18 de frebrero diamond model developing economies

Copyright © 2006 Professor Michael E. Porter1MOC Session 1 - 2007

Microeconomics of Competitiveness

Session 4: The Diamond Model in Developing / Transition Economies

This presentation draws on ideas from Professor Porter’s articles and books, in particular, The Competitive Advantage of Nations (The Free Press, 1990), “The Microeconomic Foundations of Economic Development,” in The Global Competitiveness Report 2007-08, (World Economic Forum, 2008), “Clusters and the New Competitive Agenda for Companies and Governments” in On Competition (Harvard Business School Press, 1998), and the Clusters of Innovation Initiative (www.compete.org), a joint effort of the Council on Competitiveness, Monitor Group, and Professor Porter and ongoing research at the Institute for Strategy and Competitiveness. Additional information may be found at the website of the Institute for Strategy and Competitiveness, www.isc.hbs.edu 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. Version: February 5, 2008

Microeconomics of CompetitivenessFebruary 5, 2008

Professor Michael E. Porter


$3,000

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$15,000

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$23,000

$25,000

0.0% 1.5% 3.0% 4.5% 6.0% 7.5%

Prosperity PerformanceSelected Middle- and Lower-Income Countries

PPP-adjusted GDP per Capita, 2006

Growth of Real GDP per Capita (PPP-adjusted), CAGR, 1996-2006Source: EIU (2007), authors calculations

China

Vietnam

Poland

Russia

Saudi Arabia

TurkeyThailand

Chile Croatia

Philippines

Mexico

Brazil

India

Oman

Indonesia

Argentina

MalaysiaSouth Africa

Romania

Panama

Lithuania

Ukraine

CambodiaSri LankaEcuador

PeruVenezuela

MoroccoEgypt

BelizeDominican Republic

Tunisia

Syria

Libya

Costa Rica

Colombia

Guatemala

El Salvador

8.5%5.5% 6.5%

Portugal Czech Republic

Cyprus

Estonia

Latvia

HungarySlovakia

United Arab Emirates

SloveniaSouth Korea


0

10

20

30

40

50

60

ColombiaBraz

ilChil

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ta RicaChin

aTurk

eyUnit

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es

Russia

n Fed

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nGha

naLa

tvia

Vietna

mLit

huan

ia

United

Kingdo

mEsto

niaSpa

inPola

ndIre

land

Rwanda

German

yFinl

and

Norway

Czech

Rep

ublic

Sweden

Income InequalitySelected CountriesGini Index

Note: Most recent Gini index data available for each country (1999 – 2003). Czech Republic data is from 1996. Source: World Bank, World Development Indicators, 2007.

4 Copyright © 2006 Professor Michael E. PorterMOC Session 1 - 2007

0

0.1

0.2

0.3

0.4

0.5

0.6

CHINA

THAILAND

NORWAYVIETNAM

JAPAN

IRELA

ND

CZECH R

EPUBLIC

UNITED S

TATES

SWEDEN

ESTONIAKOREA

GERMANYLA

TVIA

RUSSIA

UNITED KIN

GDOMFIN

LAND

GHANACOSTA

RIC

AMALA

YSIALIT

HUANIACHILEBRAZIL

INDIA

POLAND

TURKEYLabor Force Mobilization

Selected CountriesEmployees as % of Population, 2006

Note: Use most recent year available, either 2005 or 2006

Source: The Conference Board and Groningen Growth and Development Centre, Total Economy Database, November 2007

5 Copyright 2008 © Professor Michael E. PorterCompetitiveness Master = 2007-11-14.ppt

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-1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0%

Comparative Labor ProductivitySelected Countries

Compound annual growth rate (CAGR) of real GDP per employee (PPP-adjusted), 2001-2006

GDP per employee (PPP adjusted US$),

2006

Source: EIU (2007), Saudi Arabia employee data (number persons employed) from ILO LABORSTA (2007)

USA

Czech RepublicPortugal

Italy

Sweden

NetherlandsFrance

Slovakia

Germany

Greece

Spain

New Zealand

Ireland

Australia

Austria

Hungary

Finland

Canada Denmark

Norway

Japan

UK

Turkey

Estonia

Mexico TunisiaIran

Israel

Saudi Arabia

Brazil

Bangladesh

Hong KongTaiwan Singapore

IndiaChina (9.0%)

South Africa

Slovenia

Malaysia

Egypt

PakistanPhilippines

IndonesiaVietnam

Thailand

Chile

Croatia

Belgium

ColombiaCosta Rica

Poland

Latvia (8.2%)

Sri Lanka

Lithuania


-0.06% -0.03% 0.00% 0.03% 0.06% 0.09% 0.12% 0.15% 0.18%

National Cluster Export PortfolioEstonia, 1997-2006

Change in Estonia’s world export market share, 1997 – 2006Source: 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.

