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Russian Competitiveness:
Where Do We Stand?
Professor Michael E. Porter
Institute for Strategy and Competitiveness
Harvard Business School
U.S.-Russian Investment Symposium
Boston, Massachusetts
13 November 2003
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 2003, (World
Economic Forum, forthcoming 2003), “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
GCR Russia 2003 10-20-03.ppt
1
Copyright 2003 © Professor Michael E. Porter
Russian Economic Performance 2003
•
Russia’s overall economic performance has improved since 1999
but is not exceptional relative to peer countries
•
Recent progress has reflected clear improvements in
macroeconomic policy and, to a lesser extent, the legal and
corporate governance framework
– However, much work still lies ahead
•
Russia’s prosperity and prosperity growth still rely heavily on
inherited wealth, not created wealth
•
The critical challenge for Russia is now microeconomic: mobilizing
its potential strengths and address its considerable weaknesses to
dramatically raise the productivity of Russia as a place to do
business
GCR Russia 2003 10-20-03.ppt
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Copyright 2003 © Professor Michael E. Porter
Comparative Economic Performance
Real GDP Growth Rates
Countries sorted by 19992002 annual real GDP
growth rate (CAGR)
Annual growth rate
of real GDP
20%
Azerbaijan
Kazakhstan
China
S Korea
10%
Russian Federation
Latvia
Ukraine
0%
Estonia
Uzbekistan
Bulgaria
-10%
Hungary
Slovenia
Thailand
-20%
Lithuania
Finland
Romania
-30%
Slovakia
Croatia
Poland
-40%
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Czech Republic
Brazil
Source: EIU (2003)
GCR Russia 2003 10-20-03.ppt
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Copyright 2003 © Professor Michael E. Porter
Russian GDP over time
Real GDP,
1990 = 100
120
100
26% Gap
80
60
40
20
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Source: EIU (2003)
GCR Russia 2003 10-20-03.ppt
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Copyright 2003 © Professor Michael E. Porter
Comparative Prosperity Performance
Selected Countries
18,000
Slovenia
16,000
Czech Republic
14,000
Hungary
12,000
Slovakia
South Africa
GDP per
capita
10,000
(PPP
adjusted)
in US-$,
8,000
2002
Lithuania
Croatia
Romania
Kazakhstan
Malaysia Bulgaria
China
Ukraine
Serbia &
Montenegro
Moldova
2,000
0
-2%
Latvia
Russian Federation
Brazil
Thailand
6,000
4,000
Estonia
Poland
0%
Azerbaijan
India
Uzbekistan
2%
4%
6%
8%
10%
Compound annual growth rate of real GDP per capita, 1996-2002
Source: EIU (2003)
GCR Russia 2003 10-20-03.ppt
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Copyright 2003 © Professor Michael E. Porter
What is Competitiveness?
•
Competitiveness is determined by the productivity with which a nation uses its
human, capital, and natural resources. Productivity sets a nation’s or region’s
standard of living (wages, returns to capital, returns to natural resource endowments)
– Productivity depends both on the value of products and services (e.g.
uniqueness, quality) as well as the efficiency with which they are produced.
– It is not what industries a nation competes in that matters for prosperity, but how
firms compete in those industries
– Productivity in a nation is a reflection of what both domestic and foreign firms
choose to do in that location. The location of ownership is secondary for
national prosperity.
