NITI Lectures

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); On Competition (Harvard Business Review, 2008);

and “Creating Shared Value” (Harvard Business Review, Jan 2011). 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. For

further materials, see the website of the Institute for Strategy and Competitiveness, www.isc.hbs.edu, and FSG website, www.fsg.org.

Competitiveness of Nations and Regions:

The New Learning

Professor Michael E. Porter

Harvard Business School

New Delhi,

May 25th, 2017

http://www.isc.hbs.edu/

http://www.fsg.org/

20170525—India Competitiveness Copyright 2017 © Professor Michael E. Porter

Armenia

Benin

Bhutan

Bolivia

Burkina Faso

Burundi

Cambodia

CameroonCentral African Republic(-3.8%, $505)

ChadComoros

Congo (Brazzaville)

Congo (D.R.)

Côte d'IvoireDjibouti

El Salvador

Eritrea

EthiopiaGambia

Georgia

Ghana

Guatemala

Guinea

Guinea-Bissau

Guyana

Haiti

Honduras

India

Kenya

Kyrgyz Republic

Laos

Lesotho

Liberia

Madagascar

Malawi

Mali

Mauritania

Moldova

Morocco

Mozambique

Nepal

Niger

Nigeria

Pakistan

Papua New Guinea

Philippines

Rwanda

Samoa

São Tomé and …

Senegal

Sierra Leone

Solomon Islands

Sudan

Swaziland

TajikistanTanzania

Uganda

Ukraine

Uzbekistan

Vanuatu

Vietnam

Zambia

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

-2% -1% 0% 1% 2% 3% 4% 5% 6% 7% 8%

PPP-Adjusted Real GDP per Capita, 2016

($USD at 2005 prices)

Growth in Real GDP per Capita (PPP $US at 2005 prices), CAGR, 2006-2016

Bangladesh

Average Prosperity Growth: +2.9%

Prosperity PerformanceLow and Lower Middle Income Countries

Source: EIU (2015), authors calculations.

Note: Low and Lower Middle Countries according to World Bank Income Groups based on GNI per capita.

Average Real GDP per

Capita: $3,671

High but Declining

Low and Declining

High and Improving

Low but Improving

2


• Competitiveness depends on the long-run productivity of a location

as a place for firms to do business

- Productivity of existing firms and workers

- High participation of citizens in the workforce

• Competitiveness is not:

- Low wages

- A weak currency

A nation or region is competitive to the extent that firms operating there

are able to compete successfully in the national and global economy

while maintaining and improving wages and living standards for the

average citizen

What is Competitiveness?

3

• Successful economic development requires improving competitiveness


The Dual Challenges of Development

• There is a powerful connection between economic

and social development

• Improving competitiveness requires improving

economic and social conditions simultaneously

Economic

Development

Social

Development

4

20170525—India Competitiveness Copyright 2017 © Professor Michael E. Porter5

India in 2017• India has made significant economic progress over

the last few years, despite a challenging global context

− Robust growth of GDP, prosperity, and productivity

− Rising FDI inflows and exports

− Falling poverty

• Policy choices have begun to address some of India’s

deep-seated structural challenges

− Sustainability of macroeconomic policies

− Effectiveness of public programs

− Corruption

− Upgrading specific elements of the business

environment such as infrastructure, skills, business

regulations


The Path Ahead

•India has a promising future, but multiple

weaknesses and distortions remain that will

require time and determined action to overcome– E.g. high informality, bureaucratic complexity, limited

access to capital, public education and infrastructure

deficits

•Reaching India’s full potential, both domestically

and in the global economy, requires:

– a shared understanding of competitiveness

– a coherent strategy

– excellence in implementation


Endowments

What Determines Competitiveness?

• Endowments, including natural resources, geographical location,

population, and land area, create a foundation for prosperity, but

true prosperity arises from productivity in the use of endowments

7


Endowments

Macroeconomic Competitiveness

Human Development

and Effective

Public Institutions

Sound Monetary

and Fiscal Policies

• Macroeconomic competitiveness sets the economy-wide

context for productivity to emerge, but is not sufficient to

ensure productivity


8



Sound Monetary

and Fiscal Policies

Endowments

Human Development

and Effective

Public Institutions• Fiscal Policy:

Public spending aligned

with revenues over time

• Monetary Policy:

Low levels of inflation

• Economic

Stabilization: Avoiding

structural imbalances

and cyclical

overheating

Sound Monetary

and Fiscal Policies


9


• Human Development:

Basic education, health

care, equal opportunity

• Rule of Law:

Property rights, personal

security, and due process

• Government Institutions:

Stable and effective public

and governmental

organizations and

processes

Human Development

and Effective

Public InstitutionsMacroeconomic Competitiveness

Endowments

Sound Monetary

and Fiscal Policies

Human Development

and Effective

Public Institutions


10


How Do We Measure Development

11

Economic

Development

GDP per Capita

Social

Progress


Social Progress Index Framework

Nutrition and Basic

Medical Care

Water and Sanitation

Shelter

Personal Safety

Personal Rights

Personal Freedom

and Choice

Inclusion

Access to Advanced

Education

Basic Human Needs Foundations of Wellbeing Opportunity

Social Progress Index

Access to Basic

Knowledge

Access to Information

and Communications

Health and Wellness

Environmental Quality


Social Progress 2005-2016

2005 2016

13



Microeconomic Competitiveness

Sophistication

of Company

Operations and

Strategy

Quality of the

Business

Environment

State of Cluster

Development

Endowments

Human Development

and Effective

Public Institutions

Sound Monetary

and Fiscal Policies

• Productivity ultimately depends on improving the

microeconomic capability of the economy

• Many things matter; there is no silver bullet

14



The internal skills,

capabilities, and

management

practices that enable

companies to

achieve higher levels

of productivity and

innovationMacroeconomic Competitiveness


Sophistication

of Company

Operations and

Strategy

Quality of the

National

Business

Environment

State of Cluster

Development

Endowments

Human Development

and Effective

Public Institutions

Sound Monetary

and Fiscal Policies


15


The quality of the

business

environment that

supports company

productivity,

innovation, and

growth



Sophistication

of Company

Operations and

Strategy

Quality of the

National

Business

Environment

State of Cluster

Development

Endowments

Human Development

and Effective

Public Institutions

Sound Monetary

and Fiscal Policies


16


Context for Firm Strategy

and Rivalry

Related and Supporting Industries

Factor

(Input)

Conditions

Demand Conditions

• Sophisticated and demanding local

needs

– e.g., Sophisticated demand in the

private sector and government

– Strict quality, safety, and

environmental standards

• Many things in the business environment 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

• Local rules and incentives that

encourage investment and productivity

– e.g. incentives for capital investment,

IP protection

– Sound corporate governance

and accountability

• Open and vigorous local competition

− Openness to competition

− Strict competition laws• Improving access to high quality

business inputs

– Qualified human resources

– Capital availability

– Physical infrastructure

– Scientific and technological

infrastructure

– Administrative and regulatory

infrastructure • Availability and quality of suppliers and

supporting industries

Improving the Quality of the Business EnvironmentThe Diamond Model

17


Improving the National Business EnvironmentPeru, 2012

+ Abundant resources: mineral, agricultural,

fishing, and cultural

+ Advantageous location

+ Improving administrative infrastructure

± Sound banking system, but high interest

spreads and limited venture capital

availability

– Poor physical infrastructure

– Low skill levels in the labor force,

mismatch with demand

– Weak university-industry research

collaboration

– Few high-quality research and scientific

institutions

+ Improving consumer protection

regulation

± Improving sophistication of local buyers

− Weak environmental standards

enforcement

– Limited local suppliers and

supporting industries

– Shallow clusters

+ Openness to foreign investment,

trade, capital flows

+ Improvements in investor protections

± Efforts to strengthen competition policy

– Rigidity of employment

– Difficulty in business formation

– Low intensity of local competition

– High Informality of the economy

Context for Firm Strategy

and Rivalry

Related and Supporting Industries

Factor

(Input)

Conditions

Demand Conditions

18


0

10

20

30

40

50

60

70

80

90

100

110

120

130

140

150

160

170

180

190

200

Business Environment Quality Ease of Doing Business Rankings, India

Ranking, 2017(vs. 190 countries)

India’s GDP per capita rank: 117

Favorable

Source: World Bank Report, Doing Business (2017)19

Unfavorable


Geographic

concentrations of

firms, suppliers, and

related institutions in

particular fields (e.g.

