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Baltic Sea Region Report – HH Conference 09-02-04 CK 1 Copyright 2004 © Christian H. M. Ketels Measures of Competitiveness Prosperity Productivity Competitiveness Innovative Capacity Baltic Sea Region Report – HH Conference 09-02-04 CK 2 Source: Michael E.H.Porter Copyright 2004 © Christian M. Ketels Decomposing Prosperity Prosperity Domestic Purchasing Power • Consumption taxes • Local market competition • Efficiency of local industries Income Labor Productivity Labor Utilization • Skills • Capital stock • TFP Baltic Sea Region Report – HH Conference 09-02-04 CK • • • • 3 Working hours Unemployment Participation rate Population age profile Copyright 2004 © Christian H. M. Ketels Influences on Competitiveness Multiple Geographic Levels World Economy Broad Economic Areas Groups of Neighboring Nations Nations States, Provinces Cities, Metropolitan Areas Baltic Sea Region Report – HH Conference 09-02-04 CK 4 Source: Michael E.H.Porter Copyright 2004 © Christian M. Ketels Profile of the Region Western shore Eastern shore Nordic Countries Northwest Russia • Northwestern Region • 16 Mio. People (27%) • GDP of € 46bn (4%) • Denmark, Finland, Norway, Sweden • 24 Mio. People (41% of the region) • GDP of € 793bn (74%) Baltic States • Estonia, Latvia, Lithuania • 7.4 Mio. People (12%) • GDP of € 34bn (3%) Northern Germany • Hamburg, MecklenburgVorpommern, SchleswigHolstein • 6.3 Mio. People (11%) • GDP of € 172bn (16%) Northern Poland • Zachodnio-Pomorskie, Pomorskie, Warminsko-Mazurskie • 5.4 Mio. People (9%) • GDP of € 24bn (2.5%) Source: EU (2004) Baltic Sea Region Report – HH Conference 09-02-04 CK 5 Copyright 2004 © Christian H. M. Ketels Cluster Composition Baltic Sea Region Export Performance by Cluster World Market Share, 2000 BSR overall: +2.1% (versus +5.3% world trade) 18% Forest Products Telecommunication 16% 14% 12% 10% Multiple Business 8% Household Health Care Materials & Metals 6% Food & Beverages 4% Transportation 2% Textiles & Apparel 0% -10% -5% Petroleum/Chemicals BSR overall: 5.36% Power Entertainment Office Personal 0% Semiconductors 5% 10% 15% 20% 25% Absolute Growth* of Exports, 1995 - 2000 *Growth figures exclude Baltic States and Northwest Russia Source: WTO (2004), Institute for Strategy and Competitiveness, author’s analysis. Baltic Sea Region Report – HH Conference 09-02-04 CK 6 Copyright 2004 © Christian H. M. Ketels Regional Cooperation Levels Countries act as one Stage 3: Joint action • Limited independence • Includes joint positioning of the region abroad, including in international/ supranational bodies Stage 2: Coordinated action • Medium level of independence • Includes joint efforts to upgrade border procedures, improve infrastructure, develop clusters, .. Stage 1: Learning and benchmarking • Leaves national autonomy fully intact • Includes networks covering all areas of policy in an “open model of cooperation” Countries act in isolation Baltic Sea Region Report – HH Conference 09-02-04 CK 7 Copyright 2004 © Christian H. M. Ketels Regional Cooperation Benefits and Costs of Regional Heterogeneity Low Degree of Heterogeneity High • Easy to develop a common identity • Huge potential gains from regional benchmarking • Easy applicability of others’ experience • Huge potential gains from division of labor • Balanced distribution of benefits • Regional cooperation is easier but provides fewer benefits Baltic Sea Region Report – HH Conference 09-02-04 CK • Regional cooperation is harder but provides higher benefits 8 Copyright 2004 © Christian H. M. Ketels Key Implications Situation Implications of the Report Stage 3: Joint action • More ambition than reality • Current patterns of heterogeneity suggest high benefits but also difficulties in achieving joint action