– The productivity of “local” industries is of fundamental importance to
competitiveness, not just that of traded industries
– Devaluation does not make a country more competitive
•
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
GCR Russia 2003 10-20-03.ppt
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Copyright 2003 © Professor Michael E. Porter
Sources of Prosperity
Inherited
Inherited Prosperity
Prosperity
Created
Created Prosperity
Prosperity
•• Prosperity
Prosperity is
is derived
derived from
from selling
selling
inherited
inherited natural
natural resources
resources or
or real
real
estate
estate
•• Prosperity
Prosperity is
is limited
limited by
by the
the amount
amount of
of
natural
natural resources
resources available,
available, and
and is
is
ultimately
ultimately temporary
temporary
•• Focus
Focus gravitates
gravitates towards
towards the
the
distribution
distribution of
of wealth
wealth as
as interest
interest
groups
groups seek
seek aa bigger
bigger share
share of
of the
the pie
pie
•• Prosperity
Prosperity is
is derived
derived from
from creating
creating
valuable
valuable products
products and
and services
services
•• Prosperity
Prosperity is
is created
created by
by firms
firms
•• Prosperity
Prosperity is
is unlimited,
unlimited, based
based only
only by
by
the
the innovativeness
innovativeness and
and productivity
productivity of
of
companies
companies in
in the
the economy
economy
•• Creating
Creating the
the conditions
conditions for
for productivity
productivity
and
and innovation
innovation are
are the
the central
central policy
policy
question
question
•• Government
Government is
is the
the central
central actor
actor in
in the
the
economy
economy as
as the
the owner
owner and
and distributor
distributor of
of
wealth
wealth
•• Companies
Companies are
are the
the central
central actors
actors in
in the
the
economy
economy
•• The
The government’s
government’s role
role is
is to
to create
create the
the
enabling
enabling conditions
conditions
GCR Russia 2003 10-20-03.ppt
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Copyright 2003 © Professor Michael E. Porter
Determinants of Productivity and Productivity Growth
Macroeconomic,
Macroeconomic, Political,
Political, Legal,
Legal, and
and Social
Social
Context
Context for
for Development
Development
Microeconomic
Microeconomic Foundations
Foundations of
of Development
Development
Sophistication
Sophistication
of
ofCompany
Company
Operations
Operationsand
and
Strategy
Strategy
Quality
Qualityof
ofthe
the
Microeconomic
Microeconomic
Business
Business
Environment
Environment
• 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 companies and
local competition
GCR Russia 2003 10-20-03.ppt
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Copyright 2003 © Professor Michael E. Porter
Progress in Human Development
Selected Countries
0.90
Slovenia
S Korea
Czech Rep.
0.85
Argentina
Human
Development
Index, 2001
Poland
Hungary
Costa Rica
Chile
Estonia
Lithuania
Croatia
Latvia
0.80
Belarus
Mexico
Malaysia
Bulgaria
Russia
Colombia
Brazil
Romania
Thailand
Kazakhstan
Jamaica
Ukraine
0.75
0.000
Philippines
0.010
0.020
0.030
0.040
0.050
0.060
Change in Human Development Index, 2001 to 1995
Source: HDR (2003)
GCR Russia 2003 10-20-03.ppt
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Copyright 2003 © Professor Michael E. Porter
Integration of Macro- and Microeconomic Reforms
Stability and confidence support
investment and upgrading
Macro reform
alone can
Create opportunity
Required to achieve
lead to short
for productivity
productivity
term capital
inflows
Macroeconomic
Microeconomic
and
growth
reform
reform
spurts
that
ultimately
are not
Productivity growth allows economic
sustainable
Micro reform
is needed
to raise
the level of
sustainable
prosperity
growth without inflation, making
macroeconomic stability easier to
achieve
GCR Russia 2003 10-20-03.ppt
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Copyright 2003 © Professor Michael E. Porter
Comparative Labor Productivity
Selected Countries
45,000
Slovenia
40,000
35,000
S Korea
Hungary
30,000
GDP per
employee 25,000
(PPP
adjusted)
in US-$,
20,000
2002
Czech Rep.
Mexico
Brazil
Slovakia
Chile
Poland
Croatia
Lithuania
Latvia
Bulgaria
Serbia
Romania
15,000
Estonia
Kazakhstan
Russian Federation
Ukraine
10,000
China
India
5,000
0
-1%
Uzbekistan
0%
1%
2%
Vietnam
3%
4%
5%
Azerbaijan
6%
7%
8%
Compound annual growth rate of real GDP per employee, 1996-2002
Source: EIU (2003)
GCR Russia 2003 10-20-03.ppt
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Copyright 2003 © Professor Michael E. Porter
Russia’s Export Performance By Broad Sector
1997-2001
Russia’s average change in
world goods export share:
- 0.10%
World Export Share,
2001
8%
7%
D
D
6%
5%
= $45 billion
export volume
in 2001
Petroleum/Chemicals
Materials/Metals
4%
3%
Multiple Business
Forest Products
2%
1%
Russia’s average
goods export
share: 1.54%
Power
Entertainment
Textiles
0%
-1.0%
-0.5%
Food/Beverages
Transportation
0.0%
0.5%
1.0%
Change in Russia’s World Export Share, 1997 - 2001
Source: UNCTAD Trade Data. Author’s analysis.
