Download Creating A Competitive South Africa

Creating A Competitive South Africa
Professor Michael E. Porter
Institute for Strategy and Competitiveness
Harvard Business School
Johannesburg, South Africa
3 July 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
South Africa CAON 2007 07-02-07.ppt
1
Copyright 2007 © Professor Michael E. Porter
The Changing Nature of International Competition
Drivers
Market
reaction
•
Fewer barriers to trade and investment
•
Rapidly increasing stock and diffusion of knowledge
•
Competitiveness upgrading in many countries
•
Globalization of markets
•
Globalization of capital investment
•
Globalization of value chains
•
Increasing knowledge and skill intensity of competition
•
Value migrating to the service component of the value chain
• Improving competitiveness is increasingly essential to South Africa’s
prosperity
South Africa CAON 2007 07-02-07.ppt
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Copyright 2007 © Professor Michael E. Porter
Prosperity Performance
Selected Countries
Real PPP-adjusted GDP per
Capita, 2006
$16,000
Botswana
$14,000
South Africa
$12,000
Russia
(7.2%)
$10,000
Brazil
$8,000
Gabon
Namibia
$4,000
$2,000
Cape Verde
Swaziland
$6,000
Zimbabwe
(-6.3%)
Cote D’Ivoire
Togo
Eritrea
$0
-4%
-3%
Guinea
MadagascarKenya
Burundi
Malawi
-2%
China
(8.6%)
-1%
0%
1%
Mauritius
Cameroon
Lesotho
Rwanda
2%
India
Chad Angola
Ghana
(6.2%)
Uganda
Tanzania
Nigeria
Mozambique
Zambia
Ethiopia
3%
4%
5%
6%
Growth of Real GDP per Capita (PPP-adjusted), CAGR, 1998-2006
Source: EIU (2007)
South Africa CAON 2007 07-02-07.ppt
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Copyright 2007 © Professor Michael E. Porter
Comparative Economic Performance
Real GDP Growth Rates
Countries sorted by 20012006 annual real GDP
growth rate (CAGR)
Annual growth rate
of real GDP
20%
15%
10%
5%
0%
-5%
-10%
-15%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
ANGOLA
MOZAMBIQUE
TANZANIA
NIGERIA
ETHIOPIA
UGANDA
BURKINA FASO
GHANA
CAPE VERDE
MALAWI
BOTSWANA
NAMIBIA
RWANDA
CONGO (BRAZZAVILLE)
ZAMBIA
SOUTH AFRICA
SENEGAL
SAO TOME AND PRINCIPE
KENYA
BENIN
THE GAMBIA
CAMEROON
MAURITIUS
GUINEA
BURUNDI
LESOTHO
TOGO
SWAZILAND
MADAGASCAR
ERITREA
GABON
COTE D'IVOIRE
ZIMBABWE
Source: EIU (2007)
South Africa CAON 2007 07-02-07.ppt
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Copyright 2007 © Professor Michael E. Porter
Income Inequality
Selected Countries
Gini Index
70
60
50
40
30
20
10
Br
az
il
ut
h
Af
r ic
a
C
hi
le
Ar
ge
nt
in
a
M
ex
M
ic
ad
o
ag
as
ca
r
C
hi
C
na
ot
e
d'
Iv
oi
r
C
am e
er
oo
n
N
ig
er
ia
U
ga
nd
a
Za
m
Bu
bi
rk
a
in
a
Fa
so
G
ha
na
M
au
rit
an
ia
Be
n
Ta i n
nz
an
ia
In
do
ne
sia
Et
hi
op
ia
R
wa
nd
a
So
H
ai
ti
0
Note: Most recent Gini index data available for each country (1999 – 2003). South Africa’s data is from 2000.
Source: World Bank, World Development Indicators, 2007.
South Africa CAON 2007 07-02-07.ppt
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Copyright 2007 © Professor Michael E. Porter
South African Economy 2007
•
Economic growth rates are solid and have reached a higher path
since 2003, driven increasingly by domestic demand
•
A combination of domestic policies and supportive conditions in the
global economy have driven growth
However
•
Growth rates have not been exceptional compared to other middle
income and natural resource-rich countries
•
Domestic demand growth is threatening to create unsustainable
external balances; export capacity needs to broaden and grow
•
Unemployment, inequality, and the social tensions they create
recede only slowly
•
Is South Africa improving competitiveness fast enough to avoid
the risk of macroeconomic and political instability?
South Africa CAON 2007 07-02-07.ppt
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Copyright 2007 © Professor Michael E. Porter
What is Competitiveness?
•
Competitiveness is determined by the productivity (value per unit of input) with which a
nation uses its human, capital, and natural resources.
– Productivity sets a the standard of living (wages, returns on capital, returns on natural
resources) that a nation can sustain
– Productivity depends on the prices that a nation’s products and services command (e.g.
uniqueness, 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
– Devaluation does not make a country more competitive
• Only business can create wealth
• 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
20070511 AMP – Final 20070508
7
Copyright © 2007 Professor Michael E. Porter
Decomposing Prosperity
• Standard of living
• Inequality
Prosperity
Prosperity
Domestic
Domestic
Purchasing
Purchasing
Power
Power
Per
PerCapita
CapitaIncome
Income
• Consumption taxes
• Local prices
– Efficiency of local
industries
– Level of local market
competition
Labor
Labor
Utilization
Utilization
Labor
Labor
Productivity
Productivity
• Skills
• Capital stock
• Total factor productivity
South Africa CAON 2007 07-02-07.ppt
• Working hours
• Unemployment
• Workforce participation rate
– Population age profile
8
Copyright 2007 © Professor Michael E. Porter
Comparative Labor Productivity Performance
Selected Developing Countries
70,000
60,000
Taiwan
Spain
Japan
Slovenia
50,000
South Africa
Hungary
Portugal
GDP per
employee 40,000
(PPP
adjusted)
in US-$,
2006
30,000
Croatia
Estonia
Latvia
Chile
Turkey
Malaysia
Mexico
20,000
Singapore
Brazil
Thailand
Mauritius
10,000
Indonesia
0
-2%
0%
2%
4%
China
India
6%
8%
10%
Compound annual growth rate (CAGR) of real GDP per employee (PPPadjusted), 2001-2006
Source: EIU (2007)
South Africa CAON 2007 07-02-07.ppt
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Copyright 2007 © Professor Michael E. Porter
Unemployment Performance
Selected Countries
Unemployment
Rate, 2006
35%
Macedonia
Improving
Worsening
30%
Honduras
(14%)
South Africa
25%
20%
Tunisia
Croatia
Poland
Paraguay
15%
Indonesia
Colombia
Brazil
10%
Russia
5%
Mauritius
India
Estonia
China
Turkey
Chile
Latvia
Malaysia
0%
-5%
Thailand
-3%
-1%
1%
3%
5%
7%
9%
Change of Unemployment Rate in Percentage Points,
1998 - 2006
Source: EIU (2007)
South Africa CAON 2007 07-02-07.ppt
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Copyright 2007 © Professor Michael E. Porter
Labor Force Mobilization
Selected Countries
Employees as % of Population, 2006
0.7
0.6
0.5
0.4
0.3
0.2
0.1
C
HI
NA
BR
AZ
IL
ES
TO
NI
A
LA
TV
IA
TA
N
ZA
N
IA
G
H
M
AN
O
ZA
A
M
BI
Q
U
E
IN
D
IA
U
G
AN
D
M
A
AU
RI
TI
US
G
AB
O
N
ZA
M
SE BIA
N
EG
AL
AN
G
O
C
LA
AM
ER
C
O
O
TE
O
N
D'
SO
IV
O
U
IR
TH
E
AF
RI
CA
N
IG
ER
IA
N
AM
IB
ZI
IA
M
BA
BW
E
0
Source:
EIU,2007
2007
South Africa CAON
07-02-07.ppt
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Copyright 2007 © Professor Michael E. Porter
Domestic Purchasing Power
Normalized Purchasing Power Across Countries
Purchasing Power Factor,
2006, (USD = 1)
Higher 0.9
Cost of
Living
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
Br
az
il
Li
by
a
An
go
la
Za
m
bi
a
M
al
i
N
am
ib
ia
M
au
rit
iu
s
Su
da
n
Se
ne
ga
l
C
ha
d
Ta
nz
So ania
ut
h
Af
ric
a
Al
ge
r
C
am ia
er
oo
n
Ke
ny
a
N
ig
er
0
In
di
a
C
hi
na
Lower
Cost of
Living
Source: IMF (2007), authors’ calculations
South Africa CAON 2007 07-02-07.ppt
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Copyright 2007 © Professor Michael E. Porter
Enablers and Indicators of Competitiveness
Productivity
Exports
Inbound
Foreign Direct
Investment
Domestic
Investment
Outbound
Foreign Direct
Investment
Domestic
Innovation
Competitiveness Environment