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orld

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Change In Estonia’s Overall World Export Share: 0.30%

Estonia’s AverageWorld Export Share: 0.10%

Exports of US$300 Million =

Hospitality and Tourism

Automotive

Processed Foods

Business Services

Transportation and Logistics

Biopharmaceuticals

Motor Driven Products

Chemical Products

Oil & Gas

Fishing and Fishing Related Products

Information Technology

PlasticsTextiles

Forest Products

Construction Services

Building Fixtures and Equipment

Prefabricated Enclosures and Structures

Communication Services

Production Technology

0.40%

0.30%

0.20%

0.10%

Construction Materials

0%

Financial Services

Lighting and Electrical EquipmentHeavy Machinery

Medical Devices

Publishing and Printing

Entertainment

Communications Equipment

Agricultural Products

Metal Mining and Manufacturing

ApparelFootwear

Furniture(0.32%, 0.57%)


-0.25% -0.20% -0.15% -0.10% -0.05% 0.00% 0.05% 0.10% 0.15% 0.20% 0.25% 0.30%Change in Chile’s world export market share, 1997 – 2006

Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics Database and the IMF BOP statistics.

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6

Change In Chile’s Overall World Export Share: 0.15%

Chile’s Average World Export Share: 0.49%

Exports of US$1.2 Billion =

Hospitality and Tourism

Furniture

Processed Foods Business Services

Transportation and Logistics

Biopharmaceuticals

Motor Driven Products

Chemical Products

Oil and Gas

Fishing and Fishing Related Products (1.51%, 4.22%)

Agricultural Products

Plastics

Textiles

Forest Products

Prefabricated Enclosures and Structures

Communication Services (-0.41%)

Tobacco

0.13%

0.11%

Construction Materials

0%

Financial Services

Heavy Machinery

Publishing and Printing

Jewelry, Precious Metals and Collectibles

Communications Equipment

Metal Mining and Manufacturing (1.73%, 3.99%, $36 billion)

Automotive

National Cluster Export PortfolioChile, 1997-2006

Building Fixtures and Equipment

0.09%

0.07%

0.05%

0.04%

0.03%

0.02%

0.10%


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

-20% -10% 0% 10% 20% 30% 40% 50%

Source: USPTO (2008), EIU

Average U.S. patents per 1 million population, 2002-2006

CAGR of US-registered patents, 2002 – 2006

Belgium

Innovative CapacityInnovation Output of Selected Countries

Poland

Russia

Saudi Arabia

Turkey

Thailand

Chile

Croatia

Philippines

Mexico

BrazilIndia

Greece

Indonesia

Argentina

Malaysia

South Africa

Romania

Estonia

Slovenia (8.8)

Latvia LithuaniaCosta Rica

Colombia

Portugal

Czech Republic

Hungary (5.2)

Slovakia

United Arab Emirates

45 patents =

920080204 MOC Session 3 Copyright © 2006 Professor Michael E. Porter

Determinants of Competitiveness

Microeconomic CompetitivenessMicroeconomic CompetitivenessSophisticationSophisticationof Companyof Company

Operations andOperations andStrategyStrategy

State of Cluster State of Cluster DevelopmentDevelopment

Macroeconomic, Political, Legal, and Social ContextMacroeconomic, Political, Legal, and Social ContextMacroeconomic, Political, Legal, and Social Context

• A sound macroeconomic, political, legal, and social context creates the potential for competitiveness, but is not sufficient

• Competitiveness ultimately depends on improving the microeconomic capability of the economy and the sophistication of local competition

Quality of the Quality of the BusinessBusiness

EnvironmentEnvironment


Geography, Demographics, History, CultureGeography, Demographics, History, Culture

Conditions for Competitiveness

The DiamondContext for

Firm Strategy

and Rivalry

Context for Firm

Strategy and Rivalry

Related and Supporting Industries


Factor(Input)

Conditions

Factor(Input)