GCR Russia 2003 10-20-03.ppt
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Copyright 2003 © Professor Michael E. Porter
Comparative Inward Foreign Investment
Selected Economies
FDI Stocks as % of GDP,
Average 1998-2000
50%
Estonia
Hungary
40%
Netherlands
New Zealand
30%
Australia
Czech Rep.
Moldova
Latvia
Spain Slovakia
20%
China
Lithuania
Poland
Croatia
Slovenia
Romania
Argentina
Serbia
Germany*
Ukraine
10%
Belarus
US
Italy
Russian Federation
Japan
UK
Sweden
(18%, 89%)
Bulgaria
Finland
0%
0%
10%
20%
30%
40%
50%
60%
FDI Inflows as % of Gross Fixed Capital Formation, Average 1998-2000
Note: FDI Stocks and Inflows for transition countries are the average of 1998-2001
Germany’s FDI inflows in this period were exceptionally high due to the Vodafone-Mannesmann takeover in 2000
Source: World Investment Report 2002
GCR Russia 2003 10-20-03.ppt
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Copyright 2003 © Professor Michael E. Porter
Productivity and the Business Environment
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 resources
z
z
z
z
A local context and rules that
encourage investment and
sustained upgrading
–e.g., Intellectual property
Demand
protection
Demand
Conditions
Meritocratic incentive system
Conditions
across institutions
Open and vigorous competition
among locally based rivals z Sophisticated and demanding
local customer(s)
z Local customer needs that
anticipate those elsewhere
Related
and
Related and
z Unusual local demand in
Supporting
Supporting
specialized segments that can be
Industries
served regionally and globally
Industries
Access to capable, locally based suppliers
and firms in related fields
Presence of clusters instead of isolated
industries
• Successful economic development is a process of successive economic upgrading, in which
the business environment in a nation evolves to support and encourage increasingly
sophisticated ways of competing
GCR Russia 2003 10-20-03.ppt
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Copyright 2003 © Professor Michael E. Porter
Clusters and Competitiveness
Houston Oil and Gas Products and Services Cluster
Oil & Gas
Exploration &
Development
Oil & Gas
Completion &
Production
Oil
Transportation
Oil
Trading
Oil
Refining
Oil
Distribution
Oil
Wholesale
Marketing
Oil
Retail
Marketing
Gas
Gathering
Gas
Processing
Gas
Trading
Gas
Transmission
Gas
Distribution
Gas
Marketing
Oilfield Services/Engineering & Contracting Firms
Equipment
Suppliers
Specialized
Technology Services
(e.g. Oil Field
Chemicals,
Drilling Rigs,
Drill Tools)
(e.g. Drilling
Consultants,
Reservoir Services,
Laboratory Analysis)
Subcontractors
(e.g. Surveying,
Mud Logging,
Maintenance Services)
Business
Services
(e.g. MIS Services,
Technology Licenses,
Risk Management)
Specialized Institutions
(e.g. Academic Institutions, Training Centers, Industry Associations)
GCR Russia 2003 10-20-03.ppt
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Copyright 2003 © Professor Michael E. Porter
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
Italy
• Design, marketing,
and production of
premium shoes
• Export widely to the
world market
United States
• Design and marketing
• Focus on specific market
segments like sport and
recreational shoes and boots
• Manufacturing only in
selected lines such as handsewn casual shoes and boots
Source: Research by HBS student teams in 2002
GCR Russia 2003 10-20-03.ppt
China
• OEM Production
• Focus on low cost
segment mainly for the
US market
16
Vietnam/Indonesia
• OEM Production
• Focus on the low cost
segment mainly for the
European market
Copyright 2003 © 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
GCR Russia 2003 10-20-03.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
17
Copyright 2003 © Professor Michael E. Porter
Global Competitiveness Report 2003
The Relationship Between Business Competitiveness and GDP Per Capita
Norway
35,000
USA
y = 2002.2x2 + 8427.7x + 9514.9
30,000
R2 = 0.8266
Iceland
Denmark
Austria
Canada
Switzerland
Ireland
Germany
Finland
Italy
UK Sweden
Taiwan
Singapore
2002 GDP per
Capita 25,000
(Purchasing
Power Adjusted)
Spain
20,000
Greece
Malta
15,000
Czech Rep
Slovenia
S Korea
Portugal
Uruguay
Hungary
Slovak Rep.