South Africa CAON 2007 07-02-07.ppt
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Copyright 2007 © Professor Michael E. Porter
South African Export Performance
1994 - 2005
World Export
Market Share
0.7%
0.6%
0.5%
0.4%
Goods
Services
TOTAL
0.3%
0.2%
0.1%
0.0%
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Source: WTO (2007)
South Africa CAON 2007 07-02-07.ppt
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Copyright 2007 © Professor Michael E. Porter
Inbound Foreign Investment Performance
FDI Stocks as % of GDP,
Average 2002 - 2005
Stocks and Flows, Selected Countries
70%
Angola
(94%, 80%)
Gambia
Tunisia
Namibia
60%
Zambia
Eritrea
50%
Tanzania
Nigeria
Lesotho
40%
Swaziland
Morocco
Mozambique
Australia
30%
Canada
Zimbabwe
South Africa
Malawi
Ghana
20%
10%
Russia
Senegal
Rwanda
Mauritius
Cameroon
Kenya
0%
0%
Egypt
Brazil
Ethiopia
Sudan
Uganda
Uganda
China
Madagascar
Congo
Mali
Botswana
Algeria
India
Niger
Libya
5%
10%
15%
20%
25%
30%
35%
40%
FDI Inflows as % of Gross Fixed Capital Formation, Average 2002 - 2005
Source: UNCTAD (2007)
South Africa CAON 2007 07-02-07.ppt
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Copyright 2007 © Professor Michael E. Porter
Fixed Investment Rates
Selected Countries
Gross Fixed Investment as
% of GDP
45
Sorted by 2006 Share
China
Senegal
40
Ghana
India
35
Zambia
Namibia
30
Nigeria
25
The Gambia
Uganda
20
Mozambique
Ethiopia
15
Kenya
Tanzania
10
Botswana
South Africa
5
Russia
Brazil
0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Zimbabwe
Source: EIU, 2007.
South Africa CAON 2007 07-02-07.ppt
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Copyright 2007 © Professor Michael E. Porter
International Patenting Output
Selected Countries
Annual U.S. patents per 1
million population, 2005
4.0
3.5
Malaysia
3.0
2.5
Croatia
South Africa
2.0
1.5
Russia
Mexico
1.0
0.5
India
China
Chile
Brazil
0.0
-10%
Latvia
Indonesia
Turkey
Thailand
0%
10%
20%
30%
Compound annual growth rate of US-registered patents, 1998 – 2005
Source: USPTO, 2006
South Africa CAON 2007 07-02-07.ppt
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Copyright 2007 © Professor Michael E. Porter
South Africa’s Economic Performance
Core components of prosperity
•
Productivity is comparable versus peers but growing less dynamically
•
The mobilization of the working age population remains dramatically lower
•
Labor mobilization is becoming more crucial for future prosperity growth, but
job creation still lags the growth of the available labor force
Indicators and enablers of competitiveness
•
South Africa’s export share has been flat, despite the country’s focus on
growing natural resource-driven clusters
•
Inward foreign direct investment has increased in recent years, but South
Africa still remains well below its potential
•
Domestic investment is increasing, but continues to fall short of peer countries
and the benchmark set by the government
•
Innovation output is falling behind peer countries
•
South Africa continues to suffer from a ‘two-economy phenomena’
– A formal economy with relatively solid productivity close to global standards
– An informal economy with low productivity that provides jobs for a large
share of the population, especially the poor
South Africa CAON 2007 07-02-07.ppt
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Copyright 2007 © Professor Michael E. Porter
Determinants of Competitiveness
Macroeconomic,
Macroeconomic, Political,
Political, Legal,
Legal, and
and Social
Social Context
Context
Microeconomic
Microeconomic Competitiveness
Competitiveness
Sophistication
of Company
Operations and
Strategy
Quality of the
Business
Environment
State of Cluster
Development
• A sound 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
South Africa CAON 2007 07-02-07.ppt
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Copyright 2007 © Professor Michael E. Porter
Governance Indicators
Selected Countries
Voice and Accountability
Political Stability/No Violence
Government Effectiveness
Regulatory Quality
Rule of Law
Control of Corruption
Better
Index of
Governance
Quality,
2006
BO
TS
SO MA W
U UR ANA
TH I
AF TIU
S
N RIC
AM A
M
AD G IB
AG HA IA
A N
LE S C A
S A
SE O T R
N HO
BU
EG
R
K I M AL
N A
A L
FA I
M
O B SO
ZA E
M NI
BI N
M G QU
AU A E
B
RI O
T N
G AN
TA AM IA
N BI A
Z
M AN
AL IA
ZA AW
M I
SW N BIA
AZ IGE
I R
U LAN
G D
AN
C K DA
AM E
N
ER YA
R O
W O
N
ET AN
D
H A
IO
P
T IA
AN OG
G O
N OL
IG A
C
B U ER
O
N Z R IA
G IM U
O B N
,D A D
EM B W I
.R E
EP
.
Worse
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)
South Africa CAON 2007 07-02-07.ppt
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Copyright 2007 © Professor Michael E. Porter
Prosperity and Human Development
Selected Countries
Note: Percentages are relative to best country in the world
Source: UNDP (2006)
South Africa CAON 2007 07-02-07.ppt
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Copyright 2007 © Professor Michael E. Porter
Improving the Business Environment: The Diamond
Context
Context for
for
Firm
Firm
Strategy
Strategy
and
and Rivalry
Rivalry
z
Factor
Factor
(Input)
(Input)
Conditions
Conditions
z
Presence of high quality,
specialized inputs available
to firms
–Human resources
–Capital resources
–Physical infrastructure
–Administrative infrastructure
–Information infrastructure
–Scientific and technological
infrastructure
–Natural resource availability
z
z
A local context and rules that
encourage investment and
productivity
–e.g., Intellectual property
Demand
Demand
protection
Conditions
Meritocratic incentive systems in
Conditions
businesses and other institutions
Open and vigorous local
z Local demand with improving
competition
sophistication
–e.g., Anti-monopoly laws,
z Local customer needs that
openness to imports
anticipate those elsewhere
z Unusual local demand in
Related
Related and
and
specialized segments that can be
Supporting
Supporting
served nationally and globally
Industries
Industries
z
Access to capable, locally based suppliers
and firms in related fields
• Successful economic development is a process of successive upgrading, in which the
business environment improves to enable increasingly sophisticated ways of competing
South Africa CAON 2007 07-02-07.ppt
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Copyright 2007 © Professor Michael E. Porter
Factor
Factor
(Input)
(Input)
Conditions
Conditions
Factor (Input) Conditions
South Africa’s Relative Position 2006
Competitive Advantages
Relative to GDP per Capita
Competitive Disadvantages
Relative to GDP per Capita
Country Ranking, Arrows
indicate a change of 5 or more
ranks since 2001
Country Ranking, Arrows
indicate a change of 5 or more
ranks since 2001
Local equity market access
12
Quality of math and science education
119
Efficiency of legal framework
16
Availability of scientists and engineers
96
Financial market sophistication
18
Quality of public schools
89
University/industry research collaboration 22
Reliability of police services
86
Quality of management schools
22
Telephone/fax infrastructure quality
83
Judicial independence
22
Quality of electricity supply
68
Air transport infrastructure quality
24
Port infrastructure quality
43
Quality of scientific research institutions
25
Overall infrastructure quality
41
Railroad infrastructure development
40
Ease of access to loans
37
Venture capital availability
35
Note: Rank versus 121 countries; overall, South Africa ranks 33rd in 2005 PPP adjusted GDP per capita and 46th in Business Competitiveness.