Stage 2: Coordinated action • Some activities currently under way • High level of regional integration signals room for development of strategic action plan Stage 1: Learning and benchmarking • Many activities currently under way • High remaining heterogeneity in the region signals ample room for further cooperation Baltic Sea Region Report – HH Conference 09-02-04 CK 9 Copyright 2004 © Christian H. M. Ketels The Way Ahead Ongoing discussions in the Region Moving to Action • Validate the performance and business environment quality assessment • Identify areas for further in-depth analysis • Develop the foundations for an institutional capacity to act • Launch meetings to define a regional strategy for action • Launch institutional structure to coordinate decision making and implementation BDF Meeting Hamburg 2004 BDF Meeting Stockholm 2005 • Launch of the 1st State of the RegionReport • Set a structure for the regional debate • Provide data to review performance, cluster composition, and business environment quality across the Region • 2nd State of the Region-Report • Provide data to discuss the positioning of the Baltic Sea Region • Provide data to set regional action priorities • Provide data on current regional efforts Baltic Sea Region Report – HH Conference 09-02-04 CK 10 Copyright 2004 © Christian H. M. Ketels The Baltic Sea Region Entering a New Era Past Present • Ties in the region far below historical precedents • Many trade and organizational ties across the region • Enthusiasm about freedom and opportunity in the East • Realism about benefits raises demands on cooperation • Main goal is political: integrate and secure • Main goal is economic: raise prosperity across the region • West providing help to East; East providing new markets and access to low-wage labor • West and East operating with same objectives from different points of departure Baltic Sea Region Report – HH Conference 09-02-04 CK 11 Copyright 2004 © Christian H. M. Ketels Towards A New Strategy for the Baltic Sea Region • How strong is the economic performance of the Baltic Sea Region? • What is the profile of the economy in the Region? • What are the strengths and weaknesses of the business environments across the Region? • What are the implications for a sound regional strategy? Baltic Sea Region Report – HH Conference 09-02-04 CK 12 Copyright 2004 © Christian H. M. Ketels Real GDP Development Over Time Baltic Sea Region Countries, 1993 - 2003 Real GDP, PPP-adjusted, 1993 = 100 160% Sorted by CAGR, 1993 – 2003: 145% Poland Latvia Estonia Finland Lithuania Norway Sweden Denmark Germany Russia 130% 115% 100% EU 25 85% 70% 1993 1994 1995 1996 1997 1999 1998 2000 2001 2002 2003 Source: Groningen Growth and Development Centre and The Conference Board (2004), EIU (2004), authors’ calculations Baltic Sea Region Report – HH Conference 09-02-04 CK 13 Copyright 2004 © Christian H. M. Ketels Key Observations Profile of the Region • Clear dominance of the Nordic countries in the overall Baltic Sea Region economy – Countries on the eastern shore still account for only 10% of the regional economy – In addition, Germany, Poland, and Russia all have their economic centers of gravity outside the Region • Overall growth performance of economies in the Region suggests dominance of nation-specific over regional factors – Among western shore countries, Nordic countries did in general better than Germany but even among them differences emerge – Among the eastern shore countries, Poland and the Baltic countries followed different paths. Lithuania in particular stands out with its late bounce-back from the transition crisis Baltic Sea Region Report – HH Conference 09-02-04 CK 14 Copyright 2004 © Christian H. M. Ketels Prosperity Selected European Regions and Countries Real GDP per