconomyHarnessing 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
DistributionServices
Forest Products
Heavy Construction
Services
ConstructionMaterials
Prefabricated Enclosures
Heavy Machinery
Sporting & Recreation
Goods
Automotive
Production Technology
Motor Driven Products
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.
37 Copyright 2007 © Professor Michael E. Porter20071022 Czech Republic - DRAFT.ppt
Geographic Influences on CompetitivenessLevels of Influence
Broad Economic AreasBroad Economic Areas
Groups of Neighboring Nations
Groups of Neighboring Nations
States, ProvincesStates, Provinces
Metropolitan AreasMetropolitan Areas
NationsNations
World EconomyWorld Economy
Distressed Urban and Rural Communities
Distressed Urban and Rural Communities
38 Copyright 2007 © Professor Michael E. Porter20071022 Czech Republic - DRAFT.ppt
The Role of European Union Membership
Key Advantages
• Access to large markets
• Rapid implementation of credible and tested regulatory framework
• Stabilization of fragile political systems through external anchor, i.e. reforms needed to achieve EU membership
• Access to financial resources for competitiveness upgrading
Key Disadvantages
• Complex rules and regulationsnot aligned with needs of transition economies
• Bureaucracy and inflexibility
39 Copyright 2007 © Professor Michael E. Porter20071022 Czech Republic - DRAFT.ppt
Central European Neighborhood
•Neighboring countries can move further than the European Union on economic integration•Neighboring countries can together influence EU policies more effectively than alone
40 Copyright 2007 © Professor Michael E. Porter20071022 Czech Republic - DRAFT.ppt
• Coordinate macroecono-mic policies
• Eliminate trade and investmentbarriers within the region
• Simplify and harmonize cross-borderregulations and paperwork
• Harmonize environmentalstandards
• Harmonize product safety standards
• Establish reciprocal consumer protection laws
• Coordinateantimonopoly and fair competition policies
• Improve regional transportation infrastructure
• Create an efficient energy network
• Interconnect regional communications
• Link financial markets
• Facilitate the movement of students to enhance higher education
• Harmonize regulatory requirements for business
• Coordinate programs to improve public safety
• Coordinate development of cross-border clusters, e.g.
– Tourism
– Agribusiness
– Transport & Logistics
– Business services
• Share best practices in government operations
• Create regional institutions
– Dispute resolution mechanisms
– Regional development bank
• Develop a regional marketingstrategy
Factor (Input)
Conditions
Factor Factor (Input)(Input)
ConditionsConditionsRegional
GovernanceRegional
GovernanceContext 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
Regional Economic Coordination Illustrative Policy Areas
41 Copyright 2007 © Professor Michael E. Porter20071022 Czech Republic - DRAFT.ppt
Role of the Private Sector in Economic Development
• A company’s competitive advantage depends partly on the quality of the businessenvironment
• A company gains advantages from being part of a cluster• Companies have a strong role to play in upgrading their business environment
• Take an active role in upgrading the 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 cluster’s needs• Inform government on regulatory issues and constraints bearing on cluster
development• Focus corporate philanthropy on enhancing the local business environment
• An important role for trade associations– Greater influence if many companies are united– Cost sharing between members