tourism, automotive)

that enable

productivity and

innovationMacroeconomic Competitiveness


Quality of the

National

Business

Environment

State of Cluster

Development

Endowments

Human Development

and Effective

Public Institutions

Sound Monetary

and Fiscal Policies

Sophistication

of Company

Operations and

Strategy


20


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

Restaurants

Attractions andActivities

e.g., theme parks, casinos, sports

Airlines, Cruise Ships

Travel Agents Tour Operators

Hotels

PropertyServices

MaintenanceServices

Government Agenciese.g. Australian Tourism

Commission, Great Barrier Reef Authority

Educational Institutionse.g. James Cook University,

Cairns College of TAFE

Industry Groupse.g. Queensland Tourism

Industry Council

FoodSuppliers

Public Relations & Market Research

Services

Local Retail, Health Care, andOther Services

Souvenirs, Duty Free

Banks,Foreign

Exchange

Local Transportation

What is a Cluster?Tourism Cluster in Cairns, Australia

21


Pharmaceutical Cluster in Andhra Pradesh

Source: MOC Student Project 2013

Pharmaceutical Companies(MNCs, Domestic Companies, SOEs)

Chemical Suppliers

Printing & Packaging

Material Suppliers

Testing

Laboratories

Energy

Suppliers

International Institutions(US FDA, EDQUM in Europe, ISO, ICH,

GLP, GCP, etc.)

Marketers, BDS &

Agents

CFA and Stockists

Hospitals

Pharma Resellers

Pharmacies

Distributors /

Customers

Multi-lateral Agencies

(e.g. WHO)

Pharma Machinery

Manufacturers

Law Firms

Transportation

& Logistics

Supporting

Industry

Financial Inst.

IT / ITES

Related Industries

Medical

Tourism

Medical

Devices

Agribusiness

Health

Insurance

Bulk Mfg.Contract

R&D

Formulation

Mfg.

Institutions for Collaboration

Industry

Associations (BDMA, OPPI,

NDMA,

PASS etc)

Education &

Research (Pharma

Colleges;

Research Inst. -

NIPER, CCMB,

IICT etc)

Government

(Central, State, Patent Office)

Government, Regulatory, Quality


Source: “Clusters and the Great Recession” by Mercedes Delgado, Michael E. Porter, and Scott Stern (2014), “Clusters, Convergence, and Economic Performance” by Mercedes Delgado,

Michael E. Porter, and Scott Stern (2012), “Cluster and Entrepreneurship” by Mercedes Delgado, Michael E. Porter, and Scott Stern (2010); “The Economic Performance of Regions” by

Michael E. Porter (2003)

• Job growth

• Higher wages

• Higher patenting rates

• Greater new business

formation, growth and survival

• Resilience in downturns

• Build on the region’s existing and emerging clusters rather than chase hot fields

• Economic diversification occurs within clusters and across related clusters

Why Clusters Matter?Research Findings

23


Note: Showing only clusters with greater than $5 billion in export value.

Source: International Cluster Competitiveness Profiles project; Harvard - Prof. Michael E. Porter; Richard Bryden, Director.

= $2 billion

Business Services

Oil and Gas Production and Transportation

Hospitality and Tourism

Upstream Metal Manufacturing

Food Processing and Manufacturing

Apparel

Textile Manufacturing

Biopharmaceuticals

Transportation and Logistics

Automotive

Upstream Chemical Products

Downstream Chemical …Plastics

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

-0.50% 0.00% 0.50% 1.00% 1.50% 2.00%

World Export

Market Share, 2015

Change in World Export Market Share, 2005-2015

Computer and

Communication

services

(-2.2%, 12.7%)

7.00%

Jewelry, Precious

Metals and Collectibles

(+1.7%, 14.9%)

Overall Export Share

2015: 2.225%

24

Change in Overall

Export Growth

2005-2015: +0.874%

India’s Exports by Traded Cluster

Production Technology

and Heavy Machinery Financial Services

Downstream Metal Products


Metal-

working

Food

Processing

Lighting

Medical

Devices

IT &

Analytical

Instruments

Comm-

unications

Equip. &

Services

Down-

stream

ChemicalsBiopharma

Leather

Apparel

Printing

Services

Financial

Services

Insurance

Environ-

mental

Services

Business

Services

Education &

Knowledge

Creation

Marketing

Services

Music &

Sound

Recording

Performing

Arts

Video

Production

Hospitality

& Tourism

Metal

Mining

Coal

Mining

Upstream

Metals

Wood

Products

Furniture

Tobacco

Aerospace

Upstream

Chemicals

Trailers &

Appliances

Textiles

Footwear

Forestry

Agriculture

PlasticsPlastics

Distribution

& eComm.