Argentina
Croatia
10,000
Poland
Russian Federation
5,000
New Zealand
Israel
Bulgaria
Romania
Paraguay
0
Brazil
Ukraine
Estonia
Lithuania
South Africa
Latvia Malaysia
Thailand
China
Jordan
Vietnam India
Serbia
Kenya
Tanzania
Business Competitiveness Index
Note: Other central European countries in blue
Source: Global Competitiveness Report 2003
GCR Russia 2003 10-20-03.ppt
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Copyright 2003 © Professor Michael E. Porter
Russia’s Competitive Promise
Competitive Advantages
Relative to GDP per Capita
Country Ranking, Arrows
indicate a change of 5 or more
ranks since 1998
Human Resources
Quality of Math and Science Education
18
Quality of Educational System
38
Quality of Public Schools
41
Cooperation in Labor-Employer Relations 41
Science and Technology Base
Quality of Scientific Research Institutions
25
Availability of Scientists and Engineers
26
Note: Rank by countries; overall Russia ranks 65 (63 on National Business Environment, 48 on GDP pc 2002)
Source: Global Competitiveness Report 2003
GCR Russia 2003 10-20-03.ppt
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Copyright 2003 © Professor Michael E. Porter
International Patenting Output
Selected Countries
Annual U.S. patents
per 1 million
population, 2001
400
350
USA
300
Taiwan
250
Japan
Sweden
200
= 10,000
patents
granted in
2001
Germany
150
Israel
Finland
100
Canada
UK
50
Singapore
South Korea
Ireland
Australia
New Zealand
Russia
0
0%
10%
20%
30%
40%
Compound annual growth rate of US-registered patents, 1990 - 2001
Source: US Patent and Trademark Office (www.uspto.gov). Author’s analysis.
GCR Russia 2003 10-20-03.ppt
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Copyright 2003 © Professor Michael E. Porter
International Patenting Output
Selected Transition Countries
Annual U.S. patents per 1
million population, 2001
Average Growth Rate of
Countries shown: 11.1%
12.0
Slovenia
10.0
8.0
Hungary
6.0
4.0
Russian Federation
Average
Patents per
Czech Rep. Capita for
Countries
shown: 1.9
Romania
Slovakia
2.0
Estonia
Serbia & Mont.
0.0
-10%
Ukraine
Bulgaria
Poland
Uzbekistan
0%
10%
20%
Compound annual growth rate of US-registered patents, 1996 - 2001
30%
= 100
patents
granted in
2001
Note: Other Latin American countries have negligible rates of US patenting
Source: US Patent and Trademark Office (www.uspto.gov). Author’s analysis.
GCR Russia 2003 10-20-03.ppt
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Copyright 2003 © Professor Michael E. Porter
Barriers to Structural Change in the Russian Economy
•
Competition
– Russia scores low in the Global Competitiveness Report on
trade liberalization and non-tariff barriers
– Russia scores low on the level of domestic competition
– Competition is hampered and distorted by corruption and
administrative inefficiencies
•
Entry and exit
– Russia has low formal barriers to entry, but business leaders
report significant burdens for start-ups
– Russia has high formal barriers for firing employees and
closing businesses, but business leaders report them as nonbinding in practice
•
Financial market
– Russian financial markets get low scores for providing
sophisticated services and credit to companies
GCR Russia 2003 10-20-03.ppt
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Copyright 2003 © Professor Michael E. Porter
Russian Competitiveness
Competitive Advantages and Disadvantages
Competitive Disadvantages
Relative to GDP per Capita
Competitive Advantages
Relative to GDP per Capita
Country Ranking, Arrows
indicate a change of 5 or more
ranks since 1998
Country Ranking, Arrows
indicate a change of 5 or more
ranks since 1998
Human Resources
Quality of Math and Science Education
Quality of Educational System
Quality of Public Schools
Cooperation in Labor-Employer Relations
18
38
41
41
Science and Technology Base
Quality of Scientific Research Institutions
Availability of Scientists and Engineers
25
26
Physical Infrastructure
Railroad Infrastructure Quality
Port Infrastructure Quality
Openness and Vitality of Competition
Foreign Ownership of Companies
93
Intensity of Local Competition
83
Hidden Trade Barrier Liberalization
79
Adequacy of Public Sector Legal Recourse 78
Tariff Liberalization
76
Effectiveness of Anti-Trust Policy
73
Extent of Distortive Government Subsidies 70
Efficacy of Corporate Boards
64
Administrative Efficiency and Transparency
Extent of Bureaucratic Red Tape
89
Police Protection of Businesses
80
Favoritism in Decisions of Government
74
Officials
Judicial Independence
74
Business Costs of Corruption
53
17
42
Note: Rank by countries; overall Russia ranks 65 (63 on National Business Environment, 48 on GDP pc 2002)
Source: Global Competitiveness Report 2003
GCR Russia 2003 10-20-03.ppt
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Copyright 2003 © Professor Michael E. Porter
Corruption
Transparency International Global Corruption Report
Slovenia
Estonia
Hungary
Rank in
Global
Corruption
Index,
2003
Lithuania
Poland
Bulgaria
Slovak Rep.