Source: Global Competitiveness Report 2006-2007.
23
South Africa CAON 2007 07-02-07.ppt
Copyright 2007 © Professor Michael E. Porter
Weaknesses in South Africa’s Labor Market
•
South Africa continues to struggle with high unemployment and a
significant informal economy
•
Skill shortages are a clear reason for the persistent unemployment; a
large share of the unemployed are low-skilled long-term unemployed
• Labor market rules and regulations are major causes of low job
creation in the economy
– Hiring and firing rules and work procedures are comparable to peer
countries; especially after the 2002 modifications to the legislation of the
initial post-apartheid period
– Wage policies, which set unrealistically high minimum wages and
uneconomic wage structures within industries, are a serious barrier
•
Rising unit labor costs, despite persistently high unemployment, is a sign
of clear structural problems in South Africa’s labor market
South Africa CAON 2007 07-02-07.ppt
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Copyright 2007 © Professor Michael E. Porter
Context
Contextfor
for
Firm
Strategy
Firm Strategy
and
andRivalry
Rivalry
Context for Strategy and Rivalry
South Africa’s Relative Position 2006
Competitive Advantages
Relative to GDP per Capita
Competitive Disadvantages
Relative to GDP per Capita
Country Ranking, Arrows
indicate a change of 5 or more
ranks since 2001
Country Ranking, Arrows
indicate a change of 5 or more
ranks since 2001
Efficacy of corporate boards
8
Cooperation in labor-employer relations
107
Effectiveness of antitrust policy
19
Centralization of economic policymaking
79
Intellectual property protection
23
48
Business costs of corruption
33
Favoritism in decisions of government
officials
Decentralization of corporate activity
34
Prevalence of trade barriers
38
Intensity of local competition
35
Note: Rank versus 121 countries; overall, South Africa ranks 33rd in 2005 PPP adjusted GDP per capita and 46th in Business Competitiveness.
Source: Global Competitiveness Report 2006-2007.
25
South Africa CAON 2007 07-02-07.ppt
Copyright 2007 © Professor Michael E. Porter
Ease of Doing Business
South Africa
Ranking, 2006 (of
175 countries)
Favorable
Unfavorable
140
Median Ranking,
Sub-Saharan Africa
120
100
80
60
South Africa’s GNI per capita rank: 54
40
20
0
Doing
Business
Protecting Obtaining
Investors
Credit
Enforcing
Contracts
Dealing
with
Licenses
Starting a
Business
Closing a
Business
Trading
Across
Borders
Registering
Property
Paying
Taxes
Employing
Workers
Source: World Bank Doing Business (2007)
South Africa CAON 2007 07-02-07.ppt
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Copyright 2007 © Professor Michael E. Porter
Demand
Demand
Conditions
Conditions
Demand Conditions
South Africa’s Relative Position 2006
Competitive Advantages
Relative to GDP per Capita
Competitive Disadvantages
Relative to GDP per Capita
Country Ranking, Arrows
indicate a change of 5 or more
ranks since 2001
Laws relating to ICT
26
Stringency of environmental regulations
32
Government procurement advanced
technology products
32
Presence of demanding regulatory
standards
34
Buyer sophistication
34
Note: Rank versus 121 countries; overall, South Africa ranks 33rd in 2005 PPP adjusted GDP per capita and 46th in Business Competitiveness.
Source: Global Competitiveness Report 2006-2007.
27
South Africa CAON 2007 07-02-07.ppt
Copyright 2007 © Professor Michael E. Porter
Related
Relatedand
and
Supporting
Supporting
Industries
Industries
Related and Supporting Industries
South Africa’s Relative Position 2006
Competitive Advantages
Relative to GDP per Capita
Competitive Disadvantages
Relative to GDP per Capita
Country Ranking, Arrows
indicate a change of 5 or more
ranks since 2001
Local supplier quantity
23
Local supplier quality
28
Local availability of specialized research
and training services
31
Country Ranking, Arrows
indicate a change of 5 or more
ranks since 2001
Local availability of process machinery
Note: Rank versus 121 countries; overall, South Africa ranks 33rd in 2005 PPP adjusted GDP per capita and 46th in Business Competitiveness.
Source: Global Competitiveness Report 2006-2007.
28
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Copyright 2007 © Professor Michael E. Porter
Company Operations and Strategy
South Africa’s Relative Position 2006
Competitive Advantages
Relative to GDP per Capita
Competitive Disadvantages
Relative to GDP per Capita
Country Ranking, Arrows
indicate a change of 5 or more
ranks since 2001
Country Ranking, Arrows
indicate a change of 5 or more
ranks since 2001
Extent of incentive compensation
4
Presence across the value chain
83
Prevalence of foreign technology
licensing
11
Nature of competitive advantage
73
Degree of customer orientation
52
Reliance on professional management
13
Production process sophistication
46
Extent of regional sales
15
Control of international distribution
37
Extent of marketing
20
Capacity for innovation
35
Company spending on research and
development
22
Extent of staff training
24
Willingness to delegate authority
27
Breadth of international markets
29
Note: Rank versus 121 countries; overall, South Africa ranks 33rd in 2005 PPP adjusted GDP per capita and 46th in Business Competitiveness.
Source: Global Competitiveness Report 2006-2007.
29
South Africa CAON 2007 07-02-07.ppt
Copyright 2007 © Professor Michael E. Porter
Determinants of Competitiveness
Macroeconomic,
Macroeconomic, Political,
Political, Legal,
Legal, and
and Social
Social Context
Context
Microeconomic
Microeconomic Competitiveness
Competitiveness
Sophistication
of Company
Operations and
Strategy
Quality of the
Business
Environment
State of Cluster
Development
South Africa CAON 2007 07-02-07.ppt
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Copyright 2007 © Professor Michael E. Porter
Enhancing Cluster Development
Tourism Cluster in Cairns, Australia
Public
Public Relations
Relations &&
Market
Market Research
Research
Services
Services
Travel
Travel agents
agents
Tour
Tour operators
operators
Restaurants
Restaurants
Attractions
Attractions and
and
Activities
Activities
Food
Food
Suppliers
Suppliers
e.g.,
e.g., theme
theme parks,
parks,
casinos,
sports
casinos, sports
Property
Property
Services
Services
Maintenance
Maintenance
Services
Services
Airlines,
Airlines,
Cruise
Cruise Ships
Ships
Hotels
Hotels
Local
Local retail,
retail,
health
health care,
care, and
and
other
other services
services
Local
Local
Transportation
Transportation
Souvenirs,
Souvenirs,
Duty
Duty Free
Free
Banks,
Banks,
Foreign
Foreign
Exchange
Exchange
Government
Government agencies
agencies
Educational
Educational Institutions
Institutions
Industry
Industry Groups
Groups
e.g.