ConditionsDemand

ConditionsDemand

Conditions

Macroeconomic, Political, Legal, and Social Context


Governance IndicatorsSelected Countries

FINLA

NDSIN

GAPORE

UNITED STA

TESCHILE

ESTONIASLO

VENIA

CZECH R

EPUBLICLIT

HUANIALA

TVIA

COSTA R

ICA

POLAND

SOUTH AFRIC

AGHANABRAZIL

COLOMBIACHIN

ARUSSIA

INDONESIA

Voice and AccountabilityPolitical Stability/No ViolenceGovernment EffectivenessRegulatory QualityRule of LawControl of Corruption

Note: Sorted left to right by decreasing average value across all indicators. The ‘zero’ horizontal line corresponds to the median country’s average value across all indicators.Source: World Bank (2007)

Worstcountry in the world

Index of Governance

Quality,2006

Best country in the world


Improving the Business Environment: The Diamond

Context for Firm


Context for Firm




Factor(Input)

Conditions

Factor(Input)

ConditionsDemand

ConditionsDemand

Conditions

Access to high quality business inputs

– Natural endowments– Human resources– Capital availability– Physical infrastructure– Administrative infrastructure

(e.g. registration, permitting)– Information infrastructure

(e.g., transparency)– Scientific and technological

infrastructure

Availability of suppliers and supporting industriesPresence of clusters instead of isolated firms

Sophistication of local customers and needs

–Strict 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. salaries, incentives for capital investments, intellectual property protection

Vigorous local competition– Openness to foreign and local

competition


Context for Firm


Context for Firm




Factor(Input)

Conditions

Factor(Input)

ConditionsDemand

ConditionsDemand

Conditions

The Process of Economic DevelopmentUpgrading the Diamond in Developing Countries

1 14

3

2


Legacies of a Planned-Economy

Legacies of a Planned-Economy

• Economic policy is centrally directed

• Buyer/supplier linkages were planned from a national and Soviet Union perspective, versus an efficiency perspective

• The relationships between suppliers and buyers are specified in the production of defined goods and services

• The geographic locations of related economic activities driven by political and security considerations

• Companies are focused on narrow parts of the value chain, lacking marketing and other capabilities

• Economic policy is centrally directed

• Buyer/supplier linkages were planned from a national and Soviet Union perspective, versus an efficiency perspective

• The relationships between suppliers and buyers are specified in the production of defined goods and services

• The geographic locations of related economic activities driven by political and security considerations

• Companies are focused on narrow parts of the value chain, lacking marketing and other capabilities

Cluster-based EconomyCluster-based Economy

• Economic policy involves significant autonomy and well developed institutions at the regional and local level

• Regions specialize in terms of the fields in which they compete

• Clusters leverage externalities across firms, universities, and other local organizations that drive productivity and dynamism

• Geographic choices are based on the economic attractiveness of locations; firms co-locate with others to reap cluster benefits

• Company scale and scope is driven by economic efficiency, including the ability to access specialized skills available in the surrounding cluster

• Small and medium sized companiesare an essential part of clusters

• Economic policy involves significant autonomy and well developed institutions at the regional and local level

• Regions specialize in terms of the fields in which they compete

• Clusters leverage externalities across firms, universities, and other local organizations that drive productivity and dynamism

• Geographic choices are based on the economic attractiveness of locations; firms co-locate with others to reap cluster benefits

• Company scale and scope is driven by economic efficiency, including the ability to access specialized skills available in the surrounding cluster

• Small and medium sized companiesare an essential part of clusters

The Geographic Distribution of Economic ActivityLegacies of a Planned Economy


Stages Of Competitive DevelopmentEvolving Nature of International Competitive Position

Factor-Driven Economy


Investment-Driven Economy


Innovation-Driven Economy


Competitive Advantage

• Low-cost basic factor conditions (low-skilled labor, natural resources, geographic location)

• Companies compete on price in commodity markets or in producing goods and services for others

• Companies have limited roles in the value chain, focusing on assembly, labor intensive manufacturing, and resource extraction

• Technology is assimilatedthrough imports, FDI, and imitation

• The economy is highly sensitive to world economic cycles, commodity prices, and exchange rates


• The ability to produce standard products and services of high quality using efficient methods but at lower wages than advanced economies

• The economy is concentrated on manufacturing and outsourced service exports, though many firmscontinue to serve OEM customers

• There is heavy investment in efficient infrastructure and modern production processes