China
Czech Rep.
Latvia
Turkey
Uzbekistan
66
Russia
Romania
Ukraine
Kazakhstan
Azerbaijan
-10
-5
0
5
10
15
Change in Rank, Global Corruption Report, 2003 versus 2001
Note: Eastern European and CIS countries in blue, constant country sample
Source: Global Corruption Report, 2003
GCR Russia 2003 10-20-03.ppt
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Copyright 2003 © Professor Michael E. Porter
Russian Competitiveness
Competitive Advantages and Disadvantages (Continued)
Competitive Disadvantages
Relative to GDP per Capita
Competitive Advantages
Relative to GDP per Capita
Country Ranking, Arrows
indicate a change of 5 or more
ranks since 1998
Country Ranking, Arrows
indicate a change of 5 or more
ranks since 1998
Human Resources
Quality of Math and Science Education
Quality of Educational System
Quality of Public Schools
Cooperation in Labor-Employer Relations
18
38
41
41
Science and Technology Base
Quality of Scientific Research Institutions
Availability of Scientists and Engineers
25
26
Physical Infrastructure
Railroad Infrastructure Quality
Port Infrastructure Quality
Efficiency of Financial Markets
Protection of Minority Shareholders
Regulation of Securities Exchanges
Financial Market Sophistication
Existence of Bankruptcy Law
Ease of Access to Loans
Local Equity Market Access
Venture Capital Availability
94
86
84
82
72
70
60
Quality of the Regulatory Environment
Intellectual Property Protection
85
Laws Relating to Information Technology 71
Stringency of Environmental Regulations 70
17
42
Note: Rank by countries; overall Russia ranks 65 (63 on National Business Environment, 48 on GDP pc 2002)
Source: Global Competitiveness Report 2003
GCR Russia 2003 10-20-03.ppt
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Copyright 2003 © Professor Michael E. Porter
The Costa Rica Information Technology Cluster
Electronic Assembly
Specialized
Specialized Packaging
Packaging
(e.g.,
plastics,
(e.g., plastics, corrugated
corrugated
materials)
materials)
Computer
ComputerSoftware
Software
(e.g.,
(e.g., ArtinSoft)
ArtinSoft)
Other
Electronic Components
(e.g., circuitboards)
Passive
Electronic Components
(e.g., inductors, transistors)
Specialized
SpecializedChemicals
Chemicals
Venture
Venture Capital
Capital Firms
Firms
Semiconductor Production
Specialized
Specialized Academic
Academic and
and Training
Training
Institutions
Institutions
(e.g.,
(e.g.,Instituto
InstitutoTecnológico
Tecnológicode
deCosta
CostaRica,
Rica,
Instituto
Nacional
de
Aprendizaje)
Instituto Nacional de Aprendizaje)
State
StateGovernment
GovernmentAgencies
Agencies
(e.g.,
export
(e.g., exportand
andinvestments
investmentspromotion
promotion
agencies:
Cinde
and
Procomer)
agencies: Cinde and Procomer)
Source: Niels Ketelhohn research for Professor Michael E. Porter
GCR Russia 2003 10-20-03.ppt
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Copyright 2003 © Professor Michael E. Porter
Creating a Productive Economic Structure
Legacies
Legacies of
of aa PlannedPlannedEconomy
Economy
Cluster-based
Cluster-based Economy
Economy
•• Economic
Economic policy
policy involves
involves significant
significant
autonomy
autonomy and
and institutions
institutions at
at the
the
regional
regional and
and local
local level
level
•• Economic
Economic policy
policy is
is centrally
centrally
directed
directed
•• Buyer/supplier
Buyer/supplier linkages
linkages seen
seen from
from aa
national
national perspective
perspective
•• There
There is
is specialization
specialization of
of regions
regions
across
across the
the fields
fields in
in which
which they
they
compete
compete
•• Relationships
Relationships between
between suppliers
suppliers