e.g. Australian
Australian Tourism
Tourism Commission,
Commission,
Great
Great Barrier
Barrier Reef
Reef Authority
Authority
e.g.
e.g. James
James Cook
Cook University,
University,
Cairns
Cairns College
College of
of TAFE
TAFE
e.g.
e.g. Queensland
Queensland Tourism
Tourism
Industry
Industry Council
Council
Sources: HBS student team research (2003) - Peter Tynan, Chai McConnell, Alexandra West, Jean Hayden
South Africa CAON 2007 07-02-07.ppt
31
Copyright 2007 © Professor Michael E. Porter
Enhancing Cluster Development
California Wine Cluster
Grapestock
Grapestock
Fertilizer,
Fertilizer, Pesticides,
Pesticides,
Herbicides
Herbicides
State Government Agencies
(e.g., Select Committee on Wine
Production and Economy)
Winemaking
Winemaking
Equipment
Equipment
Barrels
Barrels
Bottles
Bottles
Caps
Caps and
and Corks
Corks
Grape
Grape Harvesting
Harvesting
Equipment
Equipment
Labels
Labels
Irrigation
Irrigation Technology
Technology
Growers/Vineyards
Growers/Vineyards
Wineries/Processing
Wineries/Processing
Facilities
Facilities
Public
Public Relations
Relations and
and
Advertising
Advertising
Specialized
SpecializedPublications
Publications
(e.g.,
(e.g.,Wine
WineSpectator,
Spectator,
Trade
TradeJournal)
Journal)
California
California
Agricultural
Agricultural Cluster
Cluster
Educational,
Educational, Research,
Research, && Trade
Trade
Organizations
Organizations (e.g.
(e.g. Wine
Wine Institute,
Institute,
UC
UC Davis,
Davis, Culinary
Culinary Institutes)
Institutes)
Tourism
Tourism Cluster
Cluster
Food
Food Cluster
Cluster
Sources: California Wine Institute, Internet search, California State Legislature. Based on research by MBA
1997 students R. Alexander, R. Arney, N. Black, E. Frost, and A. Shivananda.
South Africa CAON 2007 07-02-07.ppt
32
Copyright 2007 © Professor Michael E. Porter
The Kenyan Cut Flower Cluster
Trade Performance
Kenyan Cut Flower
Exports in thousand US $
Kenyan Cut Flower
World Export Market Share
4.5%
$250,000
4.0%
$200,000
3.5%
3.0%
$150,000
2.5%
2.0%
Value
Market Share
$100,000
1.5%
1.0%
$50,000
0.5%
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
0.0%
1990
$0
Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business School;
Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics Database.
South Africa CAON 2007 07-02-07.ppt
33
Copyright 2007 © Professor Michael E. Porter
Kenya’s Cut Flower Cluster
Sources: HBS student team research (2007) - Kusi Hornberger, Nick Ndiritu, Lalo Ponce-Brito, Melesse Tashu, Tijan Watt
South Africa CAON 2007 07-02-07.ppt
34
Copyright 2007 © Professor Michael E. Porter
Institutions for Collaboration
Selected Massachusetts Organizations, Life Sciences
Life
Life Sciences
Sciences Industry
Industry Associations
Associations
University
University Initiatives
Initiatives
Harvard
Harvard Biomedical
Biomedical Community
Community
zz MIT
MIT Enterprise
Enterprise Forum
Forum
zz Biotech
Biotech Club
Club at
at Harvard
Harvard Medical
Medical School
School
zz Technology
Technology Transfer
Transfer offices
offices
zz
Massachusetts
Massachusetts Biotechnology
Biotechnology Council
Council
zz Massachusetts
Massachusetts Medical
Medical Device
Device Industry
Industry
Council
Council
zz Massachusetts
Massachusetts Hospital
Hospital Association
Association
zz
General
General Industry
Industry Associations
Associations
Informal
Informal networks
networks
Associated
Associated Industries
Industries of
of Massachusetts
Massachusetts
zz Greater
Greater Boston
Boston Chamber
Chamber of
of Commerce
Commerce
zz High
High Tech
Tech Council
Council of
of Massachusetts
Massachusetts
Company
Company alumni
alumni groups
groups
zz Venture
Venture capital
capital community
community
zz University
University alumni
alumni groups
groups
zz
zz
Economic
Economic Development
Development Initiatives
Initiatives
Joint
Joint Research
Research Initiatives
Initiatives
Massachusetts
Massachusetts Technology
Technology Collaborative
Collaborative
zz Mass
Mass Biomedical
Biomedical Initiatives
Initiatives
zz Mass
Mass Development
Development
zz Massachusetts
Massachusetts Alliance
Alliance for
for Economic
Economic
Development
Development
zz
South Africa CAON 2007 07-02-07.ppt
New
New England
England Healthcare
Healthcare Institute
Institute
zz Whitehead
Whitehead Institute
Institute For
For Biomedical
Biomedical
Research
Research
zz Center
Center for
for Integration
Integration of
of Medicine
Medicine and
and
Innovative
Innovative Technology
Technology (CIMIT)
(CIMIT)
zz
35
Copyright 2007 © Professor Michael E. Porter
South Africa Cluster Portfolio Measured by Exports
Goods and Services Exports, 2000-2005
South Africa’s world export market share, 2005
2.00%
Coal and
Briquettes
(7.13%, +0.79%)
Change In South Africa’s Overall
World Export Share: +0.058%
Metal Mining and
Manufacturing
1.50%
Jewelry, Precious Metals
and Collectibles
(4.74%, +2.67%)
Prefabricated Enclosures
and Structures
1.00%
Forest
Products
Chemical
Products
Agricultural
Products
Hospitality and
Tourism
Tobacco
Fishing and Fishing Products
Building Fixtures and Equipment
0.50%
South Africa’s Average
World Export Share: 0.512%
Aerospace Vehicles and Defense
Automotive
Publishing and Printing
Transportation and Logistics
Leather and Construction Materials
Related Products
Financial
Services
Production Technology
Aerospace Engines
Oil and Gas Products
0.00%
-0.40%
-0.20%
0.00%
0.20%
0.40%
Change in South Africa’s world export market share, 2000 – 2005
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. Note: Services data 1997-2005.
36
South Africa CAON 2007 07-02-07.ppt
0.60%
Exports of $2Billion =
Copyright 2007 © Professor Michael E. Porter
South Africa Cluster Portfolio Measured by Exports
Goods and Services Exports, 2000-2005 (continued)
South Africa’s world export market share, 2005
0.50%
Building Fixtures and Equipment
Change In South Africa’s
Overall World Export
Share: +0.058%
0.40%
Heavy Machinery
Transportation and Logistics
0.30%
Processed Food
Textiles
Plastics
0.20%
Motor Driven Products
Furniture
Power and Power
Generation Equipment
Business
Services
0.10%
Marine Equipment
Biopharmaceuticals
Communications
Equipment
Communications
Services
Analytical Instruments
Lighting and
Electrical Equipment
Aerospace Engines
Medical Devices
Apparel
Entertainment and
Reproduction Equipment
Sporting, Recreational
and Children's Goods
Footwear
Information
Technology
0.00%
-0.10%
-0.08%
-0.06%
-0.04%
-0.02%
0.00%
0.02%
Change in South Africa’s world export market share, 2000 – 2005
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. Note: Services data 1997-2005.
37
South Africa CAON 2007 07-02-07.ppt
0.04%
0.06%
Exports of $2Billion =
Copyright 2007 © Professor Michael E. Porter
The South African Wine Cluster
Trade Performance
South African Wine
Exports in thousand US $
South African Wine
World Export Market
Share
$700,000
3.0%
$600,000
2.5%
$500,000
2.0%
$400,000
Value
1.5%
Market Share
$300,000
1.0%
$200,000
0.5%
$100,000
$0
0.0%
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
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.