Livestock

Processing

Fishing &

Fishing

Products

Water

Transport

Transport

&Logistics

Vulcanized

Materials

Construction

Nonmetal

Mining

Oil & Gas

Electricity

Down-

stream

Metals

Production

Metal-

working

Automotive

Paper &

Packaging

Recreation

& Electric

Goods

Jewelry &

Precious

Metals

Related Clusters and Economic DiversificationIndia 2015

4.5% - 9.0%

> 9%

World Export Share

2.25% - 4.5%

25


Labor/

HR-intensive

Capital/

HR-intensive

Services

Logistics

Med.

Devices

Logistics:

Docks,

Bunkering

Electronics

Petro-

chemicals

Financial

Services

Pharma

Business

Services

Aerospace

& Defense

Tourism

Media &

Design

IT

Logistics:

Air Travel

Logistics:

Trans-

shipment

Water

Technology

Higher

Education

1900-1960 1970s 1980s 1990s 2000s

Regional

HQs

Biotech

Clusters and Economic DiversificationSingapore

26


• Strengthens multiple related firms/institutions simultaneously

• Brings together firms of all sizes, including SME’s

• Enhances the effectiveness of traditional economic policy areas,

such as training, R&D, export promotion, FDI attraction, etc.

• A forum for collaboration between the private sector, trade

associations, government, educational, and research institutions

• A powerful tool for public/private collaboration

Clusters as a Tool for Economic Policy

• Sound cluster policy should address all existing

and emerging clusters, and not pick winners

27


Geographic Influences on Competitiveness

States, Regions

and Cities

Nation

• Regions are the most important economic unit for

competitiveness in larger countries, especially countries

beyond subsistence development

28


• Economic performance varies significantly across sub-national

regions (e.g., provinces, states, metropolitan areas)

The Role of Sub-National Regions in

Economic Development

29


Alabama

Alaska

Arkansas

California

Colorado

Connecticut

Delaware

Florida

Georgia

Hawaii

Idaho

Illinois

Indiana

Iowa

Kansas

Kentucky

Louisiana

Maine

Maryland

Massachusetts

Michigan

Minnesota

Mississippi

Missouri

Montana

Nebraska

New Hampshire

New Jersey

New Mexico

New York

North Carolina Ohio

Oklahoma

Oregon

Pennsylvania

Rhode Island

South Carolina

South Dakota

Tennessee

Texas

UtahVermont

Virginia

Washington

West Virginia

Wisconsin

Wyoming

$30,000

$35,000

$40,000

$45,000

$50,000

$55,000

$60,000

$65,000

$70,000

-1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0%

High but declining

prosperity versus U.S.

High and rising prosperity

versus U.S.

Low and declining

prosperity versus U.S.

Low but rising prosperity

versus U.S.

Source: BEA. Notes: GDP in real 2009 dollars. Growth rate is calculated as compound annual growth rate.

Real Growth in Gross Domestic Product per Capita, 2005 to 2015

Prosperity Performance of U.S. StatesReal GDP per

Capita, 2015

U.S. Average GDP Per

Capita, 2014: $50,054

North Dakota

Nevada

U.S. Average growth in GDP

Per Capita, 2014: 0.4%

2005-2015

30


Prosperity Performance of Indian States2005-2014

Gross Domestic Product per Capita Real Growth Rate, 1999 to 2009

Note: Growth rate is calculated as compound annual growth rate. Source: CEIC.

Real growth in GDP per Capita, 2005-2014

GDP per Capita, 2014

(2005 Indian Rupees)

India Overall: ₹45,750

India Overall: 6.6%

ChandigarhSikkim

Uttarakhand

Andaman & Nicobar Islands

Andhra Pradesh

Arunachal Pradesh

Assam

BiharChattisgarh

Delhi

Goa

Gujarat

Haryana

Himachal Pradesh

Jammu & Kashmir

Jharkhand

Karnataka

Kerala

Madhya Pradesh

Maharashtra

Manipur

Meghalaya

Mizoram

Nagaland

Odisha

Puducherry

Punjab

Rajasthan

Tamil Nadu

Telangana

Tripura

Uttar Pradesh

West Bengal

₹ 0

₹ 20,000

₹ 40,000

₹ 60,000

₹ 80,000

₹ 1,00,000

₹ 1,20,000

₹ 1,40,000

₹ 1,60,000

3% 4% 5% 6% 7% 8% 9%

31


• Economic performance varies significantly across sub-

national regions (e.g., provinces, states, metropolitan areas)