and
and buyers
buyers are
are specified
specified and
and
focused
focused on
on production
production of
of defined
defined
goods
goods and
and services
services
•• Externalities
Externalities across
across firms
firms and
and
institutions
institutions in
in clusters
clusters facilitate
facilitate
productivity
productivity and
and dynamism
dynamism
•• The
The geographic
geographic locations
locations of
of related
related
economic
economic activities
activities driven
driven by
by
political
political and
and security
security
considerations
considerations
GCR Russia 2003 10-20-03.ppt
•• Geographic
Geographic choices
choices are
are based
based on
on
the
the economic
economic attractiveness
attractiveness of
of
locations;
locations; firms
firms co-locate
co-locate with
with others
others
to
to reap
reap cluster
cluster benefits
benefits
27
Copyright 2003 © Professor Michael E. Porter
The Australian Wine Cluster
Trade Performance
Australian Wine
Exports in million US
Dollars
Australian Wine
World Export Market
Share
$1,000
8%
$900
7%
$800
6%
$700
$600
5%
$500
4%
$400
3%
Value
Market Share
$300
2%
$200
$100
1%
$0
0%
1995
1996
1997
1998
1999
2000
Source: UN Trade Statistics
GCR Russia 2003 10-20-03.ppt
28
Copyright 2003 © Professor Michael E. Porter
The Australian Wine Cluster
History
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
GCR Russia 2003 10-20-03.ppt
29
Copyright 2003 © Professor Michael E. Porter
Cluster Policy versus Industrial Policy
Industrial
Industrial
Policy
Policy
Cluster
-based
Cluster-based
Policy
Policy
• Target desirable industries /
sectors
•
• Focus on domestic companies
• Domestic and foreign companies both
enhance productivity
• Intervene in competition (e.g.,
protection, industry promotion,
subsidies)
• Relax impediments and constraints to
productivity
• Centralizes decisions at the
national level
• Encourage initiative at the state and
local level
• Emphasize cross-industry linkages /
complementarities
Distort competition
GCR Russia 2003 10-20-03.ppt
All clusters can contribute to prosperity
Enhance competition
30
Copyright 2003 © Professor Michael E. Porter
The Role of Clusters in Economic Development
Overview
•
Clusters are critical engines in the economic structure of national and
regional economies
– The health of their cluster determines the level of productivity companies
can reach
– Regional prosperity depends on significant positions in a number of
competitive clusters
•
Clusters can identify fundamental challenges in the national or regional
business environment
– Clusters are more aligned with the nature of competition and the
microeconomic factors that influence competitive advantage
– At the economy-wide level, only generic topics like taxes and trade
protection are of joint interests to all companies
•
Clusters provide a new way of thinking about an economy and organizing
economic development efforts
– Recast the role of the private sector, government, trade associations and
educational or research institutions
– Brings together firms of all sizes to identify common opportunities, not just
common problems
GCR Russia 2003 10-20-03.ppt
31
Copyright 2003 © Professor Michael E. Porter
Influences on Competitiveness
Multiple Geographic Levels
World Economy
Broad Economic Areas
Groups of Neighboring
Nations
Nations
States, Provinces
Cities, Metropolitan
Areas
GCR Russia 2003 10-20-03.ppt
32
Copyright 2003 © 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
GCR Russia 2003 10-20-03.ppt
33
Copyright 2003 © Professor Michael E. Porter
U.S. Patenting by Russian Institutions
1996
1997
1998
1999
2000
2001
Patents Issued
1996-2001
SUN MICROSYSTEMS, INC.