Capita 2003, PPP-adjusted, $-US (1999) $35,000 Norway Denmark $30,000 Germany (North) Sweden British Isles Finland $25,000 Iberian Peninsula $20,000 Baltic Sea Region Central Europe $15,000 $10,000 Estonia Poland (North) Lithuania Latvia Russia (Northwest) $5,000 $0 0% 1% 2% 3% 4% 5% 6% 7% 8% Growth of Real GDP per Capita (PPP-adjusted), CAGR, 2000-2003 Source: Groningen Growth and Development Centre and The Conference Board (2004), authors’ calculations Baltic Sea Region Report – HH Conference 09-02-04 CK 15 Copyright 2004 © Christian H. M. Ketels Key Findings Performance Drivers Advantages • Labor utilization - employees per capita and hours worked per employee are highest of all peer regions – Gap to Iberian Peninsula and British Isles is, however, falling; it is slightly increasing versus Central Europe • Labor productivity is on par with Central Europe and Iberian Peninsula, lagging the British Isles – Baltic Sea Region is currently improving its position versus peer regions • Domestic purchasing power of income is lowest of all peer regions – Gap to Iberian Peninsula and British Isles is, however, falling; it is slightly increasing versus Central Europe Disadvantages Baltic Sea Region Report – HH Conference 09-02-04 CK 16 Copyright 2004 © Christian H. M. Ketels Economic Performance Decomposition by Baltic Sea Sub-region Nordic countries Germany Poland Baltic countries Russia Labor Productivity ++ ++ -- --- --- Employees per capita =0 - - + + Hours worked per Employee - - + + + Domestic Purchasing Power - - ++ +++ ++ 154% 150% 53% 53% 37% Prosperity (% of Region) Note: +++ for >150% above Baltic Sea Region average, ++ for > 50%, + for > average, - for < average, - - for < 30%, - - - for < 50% Source: Groningen Growth and Development Centre and The Conference Board (2004), national statistics (2004), authors’ calculations Baltic Sea Region Report – HH Conference 09-02-04 CK 17 Copyright 2004 © Christian H. M. Ketels Innovation Performance Patenting in the U.S. U.S.Patents filed per Capita, 2003 200 Sweden Finland 150 Germany (North) Denmark 100 British Isles Baltic Sea Region Norway Central Europe 50 Iberian Peninsula Poland (North) 0 Estonia 0% 5% Russia (Northwest) Lithuania 10% 15% 20% Growth of U.S. Patents Filed per Capita, CAGR, 1998 - 2003 Note: Bubble size is relative to total U.S. patents filed in 2002; sub-national region shares by GDP share Source: USPTO (2004), author’s analysis. Baltic Sea Region Report – HH Conference 09-02-04 CK 18 Copyright 2004 © Christian H. M. Ketels Innovation Performance Top Patenting Organizations Company Country U.S. Patents, 1997-2001 ERICSSON Sweden 1246 NOKIA Finland 809 NOVO NORDISK A/S Denmark 553 VALMET CORP. Finland 273 SANDVIK AKTIEBOLAG Sweden 236 AKTIEBOLAGET ASTRA Sweden 202 BEIERSDORF AG Germany 136 ASEA BROWN BOVERI AB Sweden 133 AB VOLVO Sweden 126 ERICSSON, INC. Sweden 99 TETRA LAVAL Sweden 96 DANFOSS A/S Denmark 95 SIEMENS ELEMA AB Sweden 94 AKTIEBOLAGET ELECTROLUX Sweden 90 DRAGERWERK AG Germany 83 PACESETTER AB Sweden 81 PHARMACIA & UPJOHN AB Sweden 75 KVAERNER PULPING AKTIEBOLAG Sweden 74 HALDOR TOPSOE A/S Denmark 71 Source: USPTO (2004), author’s analysis. Baltic Sea Region Report – HH Conference 09-02-04 CK 19 Copyright 2004 © Christian H. M. Ketels Other Economic Indicators World Export Market Share over Time World Export Market Share 7% British Isles 6% Baltic Sea Region 5% Central Europe 4% 3% Iberian Peninsula 2% 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Source: WTO (2004), author’s analysis. Baltic Sea Region Report – HH Conference 09-02-04 CK 20 Copyright 2004 © Christian H. M. Ketels Other Economic Indicators Relative Export Intensity Share of World Exports versus Share of World GDP, 2001 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 Ba lti c