• Many essential levers of competitiveness reside at the

regional and sub-regional level

• Regions specialize in different clusters



32


Cluster Specialization Selected Indian States

Tamil Nadu

• Textile Manufacturing

• Automotive

• Footwear

• Leather and Related Products

Gujarat

• Jewelry and Precious Metals

• Upstream Chemical Products

• Water Transportation

• Nonmetal Mining

Maharashtra

• Biopharmaceuticals

• IT and Analytical Instruments

• Jewelry and Precious Metals

• Furniture

Source: India ASI 2014; India Cluster Mapping Project, Harvard ISC – Prof. Michael E. Porter, India IFC – Amit Kapoor

Uttar Pradesh

• Livestock Processing

• Footwear

• Downstream Chemical Products

• Food Processing and Manufacturing

Haryana

• Automotive

• Apparel

• Recreational and Small Electronic Goods

• Medical Devices

Clusters with strongest employment

specialization based on annual survey

of manufacturing industries 2014;




• Regions are a critical unit of competitiveness

• Each region needs its own distinctive strategy and action agenda

– Business environment improvement

– Cluster upgrading

– Improving institutional effectiveness

• Much economic policy responsibility and accountability should be

decentralized to regions

34

• The role of the national government should be to set the overall policy

framework while enabling open competition and economic integration

across regions

- Digitization

- Infrastructure for connecting states and regions

- Harmonizing rules and incentives across regions


• An overall agenda for

creating a more distinctive

and competitive position for

a country or region, based

on its particular

circumstances

• Implementing best practices

in each policy area

• There are a huge number of

policy areas that matter

• No region or country can (or

should try to) make progress

in all areas simultaneously

Policy

Improvement

Economic

Strategy

The Need for an Economic Strategy

35


National or Regional

Value Proposition

Developing an Economic Strategy

• What is a distinctive competitive position for the nation given its

location, legacy, existing strengths, and potential strengths?

– What unique advantages as a location?

– For what types of activities and clusters?

– What roles in the broader global economy?

Developing Unique

Strengths

Achieving and Maintaining

Parity with Peers

• What elements of the business

environment can be unique strengths

relative to peers/neighbors?

• What existing and emerging

clusters can be built upon?

• What weaknesses must be

addressed to remove key constraints

to growth and achieve parity with

peer locations?

• Priorities and sequencing are fundamental

to successful economic development36


What is Unique About India?• Vibrant and largest democracy in the world

• Large domestic market

• Growing labor force, including strong reservoir of skilled graduates

• Well-established position in IT services

• Growing number of internationally active firms

• Large, heterogeneous country

• Deep international linkages through history, diaspora, and growing trade and investment

• A rich history, culture, and diversity

• What will be India’s distinctive role in the global economy?

• What will be India’s unique competitive advantages?


• Competitiveness improvement will require sustained efforts across

decades and government administrations

– Mechanisms needed to improve the continuity of policy over time

• Competitiveness is affected by numerous government entities and

levels of government

– Multiple agencies and departments (e.g. finance, trade, science and

technology, commerce, regional policy, energy, agriculture) have an influence

on competitiveness

– “Economic” agencies and “social” agencies are both involved

– Multiple levels of government (nations, states, cities, etc.) affect the business

environment

– Intergovernmental relations with neighboring countries affect productivity

• Coordinating structures are needed to bring together ministries,

agencies and levels of government around an integrated economic

strategy

Government Structure and


38


The Private Sector’s Role in Economic

Development

• Inform government on the needs of business and the constraints on company and cluster development

• Work closely with local educational and research institutions to improve their quality and create specialized programs addressing the cluster’s needs

• Nurture local suppliers and attract foreign suppliers

• Collaborate with other companies to enhance competitiveness through trade associations and other mechanisms

• Participate actively in national and regional competitiveness initiatives

• Compete with shared value strategies that address social needs and challenges with a business model

– Beyond corporate philanthropy

39


Themes for India1. Broad-based inclusive development, which integrates economic

and social progress

2. A cluster-based economic development model

3. Clear roles for the national and state governments in upgrading

competitiveness

4. Make the private sector a true partner in competitiveness upgrading

5. Better data and benchmarking to inform evidence-based policy

6. Articulate a shared vision for India’s economic and social future that

motivates and inspires citizens

7. Create a culture of participation and responsibility amongst

citizens

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