South Africa CAON 2007 07-02-07.ppt
38
Copyright 2007 © Professor Michael E. Porter
The South African Wine Cluster
Changing Government Roles
• Until 1997, the South African wine industry was highly regulated through KWV
(wine grower’s cooperative):
• Regulated prices
• Quotas
• Regulated planting
Æ Surpluses and inefficient production
• After 1997, full deregulation occurred. In 2003, the Ministry of Agriculture
announced the Wine Industry Strategic Plan (WIP), a new wine policy around:
• Competitiveness
• Black Economic Empowerment (BEE)
• Resource management
• Enhanced responsibility devolved to institutions for collaboration, especially
South African Wine and Brandy Company (SAWB)
Source: Harvard students Mutsa Chironga, Maria Demeke, Christopher Maloney, Leigh C. Miselis, and Markus Scheuermaier
South Africa CAON 2007 07-02-07.ppt
39
Copyright 2007 © Professor Michael E. Porter
Ranking Microeconomic Competitiveness
Business
2005 GDP per Capita
(Purchasing Power Adjusted)
45,000
Competitiveness Index, 2006
Norway
40,000
Variation in BCI score explains more
than 80% of variation in GDP per capita
Iceland
35,000
Ireland
Canada
Australia
Qatar
30,000
UAE
Spain
Italy
25,000
New Zealand
Greece
Cyprus
Bahrain
20,000
15,000
Taiwan
Estonia
South Africa
Turkey Thailand
China
Switzerland
Finland
Japan
Germany
Sweden
Singapore
S. Korea
Chile
5,000
Denmark
Israel
Slovenia
Trinidad & Tobago
Argentina
10,000
United States
Jordan
Malaysia
Brazil
Indonesia
Jamaica
India
0
Low
Business Competitiveness Index
High
Source: Global Competitiveness Report 2006
South Africa CAON 2007 07-02-07.ppt
40
Copyright 2007 © Professor Michael E. Porter
Competitive Dynamism
Rate of Competitiveness Improvement
BCI Value, 2006
High
Level of
Competitiveness
United States
Finland
Sweden
Germany
Switzerland
Iceland
Australia
New Zealand
Japan
Ireland
Chile
Spain
Hong Kong
Norway
Malaysia
Estonia
Portugal
India
South Africa
Thailand
Slovak Republic
Greece
Lithuania
Turkey
Mauritius
Brazil
Uruguay
El Salvador
China
Trinidad
Pakistan
Peru
Russia
Dominican Rep.
Argentina
Nigeria
Vietnam
Ukraine
Mali
Nicaragua
Malawi
Mozambique
Zimbabwe
Honduras
Bolivia
Bangladesh
Paraguay Ethiopia
Italy
Low
Level of
Competitiveness
High-income
Middle-income
Low-income
Slovenia
Jordan
Colombia
Chad
Below average
Average
Above average
Dynamism Score, 2002 - 2006
Source: Global Competitiveness Report (2006)
South Africa CAON 2007 07-02-07.ppt
41
Copyright 2007 © Professor Michael E. Porter
South African Competitiveness in 2007
Overall competitiveness
•
South Africa is ranked 33rd in the Business Competitiveness Index,
down three ranks since 2001
•
Competitiveness improvement has been moderate, only slightly
above the global average
•
South Africa’s current prosperity is below the level expected given its
competitiveness, pointing towards unexploited potential
Competitiveness profile
•
Strengths are present in company sophistication, financial markets, and
some aspects of context for rivalry
•
Weaknesses are most visible in infrastructure and skills, especially
basic skills
•
South Africa is facing critical bottlenecks that limit its ability to exploit
its strengths
South Africa CAON 2007 07-02-07.ppt
42
Copyright 2007 © Professor Michael E. Porter
Operational Effectiveness is Not Strategy
Operational
Effectiveness
Strategic
Positioning
• Assimilating, attaining, and
extending best practices
•
Run the same race faster
20070618 South Africa - DRAFT.ppt
Creating a unique and
sustainable competitive
position
Choose to run a different race
43
Copyright 2007 © Professor Michael E. Porter
Geographic Influences on Competitiveness
Levels of Influence
World
WorldEconomy
Economy
Broad
BroadEconomic
EconomicAreas
Areas
Groups
Groupsof
ofNeighboring
Neighboring
Nations
Nations
“The Neighborhood”
Nations
Nations
States,
States,Provinces
Provinces
(Regional Economies)
Metropolitan
MetropolitanAreas
Areas
Distressed
DistressedUrban
Urbanand
and
Rural
Communities
Rural Communities
South Africa CAON 2007 07-02-07.ppt
44
Copyright 2007 © Professor Michael E. Porter
Specialization of Regional Economies
Select U.S. Geographic Areas
Seattle-BellevueSeattle-BellevueEverett,
Everett,WA
WA
Aerospace
AerospaceVehicles
Vehicles
and
andDefense
Defense
Fishing
Fishingand
andFishing
Fishing
Products
Products
Analytical
AnalyticalInstruments
Instruments
Denver,
Denver,CO
CO
Leather
Leatherand
andSporting
SportingGoods
Goods
Oil
and
Gas
Oil and Gas
Aerospace
AerospaceVehicles
Vehiclesand
andDefense
Defense
Chicago
Chicago
Communications
CommunicationsEquipment
Equipment
Processed
ProcessedFood
Food
Heavy
HeavyMachinery
Machinery
Wichita,
Wichita,KS
KS
Aerospace
AerospaceVehicles
Vehiclesand
and
Defense
Defense
Heavy
HeavyMachinery
Machinery
Oil
and
Oil andGas
Gas
Pittsburgh,
Pittsburgh,PA
PA
Construction
ConstructionMaterials
Materials
Metal
Manufacturing
Metal Manufacturing
Education
Educationand
andKnowledge
Knowledge
Creation
Creation
San
San FranciscoFranciscoOakland-San
Oakland-San Jose
Jose
Bay
Bay Area
Area
Communications
Communications
Equipment
Equipment
Agricultural
Agricultural
Products
Products
Information
Information
Technology
Technology
Los
Los Angeles
Angeles Area
Area
Apparel
Apparel
Building
Building Fixtures,
Fixtures,
Equipment
Equipment and
and
Services
Services
Entertainment
Entertainment
Boston
Boston
Analytical
AnalyticalInstruments
Instruments
Education
Educationand
andKnowledge
KnowledgeCreation
Creation
Communications
Equipment
Communications Equipment
Raleigh-Durham,
Raleigh-Durham,NC
NC
Communications
CommunicationsEquipment
Equipment
Information
InformationTechnology
Technology
Education
Educationand
and
Knowledge
KnowledgeCreation
Creation
San
SanDiego
Diego
Leather
Leatherand
andSporting
SportingGoods
Goods
Power
PowerGeneration
Generation
Education
Educationand
andKnowledge
Knowledge
Creation
Creation
Houston
Houston
Heavy
HeavyConstruction
ConstructionServices
Services
Oil
and
Oil andGas
Gas
Aerospace
AerospaceVehicles
Vehiclesand
andDefense
Defense
Atlanta,
Atlanta,GA
GA
Construction
ConstructionMaterials
Materials
Transportation
Transportationand
andLogistics
Logistics
Business
Services
Business Services
Note: Clusters listed are the three highest ranking clusters in terms of share of national employment
Source: Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School
South Africa CAON 2007 07-02-07.ppt
45
Copyright 2007 © Professor Michael E. Porter
Comparative Regional Economic Performance
South African Provinces
GDP per Capita,
South Africa = 100, 2003
200%
Average Growth of Real GDP: 2.6%
Gauteng
150%
Western Cape
Northern Cape
Mpumalanga
100%
KwaZulu-Natal
North West
Free State
Limpopo
50%
0%
1.0%
1.5%
2.0%
Note: Size of bubble is proportional to population
Source: Statistics South Africa, GDP Annual Estimates, 2004.