• Companies extend capabilitiesmore widely in the value chain

• Technology is accessed through licensing, joint ventures, FDI, and imitation, but local capacity to improve and develop technology is developed


• Companies produceinnovative products and services at the global technology frontier

• Companies compete with distinctive strategies that are often global in scope

• The national diamond is characterized by strengths in all areas together with the presence of deep clusters

• The economy has a high service share, and is resilient to external shocks

Source: Porter, Michael E., The Competitive Advantage of Nations, The Free Press, 1990


Stages Of Competitive DevelopmentShifting Policy Imperatives


FactorFactor--Driven Driven EconomyEconomy


InvestmentInvestment--Driven EconomyDriven Economy


InnovationInnovation--Driven EconomyDriven Economy

Source: Porter, Michael E., The Competitive Advantage of Nations, Macmillan Press, 1990

Cost of Inputs Productivity Unique Value

• Macro, political, and legal stability

• Efficient basic infrastructure

• Lowering the regulatory costs of doing business

• Local competition• Market openness• Advanced infrastructure• Incentives and rules

encouraging productivity• Cluster formation and

activation

• Advanced skills

• Scientific and technological institutions

• Incentives and rulesencouraging innovation

• Cluster upgrading


Building the DiamondFactor Conditions

Typical Starting Point for Developing Countries

• High reliance on the availability of low wage, unskilled labor and natural resources

• Lack of capital–Low savings–Capital flight

• Inefficient public administration and regulatory processes which are subject to corruption

• Underdeveloped infrastructure, capital markets, and educational system

• Most technology is externally supplied and controlled

• Low productivity

Factor(Input)

Conditions

Factor(Input)

Conditions

Successful Economic Development

• Erect the basic foundations for business activity– Ensuring public safety and rule of law– Functioning administrative infrastructure,

including efficient regulatory processes and secure property rights

– Business-related information• Improve the quality and increase the efficiency

of utilizing existing factor inputs– Natural resource pricing and conservation– Physical infrastructure efficiency– Quality and reach of public education – Efficiency of labor markets– Rate of national savings

• Widen the array of factor inputs available locally• Upgrade the factor quality of factors to higher

levels• Enhance factor specialization around clusters

to move to more advanced states of development



• Achieve political and (macro)economic stability• Create a multifaceted approach to reducing

corruption-- Transparency, civil service reform, enforcement

• Eliminate internal governmental impediments to competition

– End monopoly government licenses and concessions

– Phase out government price controls, entry controls, and locational restrictions

– Open state monopolies to competition– Privatize state-owned companies

• Begin an irreversible process of opening the economy to foreign competition, including FDI

• Create and implement an effective competition policy

• Develop an effective legal structure and enforcement mechanisms for intellectual property

• Reduce investment hurdle rates and lengthentime horizons

• Move beyond price cutting and product imitation to encompass availability and differentiation

Context for Firm Strategy and Rivalry

Context for Firm Strategy and Rivalry


• High levels of political and economic instability

• High capital costs and short time horizons• Opportunistic practices by firms• Competition blunted by

monopoly concessions, state-owned companies, corruption, and heavy government intervention

• Companies protected from foreign competitors• Monopolistic companies are dominant or cartels

divide the market• Any local rivalry occurs largely on price

Building the DiamondContext for Firm Strategy and Rivalry


Demand ConditionsDemand

Conditions


• Improve local demand quality:– Expand buyer information and increase

consumer protection against poor-quality products

– Open the market to foreign products– Phase out restrictions and tax biases against

sophisticated products

• Raise product, safety, health, and environmental standards towards international levels

• Use government procurement to stimulate the supply of higher quality products

• Facilitate exports to neighboring countries or other countries where needs are similar

• Support cluster formation in areas where local demand is relatively advanced due to history, customs, culture, or geography

• Set policies that foster early demand for more advanced products and services

Typical Starting Point forDeveloping Countries

• Undifferentiated products/commodities are the principle exports

• Unsophisticated local demand- Low average income levels- Little information- Limited selection- Overwhelming focus on price

• Product and service designs areimitated or licensed from abroad

• Lax product, health, safety and environmental standards

• Large home demand, where it is present, distracts attention from developing internationally competitive products

Building the DiamondDemand Conditions



• Isolated exporting firms and industries• Local suppliers are scarce and

uncompetitive • Most sophisticated machinery,

components, and more advanced equipment and services must be imported

• Clusters are shallow or non-existent– Unproductive local suppliers create

disadvantages for downstream industries

• Inefficient vertical integration reflects the lack of local suppliers and barriers to imported inputs