Se a R eg Es ion Li ton th ia ua N nia o D rwa en y m a La r k Fi tvia n Sw lan d e d G e er n m C a en Po n y tra la lE R nd us ur op si a C ean ze ch Re R gio ep n u H blic un Sl gar ov y Sl aki ov a e Au nia G str er ia m a Po n y la nd Ib B r er it ia ish n Pe Isl ni es ns ul a 0.0 Source: WTO (2004), EIU (2004), author’s analysis. Baltic Sea Region Report – HH Conference 09-02-04 CK 21 Copyright 2004 © Christian H. M. Ketels Other Economic Indicators Inward FDI Position Inward FDI stock as % of GDP, Average 19992001 60% Estonia 50% British Isles Denmark Sweden 40% Latvia 30% Baltic Sea Region Central Europe Iberian Peninsula Lithuania 20% Norway Germany (North) Finland Poland (North) 10% Russia (Northwest) 0% 0% 20% 40% 60% 80% Inward FDI Flows as % of Domestic Capital Formation, Average 1999-2001 Note: Bubble size is relative to FDI stock in 2001; subnational regions by their share of national GDP Source: UNCTAD (2004), author’s analysis. Baltic Sea Region Report – HH Conference 09-02-04 CK 22 Copyright 2004 © Christian H. M. Ketels Other Economic Indicators Multinational Companies’ Home Base Business Week 1000 Fortune Global 500 British Isles 77 British Isles 36 Baltic Sea Region 30 Baltic Sea Region 15 • • • • • 15 5 5 4 1 • Sweden • Finland • Denmark • Norway • Northern Germany 6 4 2 2 1 Sweden Finland Norway Denmark Northern Germany Iberian Peninsula 13 Iberian Peninsula 7 Central Europe 11 Central Europe 7 Note: Business Week ranks by Market Value, Fortune by Revenues Source: Business Week (2004), Fortune (2004), author’s analysis. Baltic Sea Region Report – HH Conference 09-02-04 CK 23 Copyright 2004 © Christian H. M. Ketels The Composition of Economies Local industries • Do not compete across regions • Tied to location • Dominated by services • More critical for prosperity than for income 31% of employment 42% of income 68% of employment Cluster • Compete across regions/countries • Can locate anywhere • Strong role of manufacturing • Critical for income 57% of income Natural-resource based industries • 1% of income and __employment Source: Michael E. Porter, Economic Performance of Regions, Regional Science (2004), Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School Baltic Sea Region Report – HH Conference 09-02-04 CK 24 Copyright 2004 © Christian H. M. Ketels Relative Cluster Specialization Baltic Sea Sub-Regions Nordic Higher share Lower Share Telecom Forest Products Health Care Oil/Chemicals Food Products Defense Power Household Metals Multiple Bus. Entertainment Office Semiconductor Transportation Textiles Personal Germany Semiconductor Transportation Office Personal Multiple Bus. Textiles Entertainment Power Health Care Household Metals Food Products Oil/Chemicals Forest Products Telecom Defense Russia Defense Oil/Chemicals Metals Multiple Bus. Forest Products Personal Food Products Power Textiles Transportation Entertainment Semiconductor Household Office Health Care Telecom Baltic Textiles Forest Products Household Food Products Entertainment Telecom Metals Personal Power Oil/Chemicals Office Transportation Health Care Semiconductor Multiple Bus. Defense Poland Textiles Entertainment Personal Household Metals Transportation Power Defense Food Products Forest Products Multiple Bus. Office Semiconductor Oil/Chemicals Health Care Telecom Source: WTO (2004), Institute for Strategy and Competitiveness, HBS (2004), author’s analysis. Baltic Sea Region Report – HH Conference 09-02-04 CK 25 Copyright 2004 © Christian H. M. Ketels Determinants of Productivity and Productivity Growth Macroeconomic, Political, Legal, and Social Context for Development Microeconomic Foundations of Development Quality of the Microeconomic Business Environment Sophistication of Company Operations and Strategy • 