South Africa CAON 2007 07-02-07.ppt
Eastern Cape
2.5%
3.0%
3.5%
4.0%
4.5%
Growth of Real GDP, 2003
46
Copyright 2007 © Professor Michael E. Porter
South Africa’s Role in the Neighborhood
South Africa CAON 2007 07-02-07.ppt
47
Copyright 2007 © Professor Michael E. Porter
Regional Economic Coordination
Illustrative Policy Areas
Factor
Factor
(Input)
(Input)
Conditions
Conditions
• Improve regional
transportation
infrastructure
• Create an efficient
energy network
• Interconnect regional
communications
• Link financial
markets
Context
Contextfor
for
Strategy
Strategy
and
andRivalry
Rivalry
• Coordinate
• Coordinate
macroecono- antimonopoly
mic policies
and fair
competition
• Eliminate
policies
trade and
investment
barriers within
the region
• Simplify and
harmonize
cross-border
• Facilitate the
movement of students regulations
and paperwork
to enhance higher
education
Demand
Demand
Conditions
Conditions
• Harmonize
environmental
standards
• Harmonize
product safety
standards
• Establish
reciprocal
consumer
protection laws
Related
Relatedand
and
Supporting
Supporting
Industries
Industries
• Coordinate
development of
cross-border
clusters, e.g.
– Tourism
– Agribusiness
– Transport &
Logistics
– Business
services
Regional
Regional
Governance
Governance
• Share best
practices in
government
operations
• Create regional
institutions
– Dispute
resolution
mechanisms
– Regional
development
bank
• Develop a
regional
marketing
strategy
• Harmonize regulatory
requirements for
business
• Coordinate programs
to improve public
safety
South Africa CAON 2007 07-02-07.ppt
48
Copyright 2007 © Professor Michael E. Porter
The Process of Economic Development
Shifting Roles and Responsibilities
Old
Old Model
Model
New
New Model
Model
•• Government
Government drives
drives economic
economic
development
development through
through policy
policy
decisions
decisions and
and incentives
incentives
•• Economic
Economic development
development is
is aa
collaborative
collaborative process
process involving
involving
government
government at
at multiple
multiple levels,
levels,
the
the private
private sector,
sector, universities,
universities,
research
research institutions,
institutions, and
and
business
business associations
associations
• Competitiveness must become a bottom-up process in which many individuals,
companies, clusters, and institutions take responsibility
South Africa CAON 2007 07-02-07.ppt
49
Copyright 2007 © Professor Michael E. Porter
Clusters and Economic Policy
Business Attraction
Education and Workforce Training
Export Promotion
Clusters
Market Information
and Disclosure
Science and
Technology
Investments
(e.g., centers, university
departments, technology
transfer)
Standard setting
Specialized Physical
Environmental Stewardship
Infrastructure
Natural Resource Protection
• Clusters provide a framework for organizing the implementation of public policy and public
investments towards economic development
South Africa CAON 2007 07-02-07.ppt
50
Copyright 2007 © Professor Michael E. Porter
Role of the Private Sector in Economic Development
•
A company’s competitive advantage depends partly on the quality of
the business environment
•
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 address 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
– Collaboration, cost sharing, and increasing influence
South Africa CAON 2007 07-02-07.ppt
51
Copyright 2007 © Professor Michael E. Porter
The Australian Wine Cluster
Time Line
1991 to 1998
1930
1965
1980
First oenology
course at
Roseworthy
Agricultural
College 1955
Australian Wine
Bureau
established
Australian Wine
and Brandy
Corporation
established 1990
1970
New organizations
created for education,
research, market
information, and
export promotions
Winemaker’s
Federation of
Australia
established
Winemaking
school at
Charles Sturt
University
founded
Australian Wine
Research
Institute founded
1950s
1960s
1970s
1980s
1990s
Import of
European winery
technology
Recruiting of
experienced
foreign investors,
e.g. Wolf Bass
Continued inflow
of foreign capital
and
management
Creation of
large number
of new wineries
Surge in exports
and international
acquisitions
Source: Michael E. Porter and Örjan Sölvell, The Australian Wine Cluster – Supplement, Harvard Business School Case Study, 2002
South Africa CAON 2007 07-02-07.ppt
52
Copyright 2007 © Professor Michael E. Porter
The Australian Wine Cluster
Recently founded Institutions for Collaboration
Winemakers
Winemakers’’ Federation
Federation of
of Australia
Australia
Cooperative
Cooperative Centre
Centre for
for Viticulture
Viticulture
zz
Established
Established in
in 1990
1990
zz
Established
Established in
in 1991
1991
zz
Focus:
Focus: Public
Public policy
policy representation
representation of
of companies
companies
in
in the
the wine
wine cluster
cluster
zz
Focus:
Focus: Coordination
Coordination of
of research
research and
and education
education
policy
policy in
in viticulture
viticulture
zz
Funding:
Funding: Member
Member companies
companies
zz
Funding:
Funding: other
other cluster
cluster organizations
organizations
Australian
Australian Wine
Wine Export
Export Council
Council
Grape
Grape and
and Wine
Wine R&D
R&D Corporation
Corporation
zz
Established
Established in
in 1992
1992
zz
Established
Established in
in 1991
1991 as
as statutory
statutory body
body
zz
Focus:
Focus: Wine
Wine export
export promotion
promotion through
through
international
international offices
offices in
in London
London and
and San
San Francisco
Francisco
zz
Focus:
Focus: Funding
Funding of
of research
research and
and development
development
activities
activities
zz
Funding:
Funding: Government;
Government; cluster
cluster organizations
organizations
zz
Funding:
Funding: Government;
Government; statutory
statutory levy
levy
Wine
Wine Industry
Industry National
National
Education
Education and
and Training
Training Council
Council
Wine
Wine Industry
Industry Information
Information Service
Service
zz
Established
Established in
in 1998
1998
zz
Established
Established in
in 1995
1995
zz
Focus:
Focus: Information
Information collection,
collection, organization,
organization, and
and
dissemination
dissemination
zz
Focus:
Focus: Coordination,
Coordination, integration,
integration, and
and standard
standard
maintenance
maintenance for
for vocational
vocational training
training and
and education
education
zz
Funding:
Funding: Cluster
Cluster organizations
organizations
zz
Funding:
Funding: Government;
Government; other
other cluster
cluster organizations
organizations
Source: Michael E. Porter and Örjan Sölvell, The Australian Wine Cluster – Supplement, Harvard Business School Case Study, 2002
South Africa CAON 2007 07-02-07.ppt
53
Copyright 2007 © Professor Michael E. Porter
The Evolution of Economies
San Diego
Hospitality and Tourism
Climate
Climate
and
and
Geography
Geography
Sporting and
Leather Goods
Transportation
and Logistics
Power Generation
Communications
Equipment
Aerospace Vehicles
and Defense
U.S.
U.S.
Military
Military
Information Technology
Analytical Instruments
Education and
Knowledge Creation
Medical Devices
Bioscience
Bioscience
Research
Research
Centers
Centers
1910
South Africa CAON 2007 07-02-07.ppt
1930
1950
Biotech / Pharmaceuticals
1970
54
1990
Copyright 2007 © Professor Michael E. Porter
Defining an Economic Strategy
Value
ValueProposition
Proposition
•
What is the unique competitive position of the nation given
its location, legacy, and existing and potential strengths?
– What roles with neighbors, the region, and the broader
world?