1
5
8
13
2
1
30
SAMSUNG ELECTRONICS CO., LTD.
0
1
1
2
10
9
23
NPO ENERGOMASH
0
0
0
0
2
16
18
R-AMTECH INTERNATIONAL, INC.
0
0
1
6
4
7
18
CERAM OPTEC INDUSTRIES, INC.
4
4
3
2
2
0
15
UNIVERSITY OF CHICAGO
0
0
4
5
2
1
12
ELBRUS INTERNATIONAL LTD.
0
0
1
4
0
6
11
AJINOMOTO COMPANY INCORPORATED
2
2
1
0
3
2
10
SOCIETE NATIONALE INDUSTRIELLE AEROSPATIALE
3
4
3
0
0
0
10
RENAL TECH INTERNATIONAL LLC
0
0
0
0
8
1
9
GENERAL ELECTRIC COMPANY
2
1
1
1
4
0
9
ADVANCED ION TECHNOLOGY, INC.
0
0
0
1
3
3
7
ALARIS INC.
0
2
3
0
0
2
7
LSI LOGIC CORPORATION
0
0
0
0
1
5
6
CYTRAN, INC.
0
0
3
1
2
0
6
ALM DEVELOPMENT, INC.
0
0
0
0
1
4
5
TCI INC.
0
0
0
3
1
1
5
QUANTA VISION, INC.
0
1
2
0
1
1
5
MCDONNELL DOUGLAS CORP.
0
0
1
1
3
0
5
SAWTEK, INC.
0
0
0
2
3
0
5
Organization
Note: Shading indicates universities, research institutions, and other government agencies
Source: US Patent and Trademark Office (www.uspto.gov). Author’s analysis.
GCR Russia 2003 10-20-03.ppt
34
Copyright 2003 © Professor Michael E. Porter
Innovative Capacity Index
Russia’s Relative Position
1
9
10
20
30
39
40
40
Russia’s GDP per Capita Rank 48
50
55
60
Russia’s Competitiveness Rank 65
70
67
75
Operations &
Strategy Index
Innovation
Policy Index
80
Innovative
Capacity Index
Scientists &
Engineers
Index
Linkages Index
Cluster
Environment
Index
Source: Global Competitiveness Report 2003
GCR Russia 2003 10-20-03.ppt
35
Copyright 2003 © Professor Michael E. Porter
Leveraging the Russian Technology Base
Illustrative Strategic Options
•
•
Russia faces challenges in attracting traditional manufacturing
investments given the inefficiencies in its business environment
relative to other locations
Near term opportunities should focus where Russia is most unique
•
Improve the innovation policy environment
– Intellectual property right protection
•
Create Technology Parks and R&D Free Zones
– Simplified administrative rules
•
Support cluster-development efforts around universities
– Technology transfer offices
– Recruiting foreign companies
– Incubators
GCR Russia 2003 10-20-03.ppt
36
Copyright 2003 © Professor Michael E. Porter
Shifting Responsibilities for Economic Development
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
GCR Russia 2003 10-20-03.ppt
•• Economic
Economic development
development is
is aa
collaborative
collaborative process
process involving
involving
government
government at
at multiple
multiple levels,
levels,
companies,
companies, teaching
teaching and
and
research
research institutions,
institutions, and
and
institutions
institutions for
for collaboration
collaboration
37
Copyright 2003 © Professor Michael E. Porter
Roles of Government in Economic Development
•
Improve the macroeconomic, political, legal, and social context
– Establish a stable and predictable macroeconomic, legal, and political
environment
– 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 upgrading
– Identify existing and emerging clusters
– Convene and participate in the identification of cluster constraints and action
plans to address them
•
Lead a collaborative process of economic change
– Create institutions and processes for upgrading competitiveness that inform
citizens and mobilize the private sector, government at all levels, educational and
other institutions, and civil society to take action
GCR Russia 2003 10-20-03.ppt
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Copyright 2003 © Professor Michael E. Porter
Role of the Private Sector in Economic Development
•
Take an active role in upgrading the local infrastructure
•
Nurture local suppliers and attract new supplier investments
•
Work closely with local educational and research institutions to
upgrade quality and create specialized programs addressing
cluster needs
•
Provide government with information and substantive input on
regulatory issues and constraints bearing on cluster development
•
Focus corporate philanthropy on enhancing the local business