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 Baltic Sea Region Report – HH Conference 09-02-04 CK 26 Source: Michael E.H.Porter Copyright 2004 © Christian M. Ketels Business Competitiveness Index Ranking of European Regions and Countries Baltic Sea Region British Isles Central Europe Iberian Peninsula TOTAL RANK 6 TOTAL RANK 9 TOTAL RANK 21 TOTAL RANK 27 Finland 1 United Kingdom 6 Germany 5 Spain 25 Sweden 3 Ireland 21 Austria 17 Portugal 36 Denmark 4 Slovenia 30 Germany 5 Czech Republic 35 Norway 22 Hungary 38 Estonia 28 Slovak Republic 42 Latvia 29 Poland 46 Lithuania 40 Poland 46 Russian Federation 63 Source: Global Competitiveness Report (2003), author’s analysis. Baltic Sea Region Report – HH Conference 09-02-04 CK 27 Copyright 2004 © Christian H. M. Ketels Business Environments’ in the Baltic Sea Region Key Observations Context for Firm Strategy and Rivalry Factor (Input) Conditions + Companies competing globally on innovation and differentiation + High formal openness of markets – Low rivalry on many local markets – High level of taxation, especially on labor, reduces incentives – Presence of distortive subsidies, especially in Germany and Russia + Strong physical infrastructure, especially for communication + High skill base of the labor force + Well developed science system Related and + Public servants apply laws with Supporting neutrality; low level of corruption Industries – Significant level of bureaucracy + Presence of a number of globally – Emerging weaknesses in the competing cluster education system + Strong basis for the activation of existing clusters Demand Conditions + Demanding regulatory standards, especially on environmental issues – Buyer sophistication, including government procurement, is only average Source: Global Competitiveness Report (2003), author’s analysis. Baltic Sea Region Report – HH Conference 09-02-04 CK 28 Copyright 2004 © Christian H. M. Ketels Factor Conditions Public expenditure on education as % of GDP, 2001 Spending on Human Resources 10% Denmark 9% Sweden 8% 7% Norway 6% Finland Baltic Sea Region Lithuania Estonia Latvia Poland (North) Central Europe 5% Germany (North) 4% 3% Iberian Peninsula British Isles 2% 1% 0% -2% 0% 2% 4% 6% 8% Growth in Spending on Human Resources, CAGR 1995-2001 Source: EU Structural Indicators (2004), author’s calculation Baltic Sea Region Report – HH Conference 09-02-04 CK 29 Copyright 2004 © Christian H. M. Ketels Factor Conditions Average of Reading, Scientific, and Mathematical Literacy Average Educational Attainment, 2000 560 540 520 OECD average 500 480 460 440 420 Ja pa n Ko re U ni Fi a te nl d a Ki nd ng do m Ire la n Au d st Sw ria ed B e en lg iu Fr m S w an itz ce er la n C ze No d ch rw a U Rep y ni te ub li d St c at e D en s m a H rk un G gar er y m an y Sp ai Po n R la us nd si an Fe Ita de ly ra t P o i on rtu g G al re ec e La tv ia 400 Source: OECD PISA-Study (2003), author’s calculation Baltic Sea Region Report – HH Conference 09-02-04 CK 30 Copyright 2004 © Christian H. M. Ketels Context for Strategy and Rivalry Market Pressure Baltic Sea Region Nordic Germany Baltic Poland Russia Effectiveness of Anti-Trust Policy 10 11 5 43 45 73 Hidden Trade Barrier Liberalization 11 10 13 41 52 79 Foreign Ownership of Companies 12 16 11 52 47 93 Intensity of Local Competition 18 22 13 39 51 83 Tariff Liberalization 20 24 15 38 45 76 Administrative Burden for Start-Ups 22 21 34 34 52 84 Extent of Locally Based Competitors 23 37 4 46 46 48 Extent of Distortive Subsidies 17 93 26 78 70 29 • Nordic and Germany both formally open for competition but effective competitive pressure is significantly lower in Nordic countries • High differences in competitive intensity among Baltic countries, Poland, and Russia Source: Global Competitiveness Report (2003), author’s analysis. Baltic