• Early export successes often occur in industries with weak inter-industry linkages




• Open market access to foreignsuppliers of sophisticated components, machinery, and services

• Seek FDI that attracts world class suppliers to support and deepen emerging local clusters

• Establish programs to support improvements in the local supplier base

• Well-developed clusters are important to move beyond lower-middle income levels

Building the DiamondRelated and Supporting Industries


Improving Company SophisticationRelative Position of Estonian Companies, 2007

Value chain breadth 46Breadth of international markets 45Control of international distribution 45Nature of competitive advantage 45Prevalence of foreign technology 40 licensingExtent of regional sales 39Capacity for innovation 35Extent of marketing 35Company spending on research and 33 developmentExtent of incentive compensation 31Production process sophistication 30Extent of staff training 29Willingness to delegate authority 29

Competitive Disadvantages Relative to GDP per Capita

Competitive Advantages Relative to GDP per Capita

Change up/down of more than 5/10 ranks since 2002

Note: Rank versus 74 countries; overall, Estonia ranks 30th in 2006 PPP adjusted GDP per capita and 25h in Business Competitiveness.Source: Institute for Strategy and Competitiveness, Harvard University (2007)

Degree of customer orientation 25Reliance on professional management 26


Laws relating to ICT 3Decentralization of economic policymaking 7Ease of access to loans 16Quality of primary education 18Quality of math and science education 18Cooperation in labor-employer relations 21Venture capital availability 21Quality of port infrastructure 22Efficiency of legal framework 22Quality of telephone/fax infrastructure 24Judicial independence 24Low business costs of corruption 24Local equity market access 26Quality of scientific research institutions 27Financial market sophistication 27Overall infrastructure quality 28



Availability of scientists and engineers 49Air transport infrastructure quality 40Reliability of police services 33Railroad infrastructure 32Quality of electricity supply 31Quality of management schools 31University/industry research collaboration 29

Factor (Input) ConditionsEstonia’s Relative Position 2007

Factor(Input)

Conditions

Factor(Input)

Conditions




Demand ConditionsEstonia’s Relative Position 2007



Demand ConditionsDemand

Conditions

Government procurement of advanced 18 technology products

Stringency of environmental regulations 27



Buyer sophistication 38

Presence of demanding regulatory 31 standards


Related and Supporting IndustriesEstonia’s Relative Position 2007







Local availability of specialized research 26 and training services

Local supplier quantity 43

Local availability of process machinery 43

Local supplier quality 33


Context for Strategy and RivalryEstonia’s Relative Position 2007

Absence of trade barriers 14

Intensity of local competition 24

Intellectual property protection 28



Extent of market dominance 34

Lack of favoritism in decisions of 32 government officials

Property rights 32

Efficacy of corporate boards 31

Effectiveness of antitrust policy 29

Context for Firm Strategy

and Rivalry

Context for Firm Strategy

and Rivalry




0

20

40

60

80

100

120

140

160

DoingBusiness

TradingAcrossBorders

Dealingwith

Licenses

Starting aBusiness

RegisteringProperty

EnforcingContracts

PayingTaxes

ProtectingInvestors

GettingCredit

Closing aBusiness

EmployingWorkers

Ease of Doing BusinessEstonia, 2007

Ranking, 2007 (of 178 countries)

Source: World Bank Report, Doing Business (2008)

Favorable Unfavorable

Median Ranking, Eastern and Central Europe

Estonia’s per capita GDP rank: 25

27 Copyright 2006 © Professor Michael E. PorterMOC Session 1 - 2007

• The diamond framework applies to economies at all stages of economic development

• The specific conditions and action recommendations generated from applying the framework, however, differs dramatically across countries and stages of development

• Developing countries must raise the macro / political / legal / social context to a minimum level to have a chance for sustained development

• Developing countries have weaknesses across many diamond dimensions

• Strategies that address only one element of the diamond are of limited effectiveness in producing growth– A focus on macroeconomic elements or trade liberalization alone is ultimately

unsustainable if not supported by broader upgrading of the microeconomic fundamentals

– Reliance on microeconomic upgrading alone will often be severely compromisedby significant challenges in macroeconomic, political, or legal context

• Diamond improvements should be sequenced to address the binding constraints to productivity at each income level

The Diamond in Developing CountriesSummary

18 de frebrero diamond model developing economies

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