environment
•
An important role for trade associations
– Greater influence
– Cost sharing
GCR Russia 2003 10-20-03.ppt
39
Copyright 2003 © Professor Michael E. Porter
Russia’s Competitiveness Agenda
• Raise the productivity of the Russian business
environment
• Adopt a cluster-based approach to economic development
• Push economic strategy to the regional level
• Shift the roles of government, business, and other
institutions in economic development
• Creating the microeconomic foundations of sustainable
prosperity in Russia
GCR Russia 2003 10-20-03.ppt
40
Copyright 2003 © Professor Michael E. Porter
Selected References on Clusters, Competition, Innovation, and
Regional Economies
Professor Michael E. Porter
• “The Economic Performance of Regions”, Regional Studies, Vol. 37, 2003
• “UK Competitiveness: Moving to the Next Stage”, with Christian Ketels, DTI Economics Papers, No.3, London:
2003
• “The Competitive Advantage of Corporate Philanthropy,” with Mark Kramer, Harvard Business Review,
December 2002
• “Building the Microeconomic Foundations of Prosperity: Findings from the Microeconomic Competitiveness
Index” in The Global Competitiveness Report 2002-03, New York: Oxford University Press, New York: Oxford
University Press, 2002
• “Clusters of Innovation Initiative: Research Triangle Report,” (with the Council on Competitiveness, Monitor
Group, and ontheFRONTIER), Washington, DC: Council on Competitiveness, 2002
• “Clusters of Innovation Initiative: Pittsburgh Report,” (with the Council on Competitiveness, Monitor Group,
and ontheFRONTIER), Washington, DC: Council on Competitiveness, 2002
• “Clusters of Innovation Initiative: Atlanta Report,” (with the Council on Competitiveness, Monitor Group, and
ontheFRONTIER), Washington, DC: Council on Competitiveness, 2002
• “Clusters of Innovation Initiative: Wichita Report,” (with the Council on Competitiveness, Monitor Group, and
ontheFRONTIER), Washington, DC: Council on Competitiveness, 2002
• “Enhancing the Microeconomic Foundations of Prosperity: The Current Competitiveness Index” in The Global
Competitiveness Report 2001-02, New York: Oxford University Press, 2001
GCR Russia 2003 10-20-03.ppt
41
Copyright 2003 © Professor Michael E. Porter
Selected References on Clusters, Competition, Innovation, and
Regional Economies
Professor Michael E. Porter
• “U.S. Competitiveness 2001,” with Debra van Opstal, Washington, DC: Council on Competitiveness, 2001
• “Innovation Lecture,” published by the Dutch Ministry of Economics, 2001
• “National Report: Clusters of Innovation Initiative,” (with the Council on Competitiveness, Monitor Group, and
ontheFRONTIER), Washington, DC: Council on Competitiveness, 2001
• “Clusters of Innovation Initiative: San Diego Report,” (with the Council on Competitiveness, Monitor Group, and
ontheFRONTIER), Washington, DC: Council on Competitiveness, 2001
• “The Current Competitiveness Index: Measuring the Microeconomic Foundations of Prosperity” in The Global
Competitiveness Report 2000-01, New York: Oxford University Press, 2000
• “Location, Competition, and Economic Development: Local Clusters in a Global Economy,” (Economic
Development Quarterly, February 2000, 15-34)
• “Locations, Clusters, and Company Strategy” in The Oxford Handbook of Economic Geography, (G. L. Clark,
M.P. Feldman, and M.S. Gertler, eds.), New York: Oxford University Press, 2000
• “Attitudes, Values, Beliefs and the Microeconomics of Prosperity,” in Culture Matters: How Values Shape Human
Progress, (L.E. Harrison, S.P. Huntington, eds.), New York: Basic Books, 2000
• “Clusters and the New Competitive Agenda for Companies and Governments” in On Competition, Boston:
Harvard Business School Press, 1998
• The Competitive Advantage of Nations, New York: The Free Press, 1990
GCR Russia 2003 10-20-03.ppt
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Copyright 2003 © Professor Michael E. Porter