Sea Region Report – HH Conference 09-02-04 CK 31 Copyright 2004 © Christian H. M. Ketels Context for Strategy and Rivalry Taxes on Production Direct Taxes and Social Security Contributions as % of GDP, 2002 40% Social security contributions Direct taxes (labor, capital) 35% 30% 25% 20% 15% 10% 5% sh Is l es a ul Br iti ni ns io n Pe Ib e ria n ea n ro p Eu en t ra l Ba C Source: Eurostat (2004), author’s analysis. Baltic Sea Region Report – HH Conference 09-02-04 CK Re g ni a ua Li th tv ia La ia to n Es la n d y Po m an G er or wa y N ar k d en m D an Fi nl en Sw ed ltic Se a R eg io n 0% 32 Copyright 2004 © Christian H. M. Ketels ltic Se a R More flexible D Less flexible eg en ion m N ark or Sw way e Li de th n ua n Po i a la n La d G tvi er a m a F i ny nl a R nd us si a Br iti sh Is le s U Ire K la C nd en tra lE ur o A u pe s C ze H tria ch un Re gar pu y b Po lic Sl land o Sl G ven ov e ia ak r m R an ep y ub Ib er lic ia n Pe ni su Sp l a Po ain rtu ga l Ba Context for Strategy and Rivalry Flexibility of Firing 80 70 60 50 40 30 20 10 0 Source: World Bank (2004), author’s analysis. Baltic Sea Region Report – HH Conference 09-02-04 CK 33 Copyright 2004 © Christian H. M. Ketels Overall Cluster Strength in Europe GCR Ranking EU-14 + Norway 2 4 5 7 8 9 10 14 15 17 18 21 25 41 51 Finland Italy Germany Denmark Sweden United Kingdom France Austria Netherlands Spain Ireland Belgium Norway Portugal Greece Accession Countries 31 32 33 34 40 44 45 53 68 Czech Republic Lithuania Latvia Poland Slovak Republic Estonia Slovenia Hungary Malta Source: Global Competitiveness Report 2003/04 , Institute for Strategy and Competitiveness (2004) Baltic Sea Region Report – HH Conference 09-02-04 CK 34 Copyright 2004 © Christian H. M. Ketels Innovation Capacity Rank on Innovation Capacity Index, 2003 1 5 10 15 20 25 30 35 Br iti sh C Is en le tra s lE Ib er ur ia op n e Pe ni ns ul a Fi nl an d G er m an y Sw ed en D en m ar k N or wa y Es to ni a La tv ia Li th ua ni a Po la nd R us si a Ba lti c Se a R eg io n 40 Source: Michael E. Porter/Scott Stern (2003), author’s calculations Baltic Sea Region Report – HH Conference 09-02-04 CK 35 Copyright 2004 © Christian H. M. Ketels Innovation Capacity Sub-Index by Country or Sub-Region Proportion of Scientists and Engineers Index Innovation Linkages Index Operations and Strategy Index Cluster Innovation Environment Index Innovation Policy Index Rank on Innovation Capacity Sub-indices, 2003 1 10 20 30 40 50 60 70 80 Germany Nordic countries Baltic countries Poland Russia Source: Michael E. Porter/Scott Stern (2003), author’s calculations Baltic Sea Region Report – HH Conference 09-02-04 CK 36 Copyright 2004 © Christian H. M. Ketels Factor Conditions Total R&D Spending Gross Domestic R&D Expenditure as % of GDP, 2001 (or latest available) 4.0% 3.5% Nordic 3.0% 2.5% Baltic Sea Region 2.0% Central Europe British Isles 1.5% Germany (North) 1.0% Baltic States Iberian Peninsula 0.5% Poland (North) 0.0% -10% 0% 10% 20% 30% Annual Growth of Gross Domestic R&D Spending, average of three preceding years - 2001 Source: EU Innovation Scoreboard 2003, author’s calculation Baltic Sea Region Report – HH Conference 09-02-04 CK 37 Copyright 2004 © Christian H. M. Ketels Factor Conditions Share of R&D Spending by Business Business Share of Total R&D Spending, 2001 (or latest available) 80% 70% 60% 50% 40% 30% 20% 10% Ba lti c Se a R eg io G n er m Nor an di c y (N or th Po ) Ba l lti and c St at es G Ce n er m tra an lE y u (S ro ou pe Sl th ov ak ea R st) ep ub li C ze Au c ch s R tria ep ub Sl lic ov en ia H un ga r Po y la nd Br Ib er itish ia Is n Pe les ni ns ul a 0% Source: EU Innovation Scoreboard 2003, author’s calculation Baltic Sea Region Report – HH Conference 09-02-04 CK 38 Copyright 2004 © Christian H. M. Ketels