– What unique value as a business location?
– For what types of activities and clusters?
Developing
DevelopingUnique
UniqueStrengths
Strengths
• What elements of context and the
business environment become crucial
priorities?
• What existing and emerging clusters
should be developed first?
Achieving
Achievingand
andMaintaining
MaintainingParity
Parity
with
withPeers
Peers
• What weaknesses must be addressed to
achieve parity with peer countries?
•ASGISA needs to become a true national economic strategy, defining the value
proposition of the country in the global economy
55
South Africa CAON 2007 07-02-07.ppt
Copyright 2007 © Professor Michael E. Porter
National Economic Strategy
Singapore
National Value
Proposition
• What roles in regional and
world economy?
e.g., Business, financial, and
knowledge hub of Southeast
Asia
• What unique value as a
business location?
e.g., Highly efficient place to
do business; access to skilled
and hardworking staff
• For what range of clusters,
activities within clusters?
e.g., clusters benefiting from
a business hub but not
dependent on a large home
market or physical proximity
to markets
South Africa CAON 2007 07-02-07.ppt
Creating Unique
Strengths
Mitigating
Weaknesses
Macro/political/legal/social
e.g., Absence of corruption
Macro/political/legal/social
e.g., Expand cultural attractions
National Diamond
e.g., Singapore’s physical
infrastructure
National Diamond
e.g., Upgrade Singapore’s research
institutions; improve the efficiency of
Singaporean domestic economy
Cluster Development
e.g., Singapore’s logistical services,
financial services, petrochemical
processing, tourism
Cluster Development
e.g., Develop more Singaporean
SMEs to deepen clusters; improve
the number and quality of IFCs
Company Capabilities
e.g., large number of world-class
multinationals with regional
headquarters and significant
operations in Singapore
Company Capabilities
e.g., build the capability of
Singaporean companies and
encourage regional strategies
Geographic Levels
e.g., Growth Triangle, ASEAN
Geographic Levels
e.g., Create friendly relationships
with ASEAN neighbors
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Government Economic Policy in South Africa
The Accelerated and Shared Growth Initiative (ASGISA)
•
•
In 2004, the South African government set ambitious goals in terms of
economic growth and social improvements
In dialogue with the private sector, civil society, and experts, binding
constraints to growth were identified
CONSTRAINTS
RESPONSES
• Volatile currency
• Macroeconomic management
• Inefficient and costly transport
infrastructure
• Infrastructure investments
• Skill shortages
• Skills and education initiatives
• Barriers to entry and competition
• Sector strategies
• Burdensome regulations for small
companies
• ‘Second economy’ programs
• Public administration reform
• Weaknesses in administrative
capacity
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Sectoral Priorities within ASGISA
TOP PRIORITY SECTORS
• Business Process Outsourcing
• Tourism
• Biofuels (under planning)
NEXT RANK OF PRIORITIES
•
•
•
•
•
•
Chemicals
Metal beneficiation
Creative industries
Clothing and textiles
Durable consumer goods
Wood, pulp and paper
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The Role of Government in Cluster Initiatives
Should...
May...
Should not
•
•
•
•
•
•
Actively participate
Be ready to
implement
recommendations
Convene
Provide matching
funds
Select priority clusters
Define cluster action
priorities
•
Debates about the role of government in cluster development are too often focused
on which clusters should be supported and how much financing they should get
•
Cluster selection is an important but ultimately operative question; focus is
necessary to achieve impact and not all clusters have equal potential
•
Financing is important but cluster policy needs to be more; policy needs to improve
the potential for companies to increase productivity
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Backup
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Copyright 2007 © Professor Michael E. Porter
Cluster Specialization
Leading Footwear Clusters
Romania
• Production subsidiaries
of Italian companies
• Focus on lower to
medium price range
Portugal
• Production
• Focus on shortproduction runs in the
medium price range
United States
• Design and marketing
• Focus on specific market
segments like sport and
recreational shoes and
boots
• Manufacturing only in
selected lines such as
hand-sewn casual shoes
and boots
Italy
• Design, marketing,
and production of
premium shoes
• Export widely to the
world market
Brazil
• Low to medium quality finished
shoes, inputs, leather tanning
• Shift toward higher quality
products in response to Chinese
price competition
Source: Research by HBS student teams in 2002 – Van Thi Huynh, Evan Lee, Kevin Newman, Nils Ole Oermann
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China
• OEM Production
• Focus on low cost
segment mainly for the
US market
Vietnam/Indonesia
• OEM Production
• Focus on the low cost
segment mainly for the
European market
Copyright 2007 © Professor Michael E. Porter
Related Clusters and Competitiveness
Cluster Overlap in the U.S. Economy
Forest
Products
Jewelry &
Precious
Metals
Footwear
Construction
Materials
Apparel
Textiles
Leather
and
Related
Products
Chemical
Products
Financial
Services
Sporting
and Recreation
Goods
Publishing
and Printing
Tobacco
Plastics
Business
Services
Pharmaceutical
Education
and
Knowledge
Creation
Tech.
Fishing &
Fishing
Products
Agricultural
Products
Transportation
and
Logistics
Hospitality
and Tourism
Entertainment
Heavy
Construction
Services
Building
Fixtures,
Equipment
and
Services
Prefabricated
Enclosures
Medical
Devices
Analytical
Information Instruments
Processed Food
Oil and
Gas
Furniture
Communications
Equipment
Aerospace
Vehicles &
Defense
Lightning &
Electrical
Equipment
Power
Generation
Distribution
Services
Aerospace
Engines
Automotive
Metal
Manufacturing
Production
Technology
Heavy
Machinery
Motor Driven
Products
Note: Clusters with overlapping borders or identical shading have at least 20% overlap (by number of industries) in both directions.
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Copyright 2007 © Professor Michael E. Porter
The Composition of Regional Economies
United States, 2004
Traded
Traded
Local
Local
Natural
Natural
Resource
-Driven
Resource-Driven
29.3%
29.3%
0.7%
0.7%
70.0%
70.0%
2.4%
2.4%
0.7%
0.7%
--1.2%
1.2%
$49,367
$49,367
137.2%
137.2%
4.2%
4.2%
$30,416
$30,416
84.5
84.5
3.4%
3.4%
$35,815
$35,815
99.5
99.5
2.1%
2.1%
144.1
144.1
79.3
79.3
140.1
140.1
Patents per 10,000
Employees
23.0
23.0
0.4
0.4
3.3
3.3
Number of SIC Industries
590
590
241
241
48
48
Share of Employment
Employment Growth Rate,
1990 to 2004
Average Wage
Relative Wage
Wage Growth
Relative Productivity
Note: 2004 data, except relative productivity which uses 1997 data.
Source: Prof. Michael E. Porter, Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School
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Stages Of Competitive Development
Shifting Policy Imperatives
Factor
-Driven
Factor-Driven
Economy
Economy
Investment
Investment-Driven
Driven Economy
Economy
Innovation
Innovation-Driven
Driven Economy
Economy
Cost of Inputs
Efficiency
Unique Value
• Macro, political, and legal
stability
• Efficient basic
infrastructure
• Lowering the regulatory
costs of doing business
• Local competition
• Market openness
• Incentives and rules
encouraging productivity
• Cluster formation and
activation
• Advanced skills
• Advanced infrastructure
• Incentives and rules
encouraging innovation
• Cluster upgrading
Source: Porter, Michael E., The Competitive Advantage of Nations, Macmillan Press, 1990
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Copyright 2007 © Professor Michael E. Porter
Government and Economic Development
Roles
•
Improve the macroeconomic, political, legal, and social context
– Establish a stable, predictable, and effective macroeconomic, legal, and political context
– Improve the social conditions of citizens
•
Upgrade the general business environment
– Improve the availability, quality, and efficiency of cross-cutting or general purpose inputs,
infrastructure, and institutions
– Set overall rules and incentives governing competition that encourage productivity growth
•
Facilitate cluster formation and enhancement
– Identify existing and emerging clusters
– Encourage and support cluster upgrading
•
Lead a collaborative process of economic change
– Develop and overall economic strategy together with key constituencies
– Organize the parts of government in a coordinated development agenda
– Engage multiple levels of government in economic development
– Create institutions and processes for upgrading competitiveness that inform citizens and
mobilize the private sector to take action
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Integrating Economic and Social Policy
• In the new thinking on competition, there is not an inherent conflict
between economic and social objectives, but a long term synergy
Economic
Objectives
Social
Objectives
•• The
Thecompetitiveness
competitivenessof
ofcompanies
companiesdepends
dependsheavily
heavilyon
on
–– Rising
Risingskill
skilllevels
levels
–– Safe
Safeworking
workingconditions
conditions
–– AAsense
senseof
ofequal
equalopportunity
opportunity
–– Low
Lowlevels
levelsof
ofpollution
pollution(pollution
(pollutionisisaasign
signof
ofunproductive
unproductiveuse
useof
ofphysical
physical
resources)
resources)
•• However,
However,efforts
effortsto
tomeet
meet“social”
“social”objectives
objectivesmust
mustbe
bealigned
alignedwith
with
productivity
productivityand
andprepare
prepareand
andmotivate
motivateindividuals
individualsto
tosucceed
succeedin
inthe
themarket
market
system
system
•• Efforts
Effortsto
tomeet
meet“economic”
“economic”objectives
objectivesmust
mustinclude
includeexplicit
explicitprograms
programsto
toraise
raise
human
humancapability,
capability,improve
improvethe
thelives
livesand
andsense
senseof
ofopportunity
opportunityfor
for
individuals,
individuals,and
andenhance
enhancethe
thebroader
broaderbusiness
businessenvironment
environment
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Copyright 2007 © Professor Michael E. Porter
Integrating Economic and Social Policy
Examples
Training
•
Organize training investments around clusters
Housing
•
Create mechanisms to encourage home ownership; provide incentives for new company
formation in the construction cluster; reduce unnecessary costs of housing construction due
to regulatory and approval requirement; secure property rights to residents
Health Care
•
Create incentives for private health insurance; open health care delivery to competition
Social Security
•
Create incentives for saving; encourage a private pension system that agglomerates
investment capital
Environmental Quality
•
Institute a regulatory regime that encourages movement to more environmental friendly
methods; invest in technical assistance in eco-efficient processes and practices
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Copyright 2007 © Professor Michael E. Porter
ASGISA and Beyond: An Early Assessment
•
The Accelerated and Shared Growth Initiative (ASGISA) is an important
step forward for South African competitiveness policy
– Fact-driven analysis of specific challenges
– Identification of key priorities
– Medium-term perspective with regular assessment of progress
•
The ASGISA needs to be ‘the’ economic action plan for the country,
internally consistent and widely accepted as a national objective
•
Execution is crucial; even when the policy right area is identified,
success depends on specific steps taken and the government’s capacity
to deliver
•
The action plan needs to add a clear geographic dimension, mobilizing
South African regions and leveraging integration with neighboring
countries
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What are Cluster Initiatives?
Cluster initiatives are collaborative activities by a group of companies, public sector
entities, and other related institutions with the objective to improve the competitiveness of a
group of interlinked economic activities in a specific geographic region
• Upgrading of
company operations
and strategies
across a group of
companies
• Upgrading of clusterspecific business
environment
conditions
• Strengthening of
networks to enhance
spill-overs and other
economic benefits of
clusters
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Towards Sustainable Black Economic Empowerment
Selected Policies
• Improve social conditions
• Improve and extend public education
• Invest aggressively in managerial training for black citizens
• Create incentives and support the hiring and promotion of black
employees into low- and middle-management positions in whiteowned local companies as well as multinationals
• Focus on upgrading indigenous local businesses, including in
agriculture, local services, and manufacturing businesses serving
local needs
• Place early attention to clusters involving small- and medium size
enterprises
• Create incentives for risk capital investments in business with
significant (>10%) black ownership. Avoid programs that apply only
to majority black-owned businesses, especially when other owners
are passive investors or private equity firms
•
There a no short cuts for addressing this long-term challenge
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Copyright 2007 © Professor Michael E. Porter
Decomposing South Africa’s GDP per Capita Growth
Contribution to change in real GDP
per Capita (PPP adjusted)
$800
$600
Labor
Productivity
$400
$200
$0
Labor Force
Participation
-$200
-$400
-$600
2001
2002
2003
2004
2005
2006
Note: Data before 2001 not available.
Source: EIU (2007)
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Copyright 2007 © Professor Michael E. Porter
U.S. Patenting by South African Institutions
Organization
Patents Issued from 2000 to 2004
1
SASOL TECHNOLOGY (PROPRIETARY) LIMITED
2
WINDSOR TECHNOLOGIES LIMITED
3
CSIR
4
WATER RESEARCH COMMISSION
4
DENEL (PROPRIETARY) LIMITED
4
IPCOR NV
4
SUPERSENSOR (PROPRIETARY) LIMITED
8
TECHNOLOGY FINANCE CORPORATION (PROPRIETARY) LIMITED
8
IMPLICO B.V.
8
CLAAS SELBSTFAHRENDE ERNTEMASCHINEN GMBH
11
SLIC TRADING COMPANY LIMITED
11
ESKOM
11
ADCOCK INGRAM LIMITED
14
MEDTRONIC INC.
14
MINTEK
14
SANDVIK AKTIEBOLAG
14
BILLITON INTELLECTUAL PROPERTY B.V.
14
CATALYTIC DISTILLATION TECHNOLOGIES
14
UNIVERSITY OF PRETORIA
14
SALBU RESEARCH AND DEVELOPMENT (PROPRIETARY LIMITED)
14
GARFIELD INTERNATIONAL INVESTMENTS LIMITED
14
14
SOUTH AFRICA NUCLEAR ENERGY CORPORATION LTD.
AZOTEQ (PTY) LIMITED
29
11
8
6
6
6
6
5
5
5
4
4
4
3
3
3
3
3
3
3
3
3
3
Note: Shading indicates universities, research institutions or government agencies. Nine more institutions with three patents are not listed.
Source: US Patent and Trademark Office (www.uspto.gov). Author’s analysis.
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Copyright 2007 © Professor Michael E. Porter
Decomposing South African Real GDP Growth
Growth rate,
CAGR
3.5%
3.0%
2.5%
2.0%
TFP
Capital
Labor
Overall GDP
1.5%
1.0%
0.5%
0.0%
-0.5%
-1.0%
1980-94
Source: IMF (2006)
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1995-2003
73
Copyright 2007 © Professor Michael E. Porter
Macroeconomic, Political, Legal, and Social Context
Macroeconomic policies
Political governance
• Sound fiscal and monetary policies create
stability and encourage business investment
and upgrading
• Due process in political decisions and
orderly transfers of power create a stable
planning horizon for business
• Sound and stable macroeconomic
conditions hold down interest rates and
provide accurate price signals for market
transactions
• Checks and balances in the political system
mitigate instability and the abuse of power
Legal system
Social conditions
• An independent, timely, effective and
trusted legal system solidifies the rule of law
and provides a fair environment for
business, encouraging investment
• Improving social conditions in basic
education, housing, health, and absence of
discrimination enhances 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 the
political support for policies to enhance
competitiveness
• Strict monitoring and prosecution of
corruption rewards productivity instead of
favoritism
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Copyright 2007 © Professor Michael E. Porter